Investing can sometimes look like a rich man’s game. But it’s possible to begin investing with a relatively small amount of money. Here’s how I would start investing by putting aside just £100 each month – a little bit more than £3 a day.
£100 a month adds up to £1,200 each year. That’s a substantial sum. Here are some different ways I could invest it.
Follow the market
A simple way to invest is to put one’s funds into an investment vehicle that simply tracks the market. That may be a unit trust or fund. Basically, it’s a pooled investment fund that buys the market in miniature, for example, through owning a weighted portfolio of the hundred leading shares.
Different trusts or funds focus on different markets. Commonly they focus on an index, like the FTSE 100 or FTSE 250 indexes of leading UK shares. An example is the Vanguard FTSE 100 index Unit Trust.
Pros and cons of trackers
Without pricy portfolio pickers to pay, such funds can offer low fees. With only £100 a month to invest, every penny matters. Another advantage is simplicity. I could simply park my money in such a fund without needing to research individual shares myself.
But the downside is that any market contains poor performing shares as well as stronger ones. I’d end up exposed to shares including those of weakly performing companies, which could drag down overall performance.
How I’d start investing for growth
If I wanted to start investing with the goal of building a nest egg, I’d be tempted to focus on growth shares. These are shares of companies that appear to have prospects of continued growth. They could be fairly new firms such as Renalytix or Deliveroo. But they could be older companies that look set to keep growing. Some companies achieve double-digit growth of revenues and profits for many years in a row.
Growth stocks can sometimes see rapid share price appreciation. If the share price grows much faster than company’s revenue or profits, it could be overvalued. In that case, even when a company’s business performance improves, its share price could still get worse.
Growth has other risks too. It often requires a lot of capital and business models change as a market matures. An example is Ocado, which after two decades as a listed company, continues to raise money to fund its growth.
Alternatively, if passive income was my reason to start investing, I’d choose shares with good income prospects. Some companies pay their shareholders income in the form of dividends. However, dividends are never certain – they can be cut, suspended, or cancelled at any time.
Typically income investments are companies where expected cash flows will be high, and massive investments aren’t required to maintain market position. A tobacco share such as Imperial Brands fits the bill.
£100 a month is enough to let me invest in more than one business sector. That would let me diversify my risk. Cigarette smoking is falling in many markets, which could hurt Imperial’s turnover. Diversification lets me get some benefit now but with some risk management against possible downsides. Another risk to consider with income shares is whether they pay out substantial income because they have limited opportunities to reinvest it in their business. If so, that could suggest turnover and profits may decline over the long term.
Christopher Ruane owns shares of Imperial Brands and Renalytix AI plc. The Motley Fool UK owns shares of and has recommended Renalytix AI plc. The Motley Fool UK has recommended Imperial Brands and Ocado Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.