It’s always a good time to start investing. But with interest rates looking set to fall, right now could be an exceptional opportunity.
The FTSE 100 is up 11% over the last 12 months, but some UK stocks have been left behind. That’s left buying opportunities for investors with cash available at the moment.
Why now?
Savers have been getting unusually good returns on their cash recently. But with inflation reaching the Bank of England’s 2% target, this could be about to change.
An interest rate cut would mean lower returns from cash savings. It’s also likely to cause share prices to rise, leading to lower returns from stocks – including dividend yields.
Tesco is a good example. The company’s share price is up 25% over the last 12 months, which has caused the dividend yield to fall from 4.4% to 3.9%.
The more the stock climbs, the more this will continue. So if interest rates come down, the returns on offer from the stock market right now might not be here in a few months.
Investing £5,000
One way of getting started with investing involves buying shares in a fund that aims to track an index – like the FTSE 100 – by owning all of the individual constituents. There are a lot of benefits to this.
The most obvious is it provides a degree of diversification. Investing in a ready-made portfolio of 100 companies means the overall effect is limited if something goes wrong with any one of them.
Furthermore, as Warren Buffett notes, it’s difficult to outperform an index fund. Despite this, I’d take a different approach if I had £5,000 to start investing with today.
For me, the most important thing is understanding the businesses that I’m invested in. And this is much harder with an index fund that’s likely to contain companies I don’t know much about.
Size and strength
From an investment perspective, understanding a business involves knowing what sets it apart from its rivals. And this is more straightforward in some cases than others.
For example, Diageo (LSE:DGE) has two big advantages over its competitors. The first is its brand portfolio, which includes leading products in a number of alcoholic beverage categories.
Selling premium products can be a risky business, though. In difficult economic times, consumers can find themselves forced to cut back on discretionary products or trade down to cheaper alternatives.
Diageo has been seeing this recently, but it has another important point of differentiation. Its scale allows it to get its products to consumers cheaply, giving it a cost advantage over competitors.
A stock I’d buy
With £5,000 to invest, I’d start by buying shares in Diageo. I’d probably look for other opportunities as well, but I’d definitely want the FTSE 100 spirits company to be part of my portfolio.
As an added bonus, the stock is significantly cheaper than it was a year ago. After a 24% decline, the company’s shares have a 3.28% dividend yield.
The most important thing, though, is that Diageo has some significant advantages over its rivals. And this means it should be in a position to generate long-term returns for investors.
