Financial advisors handle portfolios of all sizes. Some clients have a modest sum left over to invest after accounting for their regular expenses. Others have millions of dollars they’re willing to put into the market in pursuit of strong returns.
With the growing awareness of accessible portfolio options, the misconception that you need a large amount of money to begin investing is fading. However, the amount you invest can still influence your investment strategies and goals.
Here are a few points to keep in mind:
Smaller investments won’t always affect your risk tolerance
Investing offers the potential to grow your assets more quickly than if you simply put your money into a savings account. People are sometimes wary of investing, though, since there is the possibility that your portfolio will lose value if the market dips or your investments underperform.
For this reason, it’s important to create a budget as a first step. This allows you to compare your income, expenses, and contributions to other funds to determine how much money you can comfortably invest.
Individuals who have a substantial amount of money available to invest will have a higher risk capacity, which means they’ll be better equipped to absorb losses on their investments without it affecting their financial well-being. For this reason, people who can afford to put more money into investing may have more risk tolerance and will pursue more aggressive high risk, high reward strategies.
People who have less money to put aside for investing are considered to have a lower risk capacity. Since a larger share of their income goes toward essential expenses, they may be more concerned about potential losses and financial difficulties if their portfolio loses value. As such, people investing smaller sums may prefer low-risk investments that offer lower returns but also greater stability.
Even if you only have a modest amount of money available to invest, you may be able to pursue a more risk-tolerant strategy if you take steps to ensure financial stability. One key step is to establish an emergency fund with enough money to cover three to six months of regular expenses. By having this dedicated account, you’ll have a safety net to address unexpected emergency expenses such as a major medical bill. This will give you a way to remain financially stable even if your portfolio loses value, allowing you to pursue investments that carry higher risks but can also produce higher returns.
Similarly, having a high risk capacity doesn’t necessarily mean that you’ll want to pursue a high-risk investment strategy. For example, if your goal is to set up an investment fund to leave to your children as part of your estate planning, you may opt for a lower risk capital preservation strategy.
Short-term goals may be prioritized with smaller portfolios
Whenever you invest your money, you should have your personal financial goals in mind. These may include long-term objectives, such as putting aside enough money to retire, and short-term objectives, such as building capital for the purchase of a home or your children’s college education.
If you have a large amount of money to invest, it’s easier to establish multiple investment strategies to pursue different goals. You’ll also likely want to contribute more money toward long-term goals, since adding capital to these investments will allow for stronger gains over the long timeframe.
Those investing smaller amounts will need to weigh their options more carefully. It may be more challenging to pursue multiple goals with a smaller amount of funds, as this could minimize your gains. Short-term goals may take precedence over long-term ones; this priority could also necessitate a lower risk strategy, since you’ll want greater stability for certain goals (such as accumulating enough money to pay for a down payment on a house).
At the same time, investors with smaller portfolios shouldn’t lose focus on long-term investments, especially contributions to a retirement fund. Since these have a longer timeframe in which to gain value, even small contributions toward these goals can have substantial returns over time.
Smaller portfolios should pursue more tax efficient investments
If you only have a modest amount of money to invest, you’ll want to minimize the tax impact on your portfolio in order to maximize your gains. This is particularly important for long-term investments like retirement accounts, which offer tax-advantaged options like IRAs or 401(k)s.
Some more short-term investment options will also allow greater tax efficiencies for smaller investments. These include 529 funds for education savings, where earnings are tax-exempt, and dividend-paying stocks.
Investors with larger portfolios will be more capable of spreading their investments across both tax-advantaged options and taxable accounts where gains are taxed as ordinary income. Even though these accounts will lose some value to taxation, they can also offer other advantages such as greater flexibility and higher returns.
Financial advisors provide helpful guidance for all portfolio sizes
Whether you have a lot of money to invest or a small amount, financial advisors are valuable partners who can assist you in building and maintaining your portfolio.
With smaller portfolios, a financial advisor can help you set realistic goals and create a sustainable plan for your investments. They can assist you with investment options that are well-suited for smaller portfolios, such as fractional shares and exchange-traded funds, and help adjust your strategy as your portfolio matures.
Larger portfolios require more complex financial strategies and investment decisions, and financial advisors provide in-depth knowledge to assist with them. A financial advisor can also walk these investors through options for minimizing their tax liabilities and offer guidance on matters such as estate planning.
To set up a meeting with a financial advisor, contact Grey Ledge Advisors online or call us at 203-453-9075.