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Forget Cheap, High-Risk Stocks: Here Are 3 Better Ways to Invest
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Forget Cheap, High-Risk Stocks: Here Are 3 Better Ways to Invest

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Forget Cheap, High-Risk Stocks: Here Are 3 Better Ways to Invest

The English poet Percy Bysshe Shelley is credited with saying, "The rich get richer and the poor get poorer." Investing can certainly feel that way, considering a single share of Alphabet or Amazon sets you back four digits. But being short on cash doesn't mean your only options are cheap, high-risk stocks. No matter what size your budget is, you can still invest in high-quality positions with a reasonable level of diversification -- just like the wealthy person you're on your way to becoming.

Here are three strategies for investing wisely, even when you're low on cash.

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1. You have $500: S&P 500 index funds

The S&P 500 index, often referenced as a gauge for the stock market as a whole, tracks 500 of the largest publicly held U.S. companies. You can invest in the S&P 500 by way of mutual funds and exchange-traded funds (ETFs) that track the index. Doing so gives you a slice of about500 different companies for the price of one fund share.

Index funds aim to mimic the performance of the underlying index. But you should know that funds have operating expenses, which reduce returns. That's one big reason for selecting an index fund with ultra-low expenses: Lower expenses allow a greater portion of returns to flow through to shareholders, delivering results closer to the underlying index.

The table below shows key metrics for three low-fee S&P 500 index funds.

Fund Name

Expense Ratio

5-year Average Annual Returns (as of June 30, 2020)

Approximate Share Price (September 2020)

Fidelity 500 Index Fund (NASDAQMUTFUND: FXAIX)

0.015%

10.72%

$125

Vanguard S&P 500 ETF (NYSEMKT: VOO)

0.03%

10.67%

$320

iShares Core S&P 500 Index ETF (NYSEMKT: IVV)

0.03%

10.65%

$55

Table data source: Fidelity fund screener.

2. You have $100: fractional investing

If you can't invest more than $100 at a time, fractional investing is your best option. Fractional investing is just what it sounds like: buying shares in units of less than one. You can buy and sell fractional shares through investing apps like Robinhood or in a Schwab or Fidelity brokerage account.

Schwab's fractional feature lets you invest in any S&P 500 company for as little as $5. Say you want to own a piece of Facebook, and it's trading for $300 per share. Your $5 would get you 1.67% of one share.

You could pick 19 more companies and build a diversified portfolio, like a personal mutual fund, for only $100 in total.

3. You have less than $100: Fractional shares of index funds

What if your budget is much lower than $100? There is a way to start investing with as little as $1. If you have a Fidelity account, you can use the Fidelity mobile app to buy fractional shares of index funds. Spend a few dollars for a piece of the iShares S&P 500 ETF, for example, and you immediately have a diversified portfolio on your hands. Fidelity's minimum spend on a fractional order is $1.

Consistency and dollar-cost averaging

Admittedly, you're not going to retire off a single $1 investment. But there's something to be said for starting somewhere. Follow your $1 investment today with another small investment next week. Keep on that program for long enough, raising your contribution when you can, and you will build momentum.

You should also know that investing smaller amounts regularly is less risky than investing a larger amount all at once. The smaller, more frequent buys insulate you from timing mistakes, like buying a bunch of shares the day before a market crash. It's called dollar-cost averaging, and it generally results in owning more shares at a lower cost per share.

Start investing now and stick with it

You really can start investing with just a few dollars while staying diversified and avoiding risky penny stocks, too. Whether you start with a few shares of an index fund or fractional shares of stocks or funds, aim to build momentum over time with consistent buys. And, when you see an opportunity to increase your investment amount, do it -- and prove that poor-get-poorer adage wrong.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Catherine Brock owns shares of Vanguard S&P 500 ETF. The Motley Fool owns shares of and recommends Alphabet (A shares), Amazon, and Facebook. The Motley Fool owns shares of Vanguard S&P 500 ETF. The Motley Fool recommends Charles Schwab and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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