Not everybody has a lump sum at their disposal, but don’t let that stop you from investing in the stock market. By paying a regular monthly sum into a Stocks and Shares ISA, you can dramatically improve your chances of retiring in comfort.
Investing little and often has many advantages, especially in times like these, when investors are nervous about the direction of share prices. If you pay in, say, £5k or £10k and markets drop the next day, that is going to hurt. If you invest, say, £100 or £200 a month, you can take volatility on the chin.
In fact, by investing regular monthly sums, you actually benefit when share prices fall. That’s because your regular payment will actually pick up more stock or investment fund units. Then when markets recover, as they always do, given time, your portfolio will feel the benefit.
Go for growth
You can start with as little as £50 a month on many online investment platforms, or hike that to £100, £200, £500, whatever. The more you can afford, the richer you should ultimately be.
I would urge you to put your long-term savings into the market, as the FTSE 100 index of blue chips has delivered a long-term return of around 7% a year, compared to the 1% or so you get on cash these days. The index has fallen in recent weeks, and now looks relatively cheap compared to global markets, so today could be a good entry point.
As billionaire investor Warren Buffett said, successful investors should be “greedy when others are fearful”, because if you buy shares when sentiment is down, you will get them at a lower price. Investors are fearful today, making it a good time to get greedy, and dive into shares.
If you buy high-quality companies when their prices are low, then hold them for the long term, you can generate outsize returns. By setting up a regular investment plan, and paying in as much as you can afford each month, you can get on course for a comfortable retirement.
You can buy individual stocks or spread your risk by investing in an exchange-traded fund (ETF) tracking the fortunes of the FTSE 100, or maybe even the FTSE All-Share. Fund managers Vanguard and iShares both offer low-cost options. This could work as a strong core portfolio holding, and you could add individual company stocks over time, in a bid to beat the market.
Invest free of tax
Always remember to invest inside your £20,000 Stocks and Shares ISA allowance, because this means you will never have to pay any tax on your capital gains and dividend income for life, allowing you to shelter your wealth from HM Revenue & Customs.
Don’t stop at £200 a month, either. Look to invest more as your income grows, and pay in lump sums too, say, if you come into a windfall, bonus, or inheritance. The more you invest, the merrier your retirement is likely to be.
Harvey Jones 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.