# What Small Investments Make Money

Howdy! A Portland, OR native, I currently reside in the northern San Diego County area as a freelance writer. When I'm not sipping coffee, soaking up some rays and writing or playing guitar you can find me at the hot yoga studio.

Small investments are important in terms of growing wealth.

For example, the first $10,000 that is saved is more than tripled by the end of one's working life as people live longer.

As people invest more money in their retirement, those investments also grow.

Because most people don't have access to high amounts of money to invest, it's critical that they look into low-cost investments that can help grow their investments. In order to do this, they have to invest small amounts of money in the right places.

## Investment Opportunities

I will start by stating that there are several types of investment opportunities that make money. Some of these are market niche investments, as I will discuss.

## Market Segment/Market Mix

Market segmentation is a type of investing that will allow people to identify specific sectors and areas of the market to invest in. For example, you could invest in a specific market segment of a global market.

For example, if you are interested in investing in blockchain technology, you could invest in specific companies that work in this sector.

At my firm, we have a specific section called "Blockchain Technology" and a specific section called "Bitcoin & Altcoins" that we highlight in our portfolios.

We have selected specific companies for both of these sections, so that we can grow our assets by investing in companies in a specific area of the market that are valued based on their blockchain technology and cryptocurrencies.

We use the TrueCrypto Trader platform as an example, since we've been using it for a while now and it's been a successful investment.

## Let us first briefly examine how an investment works.

Investments are made with the intention to earn a return. As an investor you are making an investment with the thought that you will earn a return on your investment.

By making a small investment in a few stocks, you can make substantial returns. It all boils down to how you execute your small investments.

The most commonly used measure of how an investment is performing is the Sharpe Ratio. This ratio measures how much return you would have gotten if you had kept your original capital at risk.

Most of us are not comfortable with risking large amounts of money. So we are left with small investments. It may seem foolish to risk your entire life's savings on a few stocks. However, an average person has nothing to lose. In the long run, the money is worth more than the initial investment.

For the purposes of our discussion we will assume that you have bought $5,000 worth of stocks. We are assuming a 15% return for a year. We will use different return assumptions in the following sections.

Keep in mind that there are a variety of ways to achieve the Sharpe ratio so don't assume the one we are using is the only one.

### #1 Using the Purchasing Power Method

The most popular way to determine how well an investment is performing is to do some simple math. You multiply the number of months you have held the investment times the average return of that investment. In the case of the 15% return, you will have 15 months.

If your investment had returned 15% for the 15 months, the Sharpe ratio is 2.5. This means the annualized return of the investment is 2.5 times the average return.

The below table shows you what the Sharpe ratio looks like for different risk assumptions.

Sophisticated investors will use a set of models to determine how their investment is performing. The classic model is also called the "Max Drawdown," or Max Draw with Variable Risk. The formula for the Max Drawdown looks like this:

Max Drawdown = 1-((Retained Period)/(Expected Period)

Where Retained Period is the number of days you have held the investment for. Expected Period is the average number of days you expect to hold the investment for.

The Max Drawdown has 2 components: a standard deviation of the gain or loss, and an average of the time you held the investment.

Based on the formula for the standard deviation, the average of the number of days you hold a position can be used to calculate the average of the Standard Deviations. So if you are holding an investment for 30 days, you will have 30 Standard Deviations.

This allows you to calculate your Standard Deviations for the entire investment period.

The formula for the Standard Deviations is:

Standard Deviations = Retained Period - (Expected Period)

The formula for the Standard Deviations is the standard deviation multiplied by 1.5. So if your Standard Deviations are greater than 1.5 you are taking more risk than you can handle. If they are less than 1.5 you are taking less risk.

A person with a portfolio that generates a Standard Deviation of 1.5 will take more risk and a person with a portfolio that generates a Standard Deviation of 0.5 will take less risk. If you have a portfolio that has a Standard Deviation of 2.0 you will have a large decline. If you have a portfolio that has a Standard Deviation of 1.5 you will have a small decline.

For example, if you had a Standard Deviation of 2.0, a decline of 50% would be possible, but a decline of 25% would not be possible.

While the Standard Deviations are used to determine the maximum potential decline in a portfolio, they do not tell us much about how you will perform in the future.

## Market sector investing is the way to go

The simplest way to invest is to invest in a market sector. These sectors can be grouped into several areas, such as the consumer, financial, industrials, or biotech market sectors. For example, if you wanted to invest in a specific biotech company, you might consider investing in a stock like Gilead Sciences (GILD).

But a stock is a relatively small investment. To grow your assets, you have to invest in other types of investments to grow them, such as stocks, bonds, mutual funds, or ETFs.

If you're interested in getting an education on small investments, we recommend getting The Complete Guide to Micro-Bubbles by Pierre A. Guenther and Doug Short. If you're interested in learning more about market sector investing, I suggest reading my recent blog post "Bubbles in Micro-Cap Stocks."

I hope this article gives you some ideas to invest in small areas. The next article in this series will focus on investing in a specific industry to grow your wealth and learning how to use economic indicators to make predictions about the stock market.

*Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.*

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

*Additional disclosure: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any securities.*

Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results.

Please be aware of the risks associated with all investments. The investment return and principal value of an investment will fluctuate.