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I don't have a lump sum but may be able to set aside £2k-3k per month.

I am already paying into a pension fund but that seems unlikely to go far. Yet I think it's a good safeguard.

Can I start investing with £2000 or should I get a bigger pot first? What's the best investment for such a sum?

  • I have deleted a lot of comments that had nothing to do with clarifying the question. – GS - Apologise to Monica Sep 27 at 16:05
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Any amount greater than 0 is fine really.*

Investing great lump sums is akin to timing the market, just set a monthly target and stick to it.** Consistency over the long term is the key to success. This is a marathon, not a sprint.

[*] just make sure you use a low fee broker(some even offer promotional 0 fees choices) and ETF investing (a mixture of bonds/stocks per your personal goals and risk profile) so the amounts invested arent eaten up from fees.

[**] monthly deposits have the added bonus of cost averaging your position so you re not worried about timing your entry over a sufficiently long time frame.

Appendix:

About your current options you can find brokers offering services in the UK here.

Also, apparently nowadays Vanguard offers investing platforms to the UK directly as well.

Alternatively, you may consider getting your feet wet using a robo-advisor(nutmeg,moneyfarm,etfmatic all offer UK accounts) that will create a portfolio for you based on your risk profile. Do note this you will pay a premium for this convenience in the form of .20-1% management fees on top of the expenses associated with the underlying ETF that you would pay regardless. You may think such numbers are negligible but add up just as much over the lifetime of your account resulting in significant performance hits so the sooner you feel ready to take your ETF investments into your own hands the better off you will be.

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    Could you point me to documents to know more about this? – algiogia Sep 24 at 15:07
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    a bit of both please :) – algiogia Sep 25 at 8:33
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    A bit more detail would make this a better answer. What is an ETF for those who don't know? What is a bond / stock? – Cloud Sep 25 at 10:06
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    @cloud I think the answer would be unnecessarily lengthy for no good reason in that case. Most people here know these already and for those who dont, clicking on any of the top google results on a definition of those will suffice to educated in a simple non-technical way. – Leon Sep 25 at 10:18
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    If you enjoy investing or learning about it I think this is a great answer, for people who see investing more as 'work' I have tried to provide a quantitative analysis of whether it is worth the effort: money.stackexchange.com/a/115087/49235 – Dennis Jaheruddin Sep 25 at 16:46
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Two parter:

Part 1: How much money do you need to have before you invest?

You want to ensure that you have enough money in liquid form to cover emergency expenses/etc. before you invest in anything. If you lose your job and the market is down you don't want to have to touch your investment. I would keep enough money to cover 6 months of expenses/rent/utilities/food in a money market fund where you can earn 1-2% interest on average. That is your emergency money which you shouldn't touch.

Once you have your emergency fund set up, you're good to start investing £2000 is absolutely a fine amount to start with. In general a good rule of thumb is to start early since compounding interest works better the earlier you start. That being said, you will (probably) be charged a fee every time you buy shares. So it's probably better to have at least £500 before you make a purchase.

@Leon mentioned the idea of dollar cost averaging—essentially buying an investment at different times to spread out the risk e.g. if you buy at a peak (bad), and buy at the low point (good) then you average out to a comfortable middle. Here's an article on why that's actually not the best move. Basically, you should just invest when you can. The sooner the better. Because the longer you keep your money invested the more it's going to grow.

Part 2: What To Invest In

I'd recommend reading up on index fund investing. JL Collins and Mr. Money Mustache are both good sources on these.

These are basically investments that track an index e.g. the total stock market. What this means is that by buying them you own a tiny piece of every company that is publicly traded on that index. This has several advantages:

  1. Lower fees. Because you're not paying for a financial manager to choose the stocks and make regular trades your expense ratio is very low.

  2. Diversification. Because you own a tiny piece of every company you are protected from crashes in a specific industry, e.g. the dot com bubble.

  3. Protection from a complete crash. Because you own a tiny piece of every company the only way for your investment to lose all its value would be if the entire stock market collapses—compare that to betting on a single company which could declare bankruptcy rendering your investment worthless.

  4. Better returns. Index funds beat the majority of actively managed funds over a long period of time.

  5. You can do it yourself. It's relatively easy to purchase index funds and keep them in an investment account.

There are many sources online that provide a more expansive explanation on these points but those are the big ones that leap to mind. Just make sure that you read up on it first so you have confidence that you're making the right decision. People lose money when markets crash and they pull their money out at the worst time. If you can ride out the bad times then you're going to be in good shape.

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    Just a correction, OP doesn't really have a lump sum to invest hence why DCA was mentioned as an option for the realistically only way of investing they have(monthly deposits). – Leon Sep 25 at 6:19
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    @Leon Dollar cost averaging is about intentionally splitting a lump sum in to multiple buys, not simply buying over time when money becomes available. – quid Sep 25 at 7:58
  • @quid isn’t regular, fixed investing as money becomes available just DCA of a future lump sum over the preceding time period? – thehole Sep 28 at 0:01
  • @thehole, no. That's just a lot of lump sum investments over time. Dollar cost averaging is the decision to intentionally split an investment in to pieces RATHER than investing it at once. – quid Sep 28 at 3:58
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If you are able to invest £2000-£3000 a month then you are already in amazing shape if you ask me. That's my entire wage (and that's after tax!!). I invest something like £80 each month, and even that will add up to quite a bit by the time I retire in 40+ years.

Not quite sure what the "best investment" is, and it greatly depends on the timeframe you're working with (are we talking 5 years, 10 years, 20 years?), but a good spread with low-mid risk should work quite well. The longer the timeframe, the higher the acceptable risk (up to a point).

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The default choice for UK medium size investing should be a "stocks and shares ISA". You can invest in trackers or you can even buy individual stocks this way. A huge range of these standard products is available from UK banks. You can invest up to £20,000 per year this way, and take it out at any time (although not put it back in that year!)

If you do it this way, you're exempt from capital gains tax, income tax, tax on dividends, etc. for everything in the wrapper.

If you don't do this, you end up paying a substantial chunk of your gains (20-40%) to the taxman. Or not paying the taxman and getting an even nastier surprise.

As to what you should buy inside the wrapper: I would suggest not trying to pick individual stocks but I would suggest an index tracker. Investment website Motley Fool has some good background.

Oh, and I would avoid making any decisions until the October 31st crisis is resolved one way or the other, since that is likely to produce price swings.

  • When you say you're exempt from income tax in the wrapper.. how does that work? Since you pay it after you get paid, or is there a way to get it deducted from salary? – Cloud Sep 25 at 10:10
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    In the wrapper. So, outside an ISA, if you put in £1000 and earn £20 interest, as a higher rate taxpayer you would have to pay 40% tax on the £20. Or if you got paid more than £2000 in dividends instead you'd have to pay the 32.5% dividend tax. gov.uk/tax-on-dividends . Inside an ISA none of that applies and you get to keep the whole investment return. – pjc50 Sep 25 at 10:18
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    (This is over and above the case where the money you're investing in the first place comes from salary which you have paid tax on. The way round that is to put it in a pension.) – pjc50 Sep 25 at 10:20
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    @Cloud that depends on where you fit in the actuarial tables; currently you can take a private pension at 55. My grandmother lived to over 100 and those currently alive are expected to live longer.. – pjc50 Sep 25 at 12:26
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    @Cloud eh? Usually you take an annuity, which admittedly isn't great if you die early, and with the new "flexi-access drawdown" you can take out what you need and the remainder can be inherited. Perhaps you could ask a separate question about pensions? – pjc50 Sep 25 at 13:08
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If you don't have 3-6 months expenses saved, I'd probably try to get that nest egg built up before I did any significant investing. You might decide to start investing some smaller sums while contributing the lion's share of your excess to cash savings.

Reason being that you don't want to draw from your long-term investments in the case of large unplanned expenses (e.g., your car breaks down, you need a new furnace, etc.). If you use all of your monthly excess towards investment, and you have some unplanned expense, you'll have to draw from your investment or take it on credit and/or temporarily suspend your investment strategy -- all of which (obviously) are kind of counterproductive!

On the contrary, if you have cash reserves to handle those occasional large expenses, you can use that money and then make some minor tweaks to your budget for the following month or two (e.g., spend less on dining out, etc.) so that you can A) replenish the cash reserves and B) not miss a beat with your investments.

If you're capable of stashing 2-3K per month, I suspect it should not take very long for you to reach that 3-6 month savings cushion, after which you can comfortable start investing.

There is no "right amount" and there is no "best investment vehicle" in any objective sense. Even investing small but regular amounts is better than nothing.

3

Scale your efforts with your funds

If we assume investing is not something you mainly do for fun, we can evaluate how much effort you can justify given your portfolio. This becomes fuzzy when you are risk averse or like to learn, but let's just start simple.

Scenarios

  1. Suppose you have a trivial minimum risk option available, one scenario would be to simply use that.

  2. Now suppose you have an alternative option available (normally something risky combined with the minimum risk option) , possibly something you are still discovering, then the second scenario would be to use this.

Let us assume that the expected value of the second scenario 2% higer than the simple solution.

Evaluation

Short term

Suppose you are just looking for a solution for the coming year.

  • The average value of your portfolio throughout the first year is about 15000 = 2500*12*0.5
  • The expected increase in return will then be 300 = 15000*0.02

Long term

If you do the same analysis for year 10 (assuming you don't even reinvest the returns)

  • The average value of your portfolio throughout the tenth year is about 285000 = 2500*12*9.5
  • The expected increase in return will then be 5700 = 285000*0.02

Conclusion

Unless you invest for fun or learning, it is likely not justified for someone in your income level to spend a lot of time discovering and executing investments in the beginning.

Consider starting simple while your funds are small, don't even be embarrassed to just let it sit on a savings account until you saved at least for a number of months. Once your funds grow (and especially if you are reaching a point where a savings account is not guaranteed anymore) increase your efforts to a matching level.

  • Thank you! What does it mean "a savings account is not guaranteed anymore"? – Ciprian Tomoiagă Nov 6 at 7:45
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    In several countries the government will guarantee that you get your money back from licensed banks if they go bankrupt. I believe in most EU countries the promise is to return the full amount upto 100'000 Euro. (In other places this cap can be 0, so check for your bank if you are unsure) – Dennis Jaheruddin Nov 6 at 10:01
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Depends on the brokerage fees you have, or expect to have.

For example if your broker charges £5 per trade, and you're investing £500, then you're immediately down 1% on your investment. But if the market goes up by 10% every year on average, 1% isn't that much, and you're OK.

On the other hand if you're only investing £50, then £5 is 10%. You instantly lose a year's worth of returns by investing (this is hand-waving, not precise math). In this scenario it's better to wait till next year when you can invest twice the sum, i.e. £100.

That said £2000-£3000 is well above the range where this can be an issue, so the time to start is right now.

Aside: less starting capital means you're less able to buy individual stocks (because each trade costs £5 in this example), so you won't be able to diversify unless you tack the market. But tacking the market isn't a bad place to be, so it shouldn't be a deal-breaker.

0

1. If you have the plan of "trading" ...

So, you will actively buy and sell stocks (say, at least once a week, possibly daily) to profit.

... totally forget it.

This is not even worth discussing. Forget it.

2. If you have the idea of "picking stocks" ...

So you have the idea that you will sit there, decide on stocks you should buy. You buy them. Over the course of (say) some months or a year or two, in your plan, the stocks in questions will increase greatly in price. From time to time you will sell some of those, and buy different ones depending on your thoughts on stocks.

... you do not have enough to do this safely. Forget it.

Next,

3. If you "believe in" a company as a long term "bet" ...

We all know the story .. "if you had invested in Apple or Netscape in year X, you would now have four Bugattis..".

... yes, you absolutely have enough money to do that. More than enough. Awesome.

However, it is extremely important to remember that in situation three, there are two outcomes:

• You get incredibly rich. You'll, literally, fly on private jets, etc.

• You have absolutely nothing. That means £0. (Not like "a few pounds" .. but specifically "zero".)

It all comes down to whether you can pick the next Apple, Netflix etc in the early days.

4. Real estate investment

Facts,

i. You absolutely have enough

ii. Overwhelming fact, real estate is the only vehicle on which civilian investors can achieve high leverage, in the current historical milieu. This simply swamps all other considerations, other thoughts about investment vehicles, etc.

iii. In the long term (decades) it is exceedingly unlikely you will lose money

iv. In the long term (decades) it is exceedingly likely you will make a good amount of money

I, for example, before I entered my "old and drunk" phase was lucky enough to make considerable amounts of money "investing" as most people think of that word, item 2 above. (So, something like "buy a million of gold or APPL and sell it a year or two later for two million! Wow! Investing! Gee Whiz!")

However, carefully note the word lucky in the previous paragraph.

  • Totally agree: Remember, the investment banks spend huge amounts of time and money figuring out what investments to buy, and their track record on average is pretty bad, so the chances of an amateur beating the market average is unlikely, unless you bought amazon at the right time... – Mark Stewart Sep 27 at 18:23
  • Thanks @MarkStewart - I simply could not agree with you more. – Fattie Sep 27 at 18:38

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