Prices are rising and pressure on household budgets is increasing. Saving for the future is often the first casualty of a financial squeeze, especially since many people believe it’s not worth investing each month if the amounts are small. However, not only does setting a little aside make long-term financial sense, it is a good method of investment, helping you learn to deal with market fluctuations and develop good savings habits.
Little and often is one of the best ways to invest. By putting at least some money into financial markets each month, rather than a lump sum all in one go, investors get to buy stocks, bonds or funds at a range of prices.
This helps to avoid the risk of committing a large amount of money at a time when share prices are high and could be in danger of a correction. Instead, a regular €50 will buy more when markets are cheap, and less when they are expensive, but it will roughly even out over time.
The magic of compounding
Investing monthly also helps in developing good habits. Even if you start off investing as little as €50, you can increase the amount when you receive a pay rise or a windfall. If you’re used to a certain amount of money leaving your account each month, you won’t miss it.
What’s more, you don’t have to agonise over whether it’s a good time to invest or what to invest in – it all happens automatically. This is a good savings discipline for life.
Even small amounts can build up significantly if you allow compounding to work its magic
Even small amounts can build up significantly if you allow compounding to take effect. Invested each month at an average growth rate of 5% (approximately the long-run return from a diversified stock market investment), €50 every month (or €6000 invested in total) would grow to €7,800 over 10 years and almost €30,000 over 25 years (or just twice as much as the €15,000 invested in total). Quite attractive, provided we remember that it takes time and that we are far from such a growth rate at the time of publishing this article.
Pay attention to costs
However, if you are going to invest relatively small amounts, you need to bear in mind a number of key factors – starting with cost. If you are investing only small amounts each month, make sure you’re not paying a large fixed fee.
You will generally pay a fee for access to the investment platform costs and another for the underlying investment; some platforms charge €10 or more for each trade. That’s a large proportion of your investment disappearing each month and makes it more difficult for your wealth to grow over time.
In general, the fixed fees tend to apply to shares or other exchange-listed products such as exchange-traded funds or listed closed-ended investment vehicles.
The risk of excessive caution
Open-ended collective investment funds usually change a percentage of the total investment, which can be more advantageous for those investing small amounts. The key is to ascertain and understand what you’re paying, and how it can eat into the growth of your investment over time.
In addition, if you are investing a small amount, you should guard against being “recklessly cautious”. If you invest solely in low-yielding assets, for example in cash equivalents or bonds, your investment is not guaranteed to grow as much as the inflation rate. However, unlike stock market investments, fixed-income bond returns do not vary with the fortunes of the borrower, as long as they continue to pay the interest due.
Those who are looking for their investment to generate significant returns, particularly in pursuit of long-term goals five years or more in the future, may opt to devote a larger share of their assets to the stock market.
It has historically proved better for increasing wealth and beating inflation over the long term, although the downside is that shares exhibit greater volatility than other asset classes. That risk can be mitigated by investing regularly over a long period, which should help to average out the prices paid and received for stocks – an approach known as dollar-cost averaging.
Geographic and sector diversification
The most important rule is that your investment should be diversified. It should contain a spread of different economic sectors and be invested across a number of geographical regions – for example the US, Europe, and emerging markets such as China and Brazil.
By not putting all your eggs into the same basket, you can help ensure that at least one part of your portfolio is performing well even when other areas are in difficulty. In recent years, technology has been the dominant sector of the stock market, especially in the US, but amid a surge volatility in the start of 2022, energy and mining companies provided better returns, at least temporarily.
The performance of different sectors is prone to shift up and down, in ways that even the most experienced investment professionals sometimes struggle to predict, so investing in a range of different sectors that are subject to different economic trends and forces can help to smooth out overall returns.
Sticking with the course
A final consideration for those investing little and often is that they need to stay invested through thick and thin. There will always be moments when markets go awry, but selling up quickly may not always be the best response to the situation. It may be that you are selling just at the wrong moment, locking in your losses, while canny investors take advantage of low prices in anticipation of a rebound.
It is equally important to identify the right moment to reinvest. During the Covid-19 pandemic, stock markets initially suffered heavy losses, but then rebounded vigorously within weeks. Investors who waited until equity prices returned to stability would have missed out on the most dramatic part of the recovery.
Even if you only have €50 to invest each month, it is absolutely worthwhile. Not only can it build up to a useful amount, it can help establish a savings discipline that will be useful throughout your lifetime. You may need to be more careful on fees, and on where you invest, but the most important thing is to do something rather than nothing.
Not only is regular saving, however small, of long-term financial value, it helps investors learn to deal with market fluctuations and to build good savings habits.