If I were just starting out as an investor today with a lump sum of £500, I would start investing in stocks using a diversified approach.
Investors have a range of options to choose from when it comes to picking a broker to help them invest in the market. Long gone are the days when brokers would charge a large percentage of each transaction in fees. Some brokers still charge a fixed price, but the range of those offering low- or zero-fee trading is growing.
This has made it much easier for investors to deploy smaller sums. Indeed, 20 years ago, investors with only £500 would struggle to find a broker to take them on, as account minimums and high trading fees were commonplace. Now there is a whole range of options.
Thanks to the range of options, investors can build a diversified portfolio with just a few clicks. And this is the approach I would use to start investing in the stock market with £500.
A strategy to start investing in stocks
The easiest way to quickly build a diverse global portfolio is to acquire an index tracker fund. This is one option I would employ in my £500 portfolio. I would earmark around 50% of the cash to invest in a global tracker, such as the FTSE Global All Cap Index Fund from Vanguard.
There is a simple reason why I would use this approach. Investing can be challenging and picking stocks even harder. Even the professionals get it wrong regularly.
Finding good investments can also be time-consuming and requires a certain level of accounting know-how. By investing in a low-cost global passive tracker, I can get around some of these risks. I do not have to worry about picking stocks or figuring out if a business is cooking the books.
If the global economy does well, equity markets should reflect that. A global tracker is the most straightforward way to invest in this theme.
Stocks and shares
With the rest of the portfolio, I would invest in some of my favourite companies. I would stick to those that I know best, with products I use every day. Three examples are Visa, Diageo and Tesco.
I know how these businesses make money, I use their products and services, and they dominate their respective markets. Even though picking stocks can be challenging, I think sticking with the businesses I know and use will help improve the odds of success.
Of course, there are plenty of risks with this approach. Any one of these companies could start to struggle overnight. An array of challenges, such as rising costs, competition and additional regulations, all pose a threat to growth.
That is why I would buy these stocks alongside a global tracker. I think this approach would allow me to invest in my favourite companies while minimising risk in my £500 portfolio.
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Rupert Hargreaves owns shares of Diageo. The Motley Fool UK owns shares of and has recommended Visa. The Motley Fool UK has recommended Diageo and Tesco. 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.