With the April ISA deadline quickly approaching, investors only have a few months to snap up FTSE shares, maximising their annual allowance. But even for those with just £5k to spare, that’s still more than enough to kick start a portfolio on a lifelong journey to wealth and riches.
Obviously, the stock market is a complex machine. And for novice investors, getting started can be quite a daunting task. So, with that in mind, let’s explore how I would go about building a beginner portfolio if I were starting from scratch.
Exploring options
Arguably, the easiest way to start an investment journey is simply buying shares in an index fund. These track benchmarks like the FTSE 100 and FTSE 250, mimicking returns while putting portfolio management on autopilot. Such services aren’t free. However since these portfolios are largely passively managed by computers, the annual fund fees tend to be less than 0.1%.
The problem with this is a lack of control. Index investors cannot achieve market-beating returns. And depending on their financial goals/risk tolerance, picking individual stocks may be more appropriate.
That £5,000 can realistically be split across 10 stocks when not using investment funds. Investing around £500 per position grants a bit of diversification while keeping transaction costs as low as possible.
But what sort of FTSE stocks should be included to start off a brand-new portfolio?
Picking the right type of shares
Investors usually get put into one of two camps – growth and income. The choice depends on the individual. Typically, the latter provides more consistency, while growth usually comes with higher volatility but the potential for greater returns. There are always exceptions. And while it’s easy to forget, there’s nothing stopping a portfolio from having the best of both worlds.
In my experience, it’s often sensible to have a combination of dividend-paying sector titans and fast-expanding industry disruptions. This blends stability at the core of a portfolio with room for expansion at the edges. The amount of capital allocated to each class of stock would then be down to an individual’s appetite for risk.
Assuming a 50/50 balance is desired, that would mean investing £2,500 in income stocks and the other £2,500 into growth.
What are the best stocks to buy now?
Looking across my own portfolio, some of my favourite picks today on the income side include Greencoat UK Wind (LSE:UKW), Londonmetric Property, and Safestore Holdings. Meanwhile, for growth, I’m paying attention to Alpha Group International, Kainos Group, and Games Workshop.
Looking at wind farm specialist Greencoat, there are a few things I like. Rising interest rates have dragged down its valuation so it’s trading significantly below its net asset value. Meanwhile, demand for green electricity continues to rise, translating into reliable and consistent cash flows. With that in mind, it’s no surprise the firm has raised dividends nine years in a row.
Of course, investing in wind turbines isn’t cheap, and management has become dependent on debt financing. In fact, the group’s leveraged balance sheet is one of the reasons why the stock price has been hammered in recent years.
Greencoat appears capable of managing its debt load. However, the cost of capital is now higher, and securing future growth is going to be more challenging than before. Nevertheless, it would be among the first companies I’d consider.
