How to Invest Small Amounts

Many people assume that they don’t have enough money to become an investor. But there’s no need to wait until you’re rich – starting small is one of the smartest steps you can take to reach your financial goals.

Everyone can start to invest small amounts at almost any point. Thanks to the digitalisation of private banking methods, it’s now possible to invest in ways that were once only available to the wealthy.

Since many people are unsure how to invest small amounts of money, we created this article to show you how you can cost-effectively invest your savings online. You can get started with EUR 100!

What are the best investment approaches for small investors?

Saving money in your bank account and contributing to pension schemes is a great start. But consider this: Will the pension cover the lifestyle you’re aiming for in retirement? And how many millionaires got rich keeping their money in a bank account?

Here’s the real issue: If you invest small amounts in a German bank account, there is a good chance that you’ll receive negative interest. For many conventional and central banks, this is already business as usual. You can read more about the issues surrounding saving accounts here: The Smart Alternative to Savings Accounts. 

Additionally, inflation is now on an upward swing in Germany, meaning the price of goods and services is slowly increasing (for instance, in 2001 a BigMac cost EUR 2.71, whereas now it costs EUR 4.79). This means the money in your bank account loses value over time. Therefore, if you’re investing at a conventional bank, it doesn’t make sense (or cents!) to invest small amounts as a German depositor. That doesn’t mean investing small amounts is out of the question, however – when doing so, you’ll want to get specific about your strategy. We recommend considering the stock market as a starting point.  

What’s the best way to invest small amounts of money?

The stock market is generally a good balance between risk and return, even if you’re just investing small amounts – so long as you intend to hold onto your investment for at least five years. That’s because although the market can go up and down in the short run, the long-term trend is upward.

Sure, stock market investments are riskier than leaving your cash in a bank account, but they also offer a much higher potential return (historically 6% per year on average – even including all the big downturns, such as the Global Financial Crisis in 2008). If your goal is to increase your wealth over time, the stock market is an excellent option for investing small amounts of money.

A great example is the German car manufacturer Mercedes-Benz. The company from Stuttgart went through more than one crisis in the last decade or so. The financial crisis in 2008, the new climate agenda, the extinction of the combustion engine, and the COVID-19 crisis are just a few recent examples found throughout the history of the company. Seen in a short view, investing in Mercedes-Benz would seem foolish. But if you’d bought Mercedes-Benz shares 30 years ago and held them up to date, you’d have drawn huge profits by now.

Advantages of stock market investing for smaller investors

Good returns

Average growth of around 6% per year, compared to 0.01% interest if you keep the money in your bank account.

Risk management

Your portfolio can be optimised to the level of risk that’s appropriate for you.

Customisation

Invest in companies that are aligned with your values – it’s possible to create a positive impact on the world without sacrificing returns.

Note: This customisation isn’t possible if you choose to invest through funds or ETFs.

Liquidity

You should typically only invest in stocks if you have a view of holding your investment for a long period of time. But if you need your money because of unforeseen circumstances, it will generally be back in your account within seven business days.

6 Steps for Investing Small Amounts of Money

Step 1: Figure out the basics

How much money do you need to invest in stocks?  EUR 100 is a great amount to start.

While it is possible to invest with less, this is the amount you need to diversify your investment properly – i.e. buying a range of different company stocks throughout various industries and countries.

When you invest small amounts of money, it might be tempting to put everything into one or two companies. This is a rookie mistake!

Let’s say you only buy shares from Alphabet, the holding company of Google. If a crisis hits that company, your investment will be in trouble. The same applies if you buy a range of different company stocks within the same industry (remember the dot-com bubble?). That’s why at Inyova you’re not just investing small amounts into tech companies like Google, but also in companies like the German renewable energy producer Encavis AG.

This company from Hamburg, Germany manages solar and wind parks for power production of renewable energy all around the world. With this focus, Encavis can save 1.5 million tons of climate-damaging CO2 per year. Governmental-guaranteed power purchase rates and long-term power purchase agreements make the revenues of the company more predictable. This makes Encavis the perfect partner for a long-term and sustainable investment.

With EUR 100, you can comfortably buy stocks of 30-40 companies and spread your risk across a range of different factors.

Step 2: Consider your risk profile

Risk can be carefully managed when you take a long-term view of investing in the stock market. Our investment experts recommend a five-pronged approach to risk management:

• Think about your capacity and appetite for risk.
• Diversification is important. As mentioned before, don’t put all of your eggs in one basket.
• Balance stocks with less volatile assets such as bonds.
• Regularly rebalance your portfolio.
• Have a view of holding onto your investment for five years or more

N.B.The last point is important. The stock market has good years and it has bad years, which means there is never a guarantee that you will make a profit in five years. Investing without any risk at all is not possible. But generally speaking, the market has always moved in an upward direction over time – the longer you hold onto your investment, the more likely you are to have an attractive return on it. This is true whether you invest small amounts or large amounts.

Step 3: Choose your stocks

Which companies should you invest in? It might be tempting to try to pick the ‘next big thing’. But since no one can predict the future, trying to pick ‘winning’ stocks is almost always a losing strategy.

In fact, it’s not much more effective than throwing darts with your eyes closed. Instead, we recommend choosing a range of different stocks that are aligned with your values. This is your big chance to have real ownership in companies that share your vision for the world. But it’s important to fully do your research – companies might be more aligned with your values than they’d seem at first glance!

For example, the German company Infineon is one of the world’s leading developers and vendors of semiconductor products. While that description might not match your personal passion, Infineon’s technology is used to find solutions for global challenges like climate change, demographic changes, advancing urbanisation, and the digital shift in our society. Additionally, Infineon is involved in the development of autonomous vehicles. So you’re not just investing in products – you’re investing in a company that has tangible goals to make the world a better place beyond those projects.

Whether you have a four or a seven-figure amount to invest, research shows that impact investing does not mean sacrificing returns. Read more about it here.

In the past, impact investing required you to do a lot of research yourself, and you needed access to closely-guarded information that wasn’t publicly available.

We’ve made this much more accessible. By streamlining the investing process into an easy online tool, it is now possible for you to participate in one of the best ways to invest small amounts of money – while still making a positive impact!

Here’s a taste of what your Inyova strategy can be built around:

Step 4: Buy your stocks (and avoid hidden fees!)

Many people invest in managed funds or ETFs because they believe that it’s the only way to participate in the stock market with a small investment amount.

And yes, it’s true that transaction fees can make investing expensive.

Even if you use a low-cost ‘Do it yourself’ provider such as AgoraDirect, a well-diversified investment will attract around EUR 520 in transaction fees when you invest. That’s a massive loss to deal with on day one!

Fees of each stock transaction

With that in mind, it’s easy to see why funds and ETFs seem like a cost-effective alternative.

Unfortunately, these solutions come with their own drawbacks (read about them in detail in our article ‘ETFs: What you need to know’). A Financial Times investigation also found that several major funds cost more than four times what people think due to complicated cost structures.

Source: Financial Times

Step 5: Set up an automatic reinvestment

Assuming you don’t have to pay transaction fees, one of the easiest and most rewarding ways to grow your savings is to set up an automatic payment that regularly adds to your investment.

Let’s say you add EUR 100 each month. In Germany, that’s the price of a fancy meal out.

As countless behavioural psychologists have noted, you won’t miss that money. Since it automatically moves to your investment account, you never experience the negative emotions of ‘giving it up’.

Instead, you get extremely positive emotions when your wealth grows substantially.

Assuming the average annual stock market return of six percent, even a small investment in the stock market will double approximately every 12 years.

To be exact, your monthly EUR 100 could grow to:

EUR 6,949 in 5 years.

EUR 16,247 in 10 years

EUR 45,344 in 20 years

Most importantly, you only invested EUR 24,000 out of your own pocket (and over 20 years, you won’t notice it leaving). The remaining EUR 21,344 is pure profit.

Contributing a certain amount of your income each month has another huge advantage — it effectively balances your exposure to the volatility of the market. By investing in stocks regularly and buying them regardless of the economic situation, you achieve more stable and continuous growth, making it a great way to invest small amounts!

Step 6: Don’t do anything!

We are big fans of the “buy and hold” approach to investing. This is where you establish a well-diversified portfolio of stocks and stick with this same investment strategy over time.

As investment mogul Warren Buffett famously said: ‘My favourite holding period is forever’. This is based on historical data, which shows that the stock market has always moved upwards over time, even recovering from all corrections and crashes in history. Let’s take a look at this chart:

Stock market values over time

Some people argue they have special skills and expertise that enable them to increase their profits by buying and selling stocks all the time. Keen to prove once and for all that ‘buy and hold’ is the best approach, Buffett laid down a challenge in 2007:

He bet $US 1 million that the S&P 500 (an index of major American companies) would outperform the average hedge fund performance over the following decade.

Guess who won?

When the bet finished in 2017, the hedge funds had increased by 2.2 percent each year on average. Meanwhile, Buffett made a 7.1 percent annual gain through the ‘buy and hold’ approach.

Summary: Tips for investing small amounts

Let’s say you are looking for the best way to invest EUR 5,000 or a smaller amount. Here are the key points to keep in mind:

• Investing amount: Think about how much you want to invest. If you would like to invest small amounts, consider a saving plan and automatic reinvestments.
• Risk profile: Think about how much risk you’re comfortable with. Ideally, there should be a balance between the potential of growth and safe investments.
• Choose your stocks: Select your stocks according to your personal values and risk profile. Keep in mind that it’s essential to have a well-diversified portfolio (at Inyova we take care of this for you!).
• Buy the stocks: Buy the stocks of your choice. Pay close attention to transaction costs and hidden fees!
• Hold: You are now in a great position for long-term growth of your investment.

How can I invest in the stock market?

At Inyova, we provide a way to invest small amounts of money in diversified stock portfolios. The first step is to get your personalised impact investing strategy on our website. You’ll see the list of stocks you can buy based on your interests and values. This non-binding service is completely free of charge. 

If you decide to move ahead with your investment, our all-inclusive fee is between 0.6% and 1.2%, depending on the total balance in your account. This includes everything – there are no additional costs or hidden fees. If you have any more questions about investing small amounts, please feel free to contact our friendly team at any time. We are here to help.

Enjoy!