Investing used to be the exclusive pastime of wealthy investors. That is no longer the case. Over the past decade, a whole range of new online stock brokers have launched, allowing investors to buy UK shares for just £25 a month.
Other investing apps have also sprung up that charge no commission at all, giving investors the option to choose their own stocks and shares to buy for their portfolios.
Some investors might find this a little daunting. There are over 3,000 stocks in the UK to choose from, and more than 10 times that amount worldwide. That’s excluding investment funds. There are thousands of different investment funds available as well.
Diversification from funds
If I had a small lump sum investment of £500 to start investing today, I’d build my portfolio around investment funds. However, I’d also devote a small portion to UK shares.
The reason why I’d choose this approach is simple. To build a well-diversified portfolio, I’d have to buy around 20-30 different UK shares. With a lump sum of just £500, this would mean investing as little as £17 in each company. That seems a little silly. Instead, I think buying one or two investment funds with 80% of my capital would be the better option.
One of the best, in my opinion, is a world tracker fund. This would allow me to build exposure to every country and sector globally at the click of a button. I’d also acquire an investment trust that uses a different strategy to provide diversification.
An example is Personal Assets Trust, which owns a portfolio of precious metals, bonds and equities. Its overriding goal is to protect and grow investors’ capital in the long run.
Investing in UK shares
Alongside these investment funds, I’d take a bit more risk with the remaining 20% of my £500. I enjoy following certain companies. Therefore, I want to own their equity. This approach might not be suitable for all investors. Buying individual stocks and shares can be risky. It also requires a lot of work.
However, as I enjoy following companies and want to participate in their progress, I’m happy to take on more risk. Some examples of the sorts of UK shares I’d own are Diageo and Direct Line. I think both of these companies have exciting group prospects and attractive plans to return cash to investors. By investing just 20% of my portfolio in these two, I can build exposure to the businesses without taking on too much risk.
That’s the strategy I’d use to invest a lump sum of £500 in UK shares today. This approach offers a mix of exposure to individual companies and wider funds, which can invest around the world. This is a strategy I’m comfortable with, considering the limited investment amount.
Rupert Hargreaves owns shares of Diageo, Direct Line Insurance, and Personal Assets Trust. The Motley Fool UK has recommended Diageo. 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.