We’re not here to tell you where to invest your money. We won’t lay out a handful of shares on a “buy” list. But what we can tell you is how you can invest your money — the mechanics of investing small, large, and medium amounts of cash. We can even help you choose an online share broker.
How much money do you need?
We’d suggest the minimum amount you need to start investing in the share market is around $500.
It all comes down to costs. The minimum brokerage fees charged by the cheapest online brokers are roughly between $15 and $30 per transaction.
As we saw in The Dirty Little Secret Of Managed Funds, charges matter, and they matter a lot.
To illustrate the point, in The Little Book of Common Sense Investing, author John Bogle uses an example of a $10,000 investment growing at 8% per annum versus one growing at 5.5% per annum. The 2.5% difference is the amount the average US mutual fund charges per year.
As you can see, after the first year, the difference (the cost to you) is a mere $250. But after 30 years, almost half your investment has been eroded by charges. And after half a century, all those 2.5% per annum charges will have cost you almost $325,000!
Charges are the main reason why the Motley Fool loves index tracking funds – they simply have the lowest charges.
Back to our suggested $500 minimum to get started investing, and why we chose that particular amount.
There are 3 factors at play…
1. It’s simply great to start investing in the share market, something we think all Australians should do. In fact, if you are an employee, you’ll already have a superannuation fund, and the vast majority of super funds invest your money in the share market. Doing it yourself takes investing that one, significant step further.
2. The share market has historically been the best performing class of asset, returning around 11% per annum over the past 30 years. Compare that to the interest you earn in your savings account! Although past performance is no guarantee of future performance, putting it politely, we think you’d be a numskull to avoid investing in the share market.
3. Buying $500 worth of shares will cost you, in brokerage fees, around $20, or 4% of your amount invested. Ideally you want to get your investing costs down to around a maximum of 2% of your portfolio, but for your first foray into the share market, 4% is acceptable. Anything more than 4% and you’re just giving up too much in initial costs.
How to invest $500
So once you’ve raided the money box and picked out all those gold coins stuck down the back of the couch, you’ll have soon rustled up $500.
Instead of blowing it on DVDs and Wii games, consider investing it in an index tracking ETF like the SPDR S&P/ASX 200 Fund (ASX: STW) or the Vanguard Australian Shares Index Fund (ASX: VAS). An index fund that tracks the Australian share market has traditionally returned about 11% per year over the past 30 years.
If you have a few hundred dollars to start with, then this is a great, low-cost way to establish an instant, widely diversified (200 or 300 companies!) portfolio.
How to invest $1,000-plus
What can you do with a grand? You can invest in that index tracking ETF we mentioned above, but you can also look to buy your first individual company share.
$1,000 is a great first step. But don’t stop there. Look at the rewards if you can scrape up an additional $1,000 a year to add to your original investment…
Say you’ve got 40 years to retirement. If you start with $1,000 and invest an additional $1,000 each year, and your money earns 10% annually, then when you’re ready to retire at age 65, you’ll have $532,111.07. That seems worth it to us. It’s yet another example of the unbelievable power of regular investing.
Again, even at this level, the key is to keep fees from eating up your earnings. So make sure that the costs of investing (including brokerage commissions, and books and newsletters that help you learn to invest) are less than 2% of your account’s overall worth. With small accounts, that can be a challenge, but with such relatively low commissions being offered by online share brokers, it’s definitely doable.