Investing £1k, or any other amount, in today’s stock markets may seem risky as coronavirus fears grow, but there is always something for investors to worry about. The US-China trade war, Middle East tensions, Brexit and slowing global growth have all made investors cautious in recent months.
A good time to invest
Ironically, investing in the FTSE 100 when others are wary can be a good move. While markets may slip in the short run, they tend to recover quickly once the immediate danger has passed, and climb to fresh highs. So this could make now a good time to invest your £1k (or £2k, £5k, whatever) in the index.
The key to reducing risk is to leave the money invested for at least five years, and preferably much longer, to give time for stock markets to recover. Over the decades, the FTSE 100 has delivered an average annual return of 9% a year, including share price growth and reinvested dividend income.
Many people underestimate the importance of dividends, but if you reinvest them for growth, they will generate a substantial part of your total return. The FTSE 100 offers one of the most generous yields of any global index at 4.24% a year, far more than you will get on cash. Any capital growth from rising share prices will come on top of that.
Spread the risk around
Recent falls may make this a good time to buy an exchange traded fund (ETF) tracking the FTSE 100, or a range of income shares. Whichever you choose, be sure to invest inside a Stocks and Shares ISA, then you can take all your returns free of tax, for life.
Because of any number of global issues, you could experience a period of volatility, so the value of your money falls in the short run. However, it is important to remember that you are investing for the longer run, primarily for retirement, which could be 10, 20 or 30 years away. Over such a lengthy period, a short-term dip has little impact.
In fact, dips are good opportunities to buy, as you will pick up more stock at a reduced price.
Today’s low interest rates make FTSE 100 dividend stocks look particularly attractive, as you will struggle to get more than 1% on cash. This is driving demand for blue-chip stocks, which typically offer the most generous yields. You can access this simply and cheaply, by investing in a FTSE 100 ETF. I think the offerings from iShares and Vanguard are good value.
Get yourself a blue-chip income
Otherwise, do your research and build a spread of income-paying stocks. You can get yields as high as 8% a year from stocks such as housebuilders Persimmon and Taylor Wimpey, and tobacco giant Imperial Brands.
Investing your £1k in an ETF tracker or stocks like these can help you build your long-term wealth. If you top up your ISA when you have more money to invest, your long-term wealth should grow over time, even with a few bumps along the way.
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Harvey Jones 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.