5 essentials to investing with a small account

The Market Online

3 days ago

The material provided in this article is for information only and should not be treated as investment advice. For full disclaimer information, please click here.
When it comes to investing in the stock market, we all have to start somewhere, and today, that can be for as little as the price of one share of a company on your watchlist. This ease of access to the market, miles ahead of the egregious fees of yore, means that small accounts are now the norm, making it more important than ever for beginner investors to master the essentials about what to expect when they put money to work. Set your expectations in terms of scale and time. Keep costs low through planning and strategy. Stick to established sources for your investment research. Diversify away from going to zero. Modify your strategy as your circumstances change. Investing essential #1: Set your expectations in terms of scale and time
The most important pillar of investing with a small account, with perhaps a few thousand or even a few hundred dollars, is to calibrate your expectations about potential growth and returns.
If you're investing for the long-term – say, a few decades or more – it's reasonable to expect an average return of 6-7 per cent per year, according to data from McKinsey on the S&P 500, though you may want to cut that by a percentage point or two depending on how diversified your portfolio is, which we'll address with investing essential #4 below.
Short-term investors, on the other hand, will be bound by the outcome of their thesis, which may build a case for share-price momentum based on earnings, a new product or service, or some other potential catalyst for positive sentiment.
When it comes to scaling your portfolio, it can help to perform a little exercise with compound interest to illustrate what your path forward may look like. Suppose you open a Tax-Free Savings Account with C$1,000 and decide to contribute C$50 per month. Using a compound interest calculator, we see that, if you carry on in this way for 10 years, earning a 6 per cent annual return, you end up with a grand total of C$10,013.36. However, if you make it C$100 per month, you end up with C$18,207.33, and if you extend contributions over 20 years, you get C$49,514.29, almost 50 times your initial investment.
Experiment with the technology to determine a contribution rate you can stick to for the long term, setting a sustainable path to fulfilling your financial goals. Investing essential #2: Keep costs low through planning and strategy
Now that you have a working picture of what your time in the stock market might look like, we can begin to consider how to keep costs associated with your investments as low as possible, thus maximizing the gains that remain in your pocket. Here are three tips to consider: Choose the account provider best suited to your needs. Canadians can start investing commission-free with Wealthsimple for as little as C$1 and with Questrade for as little as C$1,000, though these institutions offer self-directed investors only minimal educational resources and limited access to financial advisors for more personalized planning. If you're looking to talk to a certified professional to run you through investing basics, make an appointment where you do your banking to get started. Just be aware that these advisors may be incentivized to sell you bank-owned investment products they receive a commission on, so make sure to ask, should it come up in discussion.
Resist the temptation of trading too much in an effort to fast-track or maximize returns. Study after study shows that the majority of day traders – investors that jump in and out of stocks based on short-term predictions – end up taking a loss, no matter their level of education, compared to those who make regular contributions over their investing lifetimes.
Make sure the stocks in your portfolio offer attractive long-term prospects by running them through a thorough due diligence process, where you evaluate products, services, financial reports and broader industry tailwinds. This will optimize your ability to buy-the-dip and benefit from stocks' proven long-term returns, with the MSCI World Index delivering 8.61 per cent annually since 1987.
With foundational principles about the stock market and its inner workings in place, we will now turn our attention to portfolio construction and maintenance, with eyes on best practices to keep your investments aligned with your financial situation and life goals. Investing essential #3: Stick to established sources for your investment research
If you're intent on taking the leap from index funds into active investing in individual stocks, you'll want to build your investment theses through proven sources of financial data, reporting and analysis, ensuring the strength of your conviction when the market inevitably turns sour and stocks take a hit on the long road to differentiated returns.
Here's a working list of trusted brands in the financial space to get to know and potentially integrate in your research process: Stockhouse, the top financial portal in Canada, with more than 1 million unique visitors per month and a leadership position in shaping discussions on small-cap stocks in North America.
Barron's, one of the world's pre-eminent sources for financial news, analysis and commentary on stocks, investments and the markets they move.
The Globe and Mail, one of Canada's top newspapers, whose financial coverage is reliably incisive and actionable.
Morningstar, a beloved education-oriented research organization whose publications are designed to improve the average investor's outcomes in the market.
After you delve into a handful of articles and start to fill your watchlist with high-potential stocks, you'll want to validate them through your aforementioned research process to determine if they deserve a place in your portfolio. If you're not sure where to start, worry not. We'll cover the basics in investing essential #4. Investing essential #4: Diversify away from going to zero
Rule number one in investing is never go to zero and we achieve this through diversification, which means to spread your investments around, across company size, industries and geographies, and with them the inherent risks you take by buying stakes in businesses whose futures can be forecasted but never fully known.
This means setting limits on maximum position size, how much you're comfortable investing in any given sector or country, and how much to hold in less volatile assets such as cash and bonds to make sure you don't have to sell stocks to fund near-term needs, interrupting compound interest.
Take the global market portfolio as your guide and feel free to modify from there to suit your financial situation. Most investors stick to a mix of stocks, bonds and cash, but may add positions in real estate, cryptocurrency, private equity or even collectibles, depending on their particular interests.
From a research perspective, as you cast your gaze for prospective names to add to your portfolio, you should know that risk increases exponentially the farther you stray from financial results.
The gold standard for a potential investment, in this case, would be rising revenue and net income or free cash flow, ideally over multiple years, with ample data in support of this trend continuing into the future – including market tailwinds, value-added products and a management team of proven capital allocators – giving the stock reasons aplenty to trend higher.
The coal standard, on the other hand, involves money-losing companies or those experiencing a dip in profitability, whose shiny stories, lacking in terms of supporting data, offer minimal conviction towards re-rating their often pessimistically priced stocks.
In sum, diversification and a data-driven research process, calibrated to your needs, will align your stock portfolio with the high-probability outcomes required for long-term success. Investing essential #5: Modify your strategy as your circumstances change
The stock fundamentals now firmly secured in your back pocket will help you step into the market, but an openness to the inevitability of change is what will keep you invested over the long term.
The truth is, the goals you set in your 20s and 30s will most surely change in your 40s, 50s and 60s, to some degree at least, because your personality will naturally evolve as you discover new passions, suffer hardships and modify your worldview accordingly.
It may be difficult to imagine from your armchair, but these changes will have direct financial consequences, leading Future You to make decisions that Today's You may consider ludicrous.
While maximizing contributions to your investment accounts may make the most sense when you're younger, for example, the unique nature of your journey may force you to take your foot off the pedal of compound interest and save cash for nearer-term catalysts to your quality of life. These include but are not limited to a family, a house, a car, a business, a degree, a year off, a career change, or whatever fulfillment happens to require from you at the time.
In this way, if you keep an open mind and meet the person you are becoming with open arms, your portfolio will always be built to perform in your best interest. On a final note
Now that you have a firm grasp on turning your small investment account into a significant amount over the coming decade or two, you can focus on what really matters; namely, being intentional about the experiences and major purchases that money will facilitate for you in due time.
There's no wrong answer, so long as you have an answer, and it's meaningful enough to keep you invested through the market highs and lows that populate every path to long-term returns.
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