Investing Basics for Shoestring Budgets

Don't pay off your credit card first! Don't fund your retirement first! Stop listening to all the advice that suggests you need excess money to start investing! Instead, consider investing as one of many necessary expenses: like groceries, clothing budgets, ice cream parlors, debts, etc. There are two major reasons for this: 1) you will spend whatever amount of money you have and it might as well be on stocks and 2) developing a net worth is a combination of reducing debt AND increasing assets. Here are some steps to help you do that:

STOP THINKING THAT THE AMOUNT YOU INVEST MATTERS. Instead, take what you can invest and every few months buy a stock. I started with $50/month and every three months I would pick up a few shares of a new stock. I waited three months because I purchased shares with Sharebuilder and that kept my purchasing commission under 2%. But, the best advice I ever heard about a $4 commission? Think of it as a cup of coffee. If you'd spend that much on a coffee one morning, don't sweat it. So regardless of whether you have $50 or $25 a month to invest - do it.

DEVELOP A BALANCED PORTFOLIO. It can be tempting to say, I only have $50/month so I'll just spend a year investing in a single stock. This is boring! We're hardwired to enjoy excitement and one way to do that is to buy different stocks. If you're on a three month rotation, every three months buy a new stock. This diversifies your portfolio while giving you some excitement.

DIVERSIFY THE RIGHT WAY. A stock portfolio should consist of stocks that will slowly grow (think blue chips) and the ones that will make you the real money. This way you're always maintaining a stable core, but have the potential to explode your earnings.

TAKE A MAJOR RISK, BUT MINIMIZE ITS EFFECT. In other words, if your portfolio is worth $500 and you see this hot new stock that you think is going to make you millions, buy it. But don't make it more than 10% of portfolio; so in this case $50. I did this with KKD, promptly lost 40% and blew it off because it was an experiment. I learned more from that experience than the $150 I invested elsewhere.

HOLD, HOLD, HOLD. THEN SELL. Stockbrokers rarely tell you to sell a stock for a very good reason: most stocks drop dramatically and then bounce back up. Only in the case of serious problems (Enron?) will a stock become useless. Remember I lost 40% on KKD? Well, I decided I'd lost that much so I might as well see what it would do; I held that stock for 6 months and it darted up to 17% before I sold. Why 17%? That was the price where I could pay my commission and get all my money back. What I learned is that few companies will not bounce back. This also applies to those stocks which grow. If a company is growing, there is no reason to sell until it stops growing. Sometimes (if you are certain it will bounce back) not even then.

DON'T BE AFRAID TO LOOSE A LITTLE MONEY. Financial planners will tell you to sell when your stock starts loosing 10%. Keep in mind they make money off your commissions so of course they want you to make more transactions. Buying and selling should happen on the strength of the company, not the stock price. Also, keep in mind if your stock has doubled since you bought it, it can drop quite a bit before you've lost any money.

SEPARATE PROFIT FROM INITIAL INVESTMENT. This follows from the previous point. If you are loosing 15%, is that from your "profit" (which is unrealized) or from your initial investment, which is actual money. If the latter, think about your strategies. If the former, try riding it out.

All of these are strategies that require you to invest money that you don't need. But keep in mind that while you want to pay off that credit card, you also have to prepare for the future. Divide and conquer. I've always looked at my investments from the perspective of what I would have done with the money otherwise. Very rarely can I say anything beyond eating out or buying clothes or seeing a movie. Because honestly, that extra money never went to the credit card bill.