Starting off an investment journey can be daunting. After all, the stock market’s a complex machine, and taking a wrong turn can be an expensive mistake. But even the world’s greatest investors like Warren Buffett started with limited knowledge. And thanks to vast improvements in technology and information availability, becoming a successful investor is now easier than ever. So with that in mind, let’s explore how I’d invest my first £1k in UK shares if I were starting from scratch.
What to invest in first?
After jumping through all the hoops of finding and opening a trading account, investors are faced with their first major challenge. Where should they invest?
Everyone’s different and we all have varying financial goals, time horizons, and risk tolerances. That makes answering the question of which stock to buy first quite difficult. However, there’s a bit of a cheat code beginners can use. And it’s one even professional money managers like to fall back on – index funds.
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Instead of investing capital into a specific business, investors can own a basket of hundreds of them within a single transaction. Index funds, as the name suggests, are designed to mimic a specific index, such as the FTSE 100. This one in particular contains the largest 100 businesses on the London Stock Exchange by market capitalisation.
The maturity of these companies can provide stability for a beginner’s portfolio. And while this does come at the cost of returns compared to the FTSE 250 or S&P 500, the UK’s flagship index has still historically delivered around 8% in total annualised returns.
Investing £1k into a low-cost FTSE 100 index fund would enable investors to reap these gains without having to think about diversification, portfolio management, or stock picking.
Limitations of index investing
Owning UK shares through an index fund provides a lot of convenience. But this does come with several caveats. The most obvious is that the returns on a portfolio will never exceed the stock market in general. Buffett’s stock-picking strategy has delivered him near 20% annualised returns since the 1960s. And when compounded over decades, earning the extra 12% has done marvels for this wealth.
So if I were to take a stock-picking route, what would be the best place to start? Staying within the FTSE 100 allows my portfolio to benefit from the advantage of size. While this isn’t always suitable, larger businesses typically have more financial resources to explore new opportunities as well as defend against economic volatility.
With that in mind, AstraZeneca (LSE:AZN) would be near the top of my list. As one of the largest pharmaceutical companies in the world, AstraZeneca is a critical player within the healthcare sector. And with a sizable list of new medicines being approved by regulators as well as a large pipeline of other drugs, the long-term potential of this business appears solid.
Of course, like any investment, it’s not risk-free. Blockbuster drugs that come off-patent can see sales evaporate within a year as generic manufacturers swoop in. Not to mention that drug development, in general, is expensive, making any failed clinical trials problematic for the share price.
But with both dividend and share price potential, paired with a proven business model, reputable brand, and solid financials, AstraZeneca looks like a good starter stock, in my eyes.
