Considering the outlook for the global economy, it may seem like a bad time to start investing in the stock market. However, I’m looking past this near-term uncertainty. The best shares to buy are often those trading at low levels after a sudden economic shock. As such, I’d invest £500 in a basket of these investments right now.
Best shares to buy
£500 is enough to get started investing, but I wouldn’t buy UK shares directly. Execution costs could eat up a substantial proportion of the investment. As well as commissions, expenses, such as stamp duty, which is usually set at 0.5% of the transaction value, and the spread between the buying and selling prices on offer, can’t be avoided.
These costs could make it impossible to build a well-diversified portfolio with just £500. So, instead, I would use investment funds.
Funds are a great way to buy a basket of shares with minimal effort and maximum diversification. What’s more, by using funds, it’s still possible to pick the best shares to buy now.
For example, some funds follow specific themes, such as UK or US stocks. Others invest in individual sectors. I own funds that specialise in technology and pharma stocks already.
While there are thousands of fund options to choose from, I think the best shares to buy now are UK stocks. Therefore, I’ve been concentrating on UK-focused funds recently.
The twin headwinds of Brexit and the pandemic have severely impacted investor sentiment towards the UK stocks over the last 12 months. And as investors have avoided the country, the valuation of UK equities compared to international stocks has fallen to a 40 year low.
While I’m concerned about the impact Brexit and the pandemic might have on the economy, I think the market has been oversold. Indeed, many UK shares have large international divisions, which will protect against any Brexit-driven economic downturn. At the same time, share price declines have pushed dividend yields up to extremely attractive levels.
The current dividend yield on the FTSE All-Share index stands at around 4%. That looks extremely attractive in the current interest rate environment.
The low valuation of UK shares, coupled with their income potential, are the two reasons why I believe these are the best shares to buy now. To gain exposure to these stocks, I’ve been purchasing a low-cost FTSE All-Share tracker fund. I have also built a selection of actively managed funds. A tracker is an easy way to invest a small lump sum. As these funds are designed to replicate the performance of an index, many only charge token fees, which makes them extremely appealing to actively managed funds.
That’s not to say I’m avoiding active funds entirely. Unlike trackers, active fund managers try and seek the best stocks to buy, rather than acquiring the whole market. This can mean they generate better performances and higher levels of income in the long run.
By combining these active managers with passive funds in a portfolio, I think it’s possible to achieve the best of both worlds.
Rupert Hargreaves 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.