There are lots of reasons why people think the stock market isn’t for them. One I hear fairly regularly is the belief that you need a vast stash of cash to start investing.
Fortunately, this simply isn’t true; even £100 can go a long way if you give it time. Before giving my thoughts on what to do with this money, however, I should mention that I’m taking a few things for granted.
The first is that you’re already debt-free. If this isn’t the case, stop reading after the next sentence. Mortgage aside, debt should always be prioritised over investing, especially if the rate of interest you’re paying is high.
The second assumption is that you already have a bit of cash put away for an emergency or two. Lots of personal finance gurus suggest between three and six months of expenses. I’d simply shoot for a figure that allows you to sleep at night.
Third, you should already have a Stocks and Shares ISA or Self-Invested Personal Pension (SIPP). If not, you need to know that opening at least one of these accounts is a priority.
Done. Now, what should I buy?
It can be tempting to jump into individual company stocks when beginning to invest. That might be appropriate if you’ve got a few thousand pounds to spend but it’s less optimal when you’re working with £100 since a significant portion of that money will be gobbled up by the costs of buying.
By far the best strategy, in my view, is to put that cash to work in a fund that tracks a market index. An index is like a league table of companies according to their market value; the more valuable a company is, the nearer the top it will be. The FTSE 100, for example, contains the biggest companies in the UK. By tracking it, you’ll generate about the same return as the index.
The explosion of interest in this way of investing over the years means there now exists a huge variety of such funds to choose from; there are indices that track multiple markets, bonds, the gold price, even companies that specialise in autonomous vehicles. This allows you to spread your cash around, making it a good option for those who lack the time, energy, or inclination to thoroughly research individual companies.
Don’t take my word for it. Legendary investor Warren Buffett thinks the vast majority of people would be best off buying shares in a fund that tracks the market rather than attempting to beat it. I’d say he’s worth listening to.
From little acorns…
Let’s say you put that £100 to work in a fund tracking the FTSE 100 and did nothing for 30 years.
Based on an achievable 7% annual market return (and not taking into account costs or fees), that £100 would turn into £761, according to my calculations. If markets did even better (or you chose to invest in a fund that tracks the returns of, say, much smaller companies) and generated a 10% return on average over the same period, you’d have £1,745.
Sure, these numbers are hardly life-changing. They do, however, show what can be done with a small amount of cash that’s allowed to compound over time. Think of what could be achieved if you were able to put some extra cash aside every month!
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.