Last weekend, we published an article of mine entitled 'How to invest if you only have £1,000.'
It was a popular piece, indicating that many readers are probably just getting started in the investing world.
With that in mind, today I'm taking the concept further. I'm revealing exactly how I would invest £1,000 if I was just starting out right now. Here are my thoughts.
If I was finding a home for my first investment cash today, there are two main challenges I would want to overcome.
The first, which I explained last weekend, is diversification. I wouldn't want to invest in only one stock. That would be quite risky. For example, let's say I had bought shares in telecommunications company BT Group this time last year. I'd now be 30% down on my investment. I would want to avoid that kind of situation.
Therefore, I'd invest in a fund. This would ensure my capital was spread out over many different companies.
Second, I'd want to buy stocks that offer good value right now. That's a little challenging at present because global markets are at all-time highs. Many shares look expensive. We're always told to "buy low, sell high," but that's easier said than done right now.
A value fund
As a result, I'd seek out a fund that invests mainly in value stocks. These are stocks that are attractively priced and often pay nice dividends. I'd avoid funds that are heavily focused on 'growth stocks' as many faster-growing companies have become expensive in the last few years.
An 'equity income fund' would satisfy my requirements. These kinds of funds invest in dividend-paying companies that are generally trading at reasonable valuations. They aim to provide investors with regular dividends as well as capital growth.
There are quite a few equity income funds available in the UK. I'd want one with a low annual fee, because fees can add up over time.
How I'd get started
To get started, I'd set up an account with investment specialist Hargreaves Lansdown. Its platform is really easy to use. From there, I'd browse through the list of Wealth 150 and Wealth 150+ funds. These are its top rated funds that have very low fees. I'd search for a UK equity income fund. There are currently nine funds listed.
From there, I'd pick a fund. Neil Woodford's Equity Income fund is listed, so that would be an option. I like his top four holdings of AstraZeneca, Imperial Brands, Legal &General and Lloyds Bank. There's some serious value there. But some of his other holdings are a little unorthodox, in my opinion. And the fund has only returned 7% in two years. As a result, I might pick one of the others available such as the J O Hambro UK Equity Income fund. Its top holdings are Royal Dutch Shell, HSBC, BP and Lloyds. It's returned over 40% in two years and around 80% over five years. That's an excellent return.
Lastly, after choosing a specific fund, I'd invest my £1,000 in two instalments: £500 now and then £500 mid-year. That way, if the stock market pulls back a little in the near term, I'll be able to capitalise on the lower stock prices.
Grow £1,000 to one million
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Edward Sheldon owns shares in Royal Dutch Shell, Imperial Brands, Lloyds Banking Group and Legal & General Group. The Motley Fool UK has recommended AstraZeneca, BP, HSBC Holdings, Imperial Brands, Lloyds Banking Group, and Royal Dutch Shell B. 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.