Many beginner investors make costly mistakes that lead to significant loss of funds. One way to avoid this is for new investors to start their investment journey by learning how to invest just $1,000 in stocks.
This is a relatively small amount that will allow you to dip your feet in without going overboard.
The lessons learnt from this exercise can then be applied to more significant sums. In this way, beginner investors can avoid significant loss while setting themselves up for wealth creation and the achievement of their financial goals.
In this article, we’ll consider strategies that can help beginner investors successfully invest $1,000.
Invest in ETFs
John Bogle, the founder of Vanguard Group; Warren Buffett, the third-richest man in the world; and Paul Samuelson, a Nobel Laureate in Economics, are among the top names that have recommended that the average investor is better off buying a fund (such as an index fund or ETF) that tracks a stock market index instead of choosing individual stocks themselves.
This is because investors who try to choose their own individual stocks end up underperforming these market indices even though they incur higher transaction fees (due to more frequent purchase and sale). Even mutual funds managed by experts have also underperformed these indices despite their high expense ratio (management fees).
Furthermore, with these funds, beginner investors are able to diversify their investment, thus reducing their investment risk. While $1,000 can only get you a few individual stocks, the same amount can get you many ETFs or index funds, with each ETF or index fund containing hundreds or even thousands of stocks.
With index funds or ETFs, beginner investors can track the performance of a market index while keeping cost and risk low.
We recommend ETFs over index funds because they are more liquid (since they are traded throughout trading hours) and transparent (since they are more open about their holdings).
In summary, as a beginner investor, you are better off using your $1,000 to build a diversified portfolio of ETFs rather than selecting individual stocks.
Embrace passive investing
But which ETFs should you choose and how would you know if you have had enough diversification in your portfolio?
As a beginner investor who does not have the time or resources to start evaluating ETFs or plotting graphs to determine your efficient portfolio, you can outsource this work to digital wealth advisors.
These advisors use time-honoured theories like the Nobel-prize winning Modern Portfolio Theory to create an efficient portfolio personalised to the risk tolerance, investment goals, and time horizon of the investor.
With their expertise, they can choose the right ETFs (low cost, sufficient liquidity, right level of diversification, good return-risk profile, etc.) and then combine them in a way that will maximise your returns given your risk tolerance and minimise your risk, given your returns expectations.
Since these advisors use ETFs and embrace a passive approach to investing (tracking a market index rather than seeking, to no avail, to outperform it), they are able to charge low fees and help investors develop a long-term approach to investing.
In summary, as a beginner investor, you are better off investing your $1,000 in an efficient and diversified portfolio created for you by a low-cost digital wealth advisor.
Use dollar-cost averaging
Even with the right strategy, some beginner investors might be unwilling to put all $1,000 in the stock market at once.
While investing all at once is better (higher compound returns), it is better to use a dollar-cost averaging (DCA) strategy if you are not emotionally confident in the market.
With this strategy, you will divide up your $1,000 into smaller amounts invested regularly over a defined period of time – say $200 at the beginning of the month for the next five months or $500 at the end of the next two months.
In summary, as a beginner investor with too little confidence in the market, you can dollar-cost average your $1,000 as a way to manage emotions.
Sarwa is a digital wealth advisor that uses the Modern Portfolio Theory to create efficient and personalized portfolios of ETFs for all kinds of investors – including beginners – at a quarter of the average industry fees.
By investing your $1,000 in a diversified portfolio of ETFs, you will be on the road to learning how to invest more significant sums in the future.
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