When I only have small amounts of cash on hand, it can be difficult to know how best to invest it. Do I spread out what I have for safety or do I concentrate it to maximise potential profits? Given that the stock market go either way, here’s how I’d plan to invest £2,000.
Fear and Greed
It’s important to note that, while we try to invest logically and with a clear head, humans are emotional creatures, and are often at the whims of two powerful feelings: fear and greed. These emotions might have once helped me survive in the wild, but in the world of investing they cost me money. Whatever choice I make with this £2,000 must take them into account.
In the grand scheme of things £2000 isn’t a lot of money. If you’re like me and you have had to work in low-paid or unstable work for most of your adult life, that can be hard to hear. I’ve worked very hard for a long time to earn this money, and I know what I’ve had to give up to save it. So, I usually have two competing instincts to contend with.
- Invest heavily in a high-risk, high reward venture to maximise the upside (greed). Or…
- Be cautious and hold on to any value (fear).
I think that the best option in this situation is a compromise. I would divide my capital in half and invest one chunk in riskier growth stocks, and the other in safer companies. This way, I will be able to take advantage of any sudden growth in the high-potential stocks I choose. But I’ll also feel that I didn’t overextend myself if there’s an unexpected market downturn like, let’s say… a pandemic.
Companies
For the low-risk portion of my capital I think it’s best to choose one or two solid companies that have been around for a long time and pay a dividend. The dividend will somewhat compensate for the lack of growth. For this I’d choose either a bank like Lloyds or a supermarket like Tesco as neither is likely to go out of business soon.
For the higher-risk category, I would look to the US and think of which companies have great growth potential. They still need to be solid businesses with great management. After all, I’m investing, not gambling.
For this I think a tech company is the best way to go, as profit margins are high and the future of innovation really lies with them. Microsoft has some excellent fundamentals and has been run spectacularly for the last decade. My other choice for this portfolio would be Apple. It has maintained steady growth this century and has continued to prove the bears wrong at every turn. Regular stock buybacks will also really put my investment to work over the long haul. If it’s good enough for Warren Buffett, it’s good enough for me.
Of course, any form of investing comes with risks. I need to remember that these are companies I plan to hold for the long term and that I should be absolutely certain of my choices before I invest. £2,000 isn’t much, but it could pay greatly if I invest it wisely today.