So you’ve decided to start regularly investing in the stock market. The first thing I’d say is: “Well done!” For one thing, owning shares is a proven way of amassing long-term wealth. For another, as markets are currently depressed, now could be a great time to start. Here’s how I’d invest £500 per month starting right now.
I’d use a Stocks and Shares ISA
I’d start by opening a Stocks and Shares ISA. You can invest up to £20,000 in the current financial year. All returns are free of income tax and capital gains tax.
Over the years, your ISA allowance could potentially save you tens of thousands of pounds in tax. This tax saving will effectively turbo-charge your investment returns.
How I’d invest £500 per month
Share-dealing costs are very reasonable these days. This makes it practical to invest £500 per month in a company. You could build a portfolio of 12 stocks in your first year of regularly investing.
I personally favour picking individual businesses to invest in, rather than paying a professional fund manager to trade stocks on my behalf. As with avoiding tax by using a Stocks and Shares ISA, I think it’s a good idea to avoid the charges of a fund manager. These charges erode returns over the long term.
Businesses I’d buy for my Stocks and Shares ISA
I put the emphasis on ‘businesses’, because when you buy shares, you’re literally buying a share of each business. You’re a part-owner of its assets. Its assets generate profits. And profits often lead to the distribution of regular cash dividends.
By using your dividends to buy more shares, you become a bigger owner, entitled to a bigger share of future dividends. This snowballing effect of reinvesting dividends is known as the ‘miracle of compounding’. It’s one of the most powerful forces in building long-term wealth.
With this in mind, I’d start to invest £500 per month by focusing on well-established businesses with a history of paying dividends. I’d also look at a few other things, because I’d want to try and ensure my Stocks and Shares ISA is full of really strong, high-quality businesses.
What to look for
For a business to deliver superior rewards for its shareholders, it has to be capable of growing its revenues, profits, and dividends over the long term.
I’d focus on industries likely to enjoy growth in the coming decades. For instance, healthcare should benefit from ageing populations, as well as rising living standards and health spending in developing markets.
I’d also look for companies with competitive advantages, such as powerful brands or valuable patents. These advantages often show up in higher profit margins than rivals.
Finally, I’d look for companies with net cash or modest debt. This is because a strong balance sheet can help a company through difficult economic times.
A great time to invest £500 a month
As I mentioned at the top of the article, now could be a great time to start by investing £500 per month in the stock market. There are strong, high-quality businesses around, on offer at prices investors haven’t been able to buy at for years. I’d go as far as to say these could be some of the best investments you’ll ever make!
