If you feel like investing is a game that is rigged to favor the wealthy, you’re right. Some of the most lucrative investments opportunities, such as hedge funds and private equity funds, are only open to people who already have a $1 million in liquid assets or an annual income of more than $200,000. In other words, those who are already rich.
Related article: How much money does it take to be considered “rich” in the US?
Many online brokers set minimum deposits of $1,000 or more before they will open an investment account. Even mutual funds, one of the simplest investment vehicles available, impose similar minimums.
So you may reasonably wonder if you can really get big returns on the small amount of cash you have available for investing. The good news is that you don’t have to be the next Warren Buffett to make money from investments. With a bit of patience and a good strategy in place, you can get big returns even from investing modest amounts, such as $1,000 or less.
Max-Out the Free Money from Your 401(k)’s Employer Contribution
Some employers offer 401(k) plans with matching employer contributions as a perk to their employees. These plans take money directly from your paycheck and invest it in a tax-deferred retirement fund. Most 401(k)s also allow employees to make additional deposits when they have cash to spare. The tax savings and matching contributions are like free money: a guaranteed return on your investment. You know better than to say no to free money. If your employer offers matching contributions, go ahead and max them out before investing anywhere else. It doesn’t get better than receiving free money on a tax-deferred investment fund. Of course, the overall investment fund could still go south but as long as the 401(k) is properly diversified this is as close as it gets to guaranteed returns when investing in the stock market.
The Return on Investment: ~7% + Free Money
A $1,000 investment in a 401(k) that has an average return of 7% will generate $7,612 over 30 years. If your employer kicks in a 50% match, your return will be $11,418. The actual ROI will obviously depend on the performance of your 401(k)’s fund and your employer’s matching contribution policy
High-Yield Checking Account
High-yield checking accounts offer interest rates that range from 1% to 5% APY. Spectacular returns when you compare it to the average savings account interest in 2016: 0.06% APY. Particularly when you consider high-yield checking accounts are insured up to $250,000.
Related article: Top 9 High-Interest Checking Accounts
High-yield checking accounts are a great option for investors who still don’t have enough to make the minimum investment in a regular mutual fund. It’s also a great place to deposit your emergency fund, regardless of how much money you have to invest. The catch is you have to meet certain requirements, such as setting up a monthly direct deposit, 10 debit card transactions, and opting for electronic monthly statements. This article looks into 9 of the best high-yield checking accounts of 2016.
The Return on Investment: Up to 5%
$1,000 invested in a high-yield checking account will generate up to 5% APY. That is $50 a year or $4,322 after 30 years if you reinvest the money your make. It may not sound like much, but it is 100 times better than the average rate for a standard interest checking account in 2016 (0.04%).
Invest Like Warren Buffett: Think Index-Funds
Well, to be more precise, invest like Warren Buffett wants his wife to invest once the Oracle of Omaha is no longer around to do his magic. Yes, putting 90% of her assets in a low-cost S&P 500 index fund and 10% in short-term government bonds are the instructions Warren Buffet has left the trustee who will manage his estate once he is gone.
Return on Investment: ~10%*
(*) Although volatile in the short term, the S&P 500 index, an index that includes the 500 largest companies listed on the New York Stock Exchange, has provided an average return of 10% over its history. Assuming an ROI of 10%, a $1,000 investment would generate $100 a year. Of course, past performance doesn’t mean anything, but that applies to practically any investment. Don’t have enough savings to meet the minimum amount required to invest in an index fund? The next tip may help.
Use a Robo-Advisor
A robo-advisor is an algorithm that automatically applies an investment strategy to an investment portfolio. Robo-advisors can diversify a portfolio, follow any investment strategy you want, and even re-balance a portfolio in response to market performance as a regular financial advisor would. There is one huge advantage. Unlike their human counterparts, robo-advisors don’t have mortgages to pay or kids to put through college, so they work for free. Combine a robo-advisor with a selection of well-selected low-cost funds and you have a winning recipe for a successful investment strategy. Online robo-advisors, such as Betterment, don’t have a minimum investment and charge an annual fee of 0.35% for its services.The fee drops to 0.15% for accounts with larger amounts.
The Return on Investment: 11% (?)
As always, there are no guarantees when it comes to investing in the stock market, however, robo-advisors, such as Betterment, claim they can improve the return on investment of the average do-it-yourself investor by 4% or more. On a $1,000 investment, that could mean an additional $3,243 over 30 years.
Invest in Peer to Peer Lending
Diversify your portfolio beyond traditional stocks and bonds by investing in personal loans. The growth of peer-to-peer lending platforms, such as Prosper and LendingClub has made it easy to invest in personal loans. The beauty of P2P platforms is you can spread your bets over many borrowers and limit your default risk to as little as $25 per borrower. P2P platforms allow you to set automatic guidelines on the percentage of loans you want from each risk grade. Borrowers are categorized by their credit score, income, and other factors that determine their likelihood of repaying the loan. The higher the risk the better the return.
The Return on Investment: 7% to 25%
The ROI depends on how much you are willing to risk. Prosper’s platform categorizes borrowers as grade A (7.34%) to G (25.54%). The actual return to investors is a little less because you have to calculate the P2P platform’s fees and there is always the risk of defaults.
Like many people, I gave P2P lending a try just to see how it works. I started with a small investment of $500 and spread it over a mix of borrower categories. Up to now, my annualized net return is over 10%, which is 10 times better than the performance of my ETFs last year. Assuming a 10% return is typical, that would be $100 a year on a $1,000 investment, or $17,500 after 30 years if you reinvest the profits.
Brokerages Vs Wealth Management Funds
If you want to build your own investment portfolio, online brokerages, such as TD Ameritrade, ETrade, and TradeKing can provide you with the tools you need to buy and sell stocks or even invest in more complex investment vehicles, such as stock futures or stock options.
Another option is to invest in wealth management firms, such as Betterment, Personal Capital, or EverBank. These online wealth management firms build personalized investment portfolios based on the risk tolerance and financial goals of investors.
Choose a Strategy and Stick with It
You may not have Warren Buffett’s money, but his value-oriented strategy is one of the best tried and true methods of consistently staying ahead on investments. Mr Buffett tells his friends and relatives to distrust the advice of financial advisors whose income depends on the number of transactions or financial products you buy. The frictional costs alone of repeatedly buying and selling stocks, for instance, can easily eat up your profits. Instead, ignore the chatter, find a low-cost investment that fits your risk tolerance and stick with it.