3 Cheap Ways to Get Started Investing – Wealth Creation Investing

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If you’re considering investing in the stock market, give yourself a pat on the back. Investing is one of the best ways to build wealth over the long term, and the sooner you begin investing, the more money you can potentially make.

However, investing can be confusing. There are seemingly unlimited investment options, and if you choose the wrong one, you could put your money at risk. In addition, some stocks cost hundreds or even thousands of dollars per share, which many investors can’t afford.

The good news is that it’s easier — and more affordable — than you may think to get started investing. These three options are a great place to begin.

1. Your 401(k) or IRA

If you have access to a 401(k) through your employer, that’s one of the easiest ways to start investing. Most plans offer a handful of mutual funds or target-date funds to choose from, which are great options for beginner investors.

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In addition, one of the biggest advantages of investing in a 401(k) is the opportunity to earn employer matching contributions. Some employers will match your 401(k) contributions up to a certain percentage of your salary, which is essentially free money. This can give your investments a boost with zero effort on your part.

If you don’t have access to a 401(k), your next best bet is to invest in an IRA. IRAs are similar to 401(k)s in many ways, and they’re also an affordable way to start investing. Once you set up your account, all you have to do is contribute regularly and give your money time to grow.

2. ETFs

ETFs, or exchange-traded funds, are collections of stocks grouped together into a single investment. An S&P 500 ETF, for example, contains all the stocks within the S&P 500 index. There are also niche ETFs that track certain industries. A tech-focused ETF, for instance, only contains stocks from the technology sector.

Gallery: 8 Ways to Double Your Money by Investing (The Motley Fool)

Strategies for success

Contrary to popular belief, it’s easy to double your money by investing. What’s not easy is doubling your money quickly. It’s a universal truth that any strategy promising to deliver quick wealth will involve a lot of risk. That’s why many investors aren’t comfortable putting more than 10% of their money on the line for speculative, high-reward positions.

Of course, doubling 10% of your money isn’t quite as exciting as doubling all of it. There is a middle ground, though. It involves investing patiently, but then powering up your investment growth by using free sources of cash and a dash of speculation. Here are eight strategies to try.

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1. Invest in equities, and then wait

The easiest and safest way to double your money is to build a diversified portfolio of mostly equities, and then wait. The long-term average annual growth of the stock market is about 7% after inflation. At that rate, you can double your money about every 10 or 11 years.

So, that $50,000 you have in your 401(k)? Keep it invested in funds that track with the market, like an S&P 500 index fund, and it should grow to about $100,000 in a decade and $200,000 in two decades.

Keep in mind that the stock market doesn’t grow at an even pace from year to year. You can expect volatility in the short term, but that should even out to growth over periods of 10 years or more.

ALSO READ: 3 Bargain-Priced Value Stocks That Could Double Your Money

2. Invest your raises and spare change

Free money is as effective in the stock market as any hard-earned dollar. If your household budget is already balanced, you can probably identify at least a few sources of free cash available to you today. Spare change in the couch is one. But more valuable are shopping rebates, savings from clipping coupons, tax refunds, cash birthday gifts from grandma, and — the big ones — bonuses and raises from work.

Individually, these activities may not produce a lot of cash. But if you direct the proceeds into your investment account, you have a higher balance available to double every decade.

As an example, say you wrangle up $25 monthly and use it to make higher 401(k) contributions. In 10 years at 7% growth, you’ll add more than $4,000 to your account balance. That’s a nice return on coupons and spare change.

3. Use your employer match

A much larger source of free money is the employer match available in your 401(k). Employer match often doubles your money immediately, and then again over time.

If your employer matches your retirement contributions dollar for dollar, whatever you contribute up to the cap is automatically doubled. If the match rate is something different, say $0.50 for every $1 you contribute, you’re still doubling a portion of your contributions up to the cap. Even better, those employer-funded deposits become far more valuable over time.

Say you make $50,000 a year and you are earning 5% of your salary in employer match. Invest those matching contributions in equity funds, and they can grow to $100,000 over 20 years — or more if your annual raises outpace inflation. Plus, you’ll have at least that much in your account from your own contributions, too.

4. Work your tax perks

401(k)s, IRAs, and health savings accounts (HSAs) all allow for tax-deferred earnings growth, which is essentially another source of free cash. Instead of sending money to Uncle Sam, you can leave those funds invested in your account, where they will double over time.

Think of it this way. A 25% tax rate for state and federal taxes lowers your net investment earnings by 25% and slows the time it takes to double your money, also by 25%. Specifically, a 7% growth rate doubles your money about every decade, but if your growth is 5.25% after taxes, it takes 13 or 14 years to double your money.

The takeaway? Use your tax-advantaged accounts to the full extent possible. You’ll double your money faster.

5. Reinvest your dividends

Reinvesting dividends also expedites your doubling time significantly. Remember that 7% average annual growth rate for the stock market? Only part of that 7% comes from share appreciation. Dividends contribute 1 or 2 points of growth every year.

Let’s say your portfolio delivers 5% share appreciation and 2% dividends each year on average. Spending those dividends is similar in effect to paying taxes — you end up with 5% net growth at year-end instead of 7%. At 5% growth, you’re waiting more than 14 years to double your investment. Reinvest the dividends, though, and you shorten that doubling time by about four years.

6. Buy in downturns

Legendary investor Warren Buffett said, “Be greedy when others are fearful.” If you have the fortitude to buy when share prices are falling, you should benefit nicely from the recovery that will inevitably follow.

The coronavirus crash in March 2020 is a great example of the opportunity that lies in market volatility. The S&P 500 closed above 3,300 on Feb. 19, 2020. By March 23, the index closed below 2,240 — a drop of nearly 34%. Since that low point a year ago, the index has increased in value by more than 70%. That’s not quite a doubling, but it’s on the fast track.

The risk in this strategy is that most bear markets don’t turn around that quickly. To protect against an uncertain timeline, only invest money you won’t need for at least five years.

7. Invest in leveraged funds

Leveraged funds use borrowed money plus derivatives to amplify investment returns of an index by a stated multiple. ProShares UltraPro S&P 500 (NYSEMKT: UPRO), for example, targets daily returns that are 300% of the S&P 500. The daily reference is important; the fund may not reach that 300% goal over longer periods of time. That’s only one reason why leveraged funds should not be long-term fixtures in your portfolio.

Another, more compelling reason is that the tripling goes both ways. If the S&P 500 rises by 10%, a fund like UPRO should go up by 30%. But if the index falls by 10%, that ETF will likely lose 30% of its value. Most investors don’t want that much volatility.

If you think you can handle the ride, keep the timeline short and don’t put in more than you’re willing to lose.

8. Speculate

You can also speculate on smaller companies and IPOs to target high returns that would shorten your doubling time. You can buy individual stocks, but that requires a huge time commitment for research and analysis.

Most investors starting out will prefer the ease and diversification of an ETF like Renaissance IPO ETF (NYSEMKT: IPO). The fund invests in the largest and most liquid IPOs, periodically removing companies that no longer fit the criteria or have been public for two years. The ETF grew more than 100% in 2020, but that annual performance has not been replicated in any other year. The fund’s five-year annualized returns are about 30%.

Risk and reward

In time, you can double your money in the stock market with only a moderate level of risk. Simply use a tax-advantaged account to invest monthly in an S&P 500 index fund or similar position that produces market-level returns. If you want to speed up the timeline without adding risk, invest every cash windfall and your raises, too.

Leveraged funds, small caps, and IPO funds can give you a shot at higher returns, but these come with added risk. Protect yourself against the downside by holding these riskier choices to less than 10% of your portfolio.

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.

10/10 SLIDES

Investing in an ETF can be a smart move for a variety of reasons. For one, it can help limit your risk. By investing in a single ETF, you’re instantly investing in dozens, hundreds, or sometimes thousands of stocks at once. If a few of those stocks take a turn for the worse, it won’t sink your entire portfolio.

Another advantage of ETFs is that they can be more affordable than investing in individual stocks. To build a diversified portfolio, it’s best to invest in at least 10 to 15 different stocks from multiple industries. That can easily amount to hundreds or thousands of dollars if you’re investing in individual stocks. But with an ETF, you can easily diversify your portfolio with just one investment.

3. Fractional shares

If you’d prefer to invest in individual stocks, there’s a more affordable way to invest: fractional shares. A fractional share is a small slice of a single share of stock.

Say, for example, you want to invest in Amazon. At the time of this writing, Amazon’s stock price is a whopping $3,094 per share. If you’re just getting started investing, you may not want to dole out thousands of dollars on a single share of stock.

With fractional shares, though, you can buy a small portion of Amazon stock for whatever price you can afford — whether it’s $500, $50, or just $5. You can still buy quality stocks, but for a much more affordable price.

The downside to fractional shares is that the earnings on your investments won’t be as high as if you’d purchased full shares. However, fractional shares are a great starting point. Rather than investing thousands of dollars up front to buy full shares immediately, it’s sometimes easier to invest a few dollars at a time and gradually work your way up to owning full shares of stock.

Investing in the stock market is a smart move, and you don’t need to be wealthy to get started in the stock market. By taking advantage of these three investment options, you can start generating wealth without breaking the bank.