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Being a student can be exciting, but it can also be daunting. Amid the challenges of paying bills and stretching budgets, putting money into the stock market might be the very last thing on many students’ minds. But, if I was a student starting out today and aged 18 or above, I’d happily put £300 to work by investing it equally across three different LSE shares.
I think that could teach me some very valuable lessons about investing that could help me for the rest of my life.
Lesson 1: diversification
The first simple, but powerful, investing practice this would teach me is diversification.
That basically means not putting all my eggs in one basket. It can help investors reduce their risk if a share they think will do really well turns out to be disappointing for any reason.
Lesson 2: stick to what we know
Higher education ought to broaden people’s knowledge and horizons.
One common mistake even among highly educated investors is investing in supposedly hot shares they do not personally understand. Maybe a friend has told them this is the next big thing.
Celebrated investor Warren Buffett emphasises the importance of staying inside one’s circle of competence, which means sticking to what we know. How much we know is not important, in his view (although he does value education). The key thing is sticking to it.
Lesson 3: look to the future
Getting a qualification like a diploma or degree is all about looking to the future.
But one mistake investors commonly make is focusing too much on the past. A company’s recent share price chart may show a solid upwards movement. But past performance alone is not necessarily an indicator of what will happen in future.
Building a starter portfolio
Bearing in mind those three lessons that apply both to student finance and investing later on in life, the three LSE shares I would spend my £300 on are Unilever, Vodafone and the City of London Investment Trust.
The first two are in the FTSE 100 index and the latter is in the FTSE 250. But, as past performance is just that, the reason I’d buy them is because of their future prospects.
Unilever and Vodafone are both UK-based but globally exposed businesses. Owning them could help teach me about the advantages of such an approach, like scale and the power of famous brands. That could help drive profits for both firms. But I would also discover some of the risks a multinational strategy involves. Those include exchange rate fluctuation as well as how a recession can hurt consumer spending — and company profits.
Meanwhile, City of London is an investment trust that buys other companies’ shares. So, even by putting £100 into its shares, I would gain diversification thanks to its portfolio spanning dozens of different businesses. If they do well, or badly, my stake’s valuation could go up (or down, of course).
Income boost
All three of these LSE shares pay dividends. But those are never guaranteed (lesson 4!).
However, investing £300 today in a share-dealing account or Stocks and Shares ISA, would hopefully me earn over £18 in dividends annually. I would also get some important investing lessons and firsthand stock market experience.
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