Believe it or not but I’m not going to try to guess what the next Afterpay Touch Group (ASX: APT) will be. Instead, here’s what I would buy with $2,000…
An ASX 200 ETF
If I had $2,000 to get started in investing, I would buy an ETF that tracks the ASX 200. Something like the BetaShares ASX200 ETF (ASX: A200) or Vanguard Australian Shares Index (ASX: VAS) to track the ASX300.
The reason I would do this is for diversification.
Why? Diversif-why
Having a diversified portfolio is important to provide balance and reduce risk, as this video shows:
If you only have $2,000 to invest, putting it all into one share can be risky.
If you put the $2,000 into one company, you are completely exposed to the risks that the business faces. You might do very well, or you might do very badly, but it essentially becomes a gamble.
Also, you won’t be able to buy shares in many companies with just $2,000 – and the brokerage fees would eat away at any return you might make.
For example, if you buy $500 worth of shares in four different companies, you might pay $10 brokerage per trade. This means you’re paying $40 when you buy the $2,000 worth of shares and another $40 when you sell. $80 is 4% of the original $2,000, so straight away you’ve lost a sizeable portion of any future returns.
One Fee, 200 Companies
By buying shares in an ETF, you can pay one brokerage fee (say $10) to get exposure to shares in 200 companies. This may give you exposure to the big banks like Commonwealth Bank of Australia (ASX: CBA), resource companies like Rio Tinto Ltd (ASX: RIO) and supermarkets like Woolworths Group Ltd (ASX: WOW). To buy the shares and sell them, you might pay 1% of the total value in transaction fees, which is still a much better option than the 4% mentioned above.
If one of the companies performs badly, it’s not going to worry you because you’re not overexposed to any one company.
Summary
In my view, buying a diversified Australian share ETF is the best way to get started in investing with a small amount of money. I have personally tried spreading small amounts of money across several companies, and it’s worked out in some cases and failed badly in others.
If you’re interested in what our number one ETF pick would be, check out the free report below.
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Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.
