A very common myth is that “you need a lot of money in order to start investing” (or to start investing on your own). This is usually heard from those who don’t actively invest on their own, or from mutual funds who ask a minimum $5000 of your money. However, this myth is probably the furthest from the truth!
Knowledge Is Needed, And A Little Bit Of Money
Money is just the physical resource that you would use when investing. Knowledge is the key, and it’s what you really need in order to start. The former without the latter is just a recipe for losing a lot of money. The real barrier to investing is knowing how to find value & opportunities that exist. Knowledge allows you to get past that barrier to make a profit with any amount of money, big or small. It enables you to grow a small sum of money into a much larger one.
Growing A Small Sum Of Money Using Knowledge
Many great investors are able to grow their capital base over many years. How is this possible? They are able pick a greater number of good investments than bad ones. It’s knowledge that allow them to do this starting from a small sum of money. Why not follow their lead and start small?
I also started investing with a small sum of money, twice. After losing all of my money during the tech bust the first time (namely from Nortel stock), I had to start from $0 again. I realized that I knew very little about investing, so I started reading books on the subject. I saved up a couple hundred dollars, and started investing once more. The difference was that I had knowledge the second time around and was better able to assess risks, find undervalued investments, and multiply returns in an increasingly consistent manner. A lack of cash didn’t stop me from getting started, and it shouldn’t stop you either.
Lottery winners are fortunate enough to find themselves in a situation with millions of dollars, but unfortunately most don’t have a clue what to do with it. The majority of lottery winners end up back to where they were financially, prior to winning the jackpot. They had the physical resources (a lot of money), but didn’t have the knowledge to grow and preserve the capital.
Knowledge Vs Lots Of Money
Most people would argue that you require much more than $1000 in order to start investing. But let’s look at two simple examples of what an investor could have done with $1000 assuming they had the knowledge to pick undervalued investments at the time of purchase:
– A $1000 investment in Rubicon Minerals [RBY/RMX] made in 2006 at $0.60/share listed on the NYSE would have bought 1650 shares (after subtracting $9.99 brokerage fee/commission) . Rubicon was a relatively unheard of gold exploration company. The closing price on Monday (July 9, 2012) was $3.08. The 1650 shares (minus brokerage fees) would now be worth $5072, a staggering 407% return!
– A $1000 investment in Walt Disney Co [DIS] made in August 2011 at $33/share would have bought 30 shares (after fees). Disney was considered a boring and forgotten dinosaur compared to the likes of fast growing companies like Apple or Facebook. The closing price on Monday (July 9, 2012) was $48.00. The 30 shares (minus fees) would be worth $1430, a handsome 43% return!
Most people would consider $50,000 a very large sum of money that would be enough to start investing with as well as to earn you a good return. Let’s look an example of what an investor might have done with the large sum of money without knowledge, if they blindly followed recommendations and invested in a popular, but overvalued stock:
– A $50,000 investment in RIM [RIMM/RIM] in March 2010 at $75 on the NASDAQ, would have bought 666 shares (after fees). At the time, it was recommended by financial advisors, magazines, fund managers on TV, etc, as a great stock to have in your portfolio. The closing price on Monday (July 9, 2012) was $7.67. The 666 shares (minus fees) would be worth only $5098, a gut wrenching 89% loss!
Knowledge Is The Only Barrier To Investing
In most domains, knowledge is always the necessary requirement, before physical resources are even considered. The requirement for building a house is proper home-building knowledge, not having a large quantity of building materials. With knowledge but less materials, you end up with a smaller house. With the opposite, you end up with a larger pile of collapsed rubble.
The idea is the same in investing. The mandatory minimum amount of capital that you really need is enough to cover the brokerage fee (typically $9.99) for any purchase and $0.01 for a single share of a penny stock. You are limited to what investments you can make (any stock priced at $0.01), but you can still invest. Starting with just $10 illustrates the idea, but it isn’t the most practical way to start. However, a few hundred dollars is very realistic. The only real barrier to investing is knowledge, and with the explosion of the internet it has never been easier to obtain it!
Now, I know some of you are going to say….. “Okay, so you don’t need to start with a lot of money. But it’s easier to make money with more money”. Well, I’ll leave that myth for next time!
FULL DISCLOSURE: I am long Disney and Rubicon Minerals. I do not intend to buy/sell any of the above mentioned stocks within the next 3 trading days.
Thanks & Happy Investing! — The Investment Blogger © 2012