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You don’t need huge amounts of money to start investing in shares

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You don’t need huge amounts of money to start investing in shares, writes The Motley Fool.

When it comes to setting up a winning portfolio, picking the best investments is essential. But what stops many potential investors from ever getting started is the mistaken impression that you need a huge amount of money before you can begin implementing a smart investing strategy.

First things first

The key to putting together a successful share portfolio is to realise that you don’t have to do everything all at once.

First step, you can open an online share broker account. Start by buying shares in a single company. Every couple of months, as you slowly save up money, either buy a few more shares of that company, or pick another share to add to your portfolio.

But that doesn’t mean you should just pick shares willy-nilly. The best way to concentrate your attention in the right place is to take a good, hard look at your time horizon and risk tolerance. That should get you pointed in the right direction.

In particular, here are some thoughts on how people in common situations can best start a share portfolio.

When time is on your side

The earlier you start saving for a long-term financial goal like retirement, the more options you have. If you want to get a head start on your retirement saving, then you have enough time to take on some significant risk.

To make the most of the opportunity you have, take a close look at small company shares. Over time, smaller companies generally outperform their larger rivals, and as they grow, they give you the potential for explosive growth.

We’re not talking about penny shares here, the 1 cent speculative dregs of the share market, but companies with market capitalisations of between say $30 million and $250 million. There are around 600 to choose from on the Australian Securities Exchange (ASX), so no shortage of candidates.

Companies like JB Hi-Fi (ASX: JBH) and Fortescue Metals (ASX: FMG) were once small-cap shares. In the early days such shares might make your portfolio a bit volatile, but the chances of earning a high return on your investment are better than if you buy more mature companies with fewer growth prospects.

When things are more urgent

On the other hand, if you waited a bit longer before starting to save, you’re in a more awkward position. You may need more growth from your portfolio to reach your goals, but you also don’t have as much time to ride out downturns.

The best choice is to split the difference. Look at smaller, higher growth companies, but rather than sticking with just those names, use your additional money to balance out your portfolio with safer, value orientated shares such as Woolworths (ASX: WOW) or QBE Insurance (ASX: QBE). That way, you won’t be taking a complete gamble with all of your money.

When it’s already crunch time

The most difficult situation is when you don’t have much time at all left to invest for a particular goal. If you only have a year or two, buying any shares is a crapshoot — you could hit the next bull market or another terrible year like 2008.

With five years or more to go, though, you can afford to build a conservative portfolio. You can stick with a value strategy, but another idea is to look for good dividend paying shares.

Dividends help investors with short time horizons because they provide much-needed income. Often, you can find value shares that pay good dividends.

Don’t despair

So, if you don’t have enough money to buy dozens of shares all at the same time, don’t let that stop you from investing at all. Even if you just begin with a single share, you can set the wheels in motion that will eventually lead you to the portfolio you’ve always wanted to own.

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