I don’t think it’s a good idea for me to invest in just one stock, and leave it at that. I’d prefer to diversify between several stocks.
So, with £1k to invest now, I’d follow two possible courses of action. Firstly, I could spend the money investing in one stock as long as I’m planning to invest more money later. And, in that way, build up a diversified portfolio of shares over time.
Secondly, I could invest in one or more share funds because they hold many stocks. In that way, my £1k investment would be supported by lots of underlying businesses. For example, I’d perhaps choose managed funds, low-cost tracker funds, or investment trusts.
Achieving diversification
In my portfolio now I’m holding investment trusts such as Smithson Investment Trust and Finsbury Growth and Income Trust. And they sit alongside various tracker funds and the stocks of individual companies.
My approach to investing aims for a diversified core of funds and investment trusts. And I also try to achieve higher returns by selecting individual company stocks with care.
However, my approach to diversification and careful stock selection doesn’t guarantee a positive investment outcome. All shares and share-backed investment vehicles carry risks. And their performance depends on factors such as the strength of underlying businesses and investor sentiment.
Nevertheless, I try to mitigate some of the risks and setbacks by aiming to hold my investments for long periods. Although that’s not always possible if something happens in a business to change my investment thesis. Sometimes it’s even necessary for me to sell a stock at a loss if the ‘story’ has changed too much.
And some businesses are better suited to a long-term investment horizon, in my view. So I tend to avoid the more speculative companies and the ups and downs that come with cyclical firms, such as banks, housebuilders, travel companies and others.
Instead, I focus on companies with stable customer demand and a competitive edge. And such stocks can often be found in sectors such as utilities, energy, IT, branded fast-moving consumer goods, pharmaceuticals, food supply and others.
Here’s my best stock to buy now
For example, right now, I’ve got my eye on stocks such as Tate & Lyle, Cranswick, Unilever, British American Tobacco and SSE. But if I had just £1k to invest and had to choose only one stock, I’d go with National Grid, the regulated energy infrastructure company with operations in the UK and USA.
With the share price near 909p, National Grid’s forward-looking dividend yield is around 5.6% for the trading year to March 2023. And City analysts have pencilled in decent double-figure percentage advances in earnings for the next two years.
I reckon the company has a competitive edge in its market because of its regulated monopoly position at the heart of the UK’s energy systems. But the business carries a lot of debt and future regulatory changes may affect the firm’s ability to keep paying generous shareholder dividends.
Nevertheless, National Grid is one of my best stocks to buy now with £1k. And I’d embrace the risks and focus on harvesting and reinvesting the dividends as part of my diversified portfolio.