When starting investing with a small sum, many beginners choose a straightforward strategy based on passive tracker funds.
This strategy may suit most investors, but it isn’t something I’m comfortable with. I like to know the companies I own, and I enjoy hunting for undervalued equities and exciting growth stocks.
That said, I’m well aware that finding growth stocks and undervalued equities is a challenging pastime. There’s no guarantee I’ll outperform the market or even match the market’s return.
Studies have shown that most investors underperform in the long run and pick the wrong investments. This is something I’d ideally like to avoid, but there’s no guarantee.
So, if I had to start investing today with just £1,000, I’d choose a mixed approach. I’d invest around a third of this money in a low-cost, passive global index tracker fund. A good example is Vanguard Funds’ FTSE All-World UCITS ETF.
Start investing with funds
I’d take another third and invest this in UK investment trusts specialising in small- and mid-cap stocks. These tend to outperform their larger blue-chip peers in the long term, but picking winners in these markets can be challenging.
This is why I’d use investment trusts, run by experienced managers and own diversified portfolios of equities, to minimise the risk of something going wrong.
Another advantage of using investment trusts is that they can borrow money to invest. By using a modest level of gearing, trusts can enhance returns and increase their chances of beating the market. One trust I already own which follows the strategy is the Mercantile Investment Trust.
By investing in small- and mid-cap companies and selectively deploying leverage, this trust has returned 13.5% per annum over the past decade. Over the same time frame, its benchmark, the FTSE All-Share Index, has returned just 10% per annum. Of course, investors should never use past performance to guide future potential.
Individual equities
If I had to start investing today with £1,000, I’d devote the final third of my portfolio to individual equities. These would be companies I know well, whose products I use regularly, or at least know someone who does.
A great example is Unilever. I use this company’s products every day, and so do billions of other people. That’s why I’d buy the stock for my portfolio. Some other examples are the online stockbroker AJ Bell and supermarket retailer Tesco. I’d purchase both of these organisations because I know their products and services and believe they have significant potential.
Still, owning individual companies might not be suitable for all investors due to the risks involved. But I’m entirely comfortable with buying individual stocks because I’m happy to keep an eye on these firms.
However, some newbie investors may not be so comfortable spending time analysing individual businesses.
