Opportunities for the Small Investor

Small investors have never had a larger selection of investments from which to choose. For this article, let's define “small” as $500 a month you can put at risk. The problem isn't finding a type of investment, it's figuring out how to get the most for your money. For every honest investment opportunity, there are any number of charlatans and mountebanks who will gladly smile as they pick your pocket.

First, let's establish that the hoary old advice of dollar cost averaging is in fact very good advice. By investing a fixed amount each month, you buy more when prices are lower; with any luck your average cost will be below your average price. Secondly, diversify your purchases. Diversification truly lowers your risk -- all your eggs in one basket is only good for making omelets. Thirdly, do not leverage. That's for big boys who know what they are risking. Don't buy on margin, and don't speculate with options and futures (although hedging with same is often a good strategy).

Here are five ways to invest your monthly funds:

  1. Mutual Funds: Only use ones where the fees are rock bottom. No sales charge, no 12b-1 fees, no redemption fees. What you do want is an indexed portfolio of global stocks and bonds. Indexing takes away the supposed contribution of a fund manager's active management. Indexing beats most fund managers each year. Vanguard is a good choice; their index funds typically charge 0.23 percent against an industry average of 1.19 percent. If you can afford an initial investment of $10,000, you can save even more with Vanguard's Admiral Shares: their average expense ratio is an astoundingly low 0.18 percent.
  2. Exchange Traded Funds: Yes, as long as they are indexed. An ETF is a basket of stocks similar to a mutual fund and management fees are very low. You buy them on the stock exchange just like any other stock, and some providers of ETFs don't even charge sales commissions (once again, see Vanguard). They sell for the combined net asset values of each basket component. You can find ones indexed to the S&P 500 and also to international indices such as the MSCI. There are ones for bonds, commodities, etc.
  3. Commodities: Physical commodities are expensive to transport and store, so stay away from gold coins and platinum bars. A better choice is to own shares of commodity producers, such as gold mines and oil drillers. You can buy or sell you position in seconds as events warrant, something impossible to do with that big bag of coins sitting in the attic. And if the shares pay dividends, so much the better. There are indexed commodity ETFs available as well.
  4. Internet Domains: A hot investment right now involves domain monetization: buy an Internet domain name (for example: http://coffeeratings.net) and then park the site with Google or another domain service. The parking service creates, for free, a website full of click-through ads, and any revenue generated is shared by you and the domain service. Your only costs are the purchase price of the domain and the annual renewal fee - each about $10. However, unless you are expert at this, the perils of parking will cause you to surely lose your investment - you need visitors to generate income, and they usually have no reason to come to your site. A better investment is a professionally-managed hedge fund of Internet domains: buying into this type of fund provides instant diversification, and most fees are only charged on profits. The only public domain fund current available is Domain Developers Fund, but others may soon appear.
  5. Foreign Exchange: The biggest market in the world, and the toughest. Over $4 trillion changes hands daily and it's a zero-sum game: for you to win somebody else has to lose. Up to 95 percent of traders lose money in the FOREX market, so unless you are an expert, you don't want to trade here. However, there is an alternative: FOREX autotrading. In this system, you sign up with a signal provider that hooks your account into the signals generated by a trader of your choosing. The signal provider hosts a selection of traders, who are walled-off from knowledge of your account. The signal provider executes the trader's transactions in his AND your accounts simultaneously, so you perform as well or poorly as your chosen trader. With proper research selecting a trader, you can do quite well. One innovator in this market is ZuluTrade - they don't charge you for the trades, so all your money is going towards the investment.

However you decide to invest your funds, make sure you only invest what you can afford to lose, and do your homework before you invest.