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Three Reasons to Start Investing When Your Portfolio is Small

The Motley Fool logo The Motley Fool 10/3/2017 Jeremy Chia
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People new to the workforce frequently have the misconception that we need to build up a large nest egg before we can start investing. In reality, starting your investment journey when your portfolio is smaller may be much better.

Unlike investing in assets like real estate or private equity, to start investing in stocks, we only need as little as $1,000 or even less. This means anyone who has just started working, can most likely afford to start putting some money into stocks. Furthermore, having a small portfolio can have a few advantages for investors who are just starting out.

This is because of the flexibility a small portfolio affords and the greater number of options available for you.

In this article, I will highlight three reasons why we should start investing when our portfolio is small.

Easier to find winners

In an interview in 1999, Warren Buffett said that he was confident he could make 50% a year if his portfolio was $1 million. That is a bold statement to make but what he was trying to imply was that having a smaller portfolio can be advantageous as it opens the door to numerous investment opportunities.

Investors or hedge funds that manage a large portfolio have a disadvantage due to the law of big numbers. On the other hand, retail investors who manage small portfolios can designate their money to small-cap companies with high growth opportunities that larger investors may be unable to capitalise on.

Mistakes are not as costly

It is inevitable that new investors will make mistakes when they first start investing. However, by starting out with a smaller portfolio, the mistakes that we make will not be as costly. This will, therefore, have a smaller effect on the long-term return of our portfolio.

On the contrary, if we were to wait a few years after accumulating wealth to start investing, each mistake we make will be amplified. Getting the mistakes out of the way before our portfolio grows is hence important for all new investors.

Easier to manage a small portfolio

When investors or hedge funds manage a large portfolio, they minimise the concentration risk by diversifying over a large number of stocks. There can sometimes be more than 30 stocks in a single portfolio. Keeping track of such a large number of stocks is not only tedious but can also cause investment mistakes.

Investors who have a smaller portfolio need not diversify to such an extent. Firstly, due to the smaller size of the portfolio, investors cannot over-diversify as it may lead to greater frictional cost due to commissions. Secondly, the small portfolio allows us to concentrate our investments on fewer stocks without such great a risk.

Because of this, we can better focus on just a few stocks in our portfolio.

The Foolish bottom line

People new to the workforce too often make the mistake of waiting to build up a large amount of savings before starting to invest. In reality, starting to invest with a smaller portfolio may be more beneficial to new investors.

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