How To Invest Your First $1000?

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Okay, I presume you are debt free – what I mean is you are not carrying a credit card debt. You also have emergency funds saved up to cover six months of your expenses. If you have not done these, in my opinion you are not ready to invest. Please read the following posts:

Getting out of Debt

Debt Free Living

If you have reached here, great! Congratulations! You have been living a fiscally responsible life and have saved your first $1000 to invest.

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Should you invest in individual stocks?

In all honesty, I had this exact question about ten years back and there was no one to guide me. Long story short – I opened a brokerage account, deposited my first $1000, started trading individual stocks and thought I knew the stock market like the back of my hands. Long story short – I was naive. I made some money, I lost some money. Fortunately, in my case, I was net positive, however there was nothing worth to write home about.

Over the course of time, I studied a lot about investing in stocks and did make a decent return in the stock market by investing in individual stocks. Would I recommend it for your first $1000? No! Would I have gone the same route knowing what I know now? No!

You want to know why? There is no diversification – no diversification means high risk! A single stock could go down for all the wrong reasons and you could panic, sell, and lose a significant portion of your investment. Look at oil stocks today – there are excellent oil companies with very clean financials and excellent fiscal accountability. The fall in crude oil price has crushed these stocks from their highs in 2014.

You could diversify by investing in 10 stocks. Then you will be paying a lot in commissions. If you were to trade individual stocks, you are looking at about $5-$10 per trade depending on the brokerage firm you choose. If you make 10 trades (purchases for diversification) per year, even it costs you only $5 per trade, the total cost is $50.

 

What is the best way to invest your first $1000?

If you prefer to be a DIY investor, the best way to invest your first $1000 is on a S&P 500 index tracking Exchange Traded Funds (ETFs) through one of the big boys (aka brokerage firms) – Vanguard, or Fidelity.

Both of them offer “commission free” trades for S&P 500 index tracking ETFs. In addition, the big boys will reinvest dividends for free and provide support for fractional shares. Something smaller players wouldn’t do.

With Fidelity you could trade IVV (S&P 500 ETF) commission FREE.

With Vanguard you could trade VOO  (S&P 500 ETF) commission FREE.

If you are not the DIY type, and you want to automate your investment across stocks and bonds using robo-advisors, then you could sign up with Betterment or Wealthfront, and let them do all the hard work while you focus on other things in life. Here are the links to my reviews on robo-advisors:

Betterment Review

Wealthfront Review

 

How much does it cost?

With an S&P 500 ETF, the cost (aka expense ratio) is about 0.07%. That means you pay $0.70 in fees for the $1000 you have invested per year. Now compare $0.70 to $50 – that is a huge difference in fees.

 

Risk vs. Return

The last argument – yes, you could hit it out of the park with your individual stock picks and beat the market (S&P 500) return. Or, you could lose a significant portion of your $1000. It comes down to risk vs. return.

 

My Opinion 

Having personally been through the journey, I wouldn’t recommend investing your first $1000 in individual stocks. At less than $1 in fees, you can invest your first $1000 and get it diversified across S&P 500.  Yes, diversification is the free lunch, enjoy it. Once you have dollar cost averaged into S&P 500 over a period of several years, consider investing in individual stocks if you have the appetite for it.

 

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