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5 Rules for Wealth-Building With Fractional Shares

By Catherine Brock – Jun 7, 2020 at 11:01AM

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If you have $5, you can afford to invest. And if you are investing, you can build wealth.

Can you get rich investing $5 at a time? Or, a better question: With stock prices of many companies soaring into the hundreds and thousands, how does one invest $5, exactly? Here's the answer. If you can't afford a whole share, just buy a piece of one.

Fractional investing is the practice of buying stock shares in units of less than one. The advantage for new investors is clear; rather than devoting thousands right off the bat to set up a diversified portfolio, you could dip a toe in the investing waters with just a few bucks. As an example, you could buy a fractional share of an exchange-traded fund (ETF) that tracks the performance of the entire stock market, like Vanguard Total Stock Market ETF, for around $5.

Young woman using mobile phone with dollar signs above it outside

Image source: Getty Images.

A $5 ETF buy is a pretty cost-efficient entry point to diversified investing. But to springboard from fractional investing to true wealth-building, you'll need to add some discipline to your process. Here are five ways to up your investing game and turn those $5 buys into a nest egg down the road.

1. Have a goal

Having a goal improves your focus, sharpens your commitment, and allows you to measure your progress. There's an art to goal setting, however. Set the goal too high or too low, and the challenge is too strong or too weak to hold your interest. For example, if you are tucking away $5 weekly, the goal to save $1 million might be too aggressive. You won't see enough progress and your motivation could dry up. On the other hand, a goal to save $100 is too easily achieved. You'll reach that benchmark in 20 weeks or less and, possibly, not feel enough satisfaction to continue on.

Rather than focusing on the total value of your portfolio at this point, try setting a goal to increase your $5 weekly investment. Could you add $0.25 weekly to reach $10 by year-end? If you stuck with that program, you'd be saving more than $100 monthly in about two years.

2. Be consistent

Don't wait for cash windfalls -- bonuses, birthday checks from Dad, or tax refunds -- to make your fractional buys. You're better off consistently investing a small sum weekly. That way, you're building momentum now that's not dependent on anything else. You can always add your cash windfall to the stash later, but you can't make up for lost time if the cash doesn't arrive as expected or if you have to use it for something else.

3. Buy and hold

If you knew how to time the market, you could make a lot of money buying low and selling high. But the reality is that most novice investors will do just the opposite. The more often you trade, the more likely you are to buy high and sell low. And since you're working with fractional shares and tiny dollar amounts, even small losses can be big setbacks.

You'll have more reliable results by leaning on the long-term stock market trends to build wealth. Long-term, the market has always risen. You can ride those coattails by investing in quality positions and holding them for the long haul. Look to index funds, blue-chip companies, and dividend payers with long track records.

4. Understand the fees and their implications

Check your account disclosures for trading fees and account management fees. Fidelity, Schwab, Robinhood, and Betterment don't charge a fee when you make fractional stock or ETF purchases. Schwab will charge an exchange processing fee when you sell a fractional share, however.

Trading fees do lower your investment returns, but they're not necessarily a bad thing. The no-fee trading model could actually encourage you to trade more often than you should, which can also reduce your returns over time. The Schwab approach of paying no fee on the buy, but a fee on the sell, might actually work in your favor. It's a subtle reminder that you should only buy positions you want to keep.

Account management fees are normally calculated as a percentage of your account balance. Betterment, for example, charges .25% of your balance annually, in exchange for investment advice, automatic rebalancing, and general use of its platform and planning tools. If you sign up for an account that charges a management fee, make sure you're getting value out of those services.

5. Be a student of investing basics

As you are building your portfolio, take the initiative to study up on investing basics. Learn about asset classes and how they behave, diversification, asset allocation, and rebalancing. Get comfortable with the difference between value investing and growth investing. Understand how to calculate your total return and how to evaluate a position's performance relative to its peers. The more you know, the better the decisions you'll make.

Stay with it

Whether you're spending $5 at a time or $5,000, building wealth in the stock market takes time. Set a goal to increase your contributions regularly and keep investing in positions you can hold for the long run. Make sure you're getting value out of any fees you're paying and keep learning as much as you can. But most importantly, stick with it. Nest eggs aren't built overnight, especially when you're working with fractional shares.

Catherine Brock has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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