Monday, August 28, 2017

Four Resources for Investing on a Budget


I once had a friend make the following overgeneralized statement. As a paraphrase he stated that the poor don't have money, the middle class buys "toys" (meaning things like boats and quads) and the wealthy invest. for some reason this stuck with me.

While I do not necessarily aspire to be wealthy, I would like to provide a means for my family to be comfortable; especially in my old age. Throughout American history investing has been a means of growing that money. The stock market is somewhat volatile, but bonds are generally minuscule and you might as well ditch that savings account (in respect to interest). The higher the risk, the higher reward. The lower the risk, the lower the reward. How do you get started when you feel as though you don't have a lot of dough to spare?

1. Vanguard

Vanguard is a huge financial company that specializes in mutual funds and ETFs. Their real strength for me is in management of retirement and index funds specifically. Their expense ratios are low and their returns are at least on par with any other financial institutions. The low expense ratios allow more money to stay in the account and be invested which has huge implications when speaking to the exponential growth that happens with long term investments. One down side is that you need to put in the time and research to decide which funds you would like to invest in. There are target retirement funds that start more risky and become more safe over time for those that like to set it and forget it. They don't have individuals micro manage most funds, but the expense ratio is so low and diversity so high that it mitigates risk. Another potential barrier is that most funds require a minimum initial investment of $3,000. While this is pretty small in terms of long term investing, it may be a lot for someone to do at once. If you can put in an initial value of $10,000 you can invest in Admiral funds which are the same thing, but with an even lower expense ratio (a fraction). I personally use this to manage the bulk on my investments that I self manage. Also, since it is so big, there is a lot of information about their various offerings so the research is relatively easy. Check out www.vanguard.com for more information.

2. Prosper

Prosper is a peer to peer lending site that allows individuals to request personal loans at rates that are generally  lower than traditional brick and mortar establishments. This allows individuals to invest in other individuals loans and benefit from the interest incurred. Prosper is just the middle man. What is really interesting is that the loans are crowdfunded. This means if someone is requesting $3,000 for dental work, for example, that you don't have to give them all $3,000. Instead, you invest in a $25 portion for that loan and you make your interest based on your investment. This means that you can buy many different loans instead of just one and really diversify. The minimum initial investment that Prosper will accept is $25 so it is very easy in terms of barrier to entry. You may need to check your state because it is not available everywhere. On the down side, personal loans are a little on the risky side. When someone defaults on their loan you are just out. They state that they have credit services that go after the money, but I've had quite a few default rather quickly. I started with 100 notes ($2,500) because their website stated that nobody has lost money with that much diversification.  To date, after about 3 years, I am at about 8.15% annualized return, which means this is a solid piece of the investment pie for me.

3. Robinhood

Robinhood is one of my newest and most exciting adventures. It is a phone app only, resource and it allows individuals to trade stock during normal trading hours completely free. Seriously, no commission, transaction fees, nothing. It is legitimately completely free. They do offer a Gold program that allows after hours trading and other benefits which is not free. The app is clean, easy and has enough information that I have been comfortable buying and trading quite a few stocks. There is no minimum initial investment (other than buying a specific stock) and the response time to buying and selling has been immediate. For me it feels a bit like fantasy football, but with money. I started by just buying and selling a couple little stocks and then have steadily been tinkering and building a portfolio. The research withing app is pretty much limited to a line graph with performance back as far as 5 years. It is pretty useful if you want to look at general trends. This would require you to do a lot of your own research if you are looking to get an edge of what to buy and sell and when. It links to your bank account and funds are immediately available once you place them in Robinhood. Potential downsides would be that you have to really put in the work to know what to buy and sell, and when you don't have a lot of diversification there is more risk. Luckily, there is a lot of information out there about stock trading (thank you Internet!).  If you're interested in trying it out (you could seriously buy one $2 stock) please click here. It will give both you and I a free stock as a promotion.

4. Betterment

Betterment is also pretty new to me. I've had it for a few months and it is very intriguing. In general, Betterment has some goal based bot traded funds. That's right; bots! Their computer algorithms work diligently to buy and sell stock at the right times to maximize investment returns. While my sample time hasn't been long enough to make a conclusion about returns, their past returns have been a little better than similar funds that are managed by humans; so that's pretty cool. There is no minimum investment and it links up real nice with existing bank accounts. There is a small maintenance fee at 0.25% a year. This is probably because that bot isn't going to be asking for a raise. I just plunked $600 in a retirement growth fund and I'm just going to keep an eye on it and see how it does for now. I'll be able to compare it to similar accounts I have with my employer and through Vanguard to make a decision if I'd like to add more in the future. Either way, I just kind of nerd out over the idea of the bot and I pray it doesn't turn into a Terminator situation. The only negative I can currently see with Betterment is that it is still linked to the volatility of the stock market. But, all investments with potential of quality return are somewhat risky.

So, what are investment resources that you are having success with on a budget? What kind of success have you found with the ones I am sharing?

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