I recently thought about how I’d approach the task of investing £10,000, and I think that’s perhaps the perfect amount to get started. It’s enough to invest with a nice amount of diversification, without spreading your individual investments too thinly. And, whatever amount you have, I reckon long-term investing should always be in stocks and shares.
But what if you have £100,000 to invest? Does that make it easier or harder to get started? You might think you’ll never have that much. But if, for example, you build up a company pension over decades and then to transfer it to a SIPP to manage yourself, you could have easily have that amount, or more.
If you’re ever investing a sum as substantial as £100,000, the first thing I’d suggest is caution. With a smaller amount of cash, having to narrow the 2,000-or-so companies on the London Stock Exchange down to, say, around 10 shares, really helps you focus on the best.
But with £100,000, it would be a lot easier to go with thoughts like “that looks good enough, it’ll do” simply because you have so much more potential. You could quickly end up with 20 or 30 stocks in your portfolio and still have plenty of cash left. And if you carefully analyse each choice, you could find none of them would have made your top 10 if you’d been focusing on a more restrictive budget.
So my biggest recommendation is that you should examine every individual purchase as if you were only buying one stock, and only go for it if you’re genuinely convinced it’s the very best of those you don’t already own.
A big advantage of investing a larger sum is that it’s a lot easier to achieve diversification, both in terms of business sectors and global spread. So holding 20 or 30 stocks would be good, yes? And 50 even better?
Well, actually, no. Numerous studies have found the risk-reducing benefits of diversification quickly fall off the more you have. So, diversifying your first five investments provides a far bigger risk reduction than the diversification you’d get from your sixth to 10th choices. And that, in turn, is greater than the benefit you’d get from stocks 11 to 15.
Most investors, it seems, hold around 15 to 20 individual stocks, and that number probably provides close to the maximum realistic diversification benefits. Personally, I’ve never sufficiently understood and been convinced by enough companies to hold that many — and if I’m not fully convinced by a share I simply won’t buy it, diversification or not.
Don’t overdo it
You obviously have to decide on your own comfort level when it comes to diversification. For me, it would be around five to 10 stocks with £10,000, and 10 to 15 with £100,000. But whatever amount I had, I’d never buy a stock just to make up the numbers — that just leads to mediocre performance.
Having a larger amount would also lead me to a modest change to my strategy. While I really think the FTSE 100 is the best home for the bulk of my retirement investments, with more cash to spare I’d venture further out into the slightly risker realms of the FTSE 250 with some of it, knowing I had more time before I’d need that portion of my money.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.