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:
- 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,