Do you need to know the 5 best investments for small investors? You’ve come to the right place. If you’re tired of reading advice for people with lots of money to lose, this article is for you. Here are five investments that’ll help a small investor build a well rounded portfolio.
- Start with an emergency reserve account. Small investors need to worry about safety, so it’s important to build reserves to use during emergencies. That way, any money in a fluctuating market can stay in place. Start a money market savings account at a reliable bank or credit union. Use direct deposit to move funds into this account monthly until you’ve amassed three to six month’s worth of expenses.
- Build a Roth IRA. “For any parents trying to straddle the college-retirement line—a Roth IRA is a no-brainer,” writes financial guru Jean Chatzky. We like a Roth regardless of children because it’s a Swiss army knife tax shelter: money grows tax free if used for retirement, may be withdrawn for college and principal may be used in emergency situations without penalty.
- Use your 401k plan at work. This is a great place for small investors to accumulate money for retirement, especially if your company matches your contributions. In a 401k plan, dollars are invested pre-tax, making a 401k an ideal tax shelter. Funds may be invested in a number of fund choices (these depend on the individual company’s plan). Most plans help small investors choose investments through literature and risk charts. These tools can help a small investor pick a good starting mix and provide online access to review performance from time to time.
- Buy mutual funds. “Some mutual funds accommodate investors who don’t have a lot of money to invest by setting relatively low dollar amounts for initial purchases, subsequent monthly purchases or both,” reports the Securities and Exchange Commission. A mutual fund is a pool of dollars shared with other investors to gain enough scale to purchase a full complement of stocks, bonds or other investments. Many have a professional manager attached to make buy/sell decisions so you don’t have to worry about investigating individual positions.
- No time? Investigate asset allocation mutual funds. If you don’t have enough money to open two or three different mutual funds or the energy to track performance over time, these may be compelling. Sometimes called target funds or lifestyle funds, an asset allocation fund is pre-diversified and features either a risk level or target withdrawal date to fit appropriate investors. The Alliance for Investor Education likes these funds because “they are designed to help investors avoid some of the most common investment mistakes.”
Chatzky, Jean Sherman, and Arielle McGowen. (2010). "Money 911: Your Most Pressing Money Questions Answered, Your Money Emergencies Solved." Harper.
Lynch, Peter, and John Rothchild. (2000). "One up on Wall Street: How to Use What You Already Know to Make Money in the Market." Simon & Schuster.