“Ok, so if I’m looking to start investing… how much does it take to get started?”
We hear this question a lot from people who are in the early stages of learning about investing. It’s a perfectly valid question, so we put it to members of our investing team to discuss.
RYAN: Scott, how much do you need to get started in investing? Is there a set amount?
SCOTT: I’d say this is the $64,000 question but then it sounds like that’s the answer as well, so let’s avoid that. The good thing with investing is you don’t need a lot of money to get started. The only thing you want to be careful about is the costS associated don’t destroy your investment. If you’re paying 20 bucks in brokerage you don’t wanna buy $30 of shares, right. The brokerage is simply too expensive as a proportion. The good news is, plenty of low cost brokerage out there. You can now trade with CommSec for example for $10 for each trade under a 1000 bucks worth of shares. So they’re starting to come down a little bit, which is nice.
Generally speaking, we want people to start saving small amounts, building up to large amounts and then investing that new cash.
So the question of how much do you need to get started, it’s a different answer to how much do you need to buy a share is one question. To get started, start with a dollar. Start with 50 cents if you need to. Put money in a jar. Start to build a savings account that you can then use to start buying shares.
We talk about investing, we think it’s just the buying shares bit. Investing is everything from saving the first dollar right through to buying that first share and those are two different things. So start with a cent, start with 50 cents, start with a buck.
When you’re buying those shares once you’ve starting amassing that money try to keep your brokerage to below 1%, maybe 2% if you want of the amount of money you’re investing, so that means if you’re paying 10 bucks for brokerage you wanna be buying probably 500 bucks to 1000 bucks worth of shares. Now, the higher your brokerage, the higher proportion that is, the more it hurts your returns so if you’re gonna pay 2% to buy and you’ll earn 10% as a return you’re giving up effectively a fifth of that return in brokerage costs. You wanna be very careful with that, but over the longterm, if you’re gonna hold shares for 10, 20, 30 years the brokerage is much, much less important than it otherwise might seem.
So don’t pay more than you need on brokerage, but start with as little as you can get away with because just getting started, the old journey of a thousand miles starts with a single step, the momentum of getting started is far, far more important than trying to be too clever and too absolute about it.
RYAN: There’s generally a, I mean I really love your point about, you know, the investing process along the way, you know, the 50 cents, the dollar just in the jar. Is there a set amount of
money though that you actually need to spend to actually buy that first share?
SCOTT: Yeah, generally speaking most brokers have a minimum parcel of 500 bucks. So that’s probably the minimum amount. You can now start to put aside some money, again we’re not sponsored by
CommSec at all by the way, but they have a new app called Pocket which lets you buy exchange traded funds – that’s a whole other conversation – for about two bucks a trade, I think it is. So you can start really, really small with 10s and 20s and $30 at a time. So there are great ways to get your foot in the door and then as you graduate to larger and larger amounts, either because you save more or that compounds to a larger amount. You then make different decisions. So, if you’re buying direct shares in the market 500 bucks is the minimum. If you’re buying something like a CommSec Pocket or other things, you can do it with much, much lower amounts of money and that’s the best place for some people to start, ’cause it simply gets you on that ladder, if you wanna call that an investment ladder. It get’s you starTed, and that’s where the power lies.
RYAN: And I think it’s a really interesting point as well about the keeping the brokerage percentage to a minimum of your overall investment. I think another good point is that it costs that initial amount to get in but you also need to consider getting out as well, so if it’s $500, you know, you put the 2% in for the initial brokerage and if you wanna get it back out it’s another 2%. It creates a fairly high barrier to cross.
SCOTT: Yeah, it’s also why we recommend people invest for the longterm. So, yes if you’re gonna buy it today and sell it tomorrow. You’ve gotta take those two lots of brokerage into account. If you can invest for the longterm, say you invest for five years, on average your shares will go up maybe 70, 80% over that period of time. That will well and truly pay for both lots of brokerage. So, yes keep the amount as small as you can, but a bit like tax, we don’t, you shouldn’t be investing for the tax deduction, you should be trying to maximise your after tax return, so it’s the profit you should be focused on not minimising the tax, or in this case minimising the cost. So yes, don’t pay more brokerage than you should, but don’t miss the forest for the trees.
RYAN: Very good point.Thanks, Scott.
SCOTT: Thanks, Ryan.