If looking to build wealth from scratch, I’d start by buying shares in the best companies I could find. Getting my hard-earned cash into a Stocks and Shares ISA is the first step I’d take. My favourite account is offered by Interactive Investor for its low fees and extensive choice of investments.
The ISA allows me to pay no tax on my investment gains and dividends. In addition, I can add a massive £20k to my portfolio every year (if I have the cash).
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Pound cost averaging
‘Pound cost averaging’ is a low-stress way to invest for the long term. It involves investing a fixed amount of money into shares at regular intervals, regardless of an asset’s price.
In my opinion, this is the best way for beginners to invest because it removes the complexity of valuation analysis. Instead of complex financial statements and ratios, I can simply buy shares in leading UK and US companies regularly over decades. For example, Big Yellow Group, Games Workshop, Apple and Realty Income shares are all options I think could work with this strategy.
However, the risk here is that I buy when the market’s overvaluing the shares. That’s why it’s so important that I commit to the companies I choose for the long term. By buying my positions over an extended period of time, I’ll likely get them at various valuations, which is better for my returns.
The magic of compound interest
With just £500 to start, I’d be looking at saving a bit of every month’s pay and adding that to my portfolio. That will help the wonders of compound interest work more in my favour over the long term.
For example, adding £200 per month to my portfolio and starting with £500 with an average annual total return of 10% would lead to a portfolio worth £155k after 20 years. That’s if I reinvested all of my dividends. I think 10% a year is achievable because that’s the average annual total return of the S&P 500 from 1926 through 2022.
Either strategy can work, and it all depends on the preference of the investor. However, reinvesting dividends usually adds up to greater overall wealth over time.
I’m eyeing up JD Sports
At the moment, one investment I’m particularly bullish on is JD Sports Fashion (LSE:JD). The shares are selling at a low forward price-to-earnings (P/E) ratio of 10, and the company is valued at only 67% of its total revenue.
The average analyst price target for JD Sports indicates a potential 25% price growth in just 12 months (which isn’t guaranteed, of course). That said, the stock has just a tiny dividend yield of 0.67%.
I’m particularly fond of the company though because of its robust acquisition and international expansion strategy. It’s buying up companies in North America and capitalising on regional fashion trends.
However, management has to navigate a difficult cost of living crisis in its core Western markets. If high inflation persists, this could cause a significant and protracted drawdown on demand for its products. Risks like this are why it is so important that I diversify my portfolio fully.
I don’t own JD shares yet, but I’m considering buying them. It’s one such company I’d feel comfortable building up my stake using pound cost averaging.
