During a company lunch, the main theme was investing for a change. It’s tech-related stuff usually along with IR35 for the past 6 months. Like most people, my colleague Alex thinks buying your first home is one of the best investments you can make. Rent is dead money after all.
I briefly argued against the point saying that although I’m a pro-buy-your-own-home person, it’s more about the security and the comfort that your own home can provide rather than the financial benefits. Probably half the amount you initially pay is
dead money interest and then you have maintenance costs and property taxes to pay (if you’re not in the UK).
Not to mention your own labour costs if you decide to paint the rooms in your spare time “for free”. Then also the total monthly payment is usually higher than the equivalent rent. This means there’s an opportunity cost of the rental money surplus as well. Simply put, you could have invested the money difference in a BTL, gold, stocks or whatever.
So buying is not exactly a clear winner compared to rent.
But why am I talking about property buy-vs-rent again? This article is about starting capital when investing!
Thankfully, Alex started talking about other investments after reaching a point where only spreadsheets and assumption-fights can give some meaningful progress to this discussion.
So he started making the point that the reason most people don’t invest is that they don’t have much capital to start with.
And what is a 10% annual return on £100? Just £110. Not much to show at the end of the year!
Naturally, this makes sense. I’ve definitely heard that before. But I believe is inherently wrong. Here’s why.
1) It’s not about investing £100, it’s about saving £100
Investing £100 or even £1000 won’t make much of a difference, indeed. Not even compounding these returns over 10 years will.
But the biggest personal finance wins come from building the habit of saving £100 to start with. £100 invested is £100 saved which is much more important in the beginning.
So if someone hasn’t really invested or saved before, learning to save is an absolute must. People overestimate what they can do in a year and underestimate what they can do in a decade.
Even if you make some bad investments that actually lose money, it’s much better than not having saved at all.
2) If you do need much capital to start investing, how much is that?
Ok, so say you do need much capital to make investing count. What is the cut-off point? And are you sure that when you actually DO accumulate the desired amount, you’ll be able to execute your investment plan with confidence?
Investing is half finance half psychology.
I’d argue it’s more psychology for the average investor and more finance for institutions, trust funds etc. I never felt “now is the right time to invest”. It always feels uncomfortable.
So when is the point that you start investing? How much do you need to accumulate first? Maybe £10k will only bring £1,000 a year, so not much impact there either. How about we agree it’s £30k, for £3,000 a year? Will you ever reach that point or will you spend it on the way?
I guess it’ll be hard to stick to your plan and keep accumulating until you reach £30,000 when you have £10,000 sitting around in your bank balance and you’ve never invested before.
So how will you overcome the biggest barrier called fear?
3) Mistakes are cheap when you start small
A 20% loss on £1,000 is just £200 which you can probably live with(out).
A 20% loss on a £30,000 portfolio is £6,000, a much harder lesson to learn the hard way! You may even lose 20% on the first day of your investing. These things seem surreal in the past decade of euphoria, but these things have happened.
Learning how you behave in a declining market is a lesson better taught when you’re poorer.
When I started investing, I was paying a 6% annual fee before my money is invested in an ISA (thanks SJP). If this sounds like too much to you, it’s because it is! So I was giving up 80% of my average profits. This was an expensive lesson which lasted for a year until my eyes opened.
So paying these lessons with small investments comes much cheaper overall.
Although the argument is clear, it’s kind of counterintuitive. I kind of get it. I was always a natural saver. But I only started investing when I had £1,000 surplus every month.
What’s the point anyway, I was thinking. But I now clearly see that if I had invested earlier I could’ve been in a better place now.
If I have a £1,000 surplus a month, I’m not living paycheck-to-paycheck. Therefore, I don’t really need to save as much compared to a person who’s struggling to make ends meet. £100 a week saved/invested is £5,200 a year. Relatively speaking, £5,200 a year may not change my life but it might as well do for someone who’s struggling.
With modern brokers such as Freetrade, you can start investing £100 a time in stocks, gold ETFs whatever you fancy. Fractional shares. But remember, investing is the carrot on a stick here. The biggest gain comes from the fact that you’re saving before investing.
It’s better to build this habit of investing the earliest possible. Even if it’s £10 a week. It will build a good habit, naturally grow your snowball and make you more confident for when your investments actually do make a difference.
If you know someone that would benefit from reading this article, please share it with them!