Novice investors often face one major challenge – diversifying their investments. This is the process of spreading capital out over many different stocks, or not putting all your eggs in one basket. Yet if you only have £1,000 to invest, it’s a challenge to diversify. With each trade costing £10, you’re looking at £100 in fees to set up a 10-stock portfolio. You’re down 10% before you’ve even started. But don’t despair as there are plenty of options.
Mutual funds
A mutual fund is an investment vehicle made up of a pool of money collected from many investors and managed by a professional fund manager who will invest in a diversified portfolio of stocks.
Mutual funds remove the stress of having to choose which stocks to buy. As a result, they are a popular way to invest in the stock market. Furthermore, it’s easy to get started. All you need is an account at a financial services company such Hargreaves Lansdown.
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Which fund do you choose? A good place to start could be to look at two of the most popular funds here in the UK – the Lindsell Train UK Equity fund and the Woodford Equity Income fund. Both fund managers have excellent long-term track records of managing clients’ money.
The downsides are the fees which generally run at around 1% per year. While that may not seem like a lot, fees can add up over time.
Investment trusts
Another sensible option is to consider investment trusts. These are similar to mutual funds in that money is pooled together from a number of investors and overseen by a fund manager.
The key difference is that investment trusts trade on the stock market and therefore can be bought and sold like regular shares. The fees are often slightly lower than mutual funds.
Popular UK-focused trusts include the City of London Investment Trust and the Edinburgh Investment Trust. Both have excellent long-term track records and mainly invest in blue-chip UK companies.
Exchange-traded funds (ETFs)
Lastly, another option for novice investors is ETFs. These are securities that track an index such as the FTSE 100. They can also be bought and sold like regular stocks.
ETFs differ from mutual funds and investment trusts in that they don’t have fund managers picking stocks – they simply track an index. The result is that their fees are lower.
Those starting out could look at a simple FTSE 100 option such as the Vanguard FTSE 100 ETF. With fees of just 0.1%, this tracker is an efficient and convenient way to get exposure to the UK’s largest companies.
Word of warning
One thing to note is that when starting out, it can be wise to invest in instalments, and not go all in at once.
There’s nothing worse than committing a lump sum, only to see your capital drop in value if the stock market declines sharply. I’m speaking from personal experience here. I made my first investment in a mutual fund in 2000. I went all in. A year later I was down about 40% as global markets slumped.
A sensible option is to invest in two or three instalments over a period of a year or two. If markets fall, you’ll be able to take advantage of the lower stock prices and buy more stocks.
