How I Would Invest $500 Starting from Zero.

Investing money into the stock market can seem like a daunting task. With many financial gurus barking at you to buy this or that, and so many different places to put your money today, it can feel impossible to discover the proper starting point. Luckily, there are simple and easy ways to get your foot in the door when it comes to basic investing. This break-down of how to invest $500 should be useful for anyone who has been searching for a guide or straight forward investing advice.

Suppose we have $500 saved up that we hope to invest. Let’s dive into what this may look like for a young adult or college student like myself.

Okay… Where is My Money Going?

Some of the safest and most profitable investments come in the form of index funds, which is a fund consisting of a list of stocks that fall under certain criteria. Some of the most popular index funds include the S&P 500 index which tracks the 500 largest public companies in the United States. Among some more popular index funds are the NASDAQ-100 and DJIA, which are similar to the S&P 500 but are weighted heavily in tech and industrials.

Index funds are a “must-include” for a couple reasons:

• They instantly diversify your portfolio and protect your investment account from unwanted downswings. By choosing an index, you avoid the risk that comes with buying into an individual stock or company, which is prone to big swings in stock price no matter how solid the business or industry.
• Even professional fund managers with decades of experience and teams of analysts regularly fail to beat the market by picking individual stocks. So your chance of consistently outsmarting the market by picking winners as an amateur investor isn’t high enough to entertain the risk.
• Index funds deliver some of the highest and most consistent returns across large periods of time, with the S&P 500 index averaging about 9% annual returns in the last 25 years. This is extremely important if you are in college or are still early in your career because it means we can take full advantage of the power of this compounding interest.

How Do I Invest in and Index?

The fastest and easiest way to invest in an index is to purchase an ETF (Exchange-Traded Fund) that tracks the index you want. For more information about ETFs check out my post What is an ETF? A college student’s Plain-English guide. 

Some of the most common ETFs that track these funds include S&P 500 ETFs (VOO, IVV, SPY), NASDAQ-100 ETFs (QQQ, QQQM, ONEQ), and DJIA ETFs (DIA, DJD, EDOW). Because all the ETFs for any individual index are practically identical, the goal here is not to research each of these ETFs in depth but to understand the slight variances between indexes.

Knowing this, here is our plan:

With our $500, I would plan to invest $400 into one or more of these index ETFs across 4 months. This way we can invest $100 a month and avoid any over-inflated valuations that may be present in the market on the day we happen to invest. 

Think of it like this: the market may be overvalued or undervalued on any given day, but by waiting a month to invest our next $100 we decrease the variance and increase the likelihood of getting a fair price for what we are buying. This method of investing money without speculation about market valuation is called dollar-cost averaging.

What About the Remaining $100?

We already have a strong base by investing in indexes, but I recommend putting the last $100 into a commodity ETF that tracks a precious metal. Have your pick between gold or silver, but by branching out from the indexes and investing into these ETFs we have a position that acts like a hedge against our other investments.

When there is extreme confidence in the market or the U.S. dollar, gold and silver tend to tank in value. This is because investors don’t feel the need for the security that these investments offer. However, in times of crisis gold and silver do very well because they have intrinsic value that holds up against inflation and poor market conditions.

In other terms, this would be a great way to diversify our portfolio even further by investing in physical commodities. Common gold ETFs include GLD, IAU, and GLDM, while common silver ETFs include SLV, SIVR, PSLV.

Is My Investment Actually Safe?

This is a fair question, and it boils down to what we mean by “safe”. By investing in funds we are confident in our pursuit of long term gains based on past performance, but day-to-day and even year-to-year variance is real. We cannot expect our investments to always be up, and we cannot always expect a positive return after just a single year of ownership.

This ties into the concept of patience and not timing the market. Basically, time in the market will always beat our attempts at timing the market. 

The most successful and admired investors of today, like Warren Buffet and Peter Lynch, never attempted to time their investments with the ebbs and flows of the market, but rather they only bought companies that they found to be reasonably priced based on what they were actually worth. Then, they waited for these companies to grow and have their values realized.

The trouble isn’t that these investments are “unsafe”, but rather the danger is in not planning properly: don’t invest money that you aren’t willing to lock away for years on end. Ask yourself, “If this money disappeared from my pocket right now, how would this impact my life?” This is the type of commitment you are making when you invest in the stock market.

What is the Benefit of a Roth IRA?

A Roth IRA is a special kind of retirement account that allows investors to eliminate capital gains tax on any profits that they have on their initial principle. 

Sounds great, right? The catch is that you cannot withdraw your money without penalty fees until you turn 59 ½ years old. This is accompanied by the stipulation that you can only invest a maximum of $7,500 a year or a maximum of your pre-tax income for that tax year if it is smaller than $7,500. 

A Roth IRA is a smart thing to set up for young people who are looking towards the future, and is worth its own dedicated post which is coming soon.