£2K in savings? Here’s how that could be used to start investing today
Is it better to start investing with £2,000 or £200,000?
I would say £2,000.
For one thing, any beginner’s mistakes will hopefully be less costly.
We all like to think beginner’s mistakes are something other people make, not ourselves. But the stock market can be a complicated place and there are very few investors who get it right all the time.
Secondly, saving up £200k could take a long time for many people.
If someone was to start investing with £2k, they could potentially begin much sooner. Time matters, because a long-term timeframe can help increase the opportunity for investments to grow in value.
Getting ready to invest
That is not guaranteed to happen, of course. Shares can soar but they can also crash. Dividends can be axed, but they can also be doled out on an unprecedented scale.
So a vital first step for any new investor is learning at least the basics of how the market works. Concepts like valuing shares and keeping a portfolio diversified to reduce risks may seem basic, but they are important.
Before someone can start investing, they need a practical way to do it.
So another initial step would be choosing a share-dealing account or Stocks and Shares ISA to put the £2k into.
How to choose from thousands of shares available
What, then, about the step of deciding what shares to buy?
Before people start investing, they may think they can trounce the market. In practice, even beating it, let alone trouncing it can be challenging. It is possible, though.
So I think it makes sense for an investor to stick firmly to areas they understand. It helps to have a consistent standard of what to look for when assessing potential shares to buy.
Deciding the right level of risk is important. As some new investors overrate their capabilities, they take bigger risks than really suits them, sometimes without realising it.
I reckon a smart approach is to start with a high focus on risk management – it can be less costly than focusing too much on the potential rewards of a share and not properly assessing its risks.
Putting the theory into practice
Pulling those ideas together, I think insurer Aviva (LSE: AV) is one share someone new to investing could consider starting with.
The company is in a market that is both large and likely to stay that way: insurance.
In recent years, it has increasingly focused on its core UK market. That brings the advantage of playing to its strengths, but also concentrates risks so Aviva’s performance is now more closely tied than before to how the UK insurance market performs.
It has a large customer base, strong brands, and deep industry experience. The forthcoming acquisition of rival Direct Line could see those strengths become even more compelling.
However, one risk I see with the merger is that it distracts Aviva management from the core role of running the existing business.
Aviva cut its dividend per share back in 2020. But it has been growing lately and the current yield is £6.90 annually for each £100 invested (6.9%).
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More reading
- Here’s how an investor could aim for an annual second income of £50k with just £10 a day
- Here’s how £200 a week invested could target a £9,091 second income
- £20k in a Stocks and Shares ISA? Here’s how to target passive income of £633 a month
- Are Aviva shares worth me buying above £5 after a 23% rise over the year?
- £20k in an ISA? Here’s how it could generate £1 of passive income every hour — forever
C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
