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How I’d start investing in a Stock and Shares ISA with £50 a month

Paul Summers — Sat, 12 Feb 2022 14:44:55 +0000

I vividly remember opening my Stocks and Shares ISA many years ago. While a little daunting at the time (“How on earth does the stock market work anyway?“), I’d do exactly the same thing if I were thinking of getting started with investing now.

Why invest via a Stocks and Shares ISA?

With such an ISA, by far the biggest incentive for me is that any profits I make are free from capital gains tax. Call me miserly but I’d rather hand as little as possible back if I’ve taken on the responsibility of growing my wealth.

The tax benefits of an ISA don’t stop there. In addition to not paying any tax of profits, I’m also not required to pay anything back for dividends I receive, assuming the investment I hold pays them.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Here’s what I’d buy

With £50 a month to invest, I’d start with buying an exchange-traded fund (or ETF).

An ETF simply tracks the return of the stock market. To give an example, the FTSE 100 index, which features the UK’s biggest companies, returned 14.3% in 2021. An ETF tracking the FTSE 100 would return almost exactly the same (once costs are factored in).

Buying an ETF would make particular sense to me as a newbie investor because my money would be spread between lots of different companies. While this won’t stop the value of my investment from falling in tough times, there are none of the risks that come from buying shares in a single business.

Clearly, I’m not obligated to buy a fund tracking the FTSE 100. There are actually a huge number of ETFs available following all sorts of markets and types of stock.

Nor must I stick to buying only these funds (although many people like to keep things simple and do). Once I became more confident in how the market works, I can expand my portfolio to include other assets.

Keep fees low

It’s worth saying a little more about fees. Since it’s essentially managed by a computer rather than a human (aka a passive fund), an ETF’s fees tend to be low. Over years, this really matters. It means more of my money is allowed to compound.

I’d also take advantage of my broker’s ‘regular investing’ service. This invests my money on a set date each month rather than immediately. As a result, my commission fees (what it costs to buy or sell a fund or stock) are roughly 10% of what they normally would be. Again, these savings add up over time and allow more of what I put in to grow in value.

Any downsides?

For me, there’s aren’t many downsides to opening a Stocks and Shares ISA. Still, let’s have a go at scraping the barrel.

One fairly obvious cost is having less cash to spend today. There’s no way of getting around this other than to earn more and/or reduce my spend. Becoming an investor also requires patience. This is no ‘get rich quick’ scheme.

The good news is that investing for the long term quickly becomes a habit. In fact, knowing that money I put away now might/should become a great nest egg eventually makes the process rather addictive.

And of course, we’re talking about £50 here. I could potentially accumulate a lot more wealth by increasing the amount I set aside every month.

The post How I’d start investing in a Stock and Shares ISA with £50 a month appeared first on The Twelfth Magpie.

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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.

Renewable energy: 2 ETFs to buy

Paul Summers — Sat, 13 Nov 2021 09:23:19 +0000

Just in case you’ve been avoiding all news flow recently, there’s probably no hotter investing space right now than renewable energy. Fortunately, there’s already a plethora of options available to investors looking to tap into the megatrend, including exchange-traded funds (ETFs). Here are two I already own and which I’d feel comfortable adding more of in the years ahead.

2 ETFs to buy

As it sounds, iShares Global Clean Energy ETF (LSE: INRG) invests in companies that have a finger or two in the clean energy production pie. Alternatively, some holdings may supply the equipment or technology that enables this energy to be generated.

All told, this ETF has 76 holdings. That’s not exactly concentrated but nor does it present as being overly diversified. This is an important consideration for me. After all, the greater the number of stocks held, the less impact each individual stock can have on returns. As such, I think INRG strikes a nice balance between risk and reward.

Another positive to this fund is the geographical spread. Companies held come from both developed and emerging markets (although 43% are based in the US). UK-listed SSE features in the portfolio, as do firms like and solar power company Enphase Energy.

A second passive fund I’m holding as part of my renewable energy strategy is WisdomTree Battery Solutions ETF (LSE: CHRG). As it sounds, this fund is more focused on energy storage. According to WisdomTree, battery technology has the potential to “significantly transform industries, services, labour and consumption“. Unsurprisingly, the electric vehicle revolution will form a major part of this.

Again, the geographical spread of this ETF is reassuring. By contrast to INRG however, almost 30% of holdings are based in China. Another 20% and 12% are based in the US and Japan respectively.

Some positives

As you might expect, there are advantages and disadvantages to playing the renewable energy theme via passive ETFs. For me, one clear benefit of using trackers is their relatively low cost. The less I give back in management fees, the better my eventual returns will be thanks to compounding.

The iShares and WisdomTree funds have total expense ratios of 0.65% and 0.40% respectively. Neither strikes me as unreasonable considering these are thematic funds. Moreover, the CHRG share price is up 50% over the last 12 months.

It’s not just about the cost. I don’t claim to have specialist knowledge of the renewable energy space. This lack of investing ‘edge’ suggests buying a diversified fund that tracks indices created by experts in the field would be the more rational move.

Then again…

On the flip side, both funds could still prove volatile. Growth companies in hot areas usually trade on high valuations. And, regardless of renewable energy’s solid prospects, that could prove problematic in the event of a global economic wobble.

In direct conflict with what I’ve stated earlier, the ‘opportunity cost’ of holding these funds over specific shares is potentially very high if I can pick a winner. As the recent performance of Tesla has shown, buying an eventual market leader has the potential to generate life-changing returns. TSLA shares are up almost 2,800% since 2016.

The low/negligible yields from both ETFs also need to be borne in mind if I was looking to generate passive income. If that’s key, dividend-focused funds like these in this area might be more appropriate.

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Paul Summers owns shares of iShares Global Clean Energy ETF and WisdomTree Battery Solutions ETF. 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.

I’d forget the FTSE 100 and buy this stock instead!

Paul Summers — Tue, 27 Jul 2021 12:26:51 +0000

I’ve nothing against buying a cheap exchange-traded fund and tracking the return of the FTSE 100. In fact, I think this would be ideal if I had no real interest in investing beyond slowly growing my money over time. I’d leave attempting to beat the market to someone else.

The trouble is, it’s not hard to find companies that feature in the top tier and yet have massively outperformed it. One example is speciality chemicals firm Croda International (LSE: CRDA).

FTSE 100 beater

Over the last year, the £12bn cap has climbed 43% in value (including today’s near-7% rise). For comparison, the FTSE 100 is up 15%.

It’s not just that Croda has beaten its index over the last year. The long-term gains have been excellent too. Since 2016, the share price has appreciated a little over 145%. The FTSE 100? Just 4%. Even though the latter boasts a larger dividend yield that can be reinvested, there’s simply no contest when it comes to performance.

Based on Croda’s fundamentals and today’s interim results, I don’t see this trend changing soon.

Record first half

Thanks in part to a recovery in demand “across all regions and sectors“, sales jumped by almost 39% to £934m from January to June. At 60%, growth at its Life Sciences division was a particular highlight. Importantly, the FTSE 100 stock announced that sales were now “well above 2019 levels” before the pandemic struck.

As such, it was no surprise that the company reported record adjusted pre-tax profit of £229.5m. That’s 50.5% higher than at this point last year. It’s also 35% higher than two years ago.

Although unlikely to generate much interest from income hunters due to its relatively low yield, I also noted that Croda hiked its interim dividend by 10% today. As the firm itself highlighted, this continues “an unbroken trend of increasing returns over nearly 30 years“. This is the sort of consistency that separates the wheat from the FTSE 100 chaff, in my opinion.

Richly-valued

Looking ahead, Croda thinks recent momentum will continue over the remainder of 2021. Thanks to ongoing demand from customers and the contribution of new acquisitions, the company now expects adjusted pre-tax profit to be “significantly ahead of current expectations“. No wonder the share price is setting fresh highs today.

This is not to say an investment in Croda now would be devoid of risk.

As always, past performance is no guide to the future. Despite today’s news, the company commented that sales of solution ingredients relating to Covid-19 “could moderate” in the months ahead.

At 38 times forecast earnings before markets opened this morning, Croda’s valuation is also undeniably rich. When markets shake, it can be the case that holders of the most expensive stocks suffer the most. And even if the FTSE 100 generally behaves itself over the rest of 2021, we could see more investors taking profits and rotating into battered value stocks as the pandemic is sent packing.

For holders of a fund tracking the return on the index, this won’t be a problem. However, it could cause some short-term pain to those backing Croda.

Still a buy for me

Despite the above concerns, I’d still buy the stock today based on its track record and growth potential. In an index that arguably features some established, but ultimately very average, companies, CRDA looks to be a great exception.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Croda International. 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.

4 minimalist investing tips for 2021 and beyond

Paul Summers — Wed, 27 Jan 2021 09:15:52 +0000

Buying and selling shares can be as engrossing an endeavour as we want to make it. Given all the other fun things we can do with our limited time on this planet, however, I find the idea of ‘minimalist investing’ very appealing. Accordingly, here are a few suggestions for making it feel less like a burden in 2021.

Minimalist investing 101

Restricting oneself to a set number of holdings could be considered the best place to start.

Naturally, the actual number will vary from person to person. That said, we all have a limit over how much time we can devote to researching, buying and tracking our investments. My ISA portfolio, for example, never has more than 20 stocks in it. Any more than this and I’d feel overwhelmed. Moreover, too many stocks might dilute the impact of my big winners!

For some people, even 20 separate companies will feel like too much. In this case, they may want to consider buying a small number of cheap, exchange-traded funds. These simply track an index like the FTSE 100, give instant diversification and require next to no ‘maintenance’.

Ditch the app

It’s been incredibly easy to spend more time than necessary staring into a screen recently. It’s for this reason that I’ve deleted all investing-related apps from my smartphone. The logic behind doing so is that I’m then less compelled to check my portfolio. As a result, both my homescreen and my brain are less cluttered.

Now, removing these apps might feel uncomfortable at first but persistence is the key to breaking any habit. It’s no different from keeping unhealthy food out of the home. By removing the ‘cue’ (the app icon), I minimise the likelihood of a ‘behaviour’ (habitual portfolio-checking) occurring. Setting daily time limits on apps is a less severe option.

Go automatic

One thing I’ve learned in many years of investing is that I can’t time the market consistently. As such, the vast majority of my buying now happens automatically on the same day every month via my broker’s regular investment scheme. This helps to remove emotion from the process. It also saves me money. Some online share-dealing platforms charge zero commission on monthly purchases! Over time, this could have a dramatic impact on my returns.

Another minimalist investing idea is to automate savings. This involves instructing a bank to transfer a fixed amount over to a Stock and Shares ISA every month. In addition to removing the need to do it manually, scheduling this transfer to happen the day after being paid also ensures building a nest egg for the future is prioritised over frivolous spending. As the saying goes, “Pay yourself first”.

Don’t ‘read all about it’

A final way to adopt a minimalist approach to investing is to reduce the amount of news we consume.

Clearly, this idea is easier said than done in the midst of a global pandemic. However, I think the important word here is ‘reduce’. Attempting to eliminate all news flow from one’s life is not only difficult but could cause anxiety. Being selective is key.

For me, this involves seeking news from only one or two reputable sources and treating everything else as noise. If this sounds too restrictive to you, consider saving your regular news binge for times when the market isn’t open.

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Forget tracking the FTSE 100. Here’s my top ETF pick for 2021 and beyond!

Paul Summers — Mon, 18 Jan 2021 09:08:47 +0000

Stock-picking isn’t for everyone and it doesn’t need to be. Over the last decade or so, exchange-traded funds (ETFs) have become the go-to destination for UK investors who don’t have the desire to buy individual company shares.

After all, why bother researching all the companies in, say, the FTSE 100 when an investor can simply buy a cheap fund that passively tracks the return of the index itself. Those who did just this back in March 2020 will have done rather well since.

FTSE 100: On a roll

From the depths of the market meltdown to last Friday’s close, the FTSE 100 has climbed back a stonking 35% in value. That’s a superb return for very little work as far as ETF holders are concerned.

This strong recovery isn’t hard to fathom either. The emergence and gradual rollout of several vaccines was a shot in the arm for market sentiment. A resolution to the bitter trade negotiations between the UK and the EU at the end of 2020 likely provided further positive momentum.

Now, I think an ETF tracking the FTSE 100 remains a good investment. It’s certainly a better idea than sticking savings in a Cash ISA! Since I’m looking to really grow my money over the next decade or so however, I’ve decided to track a group of companies that could generate an even better return.

Top ETF pick

My top passive investing pick for 2021 is WisdomTree Battery Solutions UCITS ETF (LSE: CHRG). Thanks to the rapidly growing demand for electric cars and energy storage, I see getting at least some exposure to this megatrend as vital for any investor with many years left in their stock market journey.

Why this particular fund? There are a few reasons. First, there’s the size of the portfolio. With 95 holdings, this ETF isn’t too reliant on just a few companies succeeding nor too large to completely dilute the contribution of those stocks that really do perform.

Aside from this, WisdomTree’s fund also offers good geographical diversification across 19 countries. Almost 30% of its holdings are based in China and 15% from Japan. Only 22% or so are listed in the arguably-overvalued US market.

The cherry on the cake for me is the ongoing fee of 0.4%. That may look a lot compared to the typical 0.07% charged by a FTSE 100 tracker but I consider it good value for tapping into this growth story. It’s also slightly cheaper than the only other ETF currently tracking this trend that I could find — the L&G Battery Value-Chain UCITS ETF.

Buyer beware

Of course, nothing is a sure thing when it comes to investing. After such a strong run in green energy, electric car and battery-related stocks in recent months, there remains a very real possibility that we could see some profit-taking in 2021. As such, this fund certainly has a chance of underperforming the FTSE 100 for a while.

As a long-term investor however, this doesn’t concern me. What’s more important is that I look to future proof my portfolio by buying into promising trends when they are in their infancy. The FTSE 100 might contain some great businesses but I just can’t see these growing at a similar clip to those in the battery space.

It could be a bumpy ride, but I’m optimistic that my eventual returns will be worth it.

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Paul Summers owns shares in WisdomTree Battery Solutions UCITS ETF. 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.

How to make passive income from dividends in 2021

Paul Summers — Sun, 27 Dec 2020 12:04:29 +0000

Setting up a passive income stream with whatever savings one has could be a very wise way to begin 2021. With the Covid-19 continuing to hold businesses back and unemployment levels likely to rise, having a second source of cash coming in never made more sense.

Here’s how I’d get started.

Passive income 101

The first thing to sort before buying anything whatsoever is to open up a Stocks and Shares ISA. By doing so, I know that any dividends I receive won’t be taxed. That might mean saving only a few pence in the beginning, but it could amount to an awful lot of pounds as the years pass.

As an aside, sheltering my investments in an ISA will also protect me from paying capital gains tax further down the line when I come to sell. Again, why would anyone want to hand back money to the government if they can legally avoid doing so?

Buy the best

Once an investor has an ISA ready to go, it’s time to buy some shares. Rather than dive in indiscriminately however, I’d look for the best of the best.

The first thing I’d check for is whether a firm is actually paying dividends. Unfortunately, a lot of previously great dividend stocks are not currently giving anything back due to the coronavirus. This may be because they’d rather not or, more worryingly, because they simply can’t.

Assuming a company is still providing holders with a passive income stream however, the next thing to check is whether the dividends are sustainable. The key thing to look at here is the dividend yield.

As a rough rule of thumb, a yield greater than 6% usually requires further investigation. It suggests the market suspects this cash may not be returned. Since a yield can look massive when a share price has fallen heavily, it’s vital to check how a company is faring before buying its shares.

Another ratio to look at is the dividend cover. This is the extent to which dividends are covered by profits. A cover of two is ideal here. Anything less than one is best avoided. It means a company is tapping into its reserves to pay shareholders.

A final thing to note is whether dividends have been/are increasing. A regularly-hiked payout suggests a business is growing and management is confident about the future. Stagnant dividends can point to a company treading water.

Plan B

If picking individual stocks feels too risky, there’s another way of generating passive income. This involves buying what’s known as an exchange-traded fund. These cheap funds simply track a basket of shares rather than a single company. The iShares Core FTSE 100 UCITS ETF, for example, generates the same return as the FTSE 100 index.

Most importantly, buying a product like the one above pays dividends. At the time of writing, the iShares ETF yields a very respectable 3.1%. That’s a lot more than I’d get from a Cash ISA!

One last thing

Although spending any dividends I receive from shares is tempting, I’m also aware that reinvesting this cash will make me considerably richer in time thanks to the brilliance of compound interest.

While generating a second income in 2021 is wise, throwing whatever I receive back into the market is an even better plan.

Receive, reinvest, repeat. That’s the Foolish way.

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3 reasons to not overpay a mortgage

Paul Summers — Sat, 22 Feb 2020 14:44:41 +0000

A mortgage is the biggest financial commitment many of us will ever take on. As such, it can make a lot of sense to pay off this debt as quickly as possible. Indeed, that’s why I’ve been trying to make overpayments to my own loan over the last few years.

Last month, however, I decided to stop doing so for three reasons.

Low rates

First, a bit of context. In the last month, I switched to another fixed deal at a lower rate that I was previously paying. Much my father’s indignation (he grappled with double-digit percentages back in the 1990s), my new rate is a little under 2%.

The fact that I’m now paying less than half the rate of interest I was before means there’s a bit of cash leftover. “So why not carry on making overpayments“, you might be wondering?

One reason relates to the product itself. Unsurprisingly, there are limits to how much a lender will let you pay off within a certain time frame. Go over this limit and you’ll be penalised. With repayments now less than they would have been had I not tackled the mortgage head-on in the past, this was a potential issue for me. It may be a risk for you too.

A second reason relates to the benefits that come from moving this extra cash into my Self-Invested Personal Pension (SIPP).

As I’ve mentioned before, SIPPs are a very attractive option for most long-term investors. In addition to letting you shield any investment profits from the taxman, having a SIPP means you’ll also receive tax relief from the government on any money you pay in.

In practice, this means that someone with, say, £100 left in surplus cash every month will get an additional 25% on that amount if they put it in their SIPP, assuming they pay the basic rate tax. So, they’d have £125 rather than £100 to put to work.

My third reason follows on from the second. Right now, the yield generated by a simple exchange-traded fund that tracks the FTSE 100 is higher than the interest being charged on my mortgage debt (although, clearly, rates might rise in the future). As such, I stand a chance of generating more wealth over the long term by investing the spare cash, reinvesting the income I receive in my SIPP and allowing compounding to work its magic.

A word of caution

Whether someone should switch from overpaying their mortgage to putting any surplus cash to work in the market will clearly depend on their circumstances. The latter option is far riskier.

Shares might plunge tomorrow and, in doing so, reduce the value of any money not used for the mortgage. Contrast this with the comfort felt from knowing you’re tackling your biggest debt faster than originally intended, thus potentially saving you thousands of pounds in the process.

There are ways of mitigating this risk. Buying liquid, diversified funds (such as that mentioned) rather than individual company stocks should temper some of the volatility. A commitment to investing for decades rather than a few months or years should also make it easier to deal with things on an emotional level.

Ultimately, both overpaying and investing are good ideas but the best option for someone will always be that which allows them to sleep at night.

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Forget penny stocks. Here’s how I’d invest £100

Paul Summers — Mon, 27 Jan 2020 08:16:00 +0000

The lure of penny stocks is hard to resist when you’re starting out as an investor. Today, I’m going to look at why newbies should consider bypassing the junior market completely.

What’s the pull?

It’s not hard to come across stories of investors making millions on company shares that were once trading for a few pence. This is, after all, exactly what happened to fast-fashion play ASOS. Trading at 4p a pop back in 2003, the very same shares now change hands for almost 3,200p. They were once above 7,000p!

The fact that stocks also trade at so low a price is often interpreted by new investors as a good thing since it allows you to buy what appears to be a huge initial position. A stock trading at 1p per share, for example, will give you a holding of 10,000 shares if you were to invest £100. Of course, this is irrelevant. It doesn’t matter if you have 10 shares or 10,000 if their value sinks to zero.

But there are other reasons to steer clear.

Reality check

The first is based on probability. For every ASOS, there will be thousands of businesses that merely tread water or fail completely (taking your money in the process). Winners spring to mind so easily due to survivorship bias.

To use an analogy, many will know that Usain Bolt holds the record for the 100m sprint. Few, however, will remember the names of those he beat to set that time (9.58 seconds), those who tried but failed to qualify, or know those who called time on their promising running career due to injury.

Second, many small companies see a stock market listing as a way of generating cash to make their blue-sky plans a reality. Unfortunately, just getting a business to profitability can take longer than expected, if it happens at all. This requires management to ask for more money to keep the lights on. More shares are then issued which, in turn, dilutes the value of those already held.

Third, penny stocks tend to be illiquid (hard to sell quickly) and, consequently, volatile in price. That’s less of an issue when markets are behaving themselves, but it can be an unmitigated disaster when they’re not.

A rush to jettison a minnow by investors is likely to result in a huge drop in price that doesn’t reflect its intrinsic value. If you’re actually able to sell, you may get back a lot less cash than you put in.

A better plan

Rather than diving in at the deep end of, I think all new investors should keep things as simple as possible.

By far the best way of doing this, at least in my opinion, is to invest in cheap funds that track the market return. You won’t get wealthy in a hurry, but you won’t lose your shirt either.

As an example, £100 stuffed in a fund tracking the FTSE 100 delivering a 7% annual return over 30 years would grow to £761 (excluding fees). Now think about if you were able to invest significantly more than £100 over that period of time.

Bottom line

Investing in penny stocks can be a lucrative endeavour, but anyone contemplating entering this arena should be absolutely sure they understand the risks before doing so. If in doubt, steer clear.

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Your quick 5-step guide for starting to invest in 2020

Paul Summers — Thu, 26 Dec 2019 14:24:52 +0000

One of the best resolutions anyone can possibly make for 2020, in my opinion, is to begin investing if they haven’t done so already.

Despite what some may think, it’s also easy to do. The five steps outlined below should be enough to get you on your way.

1. Know yourself

Admittedly, this isn’t the most exciting step, but nor should it be. Before putting a penny of your money to work in the market, it’s vital to know your reasons for doing so. This can have a huge impact on what, exactly, you choose to invest in.

The only ‘rule’ to abide by when setting goals is that they are sufficiently long term, such as saving for retirement, a child’s university fees or perhaps a house deposit. If you’ll need access to your money in less than, say, five years, you risk getting back less than you put in because market movements — over the short term — are unpredictable.

2. Get an ISA

Opening a Stocks and Shares ISA takes very little time but it’s a brilliant thing to do.

If you make an investment and that investment does well, you’ll pay capital gains tax on the profits you make. With an ISA, however, you can shield 100% of that profit from the taxman (along with any income you receive in the form of dividends).

This really matters. The more money you retain, the greater the effects of compounding over time, greatly increasing your chances of hitting the goals identified in Step 1.

3. Set up a direct debit

Having set up a tax-efficient account, your next job is to load it with cash. With an ISA, your total allowance is £20,000 for the current tax year. Don’t worry if you can’t find anywhere near this amount — simply deposit whatever you can afford.

You don’t need to invest everything in one go either. Indeed, a way of ensuring you’ll stick to investing (and don’t spend everything you earn) is to set up a direct debit with your bank that guarantees a fixed amount of your money is transferred over to your ISA every month.

Investing on a regular basis also means you don’t put all your cash to work just before markets crash.

4. Buy cheap funds

Here at the Fool UK, we like getting down and dirty with individual stocks. This, however, can be rather daunting for someone just starting out. Scrutinising companies also takes time and energy.

That’s why I think new investors should initially concentrate on buying exchange-traded funds. This is a low-cost strategy that guarantees you to get the market return, rather than attempting to beat it. Warren Buffett — generally regarded as the best investor on the planet — thinks the vast majority of people should adopt this approach.

5. Do nothing

The last step is arguably the most difficult of all. In an age of 24/7 news and Twitter rants, it can be easy to assume you should be doing something, anything, just to stay ahead.

Don’t be fooled. Counter-intuitive as it sounds, multiple studies have shown that the more inactive you are as an investor, the better your performance is likely to be. One reason among many for this is that costs are kept low.

Get comfortable doing nothing and you’re on the right road for stock market success.

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How I’d invest £100 right now

Paul Summers — Sat, 14 Dec 2019 10:33:22 +0000

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.

Some assumptions…

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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