Motley Fool: A little bit of frugality can result in a very productive nest egg
And while I believe the share price to be a bargain at its present levels, one bargain I’m absolutely certain of is the commission I’m paying – just £2, achieved by taking part in the broker’s collective buying scheme, where four times a month it pools its clients’ orders together to make collective purchases at discounted rates.
Last month, taking part in this scheme saw me make additional purchases in three of my favourite investment trusts: the venerable Scottish Mortgage Investment Trust, which dates from 1909; the even older Scottish American Investment Company, dating from 1873; and the more recently established Aberdeen Asian Income, dating from 2005. In each case, the trust manager waives the commission fee for monthly purchases, leaving investors only liable for stamp duty.
One reason I do this is because I’ve been privileged to get a glimpse into the personal finances of a number of individuals who have built up very decent retirement nest eggs. Canny investing has played a part, to be sure. And while I might quibble with some of the investment choices that have been made, the broad thrust has been largely correct for the individuals in question.
Being risk averse, there’s been a strong preference for ‘big brand’ funds and investment trusts, and FTSE 100 large caps and mega caps. But what has impressed me much more is where the wealth has come from. Through living relatively modestly, it’s been possible for them to put aside regular sums for investment.
And over time, these modest-but-regular sums have grown into the enviable nest eggs in question.
All quintessential Motley Fool stuff, of course. As we’ve said many times, regular investing can – quite literally – pay dividends.
Put some money aside every month, invest it preferably into a tax-efficient investment vehicle such as an ISA or SIPP, and let compound growth and pound cost averaging do the rest.
The trouble is, all too few people actually do it.
A few years back, the Office for National Statistics’ inaugural Wealth in Great Britain survey, for instance, highlighted that just 15 per cent of households in Britain own shares directly, outside an ISA wrapper. Just 10 per cent of households have a stocks and shares ISA.
In other words, while people might say they are saving, they aren’t saving – and investing – in the asset class that for over a hundred years has by far delivered the greatest returns: shares.
To me, the huge advantage conferred by saving monthly is that it makes wealth-building relatively painless. In short, set up the standing order or direct debit, and forget about it. Not quite enough room in the monthly budget? Go out less, skip those takeaways, ditch the expensive gym subscription – the opportunities are endless.
Such frugality pays off. Relatively modest sums by way of monthly investments quickly assume life-changing proportions if sustained over the long term.
Better still, with a ‘core’ holding sheltered in a diverse investment vehicle such as a low-cost index tracker or investment trust, it’s possible to more safely make ‘side bets’ – investments in riskier individual shares, with potentially market-beating upsides.
To me, the advantages of such a strategy seem obvious. Yet all too few people do it – despite the fact that a lot of brokers and investment firms actively encourage regular monthly saving with free or discounted commission schemes.
One person who saw the light a few years ago is an old family friend I’ll call Sandra. Initially saving modest amounts in an index tracker, Sandra now has decent stakes in some high-yielding FTSE 100 stalwarts – while her low-cost index tracker continues to provide a diversified stake in the market as a whole.
All for a monthly investment amount to little more than the cost of a latte coffee each day.
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