No longer than a month ago our reader – Rafikol – touched on very important topic reminding me not to forget about people who are just starting building their capital.

"I have a big favour to ask of you, Trader. Can you write an article about investing small sums – let it be $200/month with medium to long term perspective. I’m thinking about equities, commodities, bonds and currencies”.

Some people could say that $200 per month is too small of a sum to invest. On the one hand, it is far from being a huge capital. On the other hand, we can expect quite a nice capital after a dozen of years especially that this money is put to work.

Also, we must understand that in many cases saving a bigger amount is simply hard.

Having said that, none of us has an excuse not to save for our future and to rely on the government in this department. Today we are starting to understand that we either will work until we die or our pensions will suffice only for vegetation. It’s you making sure you live comfortably when you are old or hoping that government will budget for social expenditure.

$200 which Rafikol mentioned seems to be minuscule. This is why we are going to use compounding interest and long-term perspective to have something to work with.

According to my calculations, investing $200 each month with an averaged ROI 12% each year, after 10 years we will have $47 000. Both from our deposits $24 000 ($200 x 120) and returns of 23 000.

The situation looks much better after 20 years. Our capital will be equal to $193 000 ($48 000 of our deposits + $145 000 of capital gains). Ultimately, the longer our time frame the more opportunities there to multiply our money. For simplification I omitted inflation.

This 12% is not an easy goal. We need a vast knowledge and for that constant education is a must. Still it is our financial situation/future we are talking about so it’s worth paying attention. Investing is not as complicated as portrayed by financial institutions which perpetuate a myth of ‘specialised advisory’. Think: instead of working for themselves (having their own business) they are still being employed.

Before we will go through particular assets I want to point out how not to invest.

a) Stay away from any form of an intermediary/middleman that generates cost. Any form of commission paid lowers our profit.

b) Stay away from expensive investment funds – this means approximately 75-90% of the market.

c) Pay attention to the value of your transaction. It is more reasonable to accumulate capital for few months and make one deal rather than making a purchase each month. The cost of 6 small transactions may be higher than our profit that we can make in 6 months.

d) Do not buy expensive assets. ‘Expensive’ means two things:

Firstly, assets recently experienced a very strong surge and are expensive in short-term (RSI over 60 and very high level of optimism).

Secondly, assets experiencing late (or last) stage of their boom – their price compared with other assets will be high. A good example is equities in developed countries compared to precious metals, real estate and commodities etc.

e) Avoid assets with high hidden costs. Most of the investment funds publish only official costs putting their true charges in fine print.

Short selling through inverse funds can make our return lower by few percentage points. Assuming we were shorting index which hasn’t changed its price, we are going to lose money. A similar situation happens when investing in commodities through CFD or ETN where contango occurs.

To show you how seemingly trivial charges affect our long-term result I assumed that we use an intermediary or a fund costing us only 2% per year. Our return goes down from 12% to 10%.

In 20 years we accumulated not $193 000 but $150 000 and what’s more our capital made not $143 000 but only $102 000 and here you can see the real difference.

What would I invest in having $200/month?

I want to clarify from the beginning that investing $200 each month we will pay horrendous commissions (in percentage terms). In my opinion, much more reasonable is to save your money for few months and then invest after the end of calendar year when prices of many assets are very low. The same happened this year when simultaneously metals, commodities and equities experienced nose dive. “Sell in May and go away” was created for a reason.

Let’s assume we have $2 500. I believe that dividing this sum across different assets doesn’t make sense. If I had to invest today, I would put the whole sum in silver because it’s undervalued when comparing it to gold and equities.

In case that the situation will not change in a year, I would move part of the capital to either industrial or agricultural commodities – not both. The cost of buying cheap in servicing ETN (0.6% annual charge) is a sum of 15 USD, and this makes 2.4% in our situation. Increasing costs by buying both funds doesn’t make any sense.

Next year, equities would be another step. You should focus exclusively on emerging markets giving much more return than developed alternatives. Cheap in servicing ETF in any developing market or with more aggressive approach ETF closed only to the Russian market. Note that the panic in developed markets will most definitely result in a global bear market. This can make cheap equities even cheaper.

Other assets:

What I wouldn’t do (with today’s circumstances) is investing in the real estate market - REITs. Very high prices, low dividend and high potential for falls. Some exceptions can be found in Singapore’s REITs and emerging markets ETFs or REITs. Still I would recommend investing in three primary groups mentioned above – silver, commodities, EM equities – they are a much safer solution.

Bonds are off the list. Their risk is very high because of artificially inflated price by direct purchases of central banks and the end of the 35-year period of ever-lower interest rates. The change in investors’ minds is coming. Soon ‘safe bonds’ are going to be a ‘guarantor of a loss’ thanks to interest rates’ hike, bankruptcies, debt restructuring or rising inflation.

I haven’t mentioned gold on purpose. Our capital of $2 500 per year can be enough to buy 2 oz of gold. This is a very good start of your adventure with gold but remember that price of buying/selling coins below 1oz is very high. We should rather think about a fund fully (100%) secured by physical metal. Look at Swiss ZKB or Canadian Sprott’s fund.

Later, capital should be spread across equities, precious metals and real estate. We should not forget about a cash buffer especially if the situation would resemble that of today (very high prices across all groups of assets). It is better to keep your savings in safe currency (CHF) rather than forcibly invest in the overpriced market. This is not overruled by an argument that we invest thinking about long-term. I can give you an example: investors that bought Polish equities in 2007 are still in the red notwithstanding the accumulation of dividends for over a decade.

Common sense, critical thinking and never ending financial education – the three pillars of success.