What's the Right Amount to Invest... Is There One?!
Too much is never enough
It’s that time of the week again, hello fam! Before we dive in, remember you can read last week’s post on the blog (and our older stuff too) if you need a refresher!
So we’ve talked about how to open an account, what to invest in and the decision-making process. But let’s go back to basics for a moment: what about the actual amount you’re putting in? Is there an ideal figure? What about the frequency?
As with everything in life, the answer is “it depends” - on your age, your income level, your financial goals. However, given that the majority of us reading this are millennials, we can safely say that there’s no such thing as investing too much when you’re young. It’s a luxury to be able to do it at all, so the more you can allocate to your investments (whether it’s property, stocks, bonds whatever) the better your base will be for passive income later in life.
Now, that’s not to say you should have 100% of your net worth invested, certainly not in something as volatile as the stock market. But once you’ve set aside enough $$ to cover basic living expenses (a solid rainy day fund), there’s really no reason not to invest the rest - particularly as a 20-something who won’t be touching that money any time soon.
Also, one silver lining of Covid is that we’re not traveling or eating out as much as normal - and probably won’t for a while - so investing those extra shekels should be a little easier these days. With that said, how much should you target?
Building a Routine
One of the things that tends to get in the way of anyone just starting out is the feeling of self-satisfaction after you make your first investment (sort of the opposite of buyer’s remorse). Taking that first step isn’t easy, so it’s natural to pat yourself on the back about it and want to forget about your account for a while.
Here’s where we come in and (you guessed it) encourage you to discard that urge, as normal as it is. Investing a small $ amount a couple of times a year is infinitely better than not doing it at all, but to truly build a strong portfolio you’re going to want to start dollar-cost averaging.
Whether that means investing weekly, monthly, or as often as the mood strikes is entirely your call. At the end of the day, the goal is simply to have a percentage of your savings going to your investment account regularly, the same way you’d save cash. You might decide to put in the same amount every time you invest, or you might calibrate it based on market moves.
Sound like too much work? In that case, you can simply get a robo-advisor to do it all for you, with an automatic monthly deposit from your savings account.
This stuff might seem super obvious, but it’s true: having a dedicated $ amount you want to invest is a useful way to build some discipline around the process. Over time, what that means is the cost of the S&P 500 (or Tesco or HDFC) shares you buy each month gets averaged out - saving you the headache of having to decide what price to invest at, and giving you a solid base that should grow substantially in ten or twenty years’ time.
Swinging the Bat
This goes back to our recent post about what to do when the market is sh*t. If there is sudden market weakness that appears irrational or seemingly out of nowhere, it might be a good time to consider putting in more than your weekly/monthly average i.e. taking a good ol’ swing of the bat.
This is particularly true of high-priced stocks and ETFs that you consider to be good investments but feel are overvalued at current prices. Sometimes fear takes over and the market does funny (irrational) things, which might cause even great companies to be in the gutter for a while until things calm down.
Now, that kind of opportunity is rare and tbh not something you should wait around for - which is why regular investments the rest of the time will ensure you’re building a nice little portfolio regardless of what’s going on in the market.
So to summarize, there’s really no such thing as investing “too much” at this age… in fact, most people would kill to have done it earlier. And when it comes to the right approach, we know investing regularly is not as sexy as going out and buying a bunch of Tesla shares, but it’s (relatively) stress-free and likely to be a lot more successful in the long-run!
Note, these posts are intended as an educational resource and to encourage participation in the stock market. None of our opinions should be taken as investment advice, please speak to a professional for that :)