How to invest if you only have £1,000

This is what I’d do with my first £1,000 to invest on the stock market.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If I was back at the start of my investing career and had £1,000 to invest, I’d focus on preserving capital first. It’s the most important thing of all. Much more important than thinking about how big my gains from investing could be.

One of the often-quoted utterances of Warren Buffett— the well-known and super-successful US investor – is: “Rule number 1: Never lose money. Rule No. 2: Never forget rule number 1.”  He’s not talking about the day-to-day fluctuations of share prices that could cause a temporary red figure in your share account. You’ll never iron out that kind of volatility. But he’s talking about a permanent loss of capital brought on by plunging share prices that never recover. You’ve got to try to avoid those situations, which generally means avoiding risky investments such as over-priced shares or dodgy underlying businesses.

The shocking truth about losses

US-based investor and trader Mark Minervini – who has himself made several million dollars from the stock market – did a good job of explaining why it’s so important not to lose your money. In his book, Trade Like Stock Market Wizard, he explained that if you lose 5% of your money, you will have to make a gain of 5.26% to get back to breakeven. Indeed, the mathematics show us that you have to make a bigger gain than the size of your loss to recover your money.

But it gets worse. The size of the gain you’ll need to get back to breakeven rises on a scale as the loss deepens. For example, if you lose 50% of your money, you need a 100% gain to get back to breakeven. Shocking! If you’d made that gain without first losing half you’d have doubled your money, and all for the same ‘effort’.

Let’s imagine, in one final illustration, that you’d invested your £1,000 into shares of one of the big London-listed banks back in 2007, such as Royal Bank of Scotland or Lloyds Banking Group. Both firms saw their shares plunge more than 90% over the following year or two, so your £1,000 would have shrunk to below £100. With a 90% loss, you need to make a 900% gain to get back to breakeven – shareholders in those banks since 2007 are still waiting for their money to fully recover. Yet a 900% gain without first losing any would have turned your £1,000 into £10,000.

Spreading the risk

That’s why it’s so important not to lose money. One way you can do that with your £1,000 is to avoid putting it all into the shares of just one company. Single-company risk can be lurking even in places you might least expect. Back in 2007, Lloyds and Royal Bank of Scotland were great big FTSE 100 names that many investors trusted — big mistake!

I’d invest my first £1,000 in a collective investment vehicle backed by many underlying shares, which would provide me with diversification and minimise risks to my capital from any single underlying business. I could go for a managed fund. But the running charges are often quite high and there’s plenty of evidence that, as a group, fund managers don’t tend to outperform the returns from the general stock market. So I’d go for a low-cost, passive index tracker fund, such as one that follows the FTSE 100 index.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

More on Investing Articles

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

If I’d invested £5,000 in a Nasdaq index fund 5 years ago, here’s how much I’d have now

The Nasdaq index keeps hitting new all-time records in 2024, as US tech stocks fly. How much could I have…

Read more »

A senior group of friends enjoying rowing on the River Derwent
Investing Articles

£500 to invest a month? Consider aiming to turn that into a £20,000 passive income like this!

With a regular monthly investment, it's possible to build a large and steady passive income for retirement. Royston Wild explains.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Investing Articles

As retirement needs soar 60%, here’s how I’m building wealth with UK shares

A regular investment in UK shares and funds could help Brits create a large and lasting pension. Our writer Royston…

Read more »

Investing Articles

I’d buy Games Workshop shares before they reach the FTSE 100!

Games Workshop shares look likely to join the FTSE 100 soon. Here’s why I think investors should consider buying the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Could me buying this stock with a $2.5bn market-cap be like investing in Tesla in 2010?

Archer Aviation (NASDAQ:ACHR) stock's nearly doubled so far in November. Could this start-up be another Tesla in the making?

Read more »

Investing Articles

5,000 shares of this UK dividend stock could net me £1,700 a month in passive income

Our writer calculates the passive income he could earn from holding a significant number of shares in this powerful dividend-paying…

Read more »

Investing Articles

9.3%+ yields! 3 FTSE 100 dividend giants to consider buying

Our writer examines a trio of high-yield FTSE 100 shares and explains some of the opportunities and risks he sees…

Read more »

Investing Articles

As the Kingfisher share price drops on Budget fallout, should I buy?

The Kingfisher share price was on a strong 2024 run until the DIY group warned us of the possible effects…

Read more »