With UK shares falling, there are countless top-tier businesses trading at dirt-cheap discounts. That makes finding buying opportunities in the stock market today far easier than usual. And even if I were starting from scratch, these opportunities could lead to immense long-term wealth generation.
With that in mind, here’s how I would invest £500 right now.
Buying UK shares during high volatility
I’ve often said volatility is my opportunity. But investing in stocks while price movements are erratic can be pretty stressful, especially for newer investors.
The short-term performance of UK shares is largely unpredictable. And there’s a good chance I could see my portfolio tumble before it rises, even if I successfully pick the best businesses to invest in.
But it’s worth remembering that the best companies today won’t necessarily stay that way in the future. After all, competition is all around. Suppose a firm’s flagship products become obsolete? Or the management team become complacent. In that case, the stock is unlikely to deliver any meaningful returns. In fact, I could end up destroying wealth rather than creating it.
Even the most promising enterprises have their fair share of threats to contend with. And not every business will be successful in overcoming them. That’s why diversification, especially during times of heightened volatility, is paramount.
By not putting all my eggs in one basket, I can lower my overall portfolio exposure and mitigate the damaging effects of underperforming UK shares.
Investing in funds vs stocks
In the grand scheme of things, £500 really isn’t that much money. And with commission fees and stamp duty on trades, building a diversified portfolio with such a small lump sum isn’t practical.
Fortunately, index tracker funds provide a solution. In a single transaction, I could own a small piece of all the companies within an index like the FTSE 100 or FTSE 250. My investment would then track the performance of these indices, which historically have yielded an average annual return of 7-11%.
There are some management fees to consider, but they’re typically tiny for these types of funds. And given that it essentially puts my investments on autopilot, it’s a small price to pay.
That’s why many investment advisors often push new investors to follow this path. And it’s certainly not bad advice, in my opinion. However, providing I’m comfortable with more risk, individual stock picking opens the door to significantly higher returns.
Let’s say I can spare £500 for investments from my monthly paycheque rather than just a single lump sum. In this scenario, I can more realistically build a diversified portfolio of hand-selected UK shares over time.
This eliminates the problem of transaction fees gobbling up the bulk of my capital. And spreads my investing activity over a longer period of time. This can be quite advantageous during volatile periods like we’ve seen in 2022.
After all, if the stock market continues to tumble, I can capitalise on even cheaper bargains!