The investment world can be a confusing place to navigate. There are thousands of stocks to choose from on the market as well as hundreds of investment funds. That’s without including international investments.
Trying to understand the ins and outs of it all when you first start investing can be quite daunting. So, to help you navigate the investment world, I’m going to explain how I would invest a lump sum of £5,000 in a Stocks and Shares ISA.
Laying the foundations
An initial investment of £5,000 is a sizable sum, but it isn’t enough to build a diversified portfolio of single stocks. In theory, you need around 20 to 30 shares in a portfolio to be truly diversified, which would leave you with just a couple of hundred pounds invested in each equity out of that total sum.
The other option is to use funds. These are an excellent tool for those who want to invest in the stock market but don’t know where to start. Investment funds are run by experienced individuals and pool investors’ money, allowing them to invest in a broad range of businesses. Investment trusts also operate the same kind of model, but have more options as to where they can invest.
If you are starting with £5k, I recommend owning two or three investment funds. These will form the foundation blocks of your portfolio, which you can add to at a later date.
One fund I think you should definitely include in the portfolio is a low-cost FTSE All-Share tracker. The FTSE All-Share is an index of the 600 largest companies traded in London. Together these companies account for around 90% of the UK stock market, giving you an instantly diversified portfolio at the click of a button.
As well as this domestic-focused index, I recommend investing in an international index fund such as the FTSE All-World UCITS ETF offered by fund management giant Vanguard. The index is a world tracker fund, but most of its assets are invested in developed markets because these are the biggest and most liquid. US stocks, for example, make up just over 50% of assets.
As well as these two equity-focused funds, I’m also going to recommend adding a bond fund to your £5,000 portfolio. Bond funds add a degree of stability to any portfolio as well as a steady income stream.
The prices of bonds also tend to move in the opposite direction to equities. So if the market crashes, bond prices should rise, offsetting the losses in the rest of the portfolio. There are hundreds of these to choose from, but I recommend picking a government bond fund as these tend to be the cheapest.
The bottom line
That’s how I’d invest a £5k lump sum in a Stocks and Shares ISA today. The combination of the three funds should allow you to build an internationally diversified portfolio with relative ease without incurring hefty commission charges. There’s also no need to research each stock in these tracker funds.
All you need to do is sit back, relax, and watch your money grow.
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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.