We’d all love a dirty-great pile of cash with which to play the financial markets. But for a great many of us, the reality of rising living costs and tiny wage increases leaves us with little left over to invest at the end of the month.
It’s no excuse not to take part at all, though. By following the following tips, it’s still possible to make decent returns on even the smallest budgets.
Diversify to succeed
Irrespective of how much you have to spend, diversification is the key to any successful share investing strategy.
If you have £100,000 to spend, you can build a broad portfolio of dozens of stocks, if you wish. However, by the time you factor in transaction costs, this just isn’t a profitable strategy when you’re operating on an ultra-tight budget.
One way to get around this is to invest your money into a fund that spreads your capital over a broad variety of companies, a strategy that can help to significantly reduce risk.
A word of warning, though. Picking a fund that’s actively managed is more expensive than a bog-standard tracker that follows a specific stock market index. There’s also plenty of evidence to show that the expertise of a fund manager doesn’t always result in bigger returns.
Watch those transaction costs
While I’m on the subject, it’s particularly important when you’ve little capital to work with to squeeze every last ounce of value out of your investments.
It seems an obvious point to make, and is a critical thing for big-spending investors to remember, too. That said, it’s surprising to see how many share pickers get caught out by bigger-than-expected costs. By the time you add in transaction fees and stamp duty, that theoretical individual with only £1,000 to spend has already lost a sizeable chunk of their pot.
Therefore it’s worth shopping around to find the broker which charges the lowest fees. Some, like Hargreaves Lansdown, is one that offers a discount for multiple trades — its usual fee of £11.95 per deal falls to £8.95 for between 10 and 19 trades in a month, and to £5.95 for 20, or more.
Of course this isn’t applicable to those with smaller investment pots. For these individuals, Degiro is well worth a look as it offers some of the cheapest fees on the market.
As a lower cash pot significantly limits your investment possibilities, it’s important to pick assets that carry low levels of volatility. If you’re restricted to just a couple of trades at most, it’s critical to make them sensible ones and not ones that are tied closely to fragile investor sentiment.
Take the cryptocurrencies space, for example. If you’d invested in Bitcoin a year ago, you’d have seen the value of your holdings drop by almost three-quarters. It’s still falling in the first few weeks of 2019, and could keep doing so, as concerns over its true value, the transparency of the market, and the regulatory environment persist.
Even the best of us can make disastrous investment mistakes. But there’s plenty of reading material out there to help you make wise investment decisions and avoid taking on too much risk. Try to do as much research as you can to make the best decision for you and your money.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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.