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With FTSE shares delivering a long-overdue burst of growth this year, investor confidence is on the rise. But despite the welcome upward trajectory, plenty of British businesses continue to trade at cheap valuations. That’s terrific news for anyone with capital to spare, since these bargains could deliver superb returns in the long run.
However, for those who are just beginning their investment journey, building a balanced investment portfolio can be a daunting task. After all, there are a lot of conflicting opinions flooding the financial media landscape so it can be tough working things out.
So let’s try to simplify the situation. Here’s how I’d invest my first £10k if I was starting from scratch today.
Boring is usually best
Despite what a lot of headlines and posts on social media would suggest, getting rich quickly in the stock market’s often more fantasy than reality. There have been several cases of investors unlocking exorbitant wealth in a small space of time. But what’s often left out of these stories are the countless investors who were left with almost nothing trying to replicate these successes.
In the short term, the stock market behaves a bit like a casino, as stock prices are driven by emotional sentiment. And as everyone knows, human behaviour can be quite volatile and difficult to predict.
Fortunately, over the long term, stock prices end up following the underlying fundamentals of a business. As such, the stocks that end up delivering the best sustainable performance are almost always high-quality businesses with a wide range of competitive advantages. So when building a portfolio of FTSE shares in 2024, that’s exactly what I would focus on.
Penny stocks might be exciting. But with the vast majority of them trending to zero after failing to deliver on unrealistic expectations, it’s not the sort of investment I’d want to have when starting out. Instead, owning cash-rich industry leaders is far more likely to grow wealth in the long run.
These firms are undoubtedly more boring. But boredom in the stock market can be powerful. Dull firms are often ignored, leading to fantastic bargain-buying opportunities and even greater returns for prudent investors paying attention.
Best industry titans to buy now?
To minimise risk, it’s generally wise to diversify a portfolio across multiple industries. The easy solution would be to just find the biggest firms on the London Stock Exchange in each sector and then snap up some shares. However, that’s not likely to yield terrific results. That’s because industry leaders can end up becoming complacent as their size leads to inefficient capital allocation and strategic decision-making.
A perfect example from the telecommunications sector would be BT Group (LSE:BT.A). The firm loaded up its balance sheet with a jaw-dropping amount of debt as earnings tumbled to try to service both its infrastructure costs as well as its surging interest expenses. Subsequently, the stock price is down by over 70% since 2016, making it a pretty terrible investment.
A new management team’s been brought in to try and right the ship. And to be fair, it’s making some encouraging progress to fill the cracks in the balance sheet. But to avoid adding a BT-like business to a new £10k portfolio, investors need to look beyond surface-level figures and inspect what’s going on under the bonnet.
