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.
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!