Fortunately for those of us that are time-poor (or simply not all that interested in the stock market), it’s remarkably easy to begin building a Stocks and Shares ISA portfolio with £1,000. In fact, I’d consider doing so with just one ‘passive’ exchange-traded fund (ETF).
Why go passive?
It’s worth revising why the passive approach is so attractive, at least in my opinion. ETFs are wonderfully simple by design.
In contrast to having an experienced money manager picking stocks on my behalf (an ‘active’ fund), this investment vehicle just tracks a specific market or group of stocks. For example, a FTSE 100 ETF would spread my money across the UK’s biggest 100 stocks.
The lack of human involvement in index funds means the fees charged are usually very low. That really matters. It means more of my cash can be allowed to compound over time. It’s also worth bearing in mind considering that most active funds end up underperforming the market return anyway.
My ‘one fund’ Stocks and Shares ISA portfolio
For me, buying a global ETF would be a smart move if I were trying to find my feet in the investing world. The example I’ll use here will be the Vanguard FTSE All-World ETF. There are alternatives from other providers, of course.
For a low fee (0.22%), the Vanguard fund will give me instant access to a huge group of stocks from around the world (3,771, to be exact). Reflecting the size of its economy, 63% of these are currently listed in North America. However, the fund also gives exposure to businesses based in Europe, the Pacific region, and emerging markets. This diversification should allow me to get on with life without worrying too much about daily share price moves.
There’s even a dividend yield. Reinvesting this back into the fund rather than spending it means I stand to benefit even more from compound interest.
Risks to consider
I’m a great fan of passive funds in general. That said, it would be wrong to assume that a one-fund approach guarantees anything.
First, there’s the potential for volatility. Just because I’m buying a fund that tracks a huge number of stocks around the world does not mean that the value of my holding won’t rise and fall. What happened a couple of years ago during the outbreak of Covid-19 is evidence of that.
More optimistically, any dip in global markets would allow me to load up with more shares if I could add to my initial £1,000 investment.
Another potential drawback is the opportunity cost – or ‘what I’m potentially missing out on by being invested here’. By their very nature, index funds track the market return and no more. This means I’m never going to bag the sort of capital gains I might make by picking the best growth shares available.
Just the beginning…
No matter. I’m a great believer in learning to walk before attempting to run. Having built a solid foundation with a global passive fund, there’s nothing to stop me from increasing my risk appetite as time goes by. Should I want to, I could diversify my Stocks and Shares ISA portfolio further.
I could buy ETFs in more specific parts of the market. Or I could take the plunge and test my own stock-picking skills.