If you’re just starting out on your investment career, you’re probably surrounded by confusing recommendations. I often get asked things like “I have £1,000, does it make sense to get into shares?”
I ask a few questions. Firstly, I want to know about investing horizons and what the would-be investor wants to invest the money for. If it’s, say, to buy a new car next year, I say no, go stick it in the bank.
And is it a one-off, or do they intend to add to it bit by bit over the years? A long-term commitment is what’s really needed. Plenty of times I’ve seen people have a go at “this share lark” then lose interest when they don’t make quick profits — or worse, experience short-term falls.
Distant horizon?
But, with a new child, a few hundred to invest, and plans to carry on adding a bit every month to get them started well in life? Yes, definitely. I reckon that’s about the perfect scenario for investing in shares.
Is £1,000 enough cash to get started? These days, with stockbrokers’ dealing charges so low, yes it definitely is. If you follow the Motley Fool approach, you won’t be wanting a stockbroker to manage your money for you or provide advice, so what you need is an execution-only broker.
They’ll typically charge you around £10 per trade (plus 0.5% stamp duty). Some offer services that are even cheaper, though they can be restrictive on which dates per month you can trade. Though my preferred minimum investment amount in order to keep charges proportionally low is £1,000, I reckon even £500 is a reasonably cost-effective amount these days.
Stay cool
What do you do once you have your execution-only broker account open and your £1,000 transferred and ready to invest? The first thing to do is… don’t rush.
Instead, take your time and decide on what strategy to go for. You might perhaps prefer smaller growth shares (which I used to go for when I was younger) but which typically carry higher risk. Or, like the older me, you might seek reliable dividends for long-term cash generation.
One drawback you’ll face when you’re starting out is that it will take some time to build up some diversification, and that can leave your starter portfolio at greater risk of falling in value should one individual share lose ground. If your only share loses 10%, your portfolio is 10% down — but if someone else has it among 10 equally distributed investments, they’ll be down only 1% overall.
Spreading risk?
One option is to build up your cash (by monthly transfers of modest amounts) until you have enough for two or three purchases, and then you can go for some diversification right away. Alternatively, if you’ve identified a share that you’re happy represents good value, you could just swallow the short-term risk and go for it.
That latter covers the key point to building a successful portfolio — buying good quality shares when you’re convinced they’re selling at an attractive price. Oh, and invest with a decades-long horizon, of course, and you should easily even out the ups and downs and set yourself up for a comfortable future.