If you’re a beginner investor with just $500 to invest, don’t feel discouraged – everyone has to start somewhere, and the important thing is that you’re consciously putting money away to grow.
On the other hand, don’t get too reckless either. The power of compounding is real, so it’s best not to waste your capital on high-risk speculative bets.
So, with $500 to invest, your focus should be on broad diversification. Here’s exactly what I mean by that and how you can achieve it with just one exchange-traded fund (ETF).
Diversify into stocks
Stocks will be the main driver of growth in your investment portfolio, and it’s pretty straightforward. When you buy a stock, you become a part-owner of a company!
This ownership comes with risks – if the company performs poorly, your investment suffers first. However, you also gain more potential for higher returns by assuming the risk of being an owner.
The best way to prevent a single company from ruining your portfolio is to own a lot of them – companies from different industries, countries, and of various sizes. This is a very simple explanation of diversification when picking stocks.
The goal is to move away from the risks associated with individual businesses (which don’t adequately compensate you) and towards the overall risk of being invested in businesses generally, which is where your returns come from.
Diversify into bonds
You can own companies through stocks, but you can also lend them money by buying bonds. Unlike stocks, bonds don’t give you ownership risk, so your potential returns are usually lower.
However, lending money to companies provides you with a steady stream of income through interest payments. Of course, just like a deadbeat friend, companies can default, meaning they might not pay back the loan.
To mitigate these risks, the solution is to diversify – invest in bonds from companies in various sectors, with different maturity dates, and even from other entities like the Canadian federal and provincial governments.
Why invest in bonds? Because they’re generally safer. When stocks are falling, bonds tend to hold their value or even appreciate, helping your portfolio survive downturns better and reducing day-to-day volatility.
A diversified ETF to invest $500 in
For beginners, a great all-in-one ETF to consider is the BMO Growth ETF (TSX: ZGRO).
This ETF maintains a straightforward investment approach: 80% of its holdings are in thousands of global stocks, while the remaining 20% is invested in a broad range of U.S. and Canadian bonds. This mix is growth-oriented but carries less risk than a portfolio comprised entirely of stocks.
It’s also cost-effective for those just starting out. With a management expense ratio (MER) of 0.2%, the annual fees on a $500 investment would be just $1 ($500 * 0.002 = $1).
