With £2,000 right now I could begin to build a diversified portfolio with the potential to deliver meaningful returns over the long haul. Hunting for UK shares to buy now is high on my agenda.
I decided long ago to invest at least £1,000 in every stock chosen. Lesser sums make the transaction costs onerous when buying and selling. For example, the broker fees tend to be fixed whatever sum I invest. So a larger investment makes the cost a smaller percentage of my capital.
A bedrock backed by big-caps
If £2,000 was my first investment, I’d likely split it down the middle and diversify between two different stocks. For example, I could choose companies from the FTSE 100 index such as Barclays, Rio Tinto or Tesco. But mature businesses will be unlikely to deliver the growth I’m looking for in my portfolio.
There’s nothing wrong with establishing a bedrock of big-cap investments as part of a wider strategy. However, I’d prefer to sort out that part of my portfolio by investing in tracker funds, managed funds and investment trusts. Such vehicles will give me wide diversification across many underlying businesses at a low cost.
And I’d expect investments backed by big-cap stocks to deliver steady-but-pedestrian long-term returns. That’s not guaranteed, of course, because shares can go down as well as up. However, I’d aim to get the best from my approach by compounding gains along the way, such as reinvesting dividends. And many funds offer automatic dividend reinvestment if I select the accumulation version of the fund rather than the income version.
But even if my collective investments don’t provide automatic dividend reinvestment, share account providers often offer a cheap dividend reinvestment option. So, whether I’m with Interactive Investor (II), Hargreaves Lansdown or others, it’s worth asking for the service. And I’d need it for investment trusts, for example, because they usually just pay dividends into my share account.
Where I’d look for UK shares to buy now
However, my £2,000 investment would target UK shares to buy now among the universe of smaller companies, such as those found in the FTSE SmallCap Index or on the FTSE AIM market. I reckon smaller companies often have younger and more dynamic underlying businesses with plenty of room ahead to grow. And sometimes, small businesses grow surprisingly fast leading to decent returns for shareholders.
But the flip side of small-cap investing is shares can move fast in the wrong direction as well. If a business fails to perform or runs into operational trouble, small-cap shares can plunge so fast that there’s no time to react by selling the stock. In general, I think small-caps often come with more growth potential than big-caps and greater downside risks.
Nevertheless, I’m prepared to embrace the increased risk in pursuit of greater and faster returns. And I’d aim to mitigate some of the risks by diversifying across several different stocks and by keeping my positions modestly sized. I’d also choose carefully after doing thorough research. So my £2,000 investment would be the first step in constructing a larger portfolio featuring several small-cap stocks.