Moneywise24 Personal Finance

There are many different ways to invest; all offers available today make the world of investments one big jungle, and it is hard to keep up with developments. There are tens of thousands of stocks to choose from, countless derivate products (with new products being introduced regularly), bonds, mutual funds, hedge funds, speeders, sprinters, and the list goes on.

Although it might be fun to screen stocks and other market products, dig into their fundamentals and conducting extensive technical analyses, this is often not an option for people, who either have a limited understanding of investing, or who simply do not have the time. Additionally, investing in single stocks often requires some substantial amount of capital, which especially beginning investors do not have.

An alternative to picking individual stocks and investing several thousands of Dollars or Euros is to invest periodically and automatically. Automatic investing is usually applied with mutual funds. It simply means, that a specified amount is automatically taken from your account, and it is invested in a mutual fund of your choice. It happens automatic, without you having to do anything.

Although I am on top of the financial markets myself, and I like conducting analyses on stocks, I also do automatic investing. Automatic and periodical investing in mutual funds have a number of great benefits.

Small capital

Automatic investing in mutual funds often allows to start with a very small budget. If the broker allows it, you could buy parts of a share, for example 0.5 share, or 0.25 share. For example, my broker allows me to invest as little as 20 EUR in many available mutual funds. Some mutual funds currently cost more than 100 EUR or even 200 EUR, but the system allows me to buy only a part of one share.

This means, that even young people, or people on a very tight budget are given the opportunity to invest with extremely small amounts.

Diversification

Mutual funds offer a great amount of diversification in general. By investing in a mutual fund, you are basically investing in a basked, or portfolio, of stocks, bonds, or whichever the product might be. These funds are managed by fund managers, who will conduct all the research necessary to, hopefully, let the fund be profitable.

Ratings and more information about mutual funds can be obtained via the well-known sites Morningstar, or Lipper.  Here, you will find more information about the specifics of a fund, how the fund manager tends to invest, which companies are in portfolio, which industries is being focused on, and how the mutual fund is built up in general.

By investing in mutual funds, you will not need to create your own portfolio with lots of capital, but you can invest with small amounts in an already diversified portfolio.

Risk mitigation

Periodic investing means, that you invest a pre-specified amount of money into a mutual fund of your choice, repeatedly over a specific time frame. This automatically means, that you are averaging the investments.

For example, If you buy 1 share of a mutual fund for 100 USD, and a month later you buy one share of the same mutual fund for 50 USD due to sudden recession, your average investment is 75 USD per share, and your loss is only 25%.

Had you bought 2 shares of the mutual fund in the beginning, you had invested 100 USD per share and your loss would have been 50%.

Through the risk mitigation effect of periodic investing, the loss is limited. Of course, the same effect is to be observed when markets are performing well, and profits might be reduced as well.

No access to money

One of the things I love about automatic investing is that the money is taken away immediately on the specified date. I usually set the date immediately after having received my salary, so that the money is invested a few days later, and I do not have the opportunity to spend the money otherwise.

Even when you have cash sitting on a savings account, it might be tempting to access the money for impulsive expenditures. Although you usually keep full control over your mutual funds, selling your investments is a much bigger barrier to break.

Perhaps the only thing to take care of is not to investment money, which you will surely need within the short or the mid term. You never know how markets are going to move, and markets may be dropping badly as soon as you need the money, causing you to sell your mutual funds at a great loss, and not having the money available you need.

Periodic investing is a good way to invest with a small capital, to mitigate risk while keeping a diversified portfolio. Last, periodic investing forces you to invest, leaving less room for impulsive expenditures.