When investing small sums pays off

Among millennials who don’t invest in the stockmarket one common objection is: “It’s too much of an effort for something I’d only get a few hundred quid out of it.” But is this sentiment justified?

To begin with, there are two glaring reasons for why millennials shy away from investing. For one, millennials mistrust financial markets, given that they – or we – came of age and entered the job market either during or shortly after the financial crisis.

It is also the case that those in the early twenties to mid-thirties lack the financial resources of previous generations.

According to a recent report from the Resolution Foundation, millennials today suffer from an earnings squeeze and a lack of progression in the job market, while having to spend far more of their income on rent and housing than previous generations.

Putting any money into the stockmarket can be scary if you don’t have much of a cash buffer, ideally three months’ salary in cash.

Those who do have cash spare next need to weigh up whether to go down the saving or investment route. Savings rates are on the rise, but to beat inflation, currently 2.5%, you will have to lock your money away for at least five years.

Moreover, history shows that over the long term, stockmarket returns have the upper hand over cash. Data from the 2016 Barclays Equity Gilt Study shows that British shares over the past 116 years have typically returned 5% annually (including share price growth and dividend payouts), while cash has returned 0.8%.

Investing small amounts, of say £100 a month, can pay off. If you manage to save £100 a month for five years this would add up to £6000.

Invested in the stockmarket, however, this sum can grow through compounding. Many online brokers have a minimum threshold of £100, but others allow as little as £25 a month.

However, it’s crucial to remember that the stockmarket rises and falls in cycles, and that the last five years have been a bull market. 

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

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