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How to Invest Your First $1,000

How to Invest Your First $1,000 :: Mint.com/blogSaving $1,000 is a big deal. Investing it for the first time is an even bigger one.

Once you’ve reached this milestone, you might feel excited to watch your investment grow as well as terrified you could lose it all.

But investing doesn’t have to be intimidating, and it’s not as complicated as you think.

Ready to invest your first $1,000? Here’s a guide to making it simple and rewarding.

Ask This Key Question

Before you start weighing all your investment options, start with one question: When do you plan to use the money?

That’s right, it’s not about buying up the trendiest stocks. It’s about choosing the best option based on how soon you plan to spend your money.

This is crucial due to a key factor: risk. A general rule of thumb: the sooner you plan to cash out, the less risky investment you should choose.

A strategy based on your risk tolerance and time horizon will better protect you against losses.

Let’s look at short- and long-term scenarios and options for both.

Minimize Risk for Short-Term Investing

If you’re looking to invest for a year or two with a short-term goal in mind, like a down payment on a car, you likely don’t want to risk losing money.

In this case, options other than the stock market may be best, including:

  • Certificates of Deposit. These often come with a guaranteed return over a certain term combined with very little risk of loss since the FDIC backs them.
  • Treasury Direct I Savings Bonds. These are bonds issued by the U.S. government. The current rate on these bonds is 1.18% per year, and it’s possible this will increase. They’re also considered very safe against loss.
  • GE Interest Plus. Rates for these accounts are about 1% on $1,000 invested, which is higher than many savings accounts offer today.

Short-term options are low risk but also offer lower returns.

[Related Article: What Is a Stock? (infographic)]

This is a tradeoff compared to the risk of losing a big chunk of your investment in the stock market and no longer being able to make your car down payment.

Focus on Growth for the Long Term

Long-term investing — over decades, rather than just a few years — is a whole different ballgame. The most common long-term case is saving for retirement.

When you’re young, you have a relatively long investment time-horizon increasing your ability to take risk and weather the ups and down of the market over many years.

Rather than the conservative options above which return only about 1% annually, you’re now looking to create an investment portfolio to deliver you the best long-term performance possible .

Asset allocation is the single most important decision you can make when constructing your portfolio.

[Related Article: Mint’s Top 5 Investing Tips]

Studies show that over 80% of a portfolio’s variance over time is due to its asset allocation. Typical asset allocation for a younger person saving for retirement might include just three asset classes: $600 in U.S. stocks, $200 in international stocks and $200 in bonds or equivalents.

How much to invest in each should be determined by your willingness to see your portfolio rise and fall in value as you head to retirement. Free tools like Jemstep’s Portfolio Manager can help you find an asset allocation strategy that’s custom-tailored to your needs.

Next you need to evaluate and select the vehicles that are best suited to deliver strong results. A good place to start is “pooled vehicles” like mutual funds and exchange traded funds (ETFs).

[Related Article: How to Pick ETFs]

Pooled vehicles reduce the amount of time you have to spend researching individual stocks, and help you diversify and spread the risk.

With $1,000 to invest, a good place to start is with low transaction cost index ETFs (Exchange Traded Funds) as they are tax efficient and have low operating expenses.

You can also find ETFs with no transaction fees at brokers such as Charles Schwab, Fidelity or Vanguard.

When investing for the long-term in the stock market, keep these considerations in mind:

  • Use retirement accounts for tax advantages. Investing in a Roth IRA means your money can typically be withdrawn tax free in retirement. These accounts can be created in minutes with nearly any brokerage firm like Charles Schwab or Vanguard.
  • Monitor investments, but not too closely. There’s a misconception, especially among first-time investors, that you must be actively watching the stock market constantly. This just isn’t the case. Your initial $1,000 does require some attention, but this could simply be on a monthly or yearly basis. As you invest more and your situations changes, the complexity of managing increases and you may want to use a tool  like Jemstep Portfolio Manager to help guide your investments strategy and monitor and adjust your portfolio on an ongoing basis.Investing your first $1,000 is exciting, but a realistic approach will serve you best no matter how long you plan to let your money grow.
  • Before careful of the following, especially when you’re just getting started:
  • Buying individual stocks. This often isn’t the best way to get started. Picking stocks is more complicated and often riskier, as well. With only $1,000, it’s harder to get good bang for your buck while still diversifying your holdings.
  • Funds with high expenses. Mutual funds get a lot of buzz, but if you’re not careful, they can eat away at your earnings with high expenses.
  • Too good to be true” investments. The goal isn’t to turn your $1,000 into millions. Don’t chase pipe dreams of multiplying your money many times over with risky investments or borderline scams that make unrealistic promises.

Maybe most importantly, don’t wait!

The earlier that  you invest, the more time your money can spend growing. Getting started is more important than finding the perfect fund or stock.

What is your strategy for investing your first $1,000? 

How to Invest Your First $1000” was provided by Mint.com

Mint is a free personal finance tool that brings all your financial accounts together online or on your mobile device, automatically categorizes your transactions, and helps you set budgets so you can achieve your financial goals.

The Biggest Investment Mistake I Ever Made

When I finally started making enough money to invest beyond my 401K or emergency savings account, I was so excited to get started that I committed the cardinal sin of novice investors: I succumbed to transaction fees.

There I was, knowing darn well that transaction fees can seriously erode the value of your investment – but doing it, anyhow. Call it laziness, willful ignorance, or the hazy hope that somehow the rules of investing simply didn’t apply to me. Anyway you cut it, I was shooting myself in the foot every time I clicked the “trade” button and another $7 went out the window.

Investing Fees Hurt More Than You Think

If you think I’m over-reacting, bear with me for a second here as I demonstrate a simple example. Let’s say I invested $100 in stock of ABC company, paying $7 in transaction costs. That would mean the value of the stock would need to rise 7% just to cover the transaction fee. Ouch.

I was so eager to invest my money in the market, that after every paycheck I’d do it again, and end up paying too much just for the sake of buying stock or ETFs. After all, $7 here or there didn’t seem like that much money.

But my poor little investment account was suffering under the burden of transaction costs. And I wondered why I wasn’t seeing the numbers grow more significantly.

401Ks Suffer, Too

This problem isn’t limited to online brokerages or individual investment accounts, either — 401Ks, mutual funds and many other investments carry fees, as well. MSN Money created a chart demonstrating how the simple “little” one or two percent fees many of us pay on 401Ks, for example, can seriously damage your future wealth.

For example, a worker investing $5k per year for 40 years into their 401K would have over $878,000 if their fees were 0.5%, but only $475,000 if they paid 3% fees.

The Solution

The first thought that came to mind when I realized how much my investments were struggling against transaction fees was to invest less often, so that I’d have fewer transactions, and save on fees.

But that’s not a good solution, because I knew that the time value of money was important — that the sooner I invested my money, the faster it’d grow. Plus, I wanted to invest regularly and “pay myself first”.

So, I started searching for online brokerages with lower costs, and what I found surprised me:

First, trading on many ETFs is free, depending upon the broker. Charles Schwab, TD Ameritrade, and Fidelity, amongst others offer free trades on several of their most popular ETFs. They’re a good alternative to index mutual funds (such as funds that track the entire stock market, or particular sectors therein).

Mutual fund trades can also be had for free, but usually only when it’s the online broker’s own fund. The benefit of this, however, is that it also makes automatic investing possible. For example, you can set up an automatic investing account with Vanguard to invest regularly in Vanguard mutual funds, thereby helping you remove a barrier to investing.

Read the Fine Print

While these are great ways to eliminate or significantly reduce the burden of transaction fees on your investments, they do come with a few caveats. You should be aware that in many cases, you’ll be limited to a certain number of transactions per month, making it difficult for you to actively trade or change your positions frequently.

You’ll also need to take note of other fees and expenses – such as any administrative costs or processing fees. Fees are fees and they can all eat into your investments.

Finally, you should be aware that not every ETF or mutual fund may be available commission-free — and that this may be used to entice you to purchase funds that do carry fees. It’s possible to construct a well-diversified portfolio on commission-free funds, alone, but it’ll take a little research(more on this later).

Still, I’ve saved hundreds of dollars in fees and taken some of the weight off my investment account. It’s now climbing the financial returns hill a little more quickly.

Have you had success with no-commission funds and trades? Share your experience below!