If I wanted to invest £500 now, I’d head straight for the stock market.
However, with Covid-19 bubbling up in a second wave, many might think I’m nuts. But I know that many successful investors, such as Warren Buffett, have made some of their most lucrative share purchases in troubled times.
Why now is a good time to invest £500
When the general economic storm clouds are gathering, share valuations can become depressed. So, if we invest in shares and share-backed vehicles such as funds, there’s a good chance we’ll get good value for money. Then, when the good times roll again, company earnings can rise along with valuations and share prices to drive a satisfactory return for shareholders who were brave enough to invest.
Just last Monday, prime minister Boris Johnson announced the government’s new ‘traffic light’ alert system for local restrictions relating to the coronavirus. The medium, high and very high classifications will lead to measures such as restrictions for household mixing. And under the Very High alert level, pubs and bars will have to close. Local leaders will also have discretionary powers to order other non-essential businesses to shut as well.
That all sounds worrying because it will start to affect the economy again. But at least the government isn’t ordering a national lockdown as we saw in the spring. Indeed, I reckon things are different this time because we have more treatments for Covid-19. My expectation is the economy will grind on. I reckon most businesses outside the hospitality sector will keep on trading, and at some point, Covid-19 will begin to fade. Perhaps the mass distribution of a vaccine down the line will be the event that gets the world back to normal.
In some ways, conditions are perfect for considering an investment in the stock market. After all, there’s always something to fret about and that’s why we have the aphorism ‘stock markets tend to climb a wall of worry’.
How to get the biggest bang for your bucks
But it’s quite difficult to invest £500 in the shares of an individual company. Transaction costs such as the bid/offer spread and dealing charges could render the transaction uneconomic. Thankfully, you don’t have to. Indeed, you can make a successful and worthwhile investment by putting money into managed funds, investment trusts and trackers.
Collective funds are great because they automatically spread your money over many underlying individual companies’ shares. And diversification like that is valuable because it tends to reduce your risk. Funds are accessible too. Many will allow investments as small as £25 at low cost. So they are ideal for you to invest £500.
I’d set up a Stock and Shares ISA to maximise the tax advantage from holding your investments. Then, within it, I’d select three or four funds to spread the £500 between. If you choose the accumulation version of each fund rather than the income version, the dividends will automatically be rolled back in to help compound your investment.
Three investments I’d consider right now are HSBC FTSE 250 Index, Vanguard FTSE 100 Index, and UBS S&P 500.