The Right Place to Start Investing Now

When it comes to setting up a winning portfolio, picking the best investments is essential. But what stops many potential investors from ever getting started is the mistaken impression that you need a huge amount of money before you can begin implementing a smart investing strategy.

I'll admit to being guilty of giving advice like that in some of the articles I've written. From time to time, I've suggested that people drop $5,000 into a Roth IRA or buy 100 shares of half a dozen different stocks, even while I know that most people don't have thousands of dollars sitting around. And although mutual funds and direct stock purchase plans let you get started with $100 or less, you may well want to strive for the bigger rewards that choosing individual stocks can give you.

So, if you're tired of hearing advice that you can't afford to take, let me tell you how you can prioritize your investing without giving up on your ultimate goal of financial independence.

Where you are
The key to putting together a successful stock portfolio is to realize that you don't have to do everything all at once. When I first opened a discount brokerage account, I started with a single stock. Every month, as I slowly saved up money, either I'd buy a few more shares of a stock I already owned, or I'd pick another stock to add to my portfolio.

But that doesn't mean you should just pick stocks willy-nilly. The best way to concentrate your attention in the right place is to take a good, hard look at your time horizon and risk tolerance. That should get you pointed in the right direction.

In particular, here are some thoughts on how people in common situations can best start a stock portfolio.

When time is on your side
The earlier you start saving for a long-term financial goal like retirement, the more options you have. If you want to get a head start on your retirement saving, then you have enough time to take on some significant risk.

To make the most of the opportunity you have, take a close look at small-cap stocks. Over time, smaller companies outperform their larger rivals, and as they grow, they give you the potential for explosive growth. Stocks like Dynamic Materials (Nasdaq: BOOM  ) and Innophos Holdings (Nasdaq: IPHS  ) might make your portfolio a bit volatile, especially at first, but the chances of earning a high return on your investment are better than if you buy more mature companies with fewer prospects.

When things are more urgent
On the other hand, if you waited a bit longer before starting to save, you're in a more awkward position. You may need more growth from your portfolio to reach your goal, but you also don't have as much time to ride out downturns.

The best choice is to split the difference. Pick a high-growth stock like Intuitive Surgical (Nasdaq: ISRG  ) and Green Mountain Coffee Roasters (Nasdaq: GMCR  ) to begin your portfolio. But rather than sticking with those names, use your additional money to balance out your portfolio with a safer, value-oriented stock such as Chevron (NYSE: CVX  ) or Fairfax Financial (NYSE: FFH  ) . That way, you won't be taking a complete gamble with all of your money.

When it's already crunch time
The most difficult situation is when you don't have much time at all left to invest for a particular goal. If you only have a year or two, buying any stocks is a crapshoot -- you could hit the next bull market or another terrible year like 2008.

With five years or more to go, though, you can afford to build a conservative portfolio. You can stick with a value strategy, but another idea is to look for good dividend-paying stocks. Dividends help investors with short time horizons because they provide much-needed income. Often, you can find value stocks that pay good dividends; Chevron, which I mentioned earlier, pays around 3.5%, while Merck (NYSE: MRK  ) pays 4.7% and has a P/E ratio of just 12.

Don't despair
So, if you don't have enough money to buy dozens of stocks all at the same time, don't let that stop you from investing at all. Even if you just begin with a single stock, you can set the wheels in motion that will eventually lead you to the portfolio you've always wanted to own.

With the Dow having hit 10,000 recently, where do you think stocks are going next? Morgan Housel shares his insight right here.

Fool contributor Dan Caplinger started his portfolio with two stocks, one of which he still owns today. He doesn't own shares of the companies mentioned in this article, though. Green Mountain Coffee Roasters and Intuitive Surgical are Motley Fool Rule Breakers selections. The Fool owns shares of Dynamic Materials and Innophos. Dynamic Materials is a Motley Fool Hidden Gems selection. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is always the right place to start.


Read/Post Comments (7) | Recommend This Article (60)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 26, 2009, at 7:51 PM, madmilker wrote:

    thank you!

  • Report this Comment On December 21, 2009, at 5:31 AM, Fool wrote:

    thank you so much

  • Report this Comment On September 21, 2011, at 1:29 PM, inkomwealth wrote:

    As I write this 15% of US citizens live in poverty - hard to imagine as in Australia we have nearly full employment. I'd be saving cash in the current environment. Nothing has been solved in Greece. Until Greece is fixed or defaults, the markets will remain manic depressive. IMF found a gap of in European bank funding and until this is flushed out, your Index Funds or market generally (including mutual funds) are likely to drop another 20-40% easily.

    Reuters reporting that according to the IMF, "Europe's debt crisis has increased the risk exposure of banks in the region by 300 billion euros and they need to recapitalize to ensure they can weather potential losses. In its Global Financial Stability Report, the IMF said it sought to "approximate the increase in sovereign credit risk experienced by banks over the past two years." Earlier this month, IMF Managing Director Christine Lagarde drew fire from European officials when she called for a mandatory recapitalization of Europe's banks. News reports last month said the IMF had identified a 200 billion euro shortfall in European bank capital, but officials in Europe insisted the figure was off the mark and the capital position of most banks in the region was solid." Personally I see there is at least €1 trillion hole in Europe.

    Then AFTER a drop you may slowly accumulate the equities at distressed prices. My concern is that you rush in now and destroy your initial capital.

    As a Certified Financial Planner™ I created a Wealth Success Map with a Time Clock, showing visually what to do with money, almost like a board game. Check it out and feel free to share:

    http://inkom.com.au/sites/default/files/mapnsrev04-128079681...

  • Report this Comment On November 27, 2011, at 9:21 PM, shirlhinkle wrote:

    My plan is to get ahead of the game for once!

    I have more mortgage than house value.

    A large number of people lost jobs and houses in 2008 and 2009.

    Many had to declare bankruptcy.

    A portion of these people have been back to work for at least 1 year.

    They are in a good position to purchase a new home at discount prices.

    They will start qualifying for new mortgages 3 yrs after bankruptcy.

    That means these homes can get financed in 2012 and 2013.

    I'm getting on board with FNMA while it is a sleeper.

    It’s only going for 20¢!

    I don’t think the government will let it’s own property fail, do you?

    It jumped up to $1.00 last Feb 2011, so it has potential now.

    I think it is going to go far past this level - to $35 within 10 years.

    By betting $200 for 1000 shares I could lose my little investment.

    But, when it goes to $2 I make 10x my money, or $10,000.

    It was at $70 in 2008.

    When it goes to 10% of that amount or $7 that's 35x gain.

    For 1000 shares that's $35,000.

    I will use this benefit from FNMA to pay my mortgage down.

    Then I will have more house value than mortgage.

    That is the way life should be.

    It is definitely worth risking $200.

  • Report this Comment On July 18, 2012, at 8:55 PM, hrskr8z wrote:

    I like your thinking. I hope the "math" part works out for you!

  • Report this Comment On August 29, 2012, at 7:38 PM, mercermerc wrote:

    im just starting out but this sounds like sound advice. i think actual experience is better than the books ive read and the classes i took in college. im excited about the money making potential. i invested in a few of the stocks suggested in the article. starting with 700 so we will see how i can save more and make this thing grow.

  • Report this Comment On May 29, 2013, at 9:16 PM, bookiz wrote:

    According to www.pennystockipedia.com trading penny stocks is a good way to start

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