I’m not a professional investor. As well as being a way to earn some extra income, it’s a hobby of mine to follow the stock market and the latest news.
Initially I was tempted by the potential returns I could get from a Stocks and Shares ISA. With interest rates at historic lows, savings accounts were becoming less and less worthwhile for me.
Many people have at least thought about buying stocks and shares, but often don’t know how to do it. Or they may think they need to have thousands to spare every month to make it worth their while.
I don’t see it that way. When I started investing, I put a small portion of my salary towards buying UK stocks and funds. This allowed me to see how the market and various investment platforms worked. When I could afford to, I gradually increased my my investments.
Here’s how I would start investing today with just £50 per month.
Index tracker funds
The first move I made towards investing in the stock market was through index tracker funds. If I was starting out again today with £50 a month, I think it would still make sense.
These funds track the performance of indexes such as the FTSE 100 in the UK or the S&P 500 in the US, so I wouldn’t need to actively pick individual companies to invest in.
According to a report from US investment bank Goldman Sachs, historically the average return of the US stock market over 10 years is 9.2%. Despite a major economic crisis as a result of the onset of Covid-19, the UK’s FTSE 100 has gained 10.5% in the last decade.
Warren Buffett
Famed US investor Warren Buffett is a fan of this investing strategy. “By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals,” Buffett said in John C. Bogle’s book, The Little Book of Common Sense Investing.
Sure, some individual company shares are likely to generate far greater returns over a long-term period. But many won’t. Buying an index tracker fund also gives me a cross-section of the market, as opposed to concentrating my investment in one company, sector or commodity.
While I think that investing in these funds is a more risk-averse way of investing £50 a month in the stock market, it must be said that the value of my investment can always go down. Returns are never guaranteed in the stock market. The last 12 months more than ever have shown that global markets are fragile. The pandemic has shrunk the UK economy by almost 10%.
Another setback in the fight against Covid-19 could potentially lead to a major sell-off, as was seen in February and March 2020. The Footsie lost around 35% of its entire value in just two months at that time.
However, my opinion is that while these global events can hurt the market, I ultimately invest for the long term. When I buy funds or stocks I aim to hold for at least five years or longer to dilute the impact of short-term crashes. That’s why I’d start investing £50 a month in index tracker funds.