If you have £500 to invest and don’t know where to put this money, I highly recommend investing these funds in a low-cost FTSE 100 tracker. There are a handful of reasons why I believe this is the best course of action for the beginner investor.
Why the FTSE 100 is best
First of all, it’s quite straightforward to make this trade. There are plenty of low-cost FTSE 100 tracker funds to choose from. Most charge less than 0.5% per annum in management fees, so you don’t have to worry about charges eating up your hard-earned money.
What’s more, while some funds might only deal once per day, you can also gain access to the market with exchange-traded funds. These can be traded at any time when the market’s open.
Another benefit of investing in a FTSE 100 tracker is the diversification it provides. But £500 isn’t enough to build a diversified portfolio of individual stocks.
You’ll need at least 30 stocks in different sectors and with most brokers charging around £10 per trade in commission, this could mean paying virtually all of your savings in trading fees. Even if you are not paying commission, £500 split between 30 stocks is just £16.66 invested in each company.
Buying the whole FTSE 100 is a much better alternative. At the click of a button, you’ll be able to get exposure to 100 of the largest companies in the world, across virtually every market sector.
This diversification is also good for income seekers. At the time of writing, the FTSE 100 supports an average dividend yield of 4.5%, which is an aggregation of all the constituent’s distributions.
I think this method of investing for an income is much more sensible than trying to pick dividend stocks. There’s virtually no chance that the whole FTSE 100 will announce a dividend cut in one go — a risk you’re always going to have if you pick single dividend stocks.
This diversified basket of blue-chips and income stocks is, in my opinion, a great place to start your investing journey. Once you have invested in the FTSE 100, putting in the foundations of your portfolio, you can start looking at other potential investments. With a steady stream of income from the FTSE 100 to help you, it’ll be easier to build your portfolio and wealth over the long term.
The bottom line
So, that’s why I think an FTSE 100 tracker is a fantastic first investment if you have just £500 to invest. You can buy an FTSE 100 tracker easily online with almost no additional costs. This will give you an instantly diversified global income portfolio and provide a base to build off.
I think there are few, if any, other investments that offer the same level of income and diversification at the click of a button.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.