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Investing £10k in index funds vs FTSE 100 stocks

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Knowing where and how to best invest your hard-earned cash can be a challenging decision.

Successful investors such as Warren Buffett think diversification is key, and I’m not about to argue.

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If you’ve got a large lump sum, such as £10k, to invest, then I would advise that you diversify your portfolio by choosing a mixture of index funds, FTSE 100 stocks, and government bonds. Then within your FTSE 100 stocks, diversify again with a selection of sectors such as pharmaceuticals, defence and consumer goods.

Index funds have great appeal to stock market beginners because they’re a simple path to investing, without the worry of buying a stock that could lose you money. An index fund tracks an entire index, such as the FTSE 100 for the top 100 UK companies by size, or market capitalisation.

If you’re interested in purchasing shares in emerging markets, the FTSE All-World Emerging Index might be an option for you.

Investing in bonds is generally considered safe, but interest rates are so low that they’ve become very expensive and lost their appeal. However, they can be useful to create a hedge against stock market market performance. 

BAE Systems

In terms of individual stocks, two of my favourites this year are BAE Systems (LSE:BA) from the defence sector and Astrazeneca (LSE:AZN) in pharma. I think defence is a good sector if you’re worried about world conflict, and pharma is always necessary as we battle against illness and disease.

BAE Systems has defence, security, and aerospace operations throughout the world. This FTSE 100 stock has a price-to-earnings ratio (P/E) of 18, a dividend yield of 3.9%, and earnings per share of 31p. Its recent trading update was relatively positive and is on track to meet guidance for the full year.

The government has increased its funding available to defence contractors to entice them to aid in cybersecurity. This includes BAE, which is assisting government agencies both at home and abroad.

At almost 4%, its dividend yield is good, and I think this makes BAE a good addition to a portfolio for the income it will provide.

Astrazeneca

Astrazeneca is also a FTSE 100 stock and a highly regarded pharmaceutical company. It has cardiovascular and respiratory drugs in use throughout the world and increasing growth potential in emerging markets.

It recently posted its fifth successive quarter of rising revenues, has a 3% dividend yield, earnings per share are £1.32 and its P/E is very high at 55. The high P/E shows that much of the value of this company has already been priced in by shareholders.

This may be offputting for many, but I still like this share because of its defensive nature and run of success at bringing drugs to market. 

AstraZeneca is committed to investing more in China, its second-largest market. In light of this, it has teamed up with China International Capital Corporation to launch a $1b fund focused on healthcare. This includes creating a new AI innovation centre, marketing oncology drugs with Sun Pharma and upgrading its Shanghai research and development operations.

If you’ve £10k to invest and you’re a beginner to stock market investing, then I don’t think you can go too far wrong by diversifying your portfolio into a mixture of assets. This keeps things interesting and reduces the risk you’re exposed to.

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Kirsteen has no position in any of the shares 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.