If I wanted to invest in UK shares for the first time today, £5,000 would certainly be sufficient capital to get going. It’s a substantial enough sum that I could diversify across a number of different shares and industries, helping to reduce my risk. Here’s how I would approach investing £5,000 on my own account.
Setting objectives
First I’d decide whether I wanted to aim for growth, income or a mixture of both. Income could come in handy if, for example, I wanted to have some extra cash from time to time. Growth might appeal more to me if I simply wanted my £5,000 capital to increase.
Neither growth nor income is ever guaranteed with shares. But in broad terms, some companies use earnings to pay dividends, while others retain them to try and grow their business faster. Personally I like the compound income potential of holding income shares, so I would have a larger proportion of my portfolio in income shares like British American Tobacco or Diageo.
Assessing risk tolerance
Next I would assess my risk tolerance. It’s easy to think one has a high risk tolerance in theory, but if the £5,000 starts to melt away, I may realise that my risk tolerance was lower than I thought. There are lots of hard lessons investors get through experience. That can include high-yielding shares that cut dividends, or growth shares that turn out not to have been fully accurate in their accounting, for example. So as a new investor in UK shares, I’d probably be even more risk-averse than many, and try to get my feet wet in the markets without taking on much risk.
Practically that would mean focusing on well-established blue-chip companies with a proven business model, proven earnings potential and a reputation for conservative accounting. That still doesn’t guarantee that the shares won’t lose me money, but it should at least weed out some hidden traps.
Being modest about expectations
A lot of investors go into the market thinking they can beat it. But the market consists of millions of other investors who think the same thing! Many of them are professional firms with resources at their disposal I can never match as a private investor.
So, were I to start investing today, I’d set some targets for what I wanted to achieve. But I’d be realistic and purposely modest about them. As a beginner, instead of aiming to beat the market, I’d actually be happy simply to match it. That can be harder than it sounds. For example, a tracker fund replicates a market index like the FTSE 100. But buying or selling a tracker fund will likely already incur some costs. The FTSE 100 has risen 20% in the past year. But if I had invested my £5,000 in FTSE 100 tracker funds a year ago, after costs, my return would likely be less than 20%.
I’d start investing by researching
After that – and before making my first share purchase – I’d research and read lots. What shares seem to have appealing prospects? What companies match my risk tolerance? Are there emerging investment themes that can inspire my picks? Rather than pay to learn by my mistakes in the market, I’d rather learn for free by spending time researching before plunging into trading.