Here’s how I’d invest my first £500 today

Wondering how to invest your first £500? Edward Sheldon says the best strategy is to invest in a fund.

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Investing has changed a lot in the 20 years since I bought my first stock. These days, investing in the stock market is both easier and more cost-effective than it was in the past. With that in mind, if I was investing my first £500 today, here’s what I’d do.

Register with an online broker

The first thing I’d do is open an account with an online broker. I’d go with the largest in the UK, Hargreaves Lansdown (full disclosure: I’m a Hargreaves Lansdown shareholder).

The reason I like it is that its platform is extremely user-friendly. I’ve found it to be more reliable than the platforms that other brokers offer (when I was with another well-known broker, there were times I couldn’t even log in as the system was down). In addition, Hargreaves’ customer service is brilliant. It’s not the cheapest broker in the UK, but as with most things in life, I think you get what you pay for.

Protect my profits

The next thing I’d do is open a Stocks and Shares ISA. This is a flexible account (you can access your money at any time) that enables you to invest in a wide variety of assets including stocks, funds, investment trusts, and ETFs.

The main benefit of investing money within a Stocks and Shares ISA is that all capital gains and dividend income are completely tax-free. That might not seem like a big deal when you’re only investing £500, but as your portfolio grows in size, protecting your gains becomes very important. The more you can protect your wealth from the taxman, the better.

Invest in a fund

Finally, I’d put my £500 into an investment fund within the Stocks and Shares ISA. With funds, your money is pooled together with the money of other investors and managed by a professional fund manager.

The main benefit of investing in a fund, as opposed to buying an individual stock, is that your money is spread over a number of different companies. This reduces your overall portfolio risk significantly. It’s also more cost-effective compared to buying individual stocks if you’re only investing a small amount of money.

As for which fund I’d choose, I’d go with the highly popular Fundsmith Equity. This is a global equity vehicle that has exposure to leading companies listed both in the UK and internationally, such as Unilever, Diageo, Microsoft and PayPal. Managed by Terry Smith, it has an incredible long-term track record – between 1 November 2010 and 31 December 2019, it returned 364% versus 180% for its benchmark, the MSCI World index (past performance is no guarantee of future performance of course).

Once invested, I’d hold for the long term and regularly add to the fund when I had more money to invest. Once my account size was larger, I’d look to diversify my fund holdings and potentially introduce some individual stocks into the mix in an effort to generate higher returns.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon owns shares in Hargreaves Lansdown, Unilever, Diageo, and Microsoft and has a position in Fundsmith Equity. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Microsoft, PayPal Holdings, and Unilever. The Motley Fool UK has recommended Diageo and Hargreaves Lansdown and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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