The stock market is becoming increasingly hard to navigate at the moment. Rising global inflation and subsequent rising interest rates are starting to weigh on the high valuations we’ve seen from markets over the past 18 months. Year to date, the world’s two biggest exchanges, the S&P500 and the Nasdaq, have fallen 15% and 23% respectively.
So how would I use £2,000 to navigate these tough market conditions and generate healthy returns? Let’s take a look.
What do I want to achieve?
Before considering investing in any shares, I need to be clear about what I want out of my investment. That is, do I want to take a high-risk growth approach or a low-risk passive income approach?
Ideally, I’d split my funds between both approaches. This would help me diversify my portfolio and expose me to less risk.
Low-risk value strategy
One of the best ways to gain access to slow-burning consistent returns is by tracking indices. Over the past 10 years, the FTSE 100 has returned 103% with an average annualised dividend of 7.3%. This is a similar situation to US markets, with the S&P 500 returning an average of 14.7% over the past 10 years. Although past returns are no indication of future performance, this kind of slow, consistent growth looks like a good foundation for my portfolio.
I could also throw in some typical value stocks like BT, Diageo, and Taylor Wimpey. These give me more concentrated exposure to individual sectors, and all offer solid dividends. What’s more, all of these stocks are known as ‘defensive’ — they tend to perform well when the economy slows. With interest rates on the rise, the economy will inevitably contract, so stocks like these could start to shine.
Out of my £2,000, I’d allocate at least 50% (£1,000) to a mixture of indexes, and a further 30% (£600) to value stocks. This gives me a solid base of lower-risk assets that should hold strong even if inflationary pressures continue to mount. What’s more, this asset allocation would allow me access to a healthy dividend, which is great for adding passive income to my portfolio.
Growth stocks
With my final £400, I’d look at gaining exposure to some higher-risk investments. These have the opportunity to give me higher returns than my other assets, but also carry more risk. Two stocks I like the look of here are NIO and Palantir. They’ve both sunk a lot since rates have risen, but I believe they’re fundamentally sound businesses. They also have pretty big exposure in their chosen industries, and I think this will only increase as time goes on.
Overall, I think that by allocating a 50%, 30%, 20%, index, value, and growth ratio, I could generate some healthy long-term returns from my portfolio. I think the biggest impact on markets moving forward will be rising inflation and interest rates. This portfolio could give me sufficient protection from this risk, and hence it’s how I would allocate £2,000 today.