The Motley Fool

How I’d start out investing with £5,000 right now

You don’t need a lot of money to start investing in shares. If you can put away just a few tens of pounds per month, there are low-cost regular investment brokers out there that can make it worthwhile.

But what if you suddenly came into £5,000 and decided to invest it for your future? It’s a problem we’d all love to have.

Debt

First up, where to invest the cash would not be my first concern. No, the first thing I’d look at is what debts I have, because there’s no point investing in shares that might return something like 6% per year over the long term when holding credit card debt costing 30%, or personal loans running at 10% or more.

So I’d pay off all non-mortgage debt before I buy my first share.

Ready to open up a brokerage account now? Not quite yet. Next up is having a little bit of cash put aside for short-term emergencies. Have you seen those payday loan ads where the freezer fails or the car breaks down, and the hero has to borrow from a short-term loan company? Effective annual interest rates can reach 1,000% or more.

You don’t want to be that person, so have a little short-term cash saved too. OK, that’s all sorted, so what are you going to invest in?

Shares

A lot of people would recommend an index tracker, for example one that emulates the performance of the FTSE 100. They’re great, but I want more active involvement myself.

Investment trusts are often recommended for beginners, and I think they’re great. But they can feel they’re like taking me a step away from the sharp end of my investments, which is where I really want to be.

So my investments have mostly been directly in shares, and I’d probably split the £5,000 into five equal portions (assuming I didn’t actually need to use any for paying debts or putting aside as short-term cash). £1,000 is easily enough for a single stock purchase in these days of low-cost dealings.

If you’re young you’ll have a long enough horizon to handle a bit more risk and can go for smaller companies with greater growth potential, if you want. But I still think a portfolio should start with a handful of mature blue-chip stocks from the FTSE 100, paying decent dividends.

Top 5?

I’d pick from different sectors, and I’d almost certainly have some Royal Dutch Shell shares in my portfolio (I don’t hold any at the moment, but I intend to buy some soon). I’d go for a big bank too, and my current choice is Lloyds Banking Group. Brexit makes banks uncertain, but I think they’re cheap at the moment.

Right now I think I’d buy a housebuilder too — Persimmon shares look cheap to me and offer forecast dividend yields of 12%.

After that, I’d be tempted by AstraZeneca, whose prospects I think are finally turning. I’ve always liked insurers too, and I hold Aviva, but if I didn’t fancy two financial stocks out of five, maybe my favourite in the utilities sector, National Grid, might fit the bill.

Then I’d start saving more cash and enjoy researching my next investment.

Your 10 Step Guide To Making A Million In The Stock Market

A world-famous investor once said “Be greedy when others are fearful”. Here at The Motley Fool, we firmly believe that taking a different investing approach could also lead to significant potential gains for you. Get on the inside track today by reading our “10 Step Guide To Making A Million In The Market.” Click here to download for your FREE copy now.

Alan Oscroft owns shares of Aviva, Lloyds Banking Group, and Persimmon. The Motley Fool UK has recommended AstraZeneca and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.