Recently, I have encountered a bit of an investing dilemma. The S&P 500 is the most prominent stock index in the US. It is also one of the most successful stock indexes in the world. It is loaded with some of the world’s largest companies, including Apple and Microsoft. However, back here in London, UK shares are some of the cheapest equities in the world.
Despite the country’s improving economic performance and the fact that London was the leading market for IPOs in Europe in the first half of the year, investors still want to stay away.
This does not make much sense. While I will admit that there are not any companies listed in London that can rival Apple and Microsoft for scale, the UK is home to many unique businesses. Many of these are great investments in their own right.
Top-quality UK shares
Some great examples include Diageo, which I already own. This is one of the largest alcoholic beverage companies globally, which owns some of the most recognisable brands in the world, including Guinness and Johnnie Walker.
Another example is the London Stock Exchange, which owns and operates Europe’s largest stock market. As noted above, outside of New York and China, London is the most popular market in the world for international companies to go public. This gives the LSE a huge advantage over other exchanges.
The commodities trading house Glencore is another example. As the most significant commodity trader in the world, the company has an unrivalled edge in this market where size and reputation count for everything.
These are just three examples of high-quality UK shares I can buy today.
That being said, these companies may be successful today, but past performance should never be used as a guide to future potential. There is no guarantee they will be able to maintain their competitive advantages as we advance.
Best of both worlds
This is why I favour a blended approach when investing. I am happy to own individual UK shares in my portfolio, but I would also like to own the S&P 500 and other international indexes.
I think this approach gives me the best of both worlds. If the UK market starts to struggle, I will have exposure to the US and vice versa. Exposure to the S&P 500 also helps fill in the gaps where some sectors are under-represented in the UK. A good example is the technology sector. More tech businesses have a listing in New York than London.
Due to the challenges of investing overseas, rather than picking individual stocks, I would buy an S&P 500 passive tracker fund to build exposure to the index.
Some investors may be more comfortable with this approach than others. After all, there are several risks involved with buying overseas indexes like the S&P 500. For example, currency fluctuations could impact returns for UK investors. Some investors may also have difficulty understanding what the companies that make up the index actually do. Many do not have a presence outside the US.
Still, this is an approach I am comfortable using, considering the diversification it provides. I also like the exposure to different sectors and industries the strategy offers.
