Today is certainly an uncertain time in the stock market. The market is up, but has it truly recovered? History has shown that the best times to invest arrive when uncertainty reigns, or even just after it has quieted down a bit.
Many times, though, you'll run across the following: "If you had invested $10,000 into company ABC back then, you would have X today." Of course, X is always a large number, like $500,000 or $1 million.
I don't know about you, but whenever I see one of those claims, I always get depressed. Why? Because I don't have $10,000 to invest all at once!
Like a lot of you, I make a modest salary, pay my bills, and save for the future. I think I'm getting ahead when I manage to save a few hundred dollars each month. Then I read a statement like the one above, and I despair at ever making it.
So what to do?
Maybe you're in the same position, able to save what seems like just a little bit each month. Is it worth investing that little bit? You tell me. A friend of mine turned a measly $220 investment in SYSCO into $57,000. Granted, it took him 27 years, but what an X! On average, he earned about 23% per year by investing in the food distribution giant.
Back when my friend made that investment, he paid a very large commission, both because he bought a few shares rather than a 100-share "round lot," and because brokers charged a lot at the time. Paying such large commissions back then tended to keep small investors, ones like you or me with only a few hundred dollars to invest at a time, locked out.
Today, though, discount brokers such as TD AMERITRADE or Scottrade will charge you less than $10 per trade, and they no longer make you pay extra for buying less than a round lot.
Many brokers also provide other features that make this a better time than ever before for small investors to get started in the market. Maintenance fees for low-balance accounts are often a thing of the past, and many accounts have direct deposit plans, which let you put a portion of your paycheck directly into your account every payday. Saving is effortless when you never "see" the money.
It doesn't take much
Instead of the $10,000 mentioned above, let's see what small investments in a few different companies would have done.
- Just $500 invested in biotech company Biogen Idec (Nasdaq: BIIB) 15 years ago would be worth more than $55,000 today -- a beautiful annual return of 37%, even with the recent worries related to its Tysabri drug.
- Investing in another biotech firm, Gilead Sciences (Nasdaq: GILD), would have been nearly as good, at just shy of 33% per year. That would have gotten you nearly $36,000 -- an amazing 71-bagger!
- Of course, regular tech did okay, too. Even several years after the dot-com bust, a similar investment in Dell (Nasdaq: DELL) would have morphed into nearly $12,000, thanks to a 23.5% average annual return.
- Payroll services company Paychex (Nasdaq: PAYX) performed at an average 17.4% per year over the past 15 years, which would have given you more than $5,500. That 11-bagger would have made Peter Lynch happy.
- Annual returns greater than 16% could have been yours with small investments in industrial parts maker Precision Castparts (NYSE: PCP), database provider Oracle (Nasdaq: ORCL), or even (to get away from tech) discount brokerage Charles Schwab (Nasdaq: SCHW).
That's the way to riches -- starting with just a few hundred dollars, and combining it with time. Anyone can do that. If you're in school, now is the time to start. If you've been working for a few years, even many years, now is the time to start. If you've just retired, given the longer life expectancies today, it certainly can't hurt to start. In other words, get started.
"Thank you, sir! May I have another?"
The trick, of course, is knowing which stocks to pick. Analyzing stocks takes time. You have to read the annual and quarterly reports, look at margins and returns on equity or assets, and evaluate management. It's a big commitment, and it can be difficult to fit in between work, family, and watching football.
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This article was originally published on Feb. 27, 2007. It has been updated.
Fool contributor Jim Mueller lives in D.C. and is very disappointed with the Redskins. He owns shares of SYSCO. That company is a Motley Fool Income Investor pick, as is Paychex. Dell, SYSCO, and Paychex were chosen at Inside Value, and Schwab and Precision Castparts are Stock Advisor selections. The Fool owns shares of Oracle and has a disclosure policy.
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