With less than £10,000 to spare, could an investor build a rounded portfolio of blue-chip UK shares?
I think the answer is yes.
Here are a few factors such an investor might want to take into consideration.
Spreading the risk
First is a simple one: diversifying the portfolio to reduce the likely impact if one of the shares does badly.
A few thousand pounds is ample to do that.
Matching the portfolio to the timeframe
It can also be worth thinking about how long one wants to own the shares and what success might look like along the way.
Some investors might want some monthly passive income in the form of dividends. Others may like the idea of dividends, but not necessarily so frequently.
Other investors may want to be able to sell shares after a year or two if they suddenly need the capital for a different purpose.
Figuring out one’s objectives in the stock market and then designing the portfolio of UK shares to match that could help avoid disappointment.
Taking risk seriously
Still, sometimes disappointment does still arrive when investing.
All shares carry risks – but some more than others. The flipside of that is that some risky shares could potentially offer outsized rewards.
Each investor needs to decide what suits them best when it comes to striking the right balance between potential risks and rewards. But one thing I notice even from my own experience is that it can be tempting to focus more on potential rewards than on risks.
That can be a costly mistake.
Identifying possible long-term value drivers
UK shares can sometimes look cheap. Sure, the FTSE 100 index of leading British shares has hit all-time highs this year. But the UK index still trades on a lower valuation than its US counterpart.
One reason for that might be the sorts of companies on different sides of the pond. New York boasts a welter of successful, large tech companies. Meanwhile, the FTSE 100 is stuffed with companies in mature sectors.
So it can be helpful when assessing UK shares to ask where the long-term value might come from.
Could it be from dividends – and how sustainable do they look? Or might it be from business growth? After all, the UK may not have as many exciting growth shares as the US, but it still has some.
Or could it simply be from a mismatch between what a business may be worth over the long run and its current valuation?
One of the UK shares in my portfolio is B&M European Value Retail (LSE: BME) and this sort of analysis has helped me form an opinion on it.
I do see growth potential, both in the UK and continental Europe. But the growth prospects for mainstream UK retail strike me as incremental, not exponential.
The 6.2% dividend yield is certainly attractive for me. However, dividends are never guaranteed to last. B&M has been struggling with its fast moving consumer goods sales of late.
For me, B&M is attractive primarily because I think the share, selling for eight times earnings, looks badly undervalued.
It has a proven business model and as a discount retailer could actually benefit from a weak economy if shoppers tighten their belts.
