Are you looking to invest for lifetime financial security and are starting with a small sum like $15,000?
If so, you might be feeling a little intimidated by the task in front of you. After all, how can you turn $15,000 into a sum that secures your financial future when it’s not even one-tenth the amount you need to retire?
It’s true that you’ve got a long road ahead of you. Going from $15,000 to financial independence will take decades. But “a long time” is not the same thing as “forever.” If you have a little bit of patience, you can turn $15,000 into a sum you can retire on. In this article, I’ll explore the $15,000 investment approach that could secure your financial future.
Dollar cost averaging
Dollar cost averaging is a strategy I’ve explored on the Motley Fool before. It involves picking a reliable asset (let’s say a low-cost index fund) that trades on the open market and buying it at periodic intervals. A common approach to dollar cost averaging is to buy an ETF every time you get paid. By doing this, you “average out” high and low market prices, obtaining an average price. This spares you the fate of “going all in” at a market high — the most common way that people go broke in stocks.
Apart from reducing risk, dollar cost averaging has another virtue: simplicity. If you go and invest all your money in a lump sum, you might end up buying an all-time market high that’s not seen again for decades. Japan’s Nikkei Index hit a high in 1989 that it didn’t see again for 30 years! With dollar cost averaging, that, by definition, does not happen. So, a great way to get started investing is to dollar cost average rather than go “all-in” with a lump sum.
That’s not to say dollar cost averaging is always the best approach. If you find yourself in a situation where stocks have declined 90% in price, you’re probably better off just investing everything you’ve got at all once: such declines are almost always followed by quick recoveries. We’re definitely not at such a low right now, though: the TSX is near all-time highs, so dollar cost averaging makes sense here.
Dollar cost average … into what?
Having established that dollar cost averaging is a good strategy, we now need to explore what’s a good asset to invest in.
In general, index funds like iShares S&P/TSX 60 Index Fund (TSX:XIU) are good choices here. Such funds offer low fees, high diversification, and high trading volume. Such characteristics make for desirable investments.
To go into more detail on XIU specifically:
The fund has a 0.15% management fee. Total expenses — management and other — come in at 0.18%. The fund is highly diversified, with 60 stocks. It has no leverage or other risk-increasing characteristics. Finally, it is Canada’s most liquid and widely traded index fund, which lowers the bid-ask spread (another source of hidden costs). So, an investment in XIU could be a decent way to get started on your path to financial freedom with as little as $15,000.
