One of the biggest misconceptions people have about investing is that you need to have thousands of dollars ready to invest before you can even think about dipping your toe into the stock market. If this is a thought you’ve had, you’re in good company, but you’re also wrong.
The reality is that you can start investing today with a little as $5. There are tons of options for opening zero minimum investment accounts, no minimum investment funds, and countless platforms offering fractional shares. All of these efforts to democratize investing have made it incredibly easy for you to start investing with no money saved. Here’s how to do it.
Use Dollar-Cost Averaging
What Is Dollar-Cost Averaging
Dollar-cost averaging is an investment strategy where you buy stocks at regular intervals regardless of the price. Most people haven’t heard of dollar-cost averaging, but if you’ve ever invested in a 401k, you’ve used this strategy.
When you invest in your 401k a certain percentage of your paycheck gets deposited into your 401k and invested every time you get paid. It doesn’t matter if stock prices are up on payday, or down, your money gets invested regardless.
You can use this same strategy to invest small amounts of money over time in other investment accounts, like IRAs and brokerage accounts, as well. Whether you have an extra $5, $20, or $100 a month to invest, all of your small investments will add up over time and create the large amount of money you think you need to have saved to start investing.
Dollar-Cost Averaging vs Lump Sum Investing
The theory behind dollar-cost averaging is that it reduces the impact of volatility on your investment portfolio. Volatility is the fluctuation of stock market prices and is necessary for you to make money investing in stocks (when stock prices go up), but it’s also what provides an opportunity for you to lose money investing in stocks (when prices go down).
When you invest using dollar-cost averaging you buy the stocks in your portfolio at many different prices. Sometimes stock prices drop and you buy your stocks at a low price, and other times the market is up and you buy them at a higher price. When you buy at a low price, you make larger gains, and when you buy at a high price you make smaller gains.
You’re probably thinking, ok, well why don’t I just buy stocks when they’re at a low price then? There are 2 reasons for this.
- You don’t have a lump sum saved to invest right now, and the longer you wait to invest, the more earnings you’ll lose from compound interest. Dollar-cost averaging is a long-term investment strategy, and the stock market has historically always gone up over the long term. If you start investing today, you’re almost guaranteed to make huge gains over time. There’s no need to save up and wait to perfectly time your purchase.
- It’s incredibly hard to time the stock market. If it were easy, everyone would buy stocks at the bottom of a market crash and sell stocks at the peak of a market expansion. However, no one, not even the pros, knows when the market is going to crash or peak. If you try to save up and wait to time your buy during a crash, you’ll probably time it wrong.
It’s also worth noting that if you had invested in the S&P 500 at market highs before the great recession in 2008 or the covid crash in 2020, as of today, you would have made all of the money back that you lost during those crashes, plus some. This is why you don’t need to worry about buying stocks at high prices sometimes, and what makes dollar-cost averaging an incredibly easy, low-stress, and lucrative investment strategy.
What Stocks to Invest In
Index Funds and ETFs
You know the phrase, don’t put all your eggs in one basket? Well, index funds and ETFs are firm believers in that phrase, and their diversification is what makes them great investments.
Typically, people think they need to be able to choose winning stocks to be a good investor. The bad news is that choosing winners is hard and is why so many traders, over 80% in fact, lose money. The good news is that index funds and ETFs take the guesswork out of picking a winning stock by combining many different stocks into a single investment.
Let’s take an S&P 500 index fund or ETF, for example. When you buy one of these funds, you’re actually investing in a tiny sliver of stock in all 500 companies that make up the S&P 500. For you to lose all of your money, all 500 companies would need to perform poorly. This does happen when the market drops in the short term, but as we mentioned earlier, the market has always gone up over the long term. When you buy all 500 companies in the S&P 500, you’re essentially buying the market, and therefore are pretty much guaranteed to make money over several decades.
Buying index funds or ETFs and holding them for long periods of time significantly reduces your risk of losing money in the stock market, which is a great first step, but you still need to construct a well-rounded portfolio that includes 3-4 different funds. If constructing a multi-fund portfolio sounds daunting to you, you can use a Robo-advisor or a target-date fund instead.
Robo-advisors are digital advisors that provide algorithm-driven investment services. When you use a Robo-advisor, you tell them certain things about you like your tolerance for risk and your investing goals and they build your entire portfolio and manage it for you based on your personal preferences. It’s a great option for people who want to be completely hands-off investors.
Another great option is to use a target-date fund. These funds are typically available in retirement accounts like 401ks and IRAs, and they offer similar services to a Robo-advisor.
When you use a target-date fund, you select the year you plan to retire and your target-date fund will construct and manage your portfolio based on your length of time to retirement. The further you are from retirement, the more risk your portfolio can handle, and the closer you are to retirement, the less risk your portfolio can handle. By investing in a target-date fund, you’ll end up with a well-diversified portfolio that will automatically become less risky over time. This is another great option for people who want to be completely hands-off investors.
Beginner Investing Tips to Remember
Now that you know how to start investing without any money saved, here are some beginner investing tips to remember.
Investing $5 a month is better than $0 a month. No matter what your level of investment is today, it is better to start small than not start at all. When your income increases or expenses decrease in the future, you can increase your monthly investments. The most important thing is to start investing now so compound interest can help grow your investments.
Choose an Account and Funds with No Minimums
When you’re starting to invest with no money saved, you want to make sure you choose an account provider, investment account, and funds with no minimums. Some accounts and funds require that you maintain minimum balances, or have buy minimums. Avoid those when starting out.
If your ideal fund has a minimum buy, invest in a similar fund that doesn’t have a minimum until you can earn/contribute what you need to buy the fund you really want. Once you hit your goal, you can sell your current investments and buy into your ideal fund.