How would I invest £7,000 right now in UK shares? One option would be to repeat the investment I made many years ago when first putting a similar sum in stocks.
Earlier in the century, I invested a lump sum into a low-cost index tracker following the FTSE 100. And I reckon that’s a decent option for today too.
How I’d invest in UK shares
I’m bullish on the long-term prospects of the FTSE 100 index. It’s packed with the UK’s largest public limited companies. And many of them are well-established, well-financed and well-respected businesses. There’s also a high element of cyclicality in the index with big representation from firms in sectors such as finance, mining and oil production.
With the Covid vaccination programmes rolling out at pace, I reckon there’s potential for a big snap-back in economies in the UK and around the world. And that could lead to cyclical businesses doing well. I think the FTSE 100 has the potential to move higher in the short term. And it’s hard for me to imagine the index being near its current level, say in 20 years from now. I expect it to be higher.
Meanwhile, I view the FTSE 100 index as a big dividend payer. Historically, the yield has been above 4%. So I’d roll those dividends back into my investment in the years ahead to help compound the returns. Of course, I could be wrong about the Footsie’s prospects. Nevertheless, I’d make an investment in the FTSE 100 a core part of my diversified portfolio now.
However, I’d be more adventurous than before. These days, I’d spread my £7,000 between several different investments. I’d choose other trackers, such as those following the FTSE 250 mid-cap index. I see that one as more oriented to growth than the FTSE 100. And I’d target a tracker following small-cap stocks too.
The principle of diversification
One key principle worth following is diversification. So I’d aim to spread my money between several different investments rather than putting it all in one. As well as tracker funds, I’d keep a watchlist of quality shares. Many investors aim to invest in the shares of individual companies in the pursuit of higher returns. So, after building a core in my portfolio with funds, I’d branch out into stocks as well.
For example, I think the long-term potential of online fashion clothing retailer ASOS looks interesting. As the traditional high street retailing sector continues to crumble, ASOS is one of the companies buying up well-known high street brands. However, one risk for shareholders is that the valuation looks quite full.
I’m also keeping an eye on other great British businesses such as actuator and flow control company Rotork. And I like the look of fluid movement control specialist IMI. Both those firms score well against quality indicators. But they’ve both attracted full-looking valuations that could bite shareholders if forward growth fails to materialise as expected.