Tomorrow is the start of a new decade. If you’ve promised yourself that you’ll start building an investment portfolio in 2020, then you’re probably looking for ideas on how to get started.
How should you invest? If you’ve got £500 that you can afford to set aside for at least three to five years, then I’d suggest the stock market.
In this article I’ll suggest three investments I believe should deliver attractive returns.
The Buffett trade
US billionaire Warren Buffett is known for his contrarian judgement, long-term focus and incredible success rate. But he’s brutally honest about what he thinks most of us should do with our cash.
In his 2013 letter to shareholders of his company Berkshire Hathaway, Mr Buffett explained that in his will, he’s left instructions for his wife to invest 90% of her cash in a low-cost S&P 500 index fund.
For a UK investor, the equivalent would be to invest cash in a FTSE 100 index fund. This means your cash would be invested in the 100 largest listed companies on the UK stock market.
These firms are part of the fabric of life — names such as GlaxoSmithKline, Tesco, Shell and Legal & General. Collectively, they have a long track record of profitability, growth and regular dividends.
A FTSE 100 index tracker is also likely to be the cheapest stock market investment you can make in the UK. Cutting costs is a great way to boost your long-term returns, and is especially important when investing relatively small sums.
The growth trade
I’m a big fan of income investing and would put my cash in the FTSE 100. But if you’re under 40 and would like more exposure to growth stocks, I’d also consider a FTSE 250 index fund.
The mid-sized companies in the FTSE 250 have a stronger track record of growth than those in the FTSE 100. For example, over the last five years the FTSE 250 has risen by 38%, compared to an 18% increase for the FTSE 100.
I’d be very happy to put £500 into a FTSE 250 fund and leave it there for the next 10 years.
The curve ball trade
You may wonder why I haven’t suggested any individual stocks. The reason for this is that I think £500 is the absolute minimum you can invest in a single share, due to trading costs.
A portfolio with just one share is very risky, in my view. Any single company can run into problems, often with little warning for outside investors. This isn’t true with a diversified mix of stocks, hence the attraction of index funds.
However, if you would like to own shares directly, one stock I’d consider would be pharmaceutical group GlaxoSmithKline.
By 2022, GSK plans to split itself into a dedicated pharmaceutical firm and a separate consumer healthcare group, with brands such as Sensodyne, Panadol and Nicorette.
Existing shareholders will receive shares in the demerged company. So by the end of 2022, GSK shareholders should own a slice of two world-class businesses in sectors where I expect to see continued growth.
There is some risk in concentrating your investment in this way. But I rate Glaxo as a long-term buy and would be surprised if the company didn’t deliver profitable growth over the coming decade.
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Roland Head owns shares of GlaxoSmithKline and Royal Dutch Shell B. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares) and GlaxoSmithKline. The Motley Fool UK has recommended Tesco and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short January 2020 $220 calls on Berkshire Hathaway (B shares). 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.
Motley Fool UK 2019