I think it’s a great time to invest in stocks and shares. And if I had my first £700 to invest, I would plunge right in.
But to realistically stand a chance of making a million from equities, that £700 would need to be the first of many investments. And I’d aim to make investing in stocks and shares a regular habit throughout my lifetime.
However, for that first sum of £700, I wouldn’t invest in the shares of an individual company. And that’s because the buying and selling costs would likely be an uneconomic percentage of the investment value.
On top of that, owning just one company’s shares would leave me 100% exposed to the risks in that single underlying business. If something goes wrong, my concentrated investment might take a big hit.
Mitigating risk by diversifying
Many investors overcome the concentration problem by investing in several different stocks at the same time. And that approach is called diversification. But with my first £700, I wouldn’t have the ability to do that.
So I’d consider investing in share funds instead. And they’re attractive because they offer diversification between many underlying stocks and shares. But there’s a decision to make about what type of fund to use. And, for me, that means choosing between managed and passive funds.
Experienced professional investors usually run managed funds, often with the help of a team. And they choose what shares to buy and sell within the fund and when. Usually such funds measure their performance against a benchmark, such as the FTSE 100 index, or the FTSE All-Share index, and others.
The managers will run the fund according to a strategy. And the aim will often be to beat the performance of their benchmark. However, many funds don’t. And they often underperform it. But, nevertheless, the ongoing fees are often fairly high because the fund is managed actively.
That said, not all actively managed funds underperform. So doing research is key. And if choosing a managed fund, I’d look for one that has a strategy I think capable of beating the general stock market.
Mimicking the performance of benchmarks
However, it’s easy to accidentally pick a duffer. So for my first £700 investment, I’d choose a passive, mechanically-run tracker fund.
Trackers aim to mimic the performance of their benchmarks. So for example, a tracker fund might focus on the FTSE 100. And another may follow the FTSE 250, and so on.
Trackers are great because they have much lower ongoing fees than managed funds. And within a bit here and there, they mostly do succeed in copying the performance of the markets they follow.
So I’d choose one and bung my first £700 investment into that. But that would just be the beginning. And with further sums I’d consider different tracker funds, the odd managed fund and, finally, the shares of individual companies as my funds grow in value.
There are no guaranties of making a million from investing in stocks and shares. And all equity investments carry risks as well as positive potential.
But that wouldn’t stop me trying. And I’d aim to learn all I could and hone my investment skills along the way to help stack the odds of success in my favour.
