“How much should I invest in stocks, shares, bonds or funds” is one of the trickiest questions in investing. There's no set amount that works for everyone, and you need to consider various factors including your financial position, appetite for risk, and financial goals.
Not sure how to tackle the question? Here are some helpful things to ponder to get you up and running.
In this episode of ‘Investing for beginners’, Charlene Young addresses the crucial questions of how much to invest, and the impact of charges on investment returns.
Hello, I’m Charlene Young, and you’re watching AJ Bell’s video series on getting started with investing.
If you’ve seen the previous episodes, you should now be clued up on the different types of accounts, the options for where you can invest, and the importance of having a clear goal for why you want to put money to work in the markets.
The next step is to get your head around how much money you can afford to invest and why you need to be aware of charges and the impact they have on returns.
There isn’t a right or wrong answer with regards to how much you should invest - it’s down to how much you can afford. But the earlier you start investing, the better.
Before you start putting money away into an investment account, first make sure your finances are in order. It’s very important to pay off any expensive debt first. I’m talking about personal loans or credit card where the rate of interest is high - such as in double-digits.
It’s also worth building up a pot of cash to cover emergencies like your boiler or car breaking down.
If you get these issues sorted, you’ll be in a much stronger position to start putting money away into an investment account.
However, it’s worth noting that if you are employed by someone, it’s highly likely that you are already investing in the market, even if you don’t realise it.
All employers must provide a workplace pension as part of a scheme called ‘auto-enrolment’. If you’re classed as a worker, aged between 22 and state pension age, earn at least £10,000 per year and usually work in the UK, you’ll be automatically signed up to the scheme.
Currently, your employer will pay at least 3% of your salary into the pension and you pay 5% as a minimum. Many people like to make additional contributions to their workplace pension or other investment accounts.
There is nothing to stop you from paying into an ISA or another type of investment account alongside a workplace pension.
You can either deposit a lump sum or pay in whenever you have spare cash. Lots of people like to do little and often, such as a direct debit for £300 a month. These sums can really add up over time.
I’ll give you an example. Let’s say someone puts £300 a month into their ISA for three years. Each year they achieve 4.5% investment growth and incur 0.75% charges. After three years their ISA would be worth £11,400, which is fantastic.
It's important to understand the full range of charges when you come to invest so you can factor them into your budgeting. In a nutshell, you pay to buy and sell stocks, funds or bonds. That’s called a dealing charge. You also pay a custody charge which is essentially an account fee to your platform provider for holding your investments. Stamp duty is payable on some UK and Irish shares, while you also have a foreign exchange charge when buying non-UK shares.
If you can only afford a small amount each time, remember to consider the impact of charges. For example, you buy £25 worth of shares, it would cost you £5 in dealing charges per trade if you did this yourself each time. This represents a big chunk of the overall investment, so it might be worth looking at alternative options.
If you still wanted to buy shares, you could set up a regular investment instruction to automatically invest £25 on the same day each month, which would cost £1.50 each time. It also happens automatically so you don’t need to set a reminder. Or investing in funds only cost £1.50 per trade. You might also consider using Dodl by AJ Bell, an investment app where you’ll pay one all-in charge per account of 0.15% of the value of your investments per year, or a minimum of £1 per month. It’s worth noting that Dodl has a more limited range of investments compared to AJ Bell’s main platform.
I hope you’ve enjoyed the video series so far and don’t miss the next one where we will explain how to build an investment portfolio. Thanks for watching.
How much of my money should I invest?
The short answer is, it depends on your circumstances. But there’s a simple process to go through to make sure you’re prioritising your finances the right way.
First, do you have any high-cost debts? This is key when considering ‘how much should I invest’ – because if you have any debts with high interest rates, it’s important to prioritise paying them off first.
Next, do you have a rainy-day fund in case of emergencies? If not, you should think about building one up, preferably in an easy-access account paying the highest available interest. As a very rough guide, experts usually say you should aim to keep around three months’ fixed expenses handy.
Once you’ve paid off any high-cost debts and built up a rainy-day fund, you can consider how much to invest in shares, stocks, bonds or funds. To arrive at the right answer for you, here are some helpful questions to ask yourself:
- What are your saving and investing priorities? Some people have just one investing goal, but others have multiple. For example, you might want to save for a first home using a Lifetime ISA (LISA) while also building a retirement pot in a Self-invested personal pension (SIPP).
- What’s your investment time horizon and appetite for risk? Generally, the more risk you take, the more volatile your investment performance will be – particularly over the short-term. If your time horizon lies in the far future, you should be more able to ride out these short-term bumps in the road. Learn more about investing risk.
- Are you investing to grow your fund, or to produce an income? If you’re building up a nest egg for the long term, you’ll probably be more focused on growing its value. But if you’re currently taking an income in retirement, you may want your investments to focus on paying dividends.
- Do you want to pick your own investments, or pay a fund manager to do it for you (in exchange for a fee)?
Whatever your priorities and preferences, it’s always important to make sure your investments are diversified. That way, you can avoid the risk of being a hostage to the fortunes of a particular stock, sector, or area of the world.
In addition, remember to keep a laser focus on costs and charges, keeping them as low as possible.
What is a good amount to invest for beginners?
If you're a beginner, it’s important to make sure you understand the risks you may be taking.
The good news is you don’t have to decide how much to put into individual investment like stocks, shares, bonds etc. If you prefer, you can invest in funds instead.
These can make your life easier because the investments are picked by a fund manager (in exchange for a fee). And you can usually also choose difference risk levels to suit your investing goals.
We offer our own multi-asset fund range – the AJ Bell funds. They’re managed by us for you, to make investing as hands-off as possible. You can invest for growth, income, or in responsible assets, and can choose the amount if risk you’d like to take.
Our specialists have surveyed the market and compiled the AJ Bell Favourite funds list. This contains more than 70 funds picked by our research team that you can search and short list depending on your investment goal or the type of fund you’re looking for. You can also view our complete list of funds by using our fund screener tool.
How can I start investing?
If you’re ready to start investing, getting up and running is pretty easy. What account you choose should depend on whether you have a short-, medium- and long-term investing goal.
If saving for retirement is your priority, then a SIPP might be your preferred choice. Or if you’d prefer a bit more flexibility, you could opt for a Stocks and shares ISA or Lifetime ISA. Many investors hold more than one account to suit their needs.
It takes minutes to set up an account. And once you’re done, you can get in the savings habit by setting up regular monthly investments. Alternatively, you can simply top up your account with lump sums as and when you like.
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Important information: Remember that the value of investments can change, and you could lose money as well as make it. We don't offer advice, so it's important you understand the risks. If you're not sure, please speak to a financial adviser.