How I’d start investing in FTSE 100 stocks with £500
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If I wanted to begin investing in the stock market, I think now would be a good time. The FTSE 100 index is going from strength to strength. In fact, just yesterday it created a new one-year high, closing at 7,340. I think I would be likely to make gains more quickly at such a time.
What is my risk profile?
So which FTSE 100 stocks would I buy if I were starting out investing today? The answer depends on my risk profile. Typically, we have higher risk profiles when we are younger. This is because there are many years of earning ahead of us and our capacity to absorb any potential setbacks is higher.
I think that as we grow older, it is wiser to be more conservative. But that does not always have to be the case. If I have enough savings with me, I can still take some risks with an initial investment of £500. The key word here is ‘some’.
I think my initial investment can be an exercise in confidence building. So I am better off being moderate in my risk taking. I would not want to be put off by the stock market just because I was unable to make the right assessment of stocks.
Why I’d focus on FTSE 100 stocks
This is why I think it is a good idea to restrict myself to FTSE 100 stocks. The index is made up of some of the biggest companies. Many have been around for a long time. Often they are in good financial health and many are paying good dividends too. As a result, risks are minimised and the upside could be big. I have to underline that stock market investing is always subject to some risk.
Among FTSE 100 stocks, my specific investments would be based on the time horizon I have in mind. For instance, I might want to invest for three years in the hope of making capital gains that can fund a big purchase planned for later. Or I might want to invest for the next 10 years and then reinvest it perhaps with my retirement in mind. Or maybe I just want to start earning a stream of passive income.
Multiple options available
Whatever my investing goals may be, there are FTSE 100 stocks that cater to them. For the next three years, for instance, cyclical stocks could be the best purchases, in my view. Think of recovery stocks like travel, hospitality, banking, and non-essential retail. The economy is expected to be on the upswing through much of this time, so these segments could benefit.
If I have a longer-term time frame of 10 years, I would buy stocks that have a history of delivering strong returns over time. These can include segments like pharmaceuticals, construction, and utilities. In fact some of these stocks can also double-up as good income stocks.
For instance, utilities are typically quite consistent with dividends. And some construction stocks have a history of growing dividends fast, so dividend yields on the initial investment can look pretty good over time too.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.