“A journey of a thousand miles begins with a single step.”
The above is a famous Chinese proverb that emphasizes the importance of the first step that we must take, in order to achieve anything in life. The same goes for investing. Every investor starts their investment journey with their own “first step” – be it $100, $1,000, or $10,000. The open market offers abundant ways for us to invest and grow our money. However, as a start, let’s explore some of the fundamental ways to invest your first $1,000.
Before we dive into that, here are a few key points to remember about investing. Always set clear goals, understand the financial product, be clear on your risk appetite and last but not least, diversify! Keep these in mind and you should be able to keep your risk to a minimum.
Now, let’s look at some common ways to invest your first $1,000.
Stocks are definitely one of the most straightforward ways for you to get a taste of investment.
A stock is a form of equity financial security that gives the stockholder ownership in the issuing company. For example, buying an Apple stock makes you one of the owners of Apple Inc. (albeit a tiny one). Sounds pretty cool, isn’t it?
Stocks are traded (bought and sold) mainly on stock exchanges. Some examples of these stock exchanges are New York Stock Exchange (NYSE), London Stock Exchange, Singapore Exchange (SGX) and many others.
Making your first stock investment is rather simple. Open a brokerage account with a broker (either a traditional or an online broker) and you’re ready to go. With your $1,000, you can now choose to invest solely on the stocks of one company, or you can diversify and buy a few different stocks. You pick your own stock, make your own decisions on when to buy and sell your stocks. You have full control over how to invest the $1,000.
In this case, you profit in two ways – via dividends issued by the company, and the capital gains when you sell the stock at a higher price than you have previously bought it for. But (there’s always a “but” for everything, right?), dividends are not compulsory payments from the company. The company may decide to reinvest their profits to grow the company, instead of paying out to their investors (i.e. you). As for the capital gains? Well, it can be a capital loss if the value of the stock drops below your initial purchase price!
Therefore, stocks are generally seen as one of the riskier options, compared to other financial products, such as bonds, which we will discuss next.
Next, let’s take a look at another major financial instrument – bonds. A bond is a fixed income instrument which represents a debt obligation (i.e. loan) of the issuing party to the investor, or bond holder. If you were to purchase a bond for $1,000, you are technically lending money to the issuing party. Therefore, as a bond holder, you are entitled to receive fixed interest payments from the company. Furthermore, upon maturity of the bond, you will get back the full principal amount (in this case, your $1,000).
Unlike stocks, which are typically issued by corporations, bonds can be issued by governments.
Bonds are typically structured as a long-term investment which could have a maturity ranging from 1 to 10 years (some even 30 years!). And due to its nature of fixed interest payment, full principal payback, and government backing (for government-issued bonds), it is generally perceived as a safer financial instrument compared to stocks.
If choosing your own stocks, or picking a perfect bond seems too much for you to handle, or you simply don’t have the time to actively manage your own investments, then it is time to call in the professionals. For the same reason you call your plumber to handle your daunting plumbing needs, sometimes it’s best to leave the task at hand to the professionals. Plus, with only $1,000, the idea of hiring a financial advisor doesn’t seem plausible.
Here is where mutual funds come in. Mutual funds (sometimes called unit trusts) are investments that pool money from multiple investors, which will then be used to invest in different financial securities, such as stocks, bonds, or other financial products. Mutual funds are professionally managed by a fund manager, who manages and maintains the fund’s portfolio in accordance with the fund’s investment objectives.
In other words, all you need to decide on is to choose a fund with an investment objective that most closely fits your goal, such as level of return and risk tolerance. Therefore, instead of investing that $1,000 by yourself and dealing with multiple stocks and bonds, you can choose to invest in only one mutual fund, which gives you the same level of exposure and diversification to stocks, bonds, and other financial securities. Not too bad, right?
However, a mutual fund is not without its cons. As mentioned, since all investment decisions are handled by the manager, you as an investor have little to no say in which stock to invest. On top of that, fund managers are not free, they usually charge a management fee ranging from 0.5% to 1% of the fund’s asset under management (AUM).
If you look around, there are plenty of mutual funds with different investment objectives for you to choose from. It can be an aggressive fund with a heavy allocation on stocks, suitable for young investors with higher risk tolerance. Or, it can be a bond-heavy fund which gives lower returns, but in exchange, enjoys more stability due to its lower risk nature. As discussed earlier, stocks are generally seen as a riskier investment as compared to bonds, which are relatively safe due to their fixed interest income and principal return upon maturity.
Ready, Get Set…
So, how do you invest your first $1,000? Well, there is really not a straightforward answer to that. It really depends on you. What are your goals? Your risk appetite? Do you have the time and energy to actively manage your portfolio? Or do you prefer the “set-and-forget” approach?
Regardless of which approach you ultimately choose, always remember that investing is a marathon, not a sprint. If you got it right on your first $1,000, then congratulations, you can simply rinse and repeat! If not, try again with your second $1,000. We learn from our mistakes and we become better investors through our experiences.
Now, are you ready to invest your first $1,000?