Investing small amounts of money may seem like a utopia: for example, over 80% of mutual fund subscribers have a financial wealth that exceeds 100,000 euros / dollars. But with some precautions and taking advantage of the opportunities offered by technology, investing small amounts of money is possible and profitable.
Before understanding how to invest small amounts of money, let’s try to understand why until now it has been understood as a taboo for many small savers. First of all, there are technical reasons for financial instruments: high entry thresholds and fixed costs.
Invest small amounts of money: avoid high investment thresholds
The minimum denomination of a corporate bond can be as much as 100,000 dollars / euro, but there are also 1000, 5000 or 10,000 on the market. To invest in government bonds, it’s better: the minimum amount can be 1,000 $ / €.
Even assuming you have 1,000 aside to invest in bonds, this investment has a strong limit: it is not diversified at all. To build a diversified portfolio by purchasing individual stocks, the minimum capital required easily exceeds 50,000 euros / dollars.
Mutual funds offer the possibility to invest in a diversified portfolio even with limited capital, as we will see shortly.
Invest small amounts of money: fixed costs nullify the results
With small amounts to invest, fixed costs are particularly onerous because they easily erode any earnings. It is not very convenient to pay the administrative costs of a securities deposit to invest a few hundred euros, or to subscribe to an instrument that has high fixed exit costs.
Although the savings industry has turned much more to holders of large assets, offering products suitable for large investments, the main barriers that have kept small savers away from investments come from the savers themselves.
Those with small amounts of money think they can’t invest, but that’s not true
Distrust or little knowledge of investments, those who do not have large assets often do not believe they can invest small amounts of money. On the other hand, developments in the financial markets increasingly offer the possibility of investing very small amounts, even starting from 5 euros / dollars.
In this way the investment becomes an incentive to save, almost without realizing it. 5 euros or dollars in a week is a minimum amount for many: less than a coffee a day, a lottery ticket or a beer a week. However, few think they can invest 5 dollars or euros, for one or more of the reasons mentioned above.
Advantages of investing small amounts of money
But what if this action became a habit? 5 dollars / euro per week are 20 per month and 260 per year. If someone had started saving € 5 a week after the introduction of the euro in January 2002, they would have accumulated € 3,865 after 13 years. Not bad, as a result of a habit that cost very little effort.
If these € 5 a week had been invested in global equity markets (represented by the MSCI World index) instead of being stuffed into the piggy bank, today the capital available would be 7,493 euros, thanks to the sum of the accumulated savings and the earnings produced by market trend. If this goal doesn’t seem like much to you, think that if the 5 euros a week had been 10, the value of the capital today would be equal to 14,986 euros.
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The advantages of investing small amounts of money are mainly two: you are able to set aside more resources than you thought would be possible and with minimal effort, moreover, unlike what happened with the piggy bank, savings over the years can be appreciated by following the financial market trends.