When money is tight, it can feel difficult to think about investing. But my own approach is to invest through thick and thin. So if I had even just £5 a week to spare, I would happily put it into the stock market.
Not only do I think regular contributions are a useful approach for me now – I would do the same if I was to start investing for the first time. In fact, I think most people could do that.
Here is how someone with no stock market experience could start buying shares for a fiver a week.
Putting aside money regularly to invest
Five quid a week may not sound like a lot. But bear in mind two things.
First, over a year, it would add up to £260. Across a decade, that would amount to £2,600. In other words, little contributions can be the foundation of something more substantial over the long run.
Secondly, £5 is simply a start. Over time, if an investor has more spare money, they could speed things up by raising their regular contribution.
How to put that money to work? Buying shares requires an account such as a share-dealing account or Stocks and Shares ISA. Setting one up can be easy and quick, though as there are lots of options available I think it makes sense for an investor to spend some time comparing those options.
Aiming high over the long run
How much might someone make from such an approach? Imagine they start investing today with £5 a week and achieve compound annual growth of 10% (which of course is not guaranteed) via a mixture of share price growth and dividends.
By 2050, the portfolio could be worth over £26,700. Of that, just under a quarter is the £5 a week and the rest is all stock market return.
Incidentally, if instead of £5 a week the investor doubled the contribution to £10 a week from the beginning, after the same time period of 25 years the portfolio would be worth over £53,000.
Finding shares to buy
I think a 10% compound annual growth rate is achievable, but it is not easy. Share prices can go down as well as up and dividends are never a dead cert.
One share I think is worth considering for a beginner is British American Tobacco (LSE: BATS).
It has a 7.2% yield and has raised its dividend annually for decades. The share has soared 39% in the past year, although over five years it has fallen 5%.
I think that long-term performance reflects a big risk: declining numbers of cigarette smokers could hurt revenues and profits. Indeed, last year the company’s cigarette sales volumes fell significantly.
But its portfolio of premium brands such as Lucky Strike give it pricing power. Although declining, the cigarette market remains substantial and I expect it to remain that way for decades.
On top of that, the company is using its brands and distribution network to grow its non-cigarette business at speed.
This post was originally published on Motley Fool
