If you want to start investing with £1,000, where should you put your cash? Here, I’ll explain what I’d do if I was starting to invest today. I’ll keep it simple — in my experience, that’s the safest way to make money.
What are the choices?
Ultra-low interest rates means cash savings are out of the question, in my view. Although I think it’s important to have a rainy-day fund in cash, savings accounts are useless as a means of building wealth.
I’d put my £1,000 into the stock market. Although it might seem risky coming so soon after March’s market crash, actually I think now’s a relatively safe time to buy.
The FTSE 100 is down by 20% from its 52-week high, and looks much more affordable to me than it did at the start of 2020.
Although the near-term outlook for the global economy is uncertain, I think we can be sure coronavirus will eventually be under control. Stock market investments should always be made for the long term — at least five years. On this timeframe, I’m confident the market offers decent value right now.
Should you buy the FTSE 100?
To get started, I’d open a Stocks & Shares ISA. These offer the same tax-free benefits as Cash ISAs and are covered by your annual £20,000 ISA allowance.
If you’re investing £1,000, then buying individual stocks is probably not the best use of your money. Even a small portfolio of 10 stocks could cost you £100 in trading fees. You’d be down by 10% before you even started to invest. I don’t think that’s a good idea.
What I’d do instead is invest in low-cost index funds. The most obvious choice is a FTSE 100 index fund. These are widely available and very cheap.
However, the FTSE 100 index is heavily weighted towards oil, mining and bank stocks. Together, these make up nearly 30% of the value of the index. Many of these companies have underperformed the market for years. I don’t see this as a great starting point for an investment right now.
How I’d start investing: FTSE 250
If you’re starting to invest for the long-term, perhaps to build up retirement savings, then I reckon you need a decent mix of growth and income. In my view, the best way to get this in the UK is to invest in the FTSE 250. You can do this easily and cheaply through a FTSE 250 tracker fund.
The FTSE 250 has risen by 70% over the last 10 years, compared to just 15% for the FTSE 100. In addition, both indices have paid dividends to investors each year.
This mid-cap index is made up of 250 companies that are smaller and often faster-growing than those in the FTSE 100. Despite this, they’re still large enough to be well-established and relatively safe investments.
For example, motor insurer Direct Line, soft drink firm Britvic, and retailer Dunelm are all members of the FTSE 250.
I think the FTSE 250 is a great way to profit from the future growth of the UK and global economies. It’s an area where I’m planning to increase my own investing exposure.
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Roland Head owns shares of Direct Line Insurance. The Motley Fool UK owns shares of and has recommended Britvic. 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.