When money is rarer than rocking horse dung, DIY investing can seem like the sport of kings – as beyond the reach of the average punter as international polo, yacht racing, and panda wrestling.
So if you’re wondering how to invest on a budget, what is the minimum amount of money you need to invest while remaining true to the principles of passive investing?
I think saving and investing about £50 a month should do it.
For the price of 17 pints of lager, two N-Strike Raider Rapid Fire CS-35 nerf guns, or one doggy pedicure (including pad massage) you can construct a diversified portfolio that can be expected to earn reasonable returns over the long term.
Fee’s a crowd
At £50 a month your biggest enemy is costs. You can’t afford them! Upfront fees, flat-rate transaction charges, tax, admin costs – you need to duck ’em all like Indiana Jones in a sword fight.
To ensure bargain diversification, forget about:
- Shares
- ETFs
- Active funds
- Investment trusts
The associated charges of these investments will take too high a toll on a paltry budget. But while the room for manoeuvre is limited, you can beat costs by choosing:
Low cost index funds: Look for TERs under 0.5%, no trading fees, no initial fees.
Small-investor-friendly online brokers: Look for no annual admin fees, no trading fees on your chosen funds, no inactivity fees.
A tax-free account: Look for a Fund ISA with no management fees. (SIPPs are too expensive).
The budget investor’s solution
The essential components of this Pound Stretcher portfolio are a pair of broad market equity and bond funds that could sit at the heart of any portfolio:
Fund 1: 60% UK equity
- HSBC FTSE All Share Index Fund1, TER 0.27%
- A diversified, large-cap fund that represents a broad slice of the UK equity market and can be expected to provide growth over the long term.
- £30 a month
Fund 2: 40% UK Gilts
- HSBC UK Gilt Index Fund2, TER 0.26%
- A diversified, UK government bond fund that should reduce volatility in the portfolio and offer performance that’s negatively correlated to the equity fund.
- £20 a month
This pair of bargain basement beauties cuts your costs to the bone:
- Total investment = £50 a month
- Total weighted TER = 0.266
- Total trading fees = £0
- Total initial fees = £0
- Total annual administration fees = £0
- Total tax liability = 0
To make the Pound Stretcher portfolio work on a small investing budget:
- Use a no fee discount broker and go to their Fund ISA / Stocks & Shares ISA / Self Select ISA account.
- Most brokers require a £50 minimum investment per fund, but some go as low as £20.
- Use the accumulation versions of the funds to automatically reinvest dividends at no charge.
- No trading fee funds mean you can rebalance without cost, too.
- I’ve chosen the classic 60:40 asset allocation mix for illustration purposes only.
Got anything cheaper?
If that’s a bit rich for your blood then there are still a couple of ways to lower your monthly investing budget:
£40 a month: Choose a 50/50 bond/equity portfolio – it did the trick for the Nobel-prize winning economist Harry Markowitz.
£20 a month: You’ll have to be either very adventurous or super cautious, with a 100% asset allocation to either the equity or the bond fund.
£50 a quarter: You can drip-feed in money over less frequent periods and still benefit from pound-cost averaging.
£50 a year: You’re either a paperboy with vision or you’re not really trying.
From small acorns…
The power of compound interest makes it worth your while to start investing sooner rather than later, even when cash is tight.
Plus, you’ll bed in good habits and your portfolio will be easy to manage with just two funds.
Once you’ve built up a solid base using your core funds, you can think about switching to an international fund and slowly diversifying your holdings.
While it’s good to know how to invest on a budget, it’s better to invest more. If you’re able to increase your investing contributions over time then you could diversify the Pound Stretcher more along the lines of our Slow & Steady passive investing portfolio.
Take it steady,
The Accumulator
Wouldn’t diversifying away from the UK be sensible? I know that lots of UK companies have a lot of global exposure, and markets are moving in lock-step right now, but there are HSBC trackers for US, Pacific and Japan, and I’m sure there should be a way to either contribute a bit to these each month or switch which you pay into from month to month.
@gadgetmind – There’s a case for further diversification, but I’m personally in the Keep It Simple camp for new investors with limited budgets.
The UK main market is one of the most internationally-facing in the world, as you allude, so I say take advantage of that.
My own suggestion for new investors is even simpler than The Accumulators’ — I’ve previously suggested putting cash in place of bonds:
http://monevator.com/2010/01/12/what-should-a-new-investor-do/
Bonds aren’t the same as cash, of course, but I’ve found people who aren’t used to saving are comfortable (or even amazed!) by a slowly increasing cash balance. It’s quite motivating, and it still buffers the equity portfolio, albeit in a different way.
If/when the Pound Stretcher portfolio starts to become material to the investor’s new worth (say around net annual income for someone in their early middle age, as a finger in the air figure) then perhaps that would be a good time to think about widening the net.
The big issue with new investors is getting them putting money away fairly sensibly. It seems very single extra element you introduce causes a huge extra chunk of them to give up on the idea.
I use the save the same amount of cash as into ISA method as TI. Although I have specific reasons for wanting a large cash buffer, it also soothes the nerves somewhat feeling the very worst that could happen to your ‘portfolio’ if everything went down the pan is a 50% hit.
I greatly appreciated that HSBC FTAS fund tip, I had used ETFs for this job before and the costs made it a once a year purchase. For index investing, dripping in once a month is also easier on the nerves in volatile times. One thing that does concern me about iii, however, is that they ‘rebate’ 100% of the charges on that HSBC index tracker. I have a horrible feeling that after RDR fund platform fees may appear, as they can’t make money on taking bungs from other funds. In which case I’ll convert those funds to a FTAS ETF. I’m not paying anybody just for the pleasure of holding an investment, cheeky SOBs… Platform fees would also hit your visonary paperboy very hard indeed
@ermine
very worst scenario should also incorporate the potential losses you may incur through holding cash that depreceates in value over time due to inflation
I wish I’d have had this article to read 12 months ago when I started investing!
Is there any reason that you use the HSBC UK Gilt Index Fund, and not the L&G All Stocks Gilt Index Fund (http://www.iii.co.uk/factsheets/?type=detail&mex=LGGTA) it’s 0.01% cheaper (with a TER of 0.25%), and at least appears to track the same index?
🙂
Just a quick question.
Interactive investor has two HSBC FTSE All Share Index funds, one labelled R Inc and one labelled R Acc. I cannot for the life of me tell the difference by looking on morningstar except they rate Inc 4 stars and Acc 3 stars.
Sorry if this is a stupid question, as i’m quite new to investing.
@OM – No worries, we were all new once! 🙂 The difference between the two classes are the R Inc are income units, and the R Acc are accumulation units.
If you buy the Inc units you’re paid a periodic dividend (income) as cash, while with the Acc units this income is instead deployed to buy more units in the Fund on your behalf, and so increases your overall holding.
For more details see this article: http://monevator.com/2011/09/06/income-units-versus-accumulation-units-difference/
I have a question – I am also very new to investing but I wondered why you did not mention bank bonds like the ones Nationwide has or Natwest – surely beginning investors should look at bonds? Funds sound so complex and difficult.
I’d take a cruder approach: put the £50 per month in a saver cash account (some good interest rates available) then invest the proceeds in a single dividend share in a Self-Select ISA. That way you’ll have 12 months to identify the very best share to buy!
But that’s not really a crude approach, is it? After all, it relies on someone learning enough to beat the market with just one stock pick…
I’m a new investor (as of this month, now I’m not paying off a mortgage) and I went for the HSBC All Share for 1/3 of my “portfolio” specifically because I have no reason to dream that I have what it takes to beat the market. I don’t need income so the only thing that made sense was to settle for market returns and the long haul.
FWIW, I’m also in gold and 2049 gilts (I’m doing a take on the permanent portfolio which I first read about here: http://monevator.com/2010/10/19/9-lazy-portfolios-for-uk-passive-investors-2010/ ).
The only downside is that after reading loads about investing and getting quite stoked up for it, I’ve chosen a completely passive approach and don’t have anything to do except save up for the next installment! 🙁
I don’t know why I put “portfolio” in quotes above! It is a portfolio, just not worth very much…
@Ben
That’s what NS&I Index-Linked Savings Certificates are for. Index-linked and tax-free, what’s not to like? They seem to be a summer bloom these days, only appearing in the months without an R in them when you shouldn’t eat shellfish 😉 You can usually put about enough cash in an issue to match the amount you can put in a S&S ISA
@Moneyman
Thats a very good point in this context – For small sums some of the high street banks are offering very high interest rates (~8%) if you have your salary paid into their current acount
I assume its a loss leader to get you on board
The reason they’re rubbish is you can’t put much money in, but if you’re talking £50 month then maybe its worth considering as its good return at no risk
(I’d scrap the bit about the single share though)
@Kagem
I think the term ‘bonds’ in the way nationwide and co. use them is confusing as they’re just fixed term savings accounts with exit penalties. Nothing like bonds as discussed here (e.g. commercial and gilts etc.) because there is no secondary market for them, thats to say you can’t buy and sell them and their value can’t fluctuate based on supply and demand
@ermine
ah i see – yep that makes sense – no possible real loss on the cash part (unless your personal inflation is greater than RPI)
I have a wedge in those myself
@ermine
1. Sorry, if I’ve missed something, but I don’t understand your point about buying and holding HSBC index funds on Interactive Investor.
2. I use Interactive Investor, too.
3. You say: “One thing that does concern me about iii, however, is that they ‘rebate’ 100% of the charges on that HSBC index tracker. I have a horrible feeling that after RDR fund platform fees may appear, as they can’t make money on taking bungs from other funds.”
4. What exactly do you mean by “‘rebate’ 100% of the charges on that HSBC index tracker”? Are you referring to initial charges? If so, I’m confused because the relevant standard initial charges are already 0% — Interactive Investor are not reducing these.
@Alex,
I’ve just taken a butcher’s hook at iii’s funds and you’re right that it now says 0% on the HSBC find. When I first bought it that screen said something like 100% rebate on the initial charge of what was I think 1%, which turns out as the same thing.
I presume their fund platform is finaced by their rake of other funds, f’rinstance say Neil Woodford’s IP High Income where you pay 1% upfront. RDR will disallow that sort of thing I believe.
In the end iii have to get some revenue for running the fund platform. If they can’t use baksheesh from the managed funds to pay for it they will presumably either introduce transaction charges, or they will introduce annual or per-holding charges. It is the latter I want to avoid. I can eat paying transaction charges, but I don’t want to pay just for the privilege of having an account, or holding a security I don’t trade. I want to ride on the backs of more active traders ti fund iii running my ISA; while I am not a total believer in index investing on its own I find my return is better if I think harder and trade less often…
@Ben, many thanks for explaining the difference between the bonds that banks like Nationwide have.
NS&I index linker certs can be used to balance a portfolio, and Hale even suggests a global tracker and these certs as a no-brainer strategy, but (and it’s a big but) with both pensions and ISAs, there are restrictions on inflows and outflows, so you generally need to hold the uncorrelated assets in the same pot as your equities if you’re going to be rebalancing.
Of course, you might have enough ongoing income to be able to take a “sum of all pots” approach to investment diversity.
@The Investor
My knowledge is that accumulation does not purchase more units or shares. If you purchase an accumulation fund your units or shares will never change unless you put new money into that fund.
The way accumulation works is that all the holders of accumulation shares have their distribution put into the ‘pot’ of the accumulation fund, because the ‘pot’ of the fund is then increased in size (amount of money in the pot) this then makes the shares more valuable, increasing the price.
Accumulation funds = share price will rise over time, making each share more valuable
Income funds = you can either take the dividend or have the dividend reinvested (this will purchase more shares, increasing the amount of shares you have over the long term).
@MCF – Thanks for the comment, but I don’t think that first part of your answer can be correct.
The reason I say that is this ‘pot’ would not increase with compound interest. It would sit there, earning an unknown interest rate (nothing?) in your example.
Legal and General seems to agree. From its site:
Accumulation units/shares
This is where any income earned by the unit trust is reinvested in the unit or share. This means the capital value of the unit/share increases. If you are investing for income, you should look for funds offering ‘distribution units/shares’.
Also:
(Acc) Accumulation – any income earned by the unit trust is re-invested.
From MoneySupermarket:
Accumulator funds reinvest all the income you earn from dividend payouts back into the fund, which increases the number of units you own. These funds have accumulation units.
However, the HMRC suggests the mechanism is closer to what you describe:
No distributions are made to holders of accumulation units. Instead the net amount that would normally be distributed is automatically reinvested in the fund. No new units are issued but the value of the existing holding of units is increased.
In summary, I think I am right that the money is reinvested. However I’m inclined to trust HMRC most of all, so I agree that this may/will be reflected in the price of the units rising, rather than more units being accrued. To be honest, I’ve never watched what actually happens! I’ll have a look at some of my long term tracker holdings.
Ultimately it amounts to the same thing, which you summarize nicely in the second part of your comment.
Cheers!
The value of the accumulating version rises over time.
If you take the HSBC FTSE All-share as an example, the price is:
HSBC FTSE ALL SHARE INDEX INC 250.70 (p)
HSBC FTSE ALL SHARE INDEX ACC 340.40 (p)
I’m pretty sure this is how it works..?
The HMRC quote sums it up nicely. As Dave has also mentioned above you see a large disparity between prices, that is because the ‘pots’ for each fund are different in size to accommodate accumulation shares and income shares.
@ Gadgetmind – Ideally there would be a low cost World index fund to give the portfolio that level of diversification, but there isn’t. So if I can only afford one equity fund then I’ll start with a domestic one, at least I’m not exposed to currency risk, and as The Investor says the FTSE All-Share is tilted towards international markets anyway.
Right now, NS&I index-linked certs aren’t gonna help anyone cos they’re not available. Otherwise, I agree with you.
@ Jonny – purely because iii are currently listing LGGTA’s min investment as £20,000. As they also say it’s ISA compatible, I’m pretty sure that’s a mistake, but they’ve so far neglected to answer my query, so I’m going with the HSBC fund for now until I can get this cleared up.
@ TI / MCF – Divis are reinvested in an accumulation fund. The reinvested dividends buy more of the underlying shares held by the fund, which increases the value of the fund units you hold. But not the number of units. That’s how I understand it. I think you’re essentially talking about the same thing but the waters are a bit muddy because of your slightly differing use of terms. I dare say I’ve done nothing more than add to the filthy turmoil.
@ Dave – chortle, I know what you mean. Probably best to use some of that spare time reading about the “enemy in the mirror”. That always helps cool my ardour.
@The Accumulator
Just to confirm, I have been investing in the LGGTA for approx 12 months (£20-30 a time) without problems. I’m also holding them in my iii ISA.
I think the minimum (£20,000/£100,000) investment levels must be a typo (or something’s changed drastically since I last invested!)
@TheAccumulator – Yes, while many (including fund managers!) use the term ‘buy more units’ and I followed suite, it does seem on closer inspection that the mechanism is that the Unit Trust buys more on behalf of Acc shareholders, which causes the price to rise. It’s really a technical issue, as you say, as far as I can see (it could create new units and buy through them) but still, I happily stand corrected on the technicality! 🙂
What I do still disagree with is the idea presented earlier that the cash just sits there in a pot. Clearly it gets reinvested in the underlying investments one way or another, or there’d be a situation where Acc Units would become unattractive because they would stagnate, due to the cash. But that doesn’t happen, that’s for certain.
The exact technicailities of how Acc units work are still unclear to myself, but the ‘pot’ definition is how i was taught. But yes if money was to literally sit in a ‘pot’ it would of course stagnate.
My point is that…
Acc units = price of shares rise over time
Inc units reinvested = amount of shares rise over time
It’s just like running your own share portfolio: dividends keep trickling in, and you can the decide whether to use them to buy new holdings or to top up existing ones. The value of your portfolio will (hopefully!) go up, so anyone who owns part of that portfolio will see each “unit” gain in value. Come retirement, I’ll stop reinvesting dividends, and instead use them to buy fine wines and loose women, which will effectively turn my accumulation portfolio into an income one.
The only time the number of units in a fund changes is as people buy or sell units as the manager has to create new units (and buy underlying holdings) or destroy units (and sell underlying holdings).
Investment Trusts are different in that new “units” are not generally created (there are exceptions!) so the manager is never forced to buy and sell underlying holdings, which is important if said holdings are illiquid ones such as property.
@MCF — Agreed! Thanks for this discussion, it’s been interesting to clarify my understanding.
@gadget
I would hope you are buying *some* fine wines and loose women *now* otherwise you may be suffering from ‘rainy-day’ syndrome…
An excellent article, and an interesting discussion in the comments too. Just wanted to say “thanks” to you all.
Love the article, it’s very useful for a new investor on a small budget. Quick question –
I currently have an Hargreaves Lansdown account (so am tempted to stick with them) but would like to save irregular monthly amounts (between £50-£100) in my Stocks & Shares ISA. I like the idea of the Pound Stretcher portfolio but cannot provide a regular monthly Direct Debit. Would the above funds through HL be the most low-cost, low-risk, accessible solution for such savings? Many thanks indeed.
@ Rebecca – the recently introduced £2 a month platform fee makes this strategy unviable on HL in my view. You’re losing too much in costs. If you must stick with HL here’s some thoughts on an alternative: http://monevator.com/2011/11/29/blackrock-index-trackers/
Note, there’s nothing low risk about an equity tracker.
@rebecca
i’d agree with TA on this – HL is too expensive for an S&S ISA unless your saving loads and already have a big pot
Its not so bad for a SIPP as the associated charges here tend to be higher across all platforms
I would aim to overcome the inertia and jump ship if I were you
Very good point to remember that there’s nothing low risk about index trackers – this can often be forgotten in the initial throes of passive investing euphoria.
I worry about the enormous short term volatility with respect to investing large lump sums with swings of +-20% being seen over time-spans of a few weeks. This sort of thing could destroy your long term return prospects. Pound-cost averaging is your friend here. I couldn’t really stomach any other approach at the moment.
Further to iii’s new £20 per quarter charging structure (http://www.iii.co.uk/newpricing/faq/), does anyone know of any other ‘decent’ brokers/fund supermarkets who’d allow £20-£40 a month to be invested (across 1/2 funds – i.e. minimum fund purchase of £20) into a S&S ISA, without fees/charges?
Most of my investing money goes into a SIPP, though as a ‘project’ I’m hoping to save up for something long term, by drip feeding small amounts into an ISA over a number of years.
I realise other brokers are most likely to follow suit, though at these amounts (and the fact I’m not in a position to max my allowance at the moment) it shouldn’t be an issue withdrawing as cash and re-investing elsewhere (for the time being at least).
Hi, thank you for the link to this page. I purchased an Idx Fund and it says Expiry Date 4-7-2012. Does that mean it will be purchased tomorrow? Secondly, the annual management charge of 0.25%, how do I pay this ? Is it deducted from my balance or I have to pay it yearly?
Thank you.
Sorry for butting in here but thought this looked like a good place to start. I, at 59 years of age, am contemplating starting to buy shares directly via a stockbroker. I opened an account (all the usual paperwork proving my identity, location, etc. etc. hassel +++) with Barclays Stockbrokers as I no longer live in the UK. My questions are: 1) Are Barclays Stockbrokers recommended in terms of their helpfulness and reasonable charges? 2) Who (which firm of stockbrokers as an alternative for an expat) would people recommend? I’ve been thinking of doing this for the past two years and this is as far as I’ve got at this point!
PS. My budget could be up to £5K.
I’m looking at investing £85 per month (£1kpa) in Legal & General Global Technology (Class I) (Acc). Looking at your compare broker table the cheapest monthly cost is £1 per month or 1.2% in addition to the 0.32% charged by the fund. I can’t see any way of doing this monthly and cheaper? I’d be better putting a lump sum in?
@ Anon – take a look at Cavendish or Charles Stanley Direct. No dealing fees, 0.25% per year on top of the fund. If this is the only fund you own then I’d go for something more diversified like the Vanguard LifeStrategy funds.
I’d like to see this article get a refresh since all of the platform changes if you get the chance 🙂
Nice article this! I wish I stumbled across this at the time in my early 20s…
With the world how it is now and many more low cost online brokers, what portfolio would you recommend now with a £50 budget?
Hi David, take a look at Vanguard’s LifeStrategy range. You can buy it on Vanguard’s on platform for zero dealing fees and a cheap as chips 0.15% platform fee.
These funds combine equities and bonds in a one-stop-shop package:
https://monevator.com/using-vanguard-lifestrategy-funds-life/