The stock market is an attractive place for a lot of investors – but what if one wants to start with a limited budget? Most people don’t have a large amount of money to risk in investments. But they would still like the financial reward of a good investment. Here’s how I would invest £500 if that was all I could pump into shares right now.
Focus on capital preservation not upside gain
Warren Buffett is a multi-billionaire investing genius. He also started investing in the stock market with a very small sum of money so his advice is especially relevant here. Buffett summarises his rules of investing as follows, “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1”.
That sounds obvious, but many people don’t behave like that. Especially with a small sum to invest, it can seem that the only way to do well is by investing in shares with high returns projected. But such shares can be risky. For example, maybe a share has a high dividend yield because the market thinks the dividend is unsustainable and may be axed.
So if I wanted to invest £500, I would sacrifice higher returns that carry higher risks and focus on companies that look more stable, even if they were boring. For example, a company in a stable industry with a strong ‘moat’ (high barriers to entry and pricing power) would catch my attention. I’d consider a share such as British American Tobacco or Unilever, which might not offer the best returns in the market, but have a decades-long history of business success.
I’d minimise trading costs
With a limited amount to invest, even fairly small trading costs could have a significant impact in percentage terms. So I would pay attention to minimising such trading costs. First I would look for the lowest costs from a reliable operator. Secondly, I would try to avoid jumping in and out of positions more than necessary. Fewer trades mean lower trading costs.
I would also try to concentrate my investment. In general, I see diversification as good for safety. But to invest £500 only, heavy diversification could eat up a lot of the money in costs. So I would consider buying just one or two companies to start – but I would choose them very carefully.
Don’t rush to invest £500
Money burns a hole in a lot of people’s pockets. It’s easy to look at a chart of a share that has outperformed, like Tesla this year, and conclude that missing a golden opportunity at the right moment is a massive lost opportunity.
The truth is that there are always good opportunities – the challenge is spotting them before, not after, they become obvious. Instead of giving in to the fear of missing out, if I wanted to invest £500 only, I would take time to consider my options. It may take weeks or months. I would study the market closely, research companies and find out all I could about the shares I was thinking of investing in. I would do research to avoid shares that only look good on the surface, and only invest when I found a share that I really considered great after doing more research. And I would always remember warren Buffett’s Rule No. 1: never lose money!
christopherruane owns shares of British American Tobacco. The Motley Fool UK owns shares of and has recommended Tesla. The Motley Fool UK has recommended Unilever. 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.