A major challenge for most investors who are starting out is building their stock portfolio. Part of the reason for this is because most people have limited amounts of money that they can contribute to their accounts. The reason why is because when they are young, the income that they are generating is considerably lower in comparison with other points in life. This makes it challenging for them to be able to invest and build for the future. As various expenses ranging from: paying off numerous debts to current costs (i.e. car notes and housing) can make developing an investment portfolio very difficult. This is especially true if they are left with between: $25.00 to $200.00 every month. However, despite these issues, it is still possible to create a stock portfolio that will help to build your overall net worth in the future and maybe even fund your retirement.
The Use of Compounding
The key for building any kind of stock portfolio is to remember that you are using compounding. This is when you are investing your money with the intention of seeing long term appreciation as all of the dividends / income and capital gains are continually reinvested into the account. At the same time, you are continuing to invest small amounts consistently over the course of several years. For example, if you invested $83.33 each month into stocks that are listed on the Dow Jones Industrial Average (which is a total of: $999.96 every year). This amount would help to dramatically build your net worth and stock portfolio. It will grow to $23,450.00 over 25 years at an average return of 8% (taking into account capital gains and dividends). If you continue to add this amount each year, this will increase to $234,500 in 35 years. This is significant because it is showing how investing small amounts of money into the equity markets will produce long term returns that will help you to build your net worth.
Strategies for Building your Portfolio
There are several strategies that you can use for building you investment portfolio during this time. The most notable include: through utilizing IRAs and DRIP accounts. These different tools are important, because they all will give you a variety of options that you can use in achieving your long term objectives.
IRAs are an effective tool that can be utilized to help build your stock portfolio. This is because the small contributions that you are making can be invested in these kinds of accounts. The most advantageous is the Roth IRA. The reason why, is because the funds that you are contributing to your investments are more than likely considered to be after tax dollars. In a Roth IRA, you can contribute a maximum of $5,000 per year. Then, when you are withdrawing the money you do not have to worry about any kind of tax implications. At the same time, you can make purchases of different stocks and continue to reinvest the dividends into the account.
A dividend reinvestment plan (DRIP) is when you are purchasing stock directly from the company. The way it works is that you can buy small amounts of stock without having to pay any kind of commissions to a broker. When the dividends are received, these plans will reinvest them into purchasing more of the company’s stock. Over the course of time, this is one approach that can be used to build up your portfolio by purchasing a host of different corporations. This allows you to use the power of compounding, to slowly build your stock portfolio and to have a choice of different investment options available.
Clearly, there are a number of tools that can be used to help you build a common stock portfolio with little amounts of money. If you are consistent and always making regular purchases, this will continue to grow substantially over the course of many years. Once this takes place, it means that your net worth and holdings will begin to increase dramatically through the power of compounding. This is the key to helping turn these small amounts into larger returns over the course of many years. Once this occurs, it means that you will have various holdings that can be used to achieve your different financial goals.