How to Invest Wisely with Small Amounts

Contrary to popular belief, the stock market is not just for the rich. Investing is one of the best ways to create wealth and make you financially independent. The strategy of continuously investing many small amounts of money can lead to the snowball effect, which is when small snow particles gradually grow in size and momentum, eventually reaching a progressive growth rate. To have this success, you must implement a consistent strategy, be patient, disciplined, and diligent. The guidelines below will help you get started with small but smart investments.

Table of Contents

Prepare before investing

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Determine if investing is the right choice for you. Investing in the stock market is often risky, and your money can be lost forever. Before investing, make sure you can cover your basic financial needs in the event of a job loss or hardship.

You must have 3-6 months of salary in a savings account. This is to ensure that if you need your money urgently, you won’t have to sell the stock. Even relatively “safe” stocks can fluctuate very quickly, and there’s always a chance that the stock price will fall below your purchase price when it needs to be sold.
Ensure insurance needs are met. Before allocating a portion of your monthly income to investments, make sure you have the necessary insurance coverage for your property as well as your health.
Never depend on investment money to cover difficult times, because the amount invested will fluctuate over time. For example, if you invested your savings in the stock market in 2008, and you had to take six months off work due to illness, you would probably have to sell the stock at a 50% loss due to the stock market price. decline at that time. If you have enough savings and insurance, you should cover your basic needs regardless of stock market volatility.

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Select the appropriate account type. Depending on your investment needs, you should consider different account types. Each account represents a vehicle for you to hold an investment.

A taxed account is an account where all investment income will be taxed in the year you receive the income. Therefore, if you are paid interest or dividends, or if you sell stocks for a profit, you will have to pay taxes accordingly. Money in this account is available for you to withdraw without penalty, unlike investments in a deferred tax account. ^{[1] X Research Sources}^{[2] X Research Sources}
A traditional Individual Retirement Account (IRA) allows you to contribute tax-deductible investments, but limits the amount invested. An IRA account doesn’t allow you to withdraw money before you reach retirement (unless you pay the penalty). You will have to start withdrawing once you reach the age of 70. The amount withdrawn will be taxed. The benefit of an IRA account is that all the investments in the account can grow and compound without tax. For example, if you invest VND 20 million in stocks and receive a dividend of 5% (1 million per year), that 1 million amount can be fully reinvested without tax deduction. This means you will receive 5% of your 21 million next year. The trade-off is that access to funds will be limited as you will be penalized for early withdrawal. ^{[3] X Research Sources}
A Roth IRA Individual Retirement Account does not allow tax-deductible investments, but you can withdraw your money tax-free in retirement. A Roth IRA account doesn’t require you to withdraw funds upon reaching a certain age, so it’s a good way to pass on wealth to an heir. ^{[4] X Research Sources}
Any of the above accounts can be an effective investment vehicle. You should spend more time researching your options before making a decision.

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Implement cost averaging strategy. It sounds complicated, but the real meaning of this strategy is simply — by investing the same amount each month, your average purchase price will reflect the average stock price over time. Averaging your investment costs reduces your risk, as investing small amounts periodically reduces the chance of you accidentally investing before the market crashes. That is the main reason you should plan to invest periodically every month. In addition, this tactic can also reduce costs because when stocks fall, your monthly investment will help you buy more stocks at lower prices.

Investing in stocks means you buy shares at a specific price. If you invest 10 million dong per month, and the stock you want to buy costs 100,000 dong/share, you can buy 100 shares.
By investing a fixed amount in stocks each month (for example, 10 million VND), you can reduce the price of the shares you buy and make more money when the stock price increases (because costs decrease).
The reason is that when the stock price falls, the monthly amount of 10 million can buy more shares, and when the price increases, that 10 million will buy less. The end result is that the average purchase price will decrease over time.
It’s important to note that the opposite is also possible — if the stock price continues to rise, the recurring investment will buy fewer and fewer shares, and the average purchase price will increase. by the time. However, your stock will also increase in price so you will still be profitable. The key is to have a serious method of investing periodically, regardless of whether the price goes up or down, and to avoid “predicting the market”.
After the stock market plunges, and before it recovers (recovery is slower than a slump), you should consider increasing your 401k retirement investment by a few percent. That way you’ll take advantage of a period of low stock prices and do nothing but stop investing a few more years later.
Investing small amounts periodically also ensures that you won’t invest any large amounts before the market drops, thus reducing your risk.

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Learn about reinvestment. Reinvestment is a basic concept in investing, talking about a stock (or any asset) that generates income based on the amount of income reinvested.

The following example explains this concept. Let’s say you invest $20 million in stocks every year, and those shares bring in a 5% dividend each year. At the end of the first year you will have 21 million. In the second year, the shares also generated a 5% dividend but now 5% is calculated on the amount of 21 million. As a result, you receive VND 1,050,000 in dividends, 50,000 more than the first year.
Over time this number will increase a lot. You only need to put the amount of 20 million in the account with 5% dividend, then after 40 years you will receive more than 140 million. If you add 20 million per year, this number will be 2 billion 660 million after 40 years. If you start contributing 10 million per month for 2 years, the amount you will get is 16 billion after 40 years.
Remember this is just an example, let’s assume the value of the stock and the dividend remain the same. In fact, stock prices can go up or down, and your return could be significantly more or less after 40 years.

Choose good investments

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Avoid focusing on just a few stocks. The concept of not putting all your eggs in one basket is very important in investing. Initially, you should focus on diversifying your investments, which means investing your money in a variety of stocks. ^{[5] X Research Sources}

If you buy only one stock, you run the risk that the share price could plummet. If you buy a variety of stocks in different industries, the risk is reduced.
For example, if the price of oil falls and the stock of oil drops 20%, your retail stock may appreciate because customers spend more money on gasoline when the price of the commodity falls. Information technology stocks can stay the same. The end result is a portfolio that is less likely to be negatively impacted.
There is a good way to diversify, which is to invest in a product that can meet the requirements of portfolio diversification. Examples are mutual funds or exchange-traded funds (ETFs). Because of their instant diversification, these funds are a good choice for beginners. ^{[6] X Research Sources}^{[7] X Research Sources}

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Explore investment options. There are different types of investments to choose from. However, since this article focuses on stocks, there are three basic ways you can approach the stock market.

Consider investing in an exchange-traded fund (ETF). An exchange-traded fund is a passive portfolio of stocks and/or bonds for some purpose. Often this target will mimic larger indices (like the S&P 500 or NASDAQ). If you invest in an ETF that mimics the S&P 500, you’re buying stocks in 500 companies, so diversification is huge. One of the benefits of an ETF is the low investment fees. The management of these funds is very simple so customers do not have to pay much for the service. ^{[8] X Research Sources}
Consider investing in an actively managed mutual fund. An actively managed mutual fund that uses the money of many investors to buy a group of stocks or bonds, according to a particular strategy or objective. One of the benefits of mutual funds is a professional approach to investing. These funds are overseen by professional investors who invest their money in a diversified manner and will respond to changes in the market (as noted above). This is the key difference between a mutual fund and an ETF — a mutual fund has managers actively choosing stocks to buy according to a strategy, while an ETF simply mimics an index. One downside is that the cost of joining a mutual fund is higher than an ETF, since you have to pay extra for active management. ^{[9] X Research Source}^{[10] X Research Source}
Consider investing in individual stocks. If you have the time, knowledge, and interest in researching stocks, individual stocks can offer great returns. Remember, unlike a highly diversified mutual fund or ETF, an individual stock portfolio is less diversified and carries a higher risk. To reduce this risk, you should avoid investing more than 20% of your portfolio in a single stock. This will somewhat provide the same diversification as mutual funds or ETFs.

Focus on the future

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Be persistent. The biggest obstacle that prevents investors from seeing the strong impact of the above mentioned reinvestment phenomenon is impatience. It’s really hard for people to sit around and watch their account balances grow slowly, and sometimes suffer short-term losses. ^{[15] X Research Source}

Try to remind yourself that you are playing a long game. You shouldn’t take the failure to make big gains in the short term as a sign of failure. For example, if you buy a stock, you should know that its price will fluctuate leading to profit or loss. Often stocks will fall before they rise. Remember that you own a part of some business, and you shouldn’t be dismayed if the price of the gas station you own drops for a week or a month, nor should you be disheartened if your stock price fluctuates. Focus on tracking the profits of companies over time to gauge their success or failure, and how the stock price will move accordingly.

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Maintain pace. Focus on the pace of your investments. Follow the investment amount and frequency you determined earlier, and let the investment amount increase gradually. ^{[16] X Research Source}

You should take advantage of the price drop! The cost averaging strategy is the right one and has been used to create wealth in the long run. ^{[17] X Research Source} Furthermore, the cheaper a stock’s price is today, the better the chance that its price will rise tomorrow.

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Stay informed and look to the future. In this day and age, with technologies that can give you instant information, it’s hard to look to the future years into the future while constantly monitoring your investment balance. However, those who are able to do this will have their snowballs gradually increase in size and speed, until it helps them achieve their financial goals.

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Pursue the chosen path. The second major obstacle to achieving the rollover effect is an investor’s desire to change tactics, as they pursue short-term profits by investing in new high-priced stocks, or selling stocks. just dropped in price. That’s really the opposite of what successful investors do. ^{[18] X Research Sources}

In other words, don’t chase profits. Investments that are showing very high returns can turn around quickly and cause losses. “The pursuit of profit” often leads to disaster. ^{[19] X Research Resources} Stick to the original strategy patiently, provided you have thought about it carefully.
Don’t change your stance and don’t constantly buy and sell stocks. History shows that selling stocks at their peak four or five times a year can be the key to profit or loss. You won’t realize those days come when they’re gone.
Avoid predicting the market. For example, you might be tempted to sell when you feel the market might go down, or avoid investing more because you feel the economy is in a recession. Research proves that the most effective method is to invest at a steady pace and use the investment cost averaging strategy discussed above.
Research shows that people who simply apply cost averaging and invest consistently will achieve much better results than those who try to predict the market, invest large sums of money in the beginning. each year or avoid buying stocks. The reason is that it takes more than a decade to learn the pitfalls of investing in stocks, such as investor sentiment when the market turns, exaggerated information, a group of people being paid to invest in stocks. selling stocks and falsifying information to create a rosy scenario is really just cheating. Many brokers won’t tell you that 99.9999% of companies will go bankrupt over time, so mutual funds and cost averaging will help you avoid all trading companies. poorly without having to spend time to learn or suffer losses. ^{[20] X Research Source}

Advice

Find support in the beginning. Get advice from an expert or a friend or relative with financial experience. Don’t be too proud to admit you don’t know anything. There are many people who want to help you avoid the initial mistakes.
Track investments for tax and budgeting purposes. Keeping records with clear content will bring you many advantages later.
Avoid the temptation of high-risk but quick returns, especially in the early stages of investing when you could lose everything because of one wrong move.
If your company has a 401k program that matches your investment desires, it’s crazy not to take advantage of it. It will give you a 100% return on your investment. The bank will never pay you 1 million VND for every million invested.
It is important to know if the market is in a state of inflation. Inflationary periods are suitable for investments in real estate and gold, but when there is no inflation, investing in stocks is more suitable. Inflationary periods are characterized by rising prices (like gasoline), a weakening dollar, and rising gold prices. During this time the real estate market performed better than the stock market. The characteristic of the period without inflation is that interest rates fall, the dollar and the stock market become strong. During this time the stock market outperformed the real estate and gold markets.

Warning

Be patient before you can get big return on investment. Small investments with low risk take time to pay off.
Even the safest investment is risky. Do not invest more than you can accept to lose.

Steps

Prepare before investing

Choose good investments

Focus on the future

Advice

Warning

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