Stock markets display some big rises and falls over short periods. However, over the long term, these smooth out into a steady upward climb. This is because many of the companies become more valuable as they increase their sales, profits and dividends over the years.
As a result, long-term investing in the stock market can transform relatively small sums into a substantial nest egg. What’s more, if you invest via a Stocks and Shares ISA, all your gains are shielded from tax.
Some providers, including Hargreaves Lansdown and AJ Bell, allow you to make regular investments from as little as £25 a month. But is it worth investing such a sum, and how would I go about it?
Getting started with £25
Share dealing isn’t expensive these days. However, even the lowest trading charges will eat a disproportionate chunk of a £25 investment. This makes buying shares in individual companies impractical for small-sum investors.
However, investing in funds can be a different matter. Hargreaves Lansdown, for example, makes no charge for a monthly direct debit into funds. As such, it makes sense to forget about individual stocks and invest in a fund instead.
Keeping it simple
There are all manner of funds to choose from. But I think there’s a lot to be said for keeping it simple with a low-cost stock market tracker. For example, the HSBC FTSE All-Share Index Fund (Class C Accumulation) may be a bit of a mouthful, but its objective is very simple. It tracks the performance of the FTSE All-Share Index, less a very low annual management charge of 0.07%.
The FTSE All-Share Index contains over 600 companies. These range from global giants, like HSBC and Shell, through medium-size firms, such as Greggs and McCarthy & Stone, to smaller companies like Harry Potter publisher Bloomsbury.
As such, the HSBC FTSE All-Share Index Fund (Class C Accumulation) is diversified by company size, industry and geography. Investors benefit from broad exposure to economic growth both at home and abroad.
The ‘accumulation’ part of the fund’s name means it automatically reinvests the dividends many of the companies pay their shareholders. Reinvesting dividends compounds growth, snowballing long-term returns.
Turning £25 into £1,000
Over the last 10 years, the HSBC fund has delivered growth of 8.27% annualised. This is around the long-term historical average of the UK stock market.
This rate of return would turn a £25 investment into £50 in less than nine years, into £500 in less than 38, and into £1,000 in less than 47. The snowballing effect of long-term investing is the reason I believe you should start putting money into the stock market as early as possible — even a relatively small sum, like £25 a month.
Finally, do make sure before you start that you have no expensive debt (on credit cards, for example). Also, that you’ve saved some cash in an easy-access account as an emergency fund. Basically, you don’t want to be dipping into your long-term stock market investments to cover any short-term cash flow needs. Happy investing!
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown and HSBC Holdings. 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.