It isn’t always easy to know how to start investing. When I began, I faced two big challenges. First, it felt like there were too many shares and funds to choose from. Second, I didn’t have enough cash to build a balanced portfolio.
With the benefit of hindsight, I’d do things a little differently. Here, I want to explain how I’d invest £3,000 today if I was starting from scratch.
Before I start, a quick health warning. Investing in the stock market can be a great way to build wealth, but the future value of shares is always uncertain. Share prices can fall and there’s no protection if things go wrong.
For this reason, I’d always make sure I had at least three-six months’ income saved in cash before I put money into the stock market.
How I’d start investing in stocks
Three thousand pounds is not a huge amount in stock market terms, but I think it is enough to build a decent starter portfolio.
What I’d do is invest £2,000 in an investment trust. This would give me exposure to a ready-made portfolio, run by professional management.
The one I’d choose is City of London Investment Trust (LSE: CTY). This trust invests in good quality large companies, with a bias towards dividend stocks. City of London’s largest holdings including drinks giant Diageo, British American Tobacco, Tesco and insurer Phoenix Group.
However, this trust is not just a FTSE 100 clone. Its portfolio also includes FTSE 250 dividend stocks and overseas firms such as Microsoft, and Swiss-based Nestle.
City of London shares currently offer a dividend yield of 4.8%. This is usefully higher than the FTSE 100 yield of around 4%. I also consider the trust’s payout to be exceptionally safe — it has increased its dividend for 54 consecutive years. That’s one of the longest records in the UK market.
What to watch
I feel confident I could put my money into City of London Investment Trust and probably never need to sell. But one risk that concerns me is that the trust’s focus on income could mean its share price growth underperforms the wider market during periods of strong growth.
Another possibility is that the trust will alter its strategy or increase its fees — both could leave shareholder returns lagging a cheaper index tracker fund.
However, these risks would not stop me buying City of London Investment Trust. On balance, I think it would be an ideal way for me to create a starter portfolio with limited cash.
Here’s how I’d invest the final £1k
I’ll admit City of London Investment Trust is quite boring. It’s never likely to make headlines or deliver the kind of rapid gains possible with a successful growth stock.
Personally, I’ve got no problem with this. Where my money is concerned, I don’t want too much excitement. But as an active investor, I do want to have a chance of beating the market and finding big winners.
For this reason, I’d use the final £1,000 of my £3,000 budget to invest in small-cap growth stocks. The smallest amount I’ll invest in a single stock is £500, to limit the impact of trading costs. With £1k, I’d be able to add a couple stocks to my portfolio.
So here I’m going to look at two small-cap stocks I’m interested today.
#Small-cap 1: a genuine bargain?
My first pick is currency exchange specialist Argentex (LSE: AGFX). This £100m company specialises in providing forex services to companies and wealthy individuals. After a difficult period in 2020, this business appears to have returned to growth.
Revenue rose by 33% to £15.7m during the six months to 30 September, while pre-tax profit was up 22%, at £3.3m. Profit margins are high, at around 27%. Argentex also converts most of its income to cash, supporting a useful forecast dividend yield of 2.6%.
Founder and chief executive Harry Adams owns 12.3% of Argentex stock. Therefore, I reckon his interests should be well-aligned with those of shareholders.
The main risk I can see is this sector is increasingly competitive. There are a number of smaller companies who are cutting the cost of foreign exchange and fighting to take market share from the big banks.
There’s no guarantee that Argentex will be a long-term winner. But the stock looks cheap to me on 11 times 2022 forecast earnings. If it can hit earnings growth forecasts of 34% for the current year, I think the shares could rise sharply. This is a stock I’d like to add to my portfolio.
#Small-cap 2: a UK consumer favourite
Sofa and carpet retailer ScS Group (LSE: SCS) benefited from a surge of pent-up demand last year and delivered very strong sales.
The company says that new orders have now returned to pre-pandemic levels after last year’s post-lockdown surge. But ScS’s order book of £132m at 20 November is still nearly double the level seen before the pandemic. This suggests to me that profits should be strong this year as the order book is gradually delivered.
One attraction for investors here is that ScS does not have to pay upfront for its stock. Instead, it collects a customer deposit and then orders from its suppliers. Customers must pay for their products before delivery, but ScS does not normally pay its suppliers until the end of the month following delivery.
As a result of this model, the retailer generates a lot of cash. At the end of the last financial year (July 2021), the group reported net cash of about £50m, excluding customer deposits.
The main risk I can see is that when ScS next reports, we’ll find an order slowdown since last year has continued. With travel likely to reopen this summer, people may choose to spend on holidays instead. Rising inflation could also be a problem, as it may put household finances under pressure.
As I write, its shares are trading on just eight times forecast earnings, with a forecast dividend yield of 5.9%. I think the shares are probably cheap at this level, especially given the company’s net cash position. So ScS is a stock I’d consider buying today.