Is it possible to build a decent-sized and market-beating investment portfolio with a small budget? Yes, it is! I’ve managed to build a market-beating investment portfolio with virtually no income since I’ve been a stay-at-home Mum. My pension wealth has massively outstripped inflation due to some of my investment choices.
Here are some of my top tips for building investment and pension wealth on a small budget.
When I started building my investment portfolio and pension wealth, I was in my twenties and was staying at home on maternity leave. I was lucky enough to be able to scrape together £200 per month to invest, despite not being a taxpayer.
I consistently invested £200 per month over the next 10 years even though I couldn’t afford to put up my pension contributions. That consistency paid off over time, and I’ve managed to build up a decent-sized pension pot.
Invest in your pension wealth
By investing in my pension, I was able to maximise my contributions and build my pension wealth. The rules mean that it’s possible to double your contributions if you’re an employee.
Your pension contributions will be topped up by 20% by the government. They will pay pension tax relief into your pension even if you’re not a UK taxpayer (up to contributions of £3,600 per year).
If you contribute to your workplace pension, then you’ll get even more free money as your employer will top up your contributions. An £80 contribution might turn into £160. That’s due to £20 tax relief from the government and £60 contributed by your employer (based on you contributing 5% and your employer contributing 3% of your salary).
Understand your fund choices
Many investors don’t ever open up the bonnet and look inside their pension. They don’t look to see the funds their pension is invested in. That might be a mistake because the investment portfolio might not be suitable for you.
Many workplace pension schemes will bung your investments into a balance managed fund that includes bonds, gilts and cash investments. It’s suitable for cautious investors as gilts and bonds won’t go down in value. The problem is that this type of fund won’t grow much and build your pension wealth in the long run.
If you’re in your 20s, then you might not fit the profile of a cautious investor. It’s worth getting some financial advice to see whether you’re investing the most suitable fund for you.
I decided to invest 100% in equities because I was a long-term investor and I had years for my investment wealth to grow. I didn’t mind if my investments went down in value during a stock market crash as I had years and years for them to recover.
Invest in global stocks
Many pension funds will automatically invest you mainly in UK stocks. I made the decision to invest in stocks across the world rather than limiting my investment portfolio to UK stocks.
Looking back at the last five years, I can see that the global tracker share fund in my pension scheme has outstripped the performance of my UK fund by miles. The global tracker fund in my scheme has grown at 87% in the last five years, giving my pension wealth a huge boost. The equivalent UK tracker fund has languished and only grown by 29%.
Invest in smaller companies
I invest at least 30% of my pension in smaller companies funds. Smaller companies have the potential to grow more than larger companies because they aren’t yet at the top of their growth cycle.
The global smaller companies fund in my pension scheme has grown by 134% in the past five years. That means £1,000 invested five years ago would have grown to £2,340 today. It’s the best-performing fund in my portfolio and has helped improve my pension wealth. A UK smaller companies fund in my pension pot has also done well. It’s grown by 126% in the last five years. That means £1,000 invested 5 years ago would have grown to £2,260.
If my global smaller companies fund kept growing at the current pace (more than doubling every five years), then £1,000 invested now would be worth £164,171 in 30 years.
I only invest part of my pension in these smaller funds. But it’s made a huge difference to my pension wealth over time.
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