I’ve read many questions online about investing small amounts of money.
Many people seem to believe that you can only start investing with lots of money and loads of knowledge.
Whereas there’s no doubt that knowledge absolutely helps – that’s what my website is about, after all – you really don’t need much money. What you do need is discipline.
This can be a challenge for me at times.
So, I’m going to start investing a small amount of money and keep track of my portfolio on my blog. This will help me with accountability.
It’ll also be useful to compare the portfolio with a savings account and discuss the differences that arise. Making mistakes and learning from them is the best way to become a better investor.
So, without further ado, how much and what to put into my portfolio?
DISCLAIMER: NOTHING ON THIS BLOG CONSTITUTES PROFESSIONAL/FINANCIAL ADVICE. IT’S FOR INFORMATION ONLY.
How do I invest a small amount?
Most articles about investing small amounts have certain themes in common:
- Pay off your high-interest debt first. This is sensible since high-interest debt can eat into your returns or obliterate them completely.
- Invest little and often. Again very sensible. This evens out market fluctuations (hopefully) and lets us buy more shares when they’re cheap and fewer when they’re expensive.
- Diversify your assets. Another great point. Diversification of both assets and asset classes helps to prevent losses.
I’m going to stick with these themes. I’ve no high-interest debt, and I fully intend to invest little and often and diversify my assets.
I’m going to invest as little as £100 (approx $134) each month into an investment account and make any asset purchases using this money. However, there may be occasions when it makes sense for me to save up a few of these monthly deposits and make a ‘bulk’ purchase to save on trading fees.
Over the last year, I’ve saved £100 per month, and I now have £1200 to start investing. March is a great time to invest as it’s the end of a tax year, which means I can make the most of the rest of my tax-free account allowance. (In the UK, this is an ISA.)
Where should I invest my small amount of money?
To answer this, I need to break the question down into two main parts:
So, the first question.
What type of investor am I? (If you want more detail on questions to ask yourself about this, see my post about starting an investment portfolio.)
I like researching businesses, economics and financial markets, so I’m more than happy to choose assets to invest in and be able to explain why I’ve done so. Some of my decisions may be wrong(!), but each one is a learning experience.
I also have dependents. But, if I lost everything in this portfolio, we’d survive. Therefore, I can afford to be a little risky and do some speculating with this small portfolio if I decide to. (Please note, however, if this was not the case, I may make different decisions.)
Question 2. How do I build the right portfolio?
I need to decide on my asset ratio. This is the base combination of bonds, stocks and cash that I’m going to invest in. (I can add other assets later if I decide to, and I probably will.)
I think businesses are utterly fascinating, and I can spend ages researching financial statements and strategies. Because of this, I like stocks. However, 100% stocks is not a great idea because if the stock markets crash, for whatever reason, I need a cushion, which is where bonds come in. (However, it’s always worth remembering you only lose when you sell your stocks. Until then, the losses are on paper only.)
Bonds and stocks usually work in a complementary way. When stock prices go down, bond prices go up and vice versa. It’s not a hard and fast rule, but it’s a very simple description of what happens.
Admittedly, the last few years have not been great for bond yields. Currently, the UK Gilt 5 year is yielding 1.25%. Considering I can probably get up to 0.95% interest with an easy-access savings account, bonds are not hugely attractive. However, the right bonds are a cushion against loss, so I do want some.
I also need some cash. Interest rates (and I mean the Bank of England base rate here) have recently gone up to 0.75%, which means many bank accounts now at least offer something in interest payments. And unlike bonds, where you have to go through the process of buying your assets and the costs this involves, you can just stick cash straight into the bank. So, there are benefits to having cash in a portfolio.
What about inflation?
Another point I need to bear in mind is inflation. Inflation (CPI Index) in the UK is currently running at 6.2% as of the end of February this year. So, with both bonds and cash, I’m losing money in terms of purchasing power.
Stocks, especially dividend stocks, will help with this, assuming inflation doesn’t get too high. The regular dividend payments income stocks provide should bolster my portfolio against inflationary losses. As a comparison, the FTSE All-Share returned 4.6% in December 2021 but -0.8% in February 2022. These fluctuating figures demonstrate the more volatile nature of shares when compared with bonds or cash accounts.
Looking at these figures also makes you realise how much inflation eats into our wealth when it gets too high.
- I can afford for this particular portfolio to be higher risk.
- I’m content to spend time researching and choosing my own assets if needed.
- I need some bonds and cash for a cushion.
In addition, the point of this portfolio is to invest. This means holding assets for the long term to accumulate any wealth. Therefore, any decisions must be focused on that and not on day trading to try and lock in short-term capital gains on asset prices.
As a result, I’ve decided to go 75% stocks, 15% bonds and 10% cash for my base portfolio. (I may change this as my circumstances change.)
The next step is to choose an online broker and get going.
Other options for investing small amounts
There are a few other ideas I can consider when investing small amounts of money in this portfolio.
1. Buy an index tracker
Index trackers are passively managed, so tend to be cheaper than actively managed funds which require a human fund manager to manage them. When you’re only investing small amounts, the cost of managing a fund, in addition to trading fees, is a relatively big consideration as large fees will lower my returns considerably.
2. Use a robo-adviser.
Robo-advisers are digital platforms that gather information on an investor and then use an algorithm-driven financial planning service that has very little human input. They’re often cheaper than active management of investments. However, sometimes they can limit your investment options depending on how they’re set up. And, providers do charge for their use. I’m not yet convinced that a robo-advisor is worth the fees for me, so I won’t be using one for this portfolio.
3. Invest in long-term
This I’m definitely doing. It’s one of the main reasons I’m investing!
However, I won’t be using a pension account for this portfolio initially. This is because a pension wrapper costs extra money to administer. For example, Freetrade charges £9.99 per month. When you’re investing small amounts, every cost eats into your returns.
Although there are higher tax benefits for me later on from paying into a pension, with the amount in this portfolio, we’re not talking significant amounts, so, I’m happy to forgo these for now and save on the administration charge.
An ISA (tax-free account) also has the advantage over a pension wrapper of being able to take out money without losing the tax benefit. And when there’s the possibility of needing some of your money, this is an attractive option.
I may change my mind on this at a later date. But, for now, an ISA wrapper it is.
4. Use a high-yield savings account
Definitely an option. However, due to really low-interest rates, high-yield isn’t particularly high yield! And so often, with these accounts, you can’t take your money out for a period of time. As the cash in my portfolio may be needed for the odd bargain asset purchase, a high-yield savings account isn’t an option for me at this time.
5. Savings apps
You can now get savings apps that round purchases and save the small change. And when you’re saving small amounts, even small change counts! However, the ones I’ve checked out offer rates of interest lower than my bank (yes, that’s possible, apparently!). So, I’m not going to be using one of these for this portfolio.
6. Use a dividend reinvestment plan (DRIP)
I love this fancy term – DRIP! In other words, you make a plan to put your dividends back into your portfolio. It makes a lot of sense as you compound your returns over time, (To find out more about compounding, check out my post on compound interest.)
However, for now, I’m happy with the portfolio I’ve designed.
My starting portfolio
So, for my £1200 portfolio, the split works like this:
- Cash in bank: £120
- Bonds: Bond ETF £180
- Stocks: Dividend ETF £900
- Charges: £3 for ISA administration, £0 trading fees,
- Net Value: £1,197
To make a comparison with keeping money in a bank account, I’m going to compare my portfolio with… keeping the money in my bank account! This means there are no fees to pay at the start of this theoretical ‘bank portfolio’ because I already have the account.
So, currently, in my theoretical bank account:
- Cash: £1200
Obviously, the bank is better valued at the start because there were no set-up or account fees I had to pay.
I’m excited to see where my real portfolio goes!
Have you started investing with a small amount of money? What strategies do you use? Is it worth investing small amounts of money?
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