I certainly couldn’t afford to invest £10k when I started buying shares. And for years, people in the UK have thought the stock market was only for the wealthy and that we’d need a big wad to consider getting involved. But with today’s low-cost online brokers, we can start with just a relatively small amount put aside for shares every month.
But if we are able to invest £10k, it can get us off to a quick start. It does one other thing, though. It immediately crystallises some problems that we would otherwise have had more time to think about. One is how to spread the cash. When I was starting out, I had plenty of time to accumulate each investment instalment, so I never had to think about how to allocate it. No, for me it was just: do I have enough for an investment? OK, what shall I buy?
But to invest £10k, I’d be wondering how to split it. Should I put £1,000 into each of 10 stocks? That way I’d have some diversification right from the start, and that’s surely got to be good. But I’ve always had a problem with diversification, and I can never think of 10 stocks that I genuinely want to own.
How I’d split a £10k investment
But starting from scratch in 2021? I reckon I’d split the money five ways, investing £2,000 in each of five stocks. That would keep charges low as a percentage of each purchase. And it would also give me a little diversification. Not as much as many commentators would recommend, but each individual must make their own decisions.
There’s one way I would increase my effective diversification, and it’s something I wouldn’t have thought of back when I started. If I were to to invest £10k today, my first purchase would be an investment trust. I’d go for one that puts its shareholders’ cash into a variety of dividend-paying FTSE 100 shares. And I’d make sure it’s one with a solid track record of raising its annual dividend.
As an example, I currently hold City of London Investment Trust shares. It spreads the cash exactly as I’d want, and it has lifted that dividend for 54 years in a row.
In fact, I think I’d probably put my first two £2k instalments into investment trusts. For the second slot, I might look for one investing in FTSE 250 companies. That would start me out with nice effective diversification, targeting both income and growth potential.
Individual shares next
After that, I’d start investing in individual FTSE 100 stocks, until I’d invested £10k. And I’d spread my selections across sectors. I’d probably go for either GlaxoSmithKline or AstraZeneca, very likely Tesco, and probably a housebuilder for starters.
One big question I have ignored is whether to invest all at once to get fully invested. Or should I spread it out over maybe a year to even out short-term ups and downs? Prevarication is one of my strengths, so spreading it out would come naturally to me. But there are good arguments for both approaches.
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Alan Oscroft owns shares of City of London Inv Trust. The Motley Fool UK has recommended GlaxoSmithKline and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.