If you were considering investing some money besides your 401(k) plan to boost your savings and making more money for your retirement, you are maybe asking a question right now: how to do it with a small amount of money. In this post I am going to show you how I did it and what strategy I consider the best when investing small money. Later in this post I will also tell you why it is a good idea having another investing account besides your 401k, where you can invest on your own and why you should invest in your 401k only as much as to get your employer match and save the rest elsewhere. I will tell you why I decided to invest small portion of my contributions to 401k just to receive my employer’s match and the rest goes to my ROTH IRA and Investing-trading Account (this blog is a journal of my investing account only, but I am thinking to show my ROTH IRA account either on this blog or start another one).

If you do not have a lump sum of money available for investing in your own new account, you have only one way to go: invest a small amount of money every month. What strategy and what investment vehicles you should chose to start with? This is the most important question ever. You need a strategy, which will save you money on fees and commissions and which will help you to boost your savings, while still be as cheap as possible.
 

 
I tried several approaches before I came up with a strategy, which will be the most effective. Originally in my previous post I advocated to start saving in your savings account and after you save some substantial amount of money, transfer them to your new investing account. This approach didn’t prove to be the most effective to me.

I searched through the internet trying to find some feasible strategy and I have found a lot of great ideas and advice from aggressive growth trading, growth investing up to income investing. However, all of the strategies I found had something in common: all expected you to have an account with at least 10,000 of dollars or more and some income strategies even expected you to have 100,000 of dollars or more!

I also found some articles advising investing with small amount of 100 dollars a month. However, all advice I read about this investing approach revealed itself to be extremely expensive for a small investor like you or me.

Let’s say you have $50 or $100 available every month on top of what you already invest to your 401k plan. Let’s take a look at investing instruments we have available:

401(k)

This is a great investing opportunity for every employee. The great advantage of this plan is that it allows you to invest a small amount of money regularly and a manager of the plan can buy portions of the funds, so you are literally allowed to buy for example 0.43 shares of a particular mutual fund in your 401k plan. This is an excellent way of investing small money, which you probably won’t find anywhere else. Another great advantage, probably the most significant one, is your employer contributions, which is basically free money you do not get anywhere else.
However, that is all what is positive on this way of investing. With 401k you most likely won’t be allowed investing in any other investing vehicles than mutual funds and you would have to invest in only funds provided by your 401k manager (or provider). When you take a look at mutual funds in general, not many will outperform the entire market or provide the best results in a long term. If you look at funds in your portfolio and check their 10-year performance, you will probably see that none of them exceeded results of S&P 500 of the same period or if they outperformed, the results were mediocre. I checked my funds in my 401k portfolio and in long term, they were all worse or same as S&P 500 benchmark. In some years – short term, however, a few of them exceeded S&P 500 quite significantly or provided return of 15% – 40%. Another limitation would be that most likely your funds which are available through your plan, will have a higher expense ratio and a high turn-over ratio than what you can get when shopping around yourself.
The 401k manager also won’t provide you with advice services, he or she will be just buying, selling or approximately auto-balancing your portfolio. If you want to shelter your money during recessions, and you will experience way more of them than this last one, you have to actively manage your holdings yourself. I do not say trade your 401k on daily basis, or monthly, but re-allocate when a disaster is coming such the one we experienced recently to protect your holdings against losing i.e. 60% of its value. For example, I moved 50% of my equity holdings to bond holdings when I was clear that the last downturn was not a regular correction, and now I changed my allocation back to equity funds so the entire portfolio lost way less than others accounts.
Of course, there is one other significant benefit which may boost your earnings in 401k – dollar cost averaging. This strategy can be used when buying mutual funds or maybe ETFs, but definitely not when trading stocks. However, with the right selection of mutual funds, stocks and options you may get even better results than just sending your contribution to 401k and forget about it.
However, I want more than what 401k is promising. I do not advice not to contribute at all! You should contribute if you have the opportunity, but contribute as much as to get the match from your employer and go elsewhere with the rest. If you are like me and you want more or better results, you should open another account i.e. ROTH IRA and invest surplus money there on your own.

ETF (Exchange traded funds)

This is probably the best investment instrument small investors have available and I strongly recommend investing in this vehicle. You get the same diversification as with mutual funds and you can be buying a small amount of shares almost the same way as investing into stocks. There is no minimum to invest. However, if you have only $50 or $100 a month, investing into ETFs will be very expensive, because you will pay commissions for every trade. If for example one month you buy ETFs for $100, your fee will be $9.99 or 9% per trade and that is in my opinion too much. If you do not have at least $1,000 for each single trade, you need to save that money first. The question is where to save it and how to get “the best of the best of the best, (sir!)”.

Mutual funds

Mutual funds are very famous and a very large number of investors invest in them. The problem is that most of them do not even match their benchmarks or outperform the market. Most of the funds require an initial investment amount around 2,000 of dollars, some more, some less. With all the fees, expense ratios and turnover ratios the mutual fund can become quite expensive investing instrument. You can find mutual funds out there with low initial investment, but they will probably have high expense ratio. However there are some exceptions, which you can use in your favor. You can find mutual funds with no load and no transaction fees which may be ideal to start accumulating your funds as I will describe later.

Stocks, Options

Investing in stocks you need a lot of experience and a good, sound strategy along with a sound money management. This blog is my trading journal about investing into stocks. I am trying to show here my process of learning, all my mistakes and investment steps I took. I am still learning, however I can already see a progress. I have definitely created a sustainable money management plan (through all the mistakes), which is now protecting me against loses (it seems it already works correctly). I have created a screening strategy, which is providing me with good stocks and even though I am not done with all the learning and polishing the strategy yet, I really can see some improvement. However, if you want to invest in stocks you need some lump sum of money to avoid huge expense ratio. Investing only $50 or $100 a month will be as expensive as investing into ETFs. However, my goal for upcoming years is to save enough to be able trading stocks effectively. My current trading as shown here is just for my training purposes. This is why I am keeping the balance of the account at around $2,000 right now and try to learn in real situations and experiencing all emotions.

Trading options is a great tool of getting high results with little money. I started learning trading options at the beginning of January, but later I realized I was trying to attain too many things at the same time and I wasn’t able to focus on trading stocks, money management and options at the same time. So I interrupted options trading for a while. However, I am definitely planning to go back to options trading and use it as a short term, aggressive strategy to boost my results. This will, however, happen after my Accumulation investing phase.

Savings accounts, CDs, Bonds etc.

Investing into savings accounts is good only as your emergency account otherwise you earn only around 1 – 2%. CDs and bonds require large initial amount to open those accounts. Most of the CDs require $5000 and bonds range around $1000 – $5000 for initial investment. Some bonds can be purchased directly for example Treasuries, but its initial investment will be around $1000 as well. Mostly, these are not suitable investment instruments either. At least not in the phase of accumulation.

There are other investing instruments, but I mentioned only those, which may be used in your investing plan by you as a small investor. So if you have only a small amount of money, how you can start investing without accumulating it on low interest savings accounts? Stocks and ETFs are expensive for such small money and mutual funds require large initial investment. In what securities to invest then?

Accumulating strategy

I call this strategy as Accumulating strategy because of its purpose. The best investment instrument for this purpose are Mutual Funds. Wait, you just said they need large initial investment and they provide mediocre returns! Yes, but you can find funds with zero or little initial investment, with high short-term returns and compromise on expense ratio. You definitely need to find mutual funds with no load and no transaction fees. Buying those mutual funds will cost you nothing. However, the expense ratio of such funds will be around 1% – 2%, which is a bit higher than what you should seek for, but acceptable. Nevertheless, I myself plan on holding those funds only during the accumulation phase, which I plan last for five years. Since I can afford saving circa $600 a month right now (besides my debt payments and 401k contributions), after this period I should have at least $36,000 available. Then I will re-allocate into cheaper funds, ETFs and stocks.

During the accumulation phase I wanted to invest into income funds paying high yield dividends and reinvest them all. The appreciation is not as high and fast as when investing into equities, but in this phase I wanted generating money now instead of waiting on some future gain which may not come. This income strategy should provide with all benefits of dollar cost averaging, regular investing, high yield dividends reinvesting, so at the end of the period the saved amount should be larger than the one I mentioned above.

I will be investing in this accumulation phase for 5 years and after that I start reducing holdings in the mutual funds and reallocating funds into ETFs and individual stocks. The final allocation will look like this (it may change, however):

• 40% high yield bond mutual funds generating income to be reinvested (long term holdings 20 – 30 years)
• 20% aggressive equity mutual funds to achieve at least 15% or more annual return (as a short term holdings, max 1 – 2 years)
• 20% ETFs (bonds and equities, I am not decided yet what structure to chose)
• 20% Individual stocks to double or triple invested money (10% dividends & 10% high speculative, aggressive approach + options trading)

However, during the accumulation phase I will be investing 100% to high yield bond and equity high yield dividends funds. During this period I will have plenty of time to polish allocation and the strategy of the other investments (ETFs, stocks and options).

What mutual funds to select for this phase?

I screened for mutual funds following these criteria:

1. opened to new investors,
2. having initial investment < = $200,
3. no load,
4. no transaction fees,
5. and dividend yield >= 4%.

The screener returned the following results:

Symbol	Fund type	Last price	Dividend Yield	Expense ratio	Initial inv.
ATIPX	High yield bond	$8.77	7.88%	0.93%	$0
SWDIX	Large Value Equity div.	$10.50	4.59%	1.04%	$100
SNTKX	Foreign Large Blend	$19.98	4.97%	1.23%	$200

I screened those mutual funds in my TD Ameritrade account and you may get different results on your own when screening for no transaction fees. Also some funds require min. 180 days holding to wave the fees. However, I think that these funds are enough for the accumulating phase. I am going to invest 60% into bond fund and 20% into each of the equity funds and reinvesting all dividends and distributions.

And of course, since this blog is dedicated to my stock trading, some of the money I will deposit to my trading account as well. I still want to be successful in trading single stocks. What about you?

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