Very few of us have a spare £100,000 lying round. But building up a pot that big, or considerably bigger, is very much a realistic target for long-term investors buying UK shares. To develop a goal like that, I reckon it can help to think how we’d invest such a sum today.
It’s well beyond the annual Stocks and Shares ISA allowance of £20,000. So leaving it in the bank and transferring it annually to an ISA would take five years.
I see one good reason for doing that, and one bad reason. I’ll examine the bad reason first, and that’s saving tax.
Saving tax
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We could put the other £80k in a straight share-dealing account. Then we’d have to pay tax on any profit. But I’d rather make the profit and pay the tax, than not make the profit at all. It’s what lies behind the saying “Don’t let the tax tail wag the investment dog.”
Then there’s the good reason for drip-feeding a lump sum into shares over a five-year span. It can help even out stock market ups and downs. We’d buy more shares for the same money when prices are lower, and fewer when they’re higher. So our average price would be lower than if prices moved in a straight line.
Time, not timing
There’s an argument against that, though. Given that UK shares have steadily risen over long timescales, it can be more profitable to get as much money into shares as soon as possible. As billionaire investor Warren Buffett once said, “Time in the market beats market timing every time.”
Each investor must make their own decision. I’d probably invest all the money over a period of a few months. But I recognise I might lose out a bit if my timing is unfortunate.
Diversification
With £100,000 to invest, what would I actually buy? I consider diversification to be extremely important. I don’t want a big chunk of my money in a single sector if that sector should crash. I’ve owned housebuilder shares since before the current slump, for example, but as part of a diversified portfolio.
I struggle with finding enough individual stocks that I really want to buy. And I’ve never managed more than 10 at a time. So, £10,000 in each of 10 stocks, and I’d start with a couple of investment trusts.
Investment trusts
Investment trusts spread their cash across a range of investments, with a specific strategy. For example, I bought City of London Investment Trust, which targets income (and has raised its dividend every year for 56 years now). And Scottish Mortgage Investment Trust, which invests mostly in Nasdaq growth stocks. That’s wide diversification, from just two investments.
The other eight slots would be filled with mostly dividend shares, picked from across the sectors. I’d definitely hold a FTSE 100 bank, an insurance company, and a housebuilder. One of the big miners would probably make it, plus a pharmaceutical stock. Then add a top supermarket, very likely Tesco, and I’d be a long way to filling my £100,000 portfolio.
