Some people spend years thinking about investing without actually making a move. It can seem a bit bewildering to decide how to start buying shares. But that is the crucial first step in building a stock portfolio.
If I had a couple of hundred pounds of spare money today and wanted to begin my investing journey, I would split it evenly across the two shares below.
Why I diversify
With a comparatively small amount of money, why would I not just stick to one share that I felt was my best investment idea?
This reflects the risk management principle of diversification. Even if I think a share is a great investment idea, I could be wrong. Some future event might hurt the share price badly, no matter how successful the company is today.
Growth and income
A common question among investors old and new is whether to go for growth or income shares.
The division is not precise. Some shares offer both, while sadly others turn out to offer neither. But I think it would be useful when I first start buying shares to understand the dynamics of both. For example, with income I may want to get used to the idea of the company’s performance not being very high-octane, but hopefully paying me dividends.
Owning growth shares, on the other hand, may give me experience of how they can sometimes move around significantly based on a company’s evolving business outlook. In reality, that is true of both growth and income shares. Dipping a toe in the water with both could help me understand such a dynamic.
Investment trusts
But with limited funds to start, investing in a single growth share may be more risky than I feel comfortable with. For example, I own Renalytix. But if I had bought the shares a year ago, I would now have a paper loss of 90%! If I had put in £100, my shares now would be worth just a tenner.
Although I want to get firsthand experience of owning a growth share – and that can involve seeing values go down as well as up – losing 90% of my investment value in a year could put me off buying any more ever!
That is why I would invest in Scottish Mortgage Investment Trust. Its shares are down 36% in the past year so it might not seem like an obvious choice. But past performance is not necessarily a guide to what will happen next. Scottish Mortgage is an investment trust that owns stakes in dozens of growth shares such as Tesla and MercadoLibre. So buying its stock could expose me in a small way to lots of growth stories at once.
How I’d start buying shares
As I said above, the line between growth and income can be blurred. Scottish Mortgage would hopefully offer me growth, and it also pays a dividend. But the dividend yield is just 0.4%. By contrast, City of London Investment Trust currently offers me a yield of over 10 times as high. Dividends are never guaranteed though.
Like Scottish Mortgage, it is an investment trust so offers me indirect exposure to dozens of companies. With a few hundred pounds invested in these two shares, I could start building a portfolio targeting both growth and income!
