I get a lot of inquiries about how to start investing in a small portfolio. Here’s what you need to know to start your own $10,000 portfolio.
I use $10,000 only as an example. If you have $1,000 or $5,000 or $25,000, it’s very similar. The most important thing is to just begin.
There’s no doubt that we can buy some nice things for $10 grand. A very nice vacation or two, a used car, morning coffee for the next decade and the list goes on. It is a decent amount of money.
That being said, in the world of investing, $10,000 isn’t a whole lot but still a decent amount to begin as it does allow for ample diversification.
So here’s what I wanna cover in this video so you can go out there and begin your journey.
I’ll be showing you,
- How to create an investment plan to ensure that you remain on the right path
- Why it’s so important to go with lower risk stocks until you have a good amount of experience
- Why it’s vital to stick with three to five stocks until you amass more cash
Investing is Not One Size Fits All
We are all unique individuals. My goals and challenges may be very different than yours. Your investing style is not necessarily the same as mine.
Let’s talk about you.
First of all, if you have $10,000, that means that you’re a saver. That’s a great achievement. Being a saver will help you going forward because if you were able to save $10,000, then you can do even more over time.
I am also guessing that you are under the age of 40. Most of us have difficulty saving a lot of money until we have reached mid-life. When we are younger, we have expenses such as education, beginning a family or purchasing our first home.
In addition, you have probably decided that you won’t need to touch your $10,000 for at least three years. In order to wait out market volatility which is a natural part of investing, long-term investing is essential. If we anticipate needing our funds in less than a year or two, our best bet is to stay with a bank account rather than starting a portfolio.
I would say that you are excited and ready to start investing, but you are also a newcomer to the market. You know that you don’t have a lot of experience and that building capital takes time and patience.
So, where do you go from here?
Firstly starting Your Portfolio
Our first instinct may be to start out by buying our first stock. However, while we may be eager to jump right in, we first need to write an investment plan. It doesn’t have to be long, but it is essential to have one in place before putting our money into a stock.
In our plan, we should include how long we expect to leave our money in the market. If we are young, it will most likely be for over 5 years. Also, we need to think about our expectations for returns. A rule of thumb is to expect approximately 10% over the long-term. Some years more, some years less. In addition, we should know how much invested capital, including additional savings we want to have in five years. It’s important to keep your expectations realistic and achievable so you stay on path.
The most important part of our plan is to figure out our risk tolerance. Those of us that are less experienced investors will sometimes overestimate our ability to choose stocks as well as deal with falling markets.
That being said, our plan should include what percentage loss you can cope with, both for individual stocks and for your entire portfolio. By doing this, you will have an easier time selecting stocks and, if the market goes down, it will keep things in perspective.
Secondly choosing Stocks
By this time, I am sure you are itching to buy your first stock. I know you are not going to want to hear this, but there’s still more work to be done before we take that step. Let’s look at what we should do first:
- Educate yourself about valuation. Take as much time as you need to read up on investing before taking the plunge.
- Always buy a stock that is undervalued. Also, learn why the stock is undervalued. Study the company until you understand why.
- Follow your investment plan. You spent the time developing it, so use it. If a stock does not fit into your plan, skip it.
We may think we know what our risk tolerance is, but aim to have your first stocks at the lower end when it comes to risk. Low risk stocks still come with risks, sometimes they can fall by 20%-30% or more in a falling market.
It’s okay to buy listed investment companies since they are inherently diversified. Blue chip companies like Johnson and Johnson are okay as well, as long as they are undervalued. The first stocks that you buy can be looked at as educational tools, not just fast money.
Please avoid jumping into “hot” stocks. That can come when we’re more experienced. When we are new to the market, we stand to lose a lot when investing in these stocks, because we don’t know which ones to avoid.
Why do we want to avoid risk at first? As I mentioned, with only $10,000, we cannot adequately diversify. We eventually want to have between 15-20 stocks, but we should be starting off small and build up over time.
The reason we want to do this is that brokerage is costly. It can quickly eat up your returns. So, it is best to keep brokerage fees below appropriately 1% per trade. The lower the better and believe me, it does vary. Some online brokers charge around $10-$20 per trade. Others as low as $1. If we are investing $10,000, around five stocks would keep our brokerage fees below 1%. Allocating our capital equally between the five will have each stock at 20% of our portfolio.
In reality, it’s not preferable to have portfolio’s with weightings as high as this, but with such a small portfolio, there isn’t much choice in the matter. In this situation staying away from risky stocks is the way to go because if just one company you invest in goes under, a fifth of your initial $10,000 will be gone.
Final message – Time is of the Essence
We all have heard the saying, “patience is a virtue.” This is very true when it comes to investing. Being overzealous and impatient will ultimately result in mistakes and these mistakes can be very costly. We must resist the temptation to rush right in and we must stick to our investment plan.
Take the time to save. By doing this, we will see our capital grow rapidly. We can add stocks to our portfolio over time and this will improve diversification. Always remember, buy undervalued stocks.
An analogy I like to use is, as investors, we are in fact looking for BMW or Mercedes Benz quality stocks, but only pay a Toyota price for them. Most investors pay a Ferrari price for Toyota’s, which is why so few people make any money from the markets.
Taking everything that I have laid out into account, now it’s time to wait and watch our money grow. Our portfolio is always evolving, but it is very satisfying to see our money accumulate over time.