It is never too late to start investing and there is no amount to start doing it. But how is it possible to invest small amounts with Capital Accumulation Plans? And why is it so useful to do so?
Starting to invest is a step that many would like to take, but the fear of losing money is a big obstacle. Certainly a basic preparation is needed: to know what are the stock market indices and the main investment instruments, to have an idea of how the markets work. Those who want to enter the world of investment and invest small amounts have two tools to start: here we deal with the Capital Accumulation Plans, read What are ETFs and why invest in them for information on exchange-traded funds.
Start investing small amounts with the Capital Accumulation Plans
Capital Accumulation Plans are the best solution to start investing small amounts. CAPs are a way of subscribing certain financial instruments (such as mutual funds and ETFs) that allow the purchase of units with subsequent periodic payments. These programs can provide for the contribution of fixed or variable amounts, at the most convenient rate (monthly, bimonthly, quarterly and so on) and for usually fixed periods of time.
Why is it important to invest even small amounts?
For those who do not have to invest large amounts, it is important to start setting aside even small amounts of money constantly. And do it as soon as possible. In doing so, the capital grows gradually and steadily and you have the opportunity to capitalize on your earnings as time goes by. Let’s imagine starting with a capital of 2 thousand euros or dollars in 2020 and being able to pay 100 €/$ per month. In 2040 we would have saved 26 thousand (the initial 2 thousand plus the 24 thousand made).
That could become about 32 thousand with a simple overall yield of 19% (therefore less than 1% per year), 34 thousand with a simple overall yield of 25%, 37 thousand with a simple overall yield of 38% up to 42 thousand euros with a overall simple yield of 60% (on average, therefore, less than 3% per year).
Advantages of a constant accumulation investment
The greatest advantage of a small but constant investment system is to calm the “seasonal” component of the investment. The investment with a Capital Accumulation Plan is instead diluted over rather long durations and therefore fractional purchases are spread over almost all market conditions.
Another advantage is more of a psychological nature: the CAP “forces” the investor to set aside a constant amount.
Capital Accumulation Plan: what to watch out for
But are there any weaknesses in the approach to accumulation investments? Of course yes: the biggest limit is that over time, the most recent odds will affect the average price less.
Staking in a negative phase after a certain number of periods, with a value of the investment that has therefore become more substantial, could lead to significant losses. De facto nullifying part of the series of investment shares previously made.