When we were just babies, we started to crawl in order to explore the “new world”. After a while, we noticed that there was more “out there” and we started to think about a way to go faster and further during our exploration. Then one magical day we decided to stand up on our 2 feet and look out at the horizon. In order to reach this point, we learned, step by step, how to walk. We fell a few times, we got hurt but our mommy was always there to take us in her arms and comfort us. Wouldn’t life be easier if our mom was still there to show us how to manage our personal finances as she was there to teach us how to walk?
Last week, I discussed why I really like index mutual funds. Some readers might prefer to trade ETFs (Exchange Traded Fund) directly, in order to replicate stock market indices with lower fees. However, there are 2 major inconveniences with ETFs when you are investing smaller amounts (i.e. less than $10,000):
#1 You are limited in your trades due to your small amount (you shouldn’t buy 5 or 6 ETFs with 10K)
#2 Transaction fees will eat up a lot of your yield (if you buy an ETF with $3,000 and you buying cost is $10 and your selling cost is $10, this represents close to 1% already).
Last Tuesday, we looked at how to create a bond ladder with less than $10,000. While certificates of deposit are good to balance out your portfolio and provide peace of mind with security like a comfy blanket while sitting in front of a warm glowing fireplace, they will definitely not provide the growth to make your retirement savings account jump.
Some people won’t be able to endure the cruel market fluctuations and that is fine. This is why they should (even at an early age) setup their bond ladder and minimize their risk. However, if you understand that although your investments drop at times, over the long haul they have always gone back up (if you have a sane asset allocation”¦which will be explained in another post).
Being a Financial Planner, I am always discussing different investment strategies with clients and colleagues. I would say that we are all tempted to think that the most profitable and easiest strategies are for rich people. We may think that we could be making much more money with $100,000 to invest rather than $5,000. However, there are methods for small investors that can almost replicate the best investment strategies of the rich.