Tony asks: “I want to start investing in a stock & shares ISA but only investing £25 per month and would like to put it into a ETF that is fairly diverse. How should I go about doing that?”
Q&A 79 – Investing £25 Per Month – Shownotes
Hi Graham, Hope you are well.
I have another question. I want to start investing in a stock & shares ISA but only investing £25 per month and would like to put it into a ETF that is fairly diverse. I looked at different platforms and completely frazzled which one to choose. So many different charges.
I am also concerned that as I’m only putting £25 most of this money will be spent on charges as most places I have looked at have charges of £7+.
Could you please help me make sense of these various charges the platforms have and which kind of platform would be best for myself?
Thanks for your question Tony. Before I answer it, just a quick apology to regular podcast listeners who may have noticed that I didn’t upload podcasts on Monday and Wednesday this week. I fell behind a little with recordings, but hopefully that should be a one-off and you’ll have the 3 podcasts per week hitting your inbox from here on in.
Fees, fees, fees!
Regarding your new question Tony, you are right on with what you have said regarding investing small amounts and the impact of fees on your investment. Most UK brokers (who provide S&S ISAs) will either charge a fee per trade (around £5 at the cheaper end and anywhere up to £20 a trade at the expensive end) and/or an on-going platform charge.
As such, if you are only investing a small sum, this fee is huge in %age terms of your original investment.
SVS, the broker that I personally use, charge £7.95 for a trade of an ETF. If you are only investing £25, that will be £15.90 to trade in and out, which is over 60% of your original investment.
Save First, Invest Second
Therefore, you’ll need an alternative strategy.
My personal preference would be to put the £25 each month into a high interest current account. Whilst it remains in this account, you could be earning 3-5% per year. Then, when you have enough in there, you may want to transfer it to a S&S ISA with a market tracking ETF.
Say you put aside £25 per month for a year. At the end of the year, you would then have £300 plus interest earned of around £4.50 on your savings, assuming 3% return.
Then, you have the choice to leave it in that account earning 3% for another year, or place it into a S&S ISA over which we’ll assume a long-term average return of 8% (which is conservative).
The difference of 5% on £300 over the year is £15. This means that you’d earn an additional £15 by putting your money into a S&S ISA compared to leaving it in the bank account. However, you’ll still incur £16ish in fees to do so, and hence it wouldn’t be worthwhile.
As a rule of thumb, I personally wouldn’t invest money into an ETF through a S&S ISA unless you have at least £750-£1000 saved up to invest in one lump sum.
However, before I conclude with that, it is important that I explore the alternatives. Recently, investment platforms have popped up with the explicit aim to help people like yourself invest into the markets without the one-off fees destroying their returns.
They do this by pooling your investment with that of other users of the platform so that they trade less frequently and the trading fees are spread out between all of their users. Some examples of companies in this field are InvestYourWay, Nutmeg & Wealthfront. The most prominent of these in the UK is Nutmeg, who charge a “portfolio management” fee of between 0.3% and 0.95% depending on how much you have invested.
However, the minimum investment that you can hold with Nutmeg is £1,000, and for portfolios with less than £5,000 invested, they ask for minimum monthly contributions of £50 per month, so this may not suit your needs.
Equally, once you have £1,000 to invest, Nutmeg will charge an annual fee of 0.95%. That doesn’t sound like much, but it’s £9.50 in the first year, and then that charge grows each year as your investment grows through compounding.
Alternatively, with a broker platform like SVS, you could just buy the Vanguard FTSE VMID ETF for a one-off trade fee of £7.95, and then pay an ongoing management charge 0.1%. Even with only £1,000, that would be a tiny bit cheaper in year 1, but much cheaper in years 2 to forever.
So, my advice would be to avoid investing in S&S ISAs (or stocks and shares in general) until you have at least £750 to £1000 invest in a lump sum.
I hope that answers your question Tony.
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