I know people who keep meaning to start buying shares, but fail to do so year after year. Often, they are waiting to have a bigger sum of money before they start investing.
If I was investing for the first time, though, in many ways I would rather start with £300 than £3,000. Here’s why.
Cheaper lessons
Many people think they could handily beat the stock market. It is easy to find a pub bore who claims that at some point in the early days of Amazon or Tesla, he had a good feeling about buying their shares.
But such stories often have what behavioural psychologists call a survivorship bias. People may remember companies they spotted early on that later performed well. But they may well forget the dogs they also liked that later sank without trace.
It is also easy to underestimate the psychology of investing if one does not actually have skin in the game. Armchair pundits may focus on their potential return had they bought into a certain share at its year low. But it is another thing in reality to look at a stock that has recently hit the lowest point in 52 weeks, like Scottish Mortgage did in the past week, and part with one’s hard-earned cash to buy into it.
In other words, like many things, investing is something one learns partly by doing. But to start investing, — or anything else — often involves a learning curve.
Nobody sets out to lose money buying a stock. But it is part of investing – and starting with less at stake can mean that valuable investing lessons come at a cheaper price.
Forced to choose
One of the risk management principles I always use is diversification. I think £300 would still be enough to let me do this. I could buy into two or three different shares.
But typically, each trade brings costs such as share-dealing fees. So, if I spread my £300 too thinly, costs would eat up a disproportionate amount of my funds.
Given that, why would I rather start investing with £300 than a larger sum? If I could immediately diversify between 10 or 20 shares, I fear that I might have less incentive to focus on finding brilliant ones. I would potentially simply hope that I had a few strong performers in my broad selection.
By contrast, if I could only invest £150 in each of two shares, I would be more likely only to buy when I felt I was getting a great bargain. A lack of firepower could work in my favour as I would choose my targets with real care and discipline.
Famous investor Warren Buffett thinks most small investors would achieve better results if they took a disciplined approach based on having a finite (and small) number of investment moves they could make in their lifetime.
If I was to start investing with just £300, I would be able to apply this Buffett approach from day one.
