Investing When You Have Little Disposable Income

by admin on October 10, 2011

The Canadian Payroll Association has published a study according to which, 57 percent of working people in the country would be in trouble if their paycheck were delayed by just one week. The percentages are higher for single parents and workers 18 to 34 years of age. It is clear that most Canadians do not have a lot of disposable income to invest.

For many, this is not even an option. Rather than investing, it is reducing debt and increasing income level that is important. Others invest but choose the wrong strategies. What are these? One is market timing. Investors think there is a wrong time and right time to invest in the stock market, and it is possible to predict both. Nobel Prize winner and economist William F. Sharpe has developed the Modern Portfolio Theory to explain how this would work. According to his theory, a person who does market timing has to be right about 3 times out of 4 as to perform as well as buy-and-hold investors. With major moves on the market due to unexpected events, this will be difficult to achieve. Another mistake is failing to diversify one’s portfolio. You can accumulate company stock, true. However, this reflects poor knowledge of investment instruments and how they move in complex or not so much relationships. Strategic asset allocation and diversification are key, even if you have little disposable income to invest.  This helps increase returns and minimizes volatility (MSN Money).

Investing in the stock market is not a good idea with little money, and there is one more reason for this. Most of the investor’s base investment will go toward paying fees or trading commissions. These are to be paid when buying and selling stock. Then, stock appreciation is not going to be considerable if you just have a few shares (Saving Cash and Making More).

Some recommend investing in other types of investment instruments (e.g. mutual funds), others argue that it is best not to invest at all. Author, blogger, and portfolio manager Danielle Park explains that some people are tempted to borrow when the rates are low. But if they are low indeed, isn’t it better to pay your other debts as fast as possible? If the typical interest rate on a 5-year mortgage is 8 percent, and it is set at 3 percent at the moment, this is certainly a gift to this generation.

If you are living paycheck to paycheck, you should not be investing, adds Bruce Sellery, businessman, journalist, and author of Moolala: Why Smart People Do Dumb Things With Their Money. There is a bigger fish to fry, Sellery explains. Most people with little disposable income also have consumer debt. They have to deal with it before considering investing, and this is mainly because of the high interest rates. Investing is an option for those who handle debt and have developed a sustainable spending plan (the Globe and Mail).

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