How I’d invest £500 in UK shares in 2022

Investing a small amount of capital in UK shares can result in high commission costs. Zaven Boyrazian explains how to avoid this problem.

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With the stock market having a bit of a meltdown, 2022 presents an excellent opportunity to buy high-quality UK shares at some major discounts. But for those with only a small amount of capital on hand, investing directly into these companies may not be the best strategy, especially when starting from scratch.

So let’s take a closer look at how I’d go about investing £500 into the stock market today.

Building a portfolio of UK shares

In the grand scheme of things, that’s not a not a huge amount. While building a diversified portfolio of individual stocks is possible, the commission fees incurred will likely gobble up a large chunk of this capital. Yes, there are plenty of online brokers offering commission-free trading. But most incur hidden fees, and there are other expenses like stamp duty to consider.

That’s why if I was starting from scratch today with only £500, I would invest in UK shares through an exchange-traded fund (ETF). These funds mimic the structure of an underlying index and enable investors to own a small piece of each company inside. For example, if I buy shares in a FTSE 100 tracker fund, I’d effectively purchase a piece of every business in the lead index.

This approach has several advantages. Firstly, my portfolio becomes instantly diversified. Secondly, I only pay a commission fee once. And third, I can pretty much leave my investments on autopilot.

The downside is I have to pay an annually recurring management fee, and my portfolio will never be able to outperform the market.

But what if I were able to invest £500 every month, rather than just a lump sum? That’s where things get more interesting.

DIY investing

If I can spare such a chunk from my monthly salary for investments, picking UK shares becomes a more financially viable strategy. Of course, I could elect to simply top up my index tracker. But buying individual high-quality stocks opens the door to market-beating returns and, potentially, faster wealth generation.

Building a diversified portfolio doesn’t need to happen all at once. By consistently pouring in more capital, I can invest in a new business each month until my portfolio reaches a diversified state.

This approach obviously requires more effort. Stock picking demands dedication, research, and emotional discipline – somethings that are easier said than done. Yet even the slightest outperformance of the stock market can have an enormous long-term impact.

Historically, the FTSE 100 has yielded an annual return of around 8%, including dividends. That would be good, although of course, it’s not guaranteed. Investing £500 a month at this rate of return for 30 years results in a portfolio worth around £750,000. But if I can boost this annual return to just 12% through careful stock picking (admittedly a very tough call), then my portfolio would be worth more than double — at around £1.75m over the same time period!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

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.

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