Here’s how I’d invest £3,000 if I was starting from scratch today

Roland Head explains how he’d start investing today by creating an instant portfolio. He also highlights two small-cap stocks that look cheap at current levels.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It isn’t always easy to know how to start investing. When I began, I faced two big challenges. First, it felt like there were too many shares and funds to choose from. Second, I didn’t have enough cash to build a balanced portfolio.

With the benefit of hindsight, I’d do things a little differently. Here, I want to explain how I’d invest £3,000 today if I was starting from scratch.

Before I start, a quick health warning. Investing in the stock market can be a great way to build wealth, but the future value of shares is always uncertain. Share prices can fall and there’s no protection if things go wrong.

For this reason, I’d always make sure I had at least three-six months’ income saved in cash before I put money into the stock market.

How I’d start investing in stocks

Three thousand pounds is not a huge amount in stock market terms, but I think it is enough to build a decent starter portfolio.

What I’d do is invest £2,000 in an investment trust. This would give me exposure to a ready-made portfolio, run by professional management.

The one I’d choose is City of London Investment Trust (LSE: CTY). This trust invests in good quality large companies, with a bias towards dividend stocks. City of London’s largest holdings including drinks giant Diageo, British American Tobacco, Tesco and insurer Phoenix Group.

However, this trust is not just a FTSE 100 clone. Its portfolio also includes FTSE 250 dividend stocks and overseas firms such as Microsoft, and Swiss-based Nestle.

City of London shares currently offer a dividend yield of 4.8%. This is usefully higher than the FTSE 100 yield of around 4%. I also consider the trust’s payout to be exceptionally safe — it has increased its dividend for 54 consecutive years. That’s one of the longest records in the UK market.

What to watch

I feel confident I could put my money into City of London Investment Trust and probably never need to sell. But one risk that concerns me is that the trust’s focus on income could mean its share price growth underperforms the wider market during periods of strong growth.

Another possibility is that the trust will alter its strategy or increase its fees — both could leave shareholder returns lagging a cheaper index tracker fund.

However, these risks would not stop me buying City of London Investment Trust. On balance, I think it would be an ideal way for me to create a starter portfolio with limited cash.

Here’s how I’d invest the final £1k

I’ll admit City of London Investment Trust is quite boring. It’s never likely to make headlines or deliver the kind of rapid gains possible with a successful growth stock. 

Personally, I’ve got no problem with this. Where my money is concerned, I don’t want too much excitement. But as an active investor, I do want to have a chance of beating the market and finding big winners.

For this reason, I’d use the final £1,000 of my £3,000 budget to invest in small-cap growth stocks. The smallest amount I’ll invest in a single stock is £500, to limit the impact of trading costs. With £1k, I’d be able to add a couple  stocks to my portfolio.

So here I’m going to look at two small-cap stocks I’m interested today.

#Small-cap 1: a genuine bargain?

My first pick is currency exchange specialist Argentex (LSE: AGFX). This £100m company specialises in providing forex services to companies and wealthy individuals. After a difficult period in 2020, this business appears to have returned to growth.

Revenue rose by 33% to £15.7m during the six months to 30 September, while pre-tax profit was up 22%, at £3.3m. Profit margins are high, at around 27%. Argentex also converts most of its income to cash, supporting a useful forecast dividend yield of 2.6%.

Founder and chief executive Harry Adams owns 12.3% of Argentex stock. Therefore, I reckon his interests should be well-aligned with those of shareholders.

The main risk I can see is this sector is increasingly competitive. There are a number of smaller companies who are cutting the cost of foreign exchange and fighting to take market share from the big banks.

There’s no guarantee that Argentex will be a long-term winner. But the stock looks cheap to me on 11 times 2022 forecast earnings. If it can hit earnings growth forecasts of 34% for the current year, I think the shares could rise sharply. This is a stock I’d like to add to my portfolio.

#Small-cap 2: a UK consumer favourite

Sofa and carpet retailer ScS Group (LSE: SCS) benefited from a surge of pent-up demand last year and delivered very strong sales.

The company says that new orders have now returned to pre-pandemic levels after last year’s post-lockdown surge. But ScS’s order book of £132m at 20 November is still nearly double the level seen before the pandemic. This suggests to me that profits should be strong this year as the order book is gradually delivered.

One attraction for investors here is that ScS does not have to pay upfront for its stock. Instead, it collects a customer deposit and then orders from its suppliers. Customers must pay for their products before delivery, but ScS does not normally pay its suppliers until the end of the month following delivery.

As a result of this model, the retailer generates a lot of cash. At the end of the last financial year (July 2021), the group reported net cash of about £50m, excluding customer deposits.

The main risk I can see is that when ScS next reports, we’ll find an order slowdown since last year has continued. With travel likely to reopen this summer, people may choose to spend on holidays instead. Rising inflation could also be a problem, as it may put household finances under pressure.

As I write, its shares are trading on just eight times forecast earnings, with a forecast dividend yield of 5.9%. I think the shares are probably cheap at this level, especially given the company’s net cash position. So ScS is a stock I’d consider buying today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco, Diageo, Microsoft, and Tesco. 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.

More on Investing Articles

Smart young brown businesswoman working from home on a laptop
Investing Articles

Have I left it too late to buy Nvidia shares?

When the whole world was racing to buy Nvidia shares, Harvey Jones decided they were overhyped. Does the recent dip…

Read more »

Dividend Shares

I asked ChatGPT to pick me the best passive income stock. Here’s the result!

Jon Smith tries to make friends with ChatGPT and critiques the best passive income pick the AI tool suggested for…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Hargreaves Lansdown’s clients are buying loads of this US growth stock. Should I?

Our writer's noticed that during the week after Christmas, many investors bought this US growth stock. He asks whether he…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Greggs shares plunge 11% despite growing sales. Is this my chance to buy?

As the company’s Q4 trading update reveals 8% revenue growth, Greggs shares are falling sharply. Should Stephen Wright be rushing…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

Will ‘biggest ever Christmas’ help keep the Tesco share price climbing in 2025?

The Tesco share price had a great year in 2024. And if 2025 trading continues in the same way, we…

Read more »

Investing Articles

This dirt cheap UK income stock yields 8.7% and is forecast to rise 45% this year!

After a disappointing year Harvey Jones thinks this FTSE 100 income stock is now one worth considering for investors seeking…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

With much to be cheerful about, why is this FTSE 250 boss unhappy?

JD Wetherspoon, the FTSE 250 pub chain, is a British success story. But the government’s budget has failed to lift…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

2 huge investment risks I’m worried about in 2025

Ken Hall looks at two big investment risks that are keeping him up at night as we enter 2025 with…

Read more »