With 2018 well under way and the FTSE 100 being in the news due to last week’s big falls, a lot of people are thinking about making their first foray into shares — perhaps with a bit of trepidation.
Things are a lot easier than when I started. For one thing, we didn’t have online brokers and trades had to be done by phone. That meant it was more expensive and we had to be more careful about the minimum amount we invested so that charges didn’t take too big a portion of our cash.
But the online broker I use today charges a flat £10 per trade (plus 0.5% stamp duty when you buy, nothing when you sell), and that makes amounts as little as £500 very much worthwhile for a single purchase.
How many stocks?
So starting out today with £2,000, it’s a realistic proposition to split that cash into two, three or four different stocks. That gives you the chance to get a bit of diversification straight away when you buy shares from different sectors. After all, you wouldn’t like it if you’d had all your money in banking shares when the financial crisis hit.
But I’ll sound a note of caution here too. I wouldn’t buy a share in a new sector only for the sake of diversification — it would always have to be a good company that I’d want to buy in its own right. But if you don’t diversify right away, it actually shouldn’t be a big problem as you’ll have plenty of time in your first few years to spread your horizons.
The key thing is to buy good companies at attractive prices, and I’d say be careful to steer clear of whatever fad or bandwagon is hitting the headlines. Piling into the latest hot tip might pay off, but it’s an approach that very often fails, and early losses can turn a new investor off the stock market for life.
I reckon the best approach is to follow Warren Buffett‘s first rule of investing — Don’t Lose Money!
So focus on minimising the downside and buy into solid companies that have almost no chance of going bust.
What should you buy?
My shortlist would include either BP or Royal Dutch Shell, for sure. The oil price crisis and the Deepwater Horizon disaster have kept the BP share price flat for the past five years, but shareholders have also enjoyed steady 6% dividends per year.
I’d also include a utility company, as they have great visibility of earnings and can pay out lots of cash. I’d consider SSE, but I’d probably go for National Grid, mainly because it operates the distribution networks and profits regardless of who’s actually selling the electricity and gas.
A big consumer goods company like Unilever would be a candidate too. It’s very hard to do a week’s shopping without buying Unilever brands, and it would also give you some global diversity.
The big pharmaceuticals companies have very long track records of success, so I’d add GlaxoSmithKline and AstraZeneca to my shortlist. And considering our chronic housing shortage and the dividends that housebuilders pay, something like Taylor Wimpey might get some of my cash too.
Two to four of those, I think, would make a great start to a long-term investment portfolio.
