Although investing is a long-term game, I find it easier to break it down into smaller time frames. It’s great to think about what my returns could be in a decade, but it’s what I do today that’s going to help me keep on track. Investing small amounts on a regular basis into UK growth stocks can help me to continually grow my exposure to the market.
The benefits of small-but-regular investing
In my opinion, making regular investments helps in several ways. Firstly, it allows me to blend my buying price on my favourite UK growth stocks. For example, I might put some money into the same stock each month for a year. In this way, I reduce the risk of trying to pick the best time to invest a lump sum in one go.
Secondly, building up my investments slowly reduces the tangible impact of putting money aside. It’s much easier for me to compute putting £20 a day away instead of trying to find £600 at the end of the month. The amount is the same in both cases, but psychologically easier to digest in a smaller increment.
On that note, how much would my £20 a day turn into over a sustained period of time? Well let’s say I set aside £20 a day, and look to invest the accumulated amount once a week. This £140 a week I’ll assume could generate me 8% a year from the UK growth stocks I select. If I manage to keep this up for 10 years, I’ll have a pot size of around £110,000.
The role of UK growth stocks and compounding
There are two main reasons why I realistically could have grown my investment portfolio to a six-figure sum in a decade. One is the benefit of frequent compounding. In simple terms, investing regularly allows my money to start increasing in value quicker.
The second element is the assumption of an 8% return per year. This comes from projected performance of the UK growth stocks. Personally, I think this is reasonable to achieve when I look at the past performance of companies such as Ocado and JD Sports Fashion. However, I would note this as the key risk to my overall strategy. If my average return decreases by even a few percentage points, my pot at the end of 10 years is impacted significantly.
I’d try and reduce this risk by diversifying my investments. My accumulated £20 a day would be invested each week into different growth stocks. As I’m investing each week, it gives me plenty of opportunities to pick different stocks that I have a high conviction on. Over time I can build my holdings to a dozen or more companies. This should help to reduce the risk of my return being severely impacted by one underperformer.
Another risk I need to watch out for is needing to sell my investments early. Hopefully putting away small amounts reduces this risk. Yet if I do need cash, I’ll have to sell some stocks. This immediately reduces any potential returns if I’m not invested. The longer this cash isn’t in growth stocks, the lower my overall pot size will be at the end.
jonathansmith1 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.