Every once in a while, investors may find themselves fortunate enough to stumble upon some extra cash. This could come from a holiday refund, or a surprise gift from friends and family.
Regardless, providing that there aren’t any immediate needs for this capital, like paying off credit card debt, investing in UK shares could be an excellent way to grow wealth.
So if I had a £1,000 windfall, here’s how I’d go about putting this money to work.
There’s no rush
New investors are often told to get started as soon as possible along their investing journey to maximise the benefit of compounding. This is pretty sound advice.
However, it’s important not rush into anything. Waiting to invest in a superb company at a good price will likely yield far better results than snatching up any old popular stock.
It’s not about timing the market since that’s a pointless endeavour. But rather being smart with the money to only invest it in UK shares is likely to deliver market-beating returns without excessive exposure to risk.
Finding such opportunities takes time. And during this process, keeping money in a good savings account may be smarter. After all, the one benefit of the current inflationary environment is that interest rate hikes have paved the way for 4-5% savings accounts.
How many shares should I buy?
There is ongoing debate within the investing community about how many stocks belong in a portfolio before it can be considered diversified. However, most investors typically agree on the range of 15-25.
So if I were starting from scratch with £1,000, should I split this capital across 20-ish companies? No.
It’s critical to remember that buying and selling stocks isn’t free. Brokers charge transaction fees, and for non-AIM-listed UK shares, there’s also stamp duty tax to cover. Even commission-free trading platforms have hidden fees that eat into investment returns.
That £1,000 split across 20 stocks translates to £50 a position. Assuming that the trading fee is £7.50 a transaction, my investment portfolio would need to generate a 15% return just to break even.
Therefore, instead, I would only split this capital across three or four businesses. While that’s quite a concentrated split, I now only have to achieve up to a 3% return before making a profit.
And should I be fortunate enough to come across another £1,000 cash windfall in the future, I can further diversify my portfolio then.
Where are the best stocks to buy now?
There are thousands of publicly-traded enterprises on the London Stock Exchange. And most of them aren’t likely to deliver groundbreaking returns in the long run. The challenge stock pickers have to overcome is filtering out the duds.
However, even after carefully studying and evaluating the financials and business model, there’s still no guarantee that a good company will be a good investment.
Overpaying for a high-quality enterprise can still lead to lacklustre returns. And may even destroy wealth instead of creating it.
That’s why, in my experience, the best UK shares to buy are the ones in industries that are out of favour.
With fewer investors searching these spaces, there’s a higher opportunity to find an unappreciated and undervalued business ripe for hopefully ginormous long-term gains.
