When you’re just starting to invest, it’s not easy to decide how to spend your cash. The good news is there are several simple and cheap options which I think will provide good results over many years. Here, I’m going to take a look at how I’d invest £1,000 today.
Why the stock market?
At the Fool, we believe stock market investments generally provide the best long-term results. As I’ll explain, even a relatively small amount of cash, such as £1,000, is enough to give you broad exposure to different types of business, plus a regular income.
You can also keep stock market investments in a Stocks and Shares ISA, avoiding any future tax bills. That simply isn’t true with most other asset classes, such as property or gold.
How to invest #1: buy shares directly
The most obvious way to invest in the stock market is to buy shares in one or more companies. But with a budget of £1,000, I don’t think this is a good choice.
To avoid losing too much in dealing charges, the absolute minimum I’d invest in a single stock is £500. On a budget of £1,000, that means a maximum portfolio of two stocks. In my view, this isn’t a good idea. It means that all your eggs are in one (or two) baskets.
If something goes wrong, you could easily lose a quarter of your investment in one day. And even if the market rises, you may not be exposed to winning sectors.
How to invest #2: buy an index tracker
A more sensible choice would be buy an index tracker fund. These cheap, simple passive funds simply follow the performance of a major stock market index. My choice would be a FTSE 100 tracker fund.
At current levels, this should provide a dividend yield of about 3.5%, even after this year’s widespread dividend cuts. Over time, I’d expect this payout to rise steadily. And, in my view, the index is quite attractively priced at around 6,000, so I’d also expect capital gains over time.
However, that’s not actually how I’d invest £1,000 today. Let me explain what I’d really do.
What I’d buy today
If I was investing that sum today, I’d buy shares in an investment trust. These unfashionable vehicles are sometimes overlooked but, in my view, they’re a great tool for long-term investors.
One particular attraction is that they’re allowed to hold back some of the income they generate each year. This can be used to ‘smooth’ out dividend payments in future years, protecting shareholders (you and me) from cuts.
There are hundreds of trusts to choose from on the London market, but the one I’d buy today for a starter portfolio would probably be the Mercantile Investment Trust (LSE: MRC). Founded in 1884, this trust invests in mid-sized companies which the trust’s managers think will do well in the future.
Mercantile’s strategy has worked well in recent years — shares in the trust have doubled over the last 10 years. The FTSE 100 has risen by just 10% over the same period.
The Mercantile Investment Trust currently offers a dividend yield of around 3.4% and the shares trade at a discount of around 5% to their book value. I think that now could be a good time to buy.
