If you’re just starting out on your investing adventure, there are certain places your money should go before you buy individual shares, in my opinion.
First, you should definitely make sure you have a couple of months’ worth of salary as an emergency fund – at least £1,000 or so.
Second, you don’t want to be investing money you need for rent, bills or any of the household expenses that allow you to live. There’s no point building up a healthy amount in a Stocks and Shares ISA if you have to sell it off to afford everyday things like petrol, phone bills, or your Netflix subscription.
The place I think beginner investors should put their first spare few hundred quid is in index funds.
Whether you invest your money tracking the performance of the UK’s richest 100 companies, represented by the FTSE 100, or the 500 largest US companies, with the S&P 500, you’ll have the opportunity to watch your investment grow at minimal risk.
Some of the best index funds even pay a strong dividend that beats the rest of the market. What’s not to love?
FTSE, S&P, you choose
Passive investing like this is extremely popular because it take zero work and is a low-stress, leave-it-alone investment.
Index funds also have diversification. That means if one sector starts to struggle, your investment is protected by its wide spread across industries.
You win when the index of shares goes up, and you lose when the index goes down. This is a long-term investment: you’ll need to be able to take daily or monthly losses in your stride, hold on, and hang on for a number of years to really see the benefit.
The most popular index funds
You’ll see the most popular index funds are called ETFs, or exchange-traded funds. They are run by investment companies like Vanguard or Blackrock, and they effectively own a piece of each of the 100 stocks in the FTSE 100, or each of the 250 stocks in the FTSE 250, and then track the value of all of them over time.
This industry loves to put things into mystifying acronyms like ETF or UCITS. Google is your friend here, but you really don’t need to worry exactly what these things stand for.
Focus on getting the right fund for your risk profile. If you want steady and stable, the FTSE 100 is for you. If you’re want more risk-reward, try the FTSE 250.
Just like shares, each fund comes with its own shortcode (VMID, CUKS). You may find there is more choice on a pay platform like Hargreaves Lansdown or AJ Bell than with free platforms like Freetrade.
These three index funds always top the charts as the most popular: the Vanguard FTSE 250 UCITS ETF (VMID), which tracks FTSE 250 companies; the iShares Core FTSE 100 UCITS ETF (ISF), which tracks the whole of the FTSE 100; and the iShares UK Dividend UCITS ETF, which focuses on really high dividend-paying UK stocks and shares. It comes with a 6.6% dividend that beats the UK market comfortably.
Just watch out for fees. These are usually called “annual management charges” and are the running costs you will pay the investment company every year. Vanguard’s VMID is so popular because of its low 0.1% yearly fees. Higher costs will eat into your profits.
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.