How to Start Investing With Little Money

ETFs are a great way for beginner investors to start building a portfolio with little capital.

| More on:
ETF chart stocks

Image source: Getty Images

Albert Einstein once described compound interest as “the eighth wonder of the world.” Patient investors who buy high-quality stocks, reinvest dividends, and hold for the long term are capable of turning even modest amounts into comfortable retirement nest eggs.

Still, for investors starting out with less money (think $1,000ish), investing can be daunting. Imagine trying to buy a share of Amazon pre-split when the stock traded at over US$2,000 per share! You’d barely be able to afford half a share, let alone diversify with other stocks.

This can be discouraging, but fear not! There is a solution if you’re strapped for cash. With this alternative, even the smallest of investment portfolios can grow strongly.

ETFs are the solution

Thanks to exchange-traded funds (ETFs), investors no longer need vast sums of money to buy dozens of individual stocks. ETFs trade with their own ticker on a stock exchange and can hold a basket of up to thousands of various stocks. Some ETFs are basically all-in-one stock portfolios that are managed on your behalf by a professional.

This approach is capital efficient. For instance, an ETF might trade at a price of $50 per share yet hold over 1,000 stocks in it. With your $1,000, you can now buy 20 shares of that ETF and gain proportional exposure to all of its underlying companies. This way, you become diversified without needing to buy 1,000 individual stocks!

Index ETFs are ideal

ETFs aren’t a free lunch though. They charge a management expense ratio (MER). This is a percentage fee deducted from your investment on an annual basis. For example, an ETF that charges a 0.05% MER would cost an annual fee of 0.05 * $1,000 = $5 on your $1,000 investment.

Keeping this as low as possible is ideal, and the best choice to make for a low MER is an index fund. These are passively managed investments that track an existing stock market index, like the S&P 500. With index funds, fees are low since the fund manager isn’t actively trying to pick stocks, so fund turnover remains minimum.

I like the CRSP U.S. Total Market Index. This index tracks over 3,500 stocks listed on U.S. exchanges, from all 11 stock market sectors, and covers large-, mid-, and small-cap stocks. In many ways, it is the ultimate hands-off investment. Buying this index allows investors to match the long-term performance of the U.S. stock market.

Why the U.S. stock market

Since its inception in 1971 to date, the U.S. stock market has returned a compound average growth rate (CAGR) of around 13.3% with dividends reinvested. This is a fantastic return that could turn your initial $1,000 deposit into high six-figures over several decades even with only modest contributions. Let’s use a real-life example to see this in action.

Imagine you started investing in 1985 as a broke 18-year-old student with just $1,000 to your name. You invest it all in an index fund tracking the U.S. stock market. Every month thereafter, you scrounge up $100 and invest it promptly in a disciplined and consistent manner.

After holding the ETF for 37 years, consistently putting in $100 every month, reinvesting all dividends, and never panic selling, you would be able to retire early at 55 with a cool $635,405.

This is incredible considering that all your hypothetical self did was buy an index fund, consistently invest small amounts, and stay the course. If you started with more than $1,000, held longer, or contributed more than $100 monthly, your returns would have been even better. With this strategy, maximizing your contribution rate and staying invested is key.

Do you want to implement this passive, hands-off investing strategy? A great ETF to use is Vanguard Total U.S. Stock Market Index ETF (TSX:VUN), which has a low MER of just 0.16%. VUN trades at around $70 per share right now, making it accessible to investors with a smaller portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool recommends Amazon.

More on Stocks for Beginners

A stock price graph showing declines
Dividend Stocks

Here’s Why I’m Confident About Investing Through the Down Market

There is no bear market in history that has not been followed by a bull cycle. Rather than fret over…

Read more »

A bull and bear face off.
Stocks for Beginners

2 TSX Stocks to Buy in a Recession

Are you worried about a recession? Top TSX stocks like Fortis and Dollarama may be perfect investments for a future…

Read more »

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Stocks for Beginners

How to Turn a $6,000 TFSA or RRSP Into $600,000

You can retire comfortably early if you do some serious retirement planning. Investing regularly in your TFSA and maybe your…

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Stocks for Beginners

3 TSX Stocks You’ll Wish You Bought at These Prices

Stocks are currently trading at unbelievable discounts. Here are three TSX stocks you’ll wish you had bought at these prices!

Read more »

funds, money, nest egg
Stocks for Beginners

No Time to Invest? The Easiest Way to Create a Million-Dollar TFSA

Here’s how investors can take advantage of a recent market crash to create a million-dollar TFSA with ease.

Read more »

Volatile market, stock volatility
Bank Stocks

Here’s Why I’m Confident About Investing in a Down Market

This down market continues to trade near 52-week lows, providing you with a small window of time where you can…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Stocks for Beginners

2 Safe Stocks to Buy for a Bear Market

As the market conditions continue to worsen as we begin the fall, safe stocks, such as these two, are some…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Stocks for Beginners

3 of the Safest U.S. Stocks Right Now

Are you looking for some safe stocks to weather volatility? Here are some of the safest U.S. stocks to consider…

Read more »