How to invest with little money is a careful art form. It can be done if you follow these tips on investing. If you can master these techniques, you’ll be able to transform your financial situation – and eventually be an investor with a nice sized investment portfolio. How does that sound?
How to invest with little money
At Financial Expert we have a tonne of content for new investors, such as our beginners guide to investing and our investing courses. This content is aimed at investors with no experience of buying shares and our focus is on teaching the basic principles of financial markets and how to begin investing.
This article zooms in on a specific challenge – how to invest with little money. Investing without much money creates a new challenge which I’ll explain.
Fees are the enemy when investing small sums
If you’re investing a small sum like £100, your objective is to get as much of that money working for you as possible.
If you can successfully buy £100 of investments with each £100 deposit, you’ve succeeded in investing your small sum.
For that to happen, you need to reduce or completely eliminate your investing costs. However if you’re not careful, 30% of your money will be lost at this stage through fees and will end up in the pocket of your stockbroker.
Many large stockbrokers charge between £8 – £13 for a single trade. These costs are easy to ignore when you’re investing £50,000. But for a small deposit of £100, these fees will cause serious harm to the efficiency of your investing.
At £10 per trade, you’ll be waving goodbye to a big slice of your savings before they even enter the stock market. If you spread your £100 over shares in three different companies, that’s £30 of fees spent on a £100 investment.
It goes without saying, that incurring a 30% loss to simply buy the shares will damage your investment returns. You might be better off with a savings account!
You’ve got to be clever and savvy when investing small amounts of money to ensure your pounds go as far as possible, here’s how:
Investing small sums tip #1: Build portfolios slowly
If you understand the benefits of diversification, you’ll be looking to own at least 20 individual company shares to protect yourself from sharp changes in a single share price.
Instinctively, you’d want to build that portfolio in a short space of time. One way to do this would be by splitting your deposits across multiple shares each month. If you bought 5 different shares per month, then you’d have a full portfolio within 4 months.
The problem here is that fixed trading costs will multiply with each different company trade you execute. 5 trades per month for 4 months means 5 x 4 = 20 trades in four months. At £10 per trade, that’s £200 in fees, or £50 per month.
To minimise trading costs, you will need to accept a slower pace of portfolio creation. Consider buying 1 company per month for twenty months. This would only result in trading costs of £10 per month.
This approach will expose you to more risk in the short term, while your portfolio is not diversified. However, as you’re only investing small sums, your exposure will still be limited. Also, you’ll be saving cash on trading fees, which may fully compensate you for that additional risk.
Investing without much money tip #2: Consider funds
When investing small amounts of money, investment funds are your friend for two reasons:
- The instant diversification offered by funds means that you may only need one fund in your portfolio. This means you’ll be placing far fewer trades.
- Several fund supermarkets and fund managers allow you to invest in funds for zero fees.
Examples include the Vanguard Investor platform. This platform restricts investors to its own in-house range of Vanguard funds, but these are often industry leaders. Several of which are suited to ‘one-fund portfolios’, such as the LifeStrategy series of funds which includes equities and corporate bonds within a single fund.
By picking the right platform, and selecting the right fund (or selection of funds), you could invest for zero upfront fees.
That’s right, with a £100 cash deposit, you could own £100 of fund units within a few days. This is therefore an optimal strategy when investing without much money.
Investing without much money tip #3: Look at the annual costs
Fixed fees come to haunt a small investor portfolio in a second guise: annual charges.
Virtually all stockbrokers and investment platforms charge a periodic fee. This might be called an ‘administration fee’ or a ‘platform fee’, it could be charged quarterly or annually. But however it’s branded, it’s the same foe.
If you’re a small investor, these annual charges could make a huge difference to your annual return, depending on how they’re calculated. Some fees are charges as a fixed £ rate, and others are charged as a set % of your account value.
Fixed or minimum fees are a problem – They become more affordable for larger portfolios, but have the maximum impact as a % to small portfolios.
% of account value fees are generally advantageous for small investments. A small percentage of a small portfolio should equal a reasonable fee which won’t disrupt your investment performance.
Annual fees are easily overlooked when you’re comparing stockbrokers, but ignore them at your peril. It’s still money walking out of your account which might be completely avoidable. Keep hold of as much as your cash as possible by choosing an account which is kind to small portfolio values.
How to invest with little money tip #4: Consider fee-free trading
If you don’t like the sound of picking investment funds, consider the new breed of share dealing platforms which have appeared in the last decade which offer ‘fee-free trading’.
Examples of these include:
These platforms allow you to buy shares without paying commission on each trade. This is a revolutionary idea and is supported by other sources of revenue, such as selling user trade data to hedge funds.
The downside is that often the range of shares is not comprehensive. Some apps only allow trading of US shares, which may be unattractive to UK investors who don’t want to own a portfolio completely priced in US Dollars, as this adds a layer of foreign exchange risk.
However if you’re really keen on being able to pick shares then this could offer an efficient way into the market with small investments.
How to invest without much money tip #5: Always reinvest your dividends
Whether you invest in shares directly, or buy units in mutual funds, you may find that after a few months, a small amount of cash has accumulated in your account as a result of dividends.
For small portfolios and large, it’s important to be making each pound work as hard as possible. It isn’t achieving that if it’s sat in your cash or holding account.
Therefore, using a cost-efficient strategy (free trading or fee-free fund purchases are ideal), ensure that you are reinvesting these proceeds back into your investments on a monthly or quarterly basis.
You have probably seen charts showing the powerful effect of compound interest. My guide to retiring at 50 includes a few charts that shows the tremendous power of compounding to change our retirement date. The maths behind these charts will always assume that all income is immediately reinvested, therefore any delay in doing so will cause your returns to lag behind these charts.
How to invest with little money: Bonus tips
How to invest with little money is a large topic, so I thought I’d share some extra things to bare in mind when approaching your investments:
Keep things simple
An effective portfolio need only contain a single fund. Never forget this simple fact. Adding funds, individual shares and investing in other asset classes may actually harm your return if this leads to fees stacking up.
At the end of the day, the explicit objective of your portfolio is to maximise its return on capital, not to impress others with its complexity.
Keep your portfolio at arms length
I’d urge you to resist the desire to agonise over every nuance of your portfolio.
The most common symptom of this is spending way too much time deliberating over investment choices and performing research.
If your portfolio is only tiny and only has an expected return of £100 in its first year, it wouldn’t make sense to spend 100 hours researching companies and funds.
Focus on your main constraint
Thinking strategically, it would be more useful to choose a basic and cheap ETF and then spend those 100 hours earning an additional income or working overtime at your existing job. The extra income could then turbocharge the amount available to invest.
When you’re investing small sums of money – the main constraint is the size of your deposits, not the investing expertise. So it makes sense to put your efforts towards raising more cash rather than squeezing an additional 1% annual return out of your portfolio.