Stock market investing can be a confusing subject for beginner investors. There are thousands of companies and funds available to buy, and there’s a range of strategies investors can use even for a smaller lump sum, like £5,000.
If I were investing my first £5k in the stock market today, I’d use a mixed approach. First, I’d acquire a handful of investment funds. These would make up around 80% of my portfolio. The last 20% would be devoted to individual companies.
Stock market investing
Analysing individual companies can be a time-consuming challenge. It also requires a high level of understanding of the firm’s sector. As such, I think it’ll be almost impossible for me to research more than about two or three different stocks.
So that’s where I’d focus my energies. With the rest of the portfolio concentrated on investment funds, I can leave the hard work to the experts. What’s more, these funds also provide a high level of diversification, and I don’t need to worry about making mistakes.
I’d focus on passive investment funds for the fund section of my portfolio. Owning passive funds can simplify stock market investing because these are designed to track an index. There’s no need to research the manager and past performances or understand the fund manager’s strategy.
On that basis, I’d buy a low-cost S&P 500 tracker fund to provide exposure to the largest market in the United States. I’d also buy a low-cost MSCI World Tracker fund and an FTSE All-Share tracker. I think this mix of three different passive tracker funds would give my portfolio a solid base on which to build.
Global exposure
Not only would I have exposure to UK markets, and the US via a S&P 500 tracker, but a world tracker fund would also give exposure to the US, UK and smaller markets around the world, such as those in Europe and Asia.
The one downside of using this strategy is that passive tracker funds cannot outperform the market. As they’re only designed to track the market’s performance, they may underperform actively-managed funds picking and choosing their investments. Further, trackers follow the market higher and lower, so I’ll have no protection if there’s a stock market crash.
Still, I’d buy these funds as a way to simplify my stock market investing approach.
As well as these tracker funds, I’d also buy single stocks Admiral, Microsoft and Unilever. I’ve picked these companies because I believe they’re the best at what they do.
Admiral is one of the UK’s leading insurance companies. Microsoft is one of the largest tech giants in the world, and Unilever is one of the largest consumer goods giants.
Ok, their size doesn’t guarantee success, but their competitive advantages are desirable. That’s why I’d buy all three for the 20% of my portfolio devoted to single stocks.