When you first open a Stocks and Shares ISA, all the investment options can be a bit daunting. Typically, within this type of ISA, you have the choice of investing in stocks, funds, investment trusts, exchange-traded funds (ETFs), and more. And within each of these asset classes, there are often hundreds or even thousands of options to choose from.
Here, I’m going to explain what I’d do (with the benefit of over 20 years’ investing experience) if I was investing my first £1,000 in a Stocks and Shares ISA today. Here’s how I’d invest £1k.
The best way to invest £1,000
I’m a big fan of investing in individual stocks. I believe that owning a diversified portfolio of high-quality stocks is one of the best ways to generate wealth over the long term.
But here’s the thing. If I was investing my first £1,000 in a Stocks and Shares ISA today, I wouldn’t actually buy individual stocks. The reason for this is that when you own individual stocks, you face stock-specific risk (ie every stock has its own risks).
This can be reduced significantly by owning a wide range of stocks (20+). However, for an investment of £1,000, it’s generally not efficient or cost-effective to own this amount of stocks when you consider that most investment platforms still charge trading commissions to buy stocks.
Even if the commission is only £5 per trade, you’re still looking at commissions of £100 to put together a portfolio of 20 stocks. That’s 10% of your investment.
How I’d invest £1,000
So what I’d do with my £1,000 is invest it in a fund. With a fund, your money is pooled together with the money of other investors and managed by a professional fund manager. The money is typically spread over lots of stocks, reducing stock-specific risk significantly.
The fund I’d go for, if I was investing my first £1k, would be Fundsmith Equity. This is one of the largest and most popular funds in the UK. It invests in great companies all around the world. Top holdings currently include the likes of software giant Microsoft, payments company PayPal, beauty powerhouse Estée Lauder and social media company Facebook.
This particular fund has a great track record. Since its launch a little over a decade ago, it’s returned about 18% per year. This isn’t an indicator of future performance however.
There are fees for investing in this fund. On my investment platform, Hargreaves Lansdown, ongoing charges are 0.95% per year. Hargreaves also charges a custody fee on fund investments. Given Fundsmith’s performance track record however, I think the fees are worth it.
Investing £1k for the first time
To manage risk, I wouldn’t invest the full £1,000 all at once, just in case the stock market experiences some short-term weakness.
What I’d do is invest £500 now and £500 in a few months. Or, I’d invest £250 every month for the next four months. If stocks did fall, I’d be able to invest money at lower prices.
Finally, I’d leave my £1k investment for at least five years. This would give my money plenty of time to grow. Once my investment balance was larger, I’d then consider adding some individual stocks to my portfolio for extra growth.