Since October 2023, the stock market has been on a bit of a rally. The FTSE 100 is up nearly 10%, including dividends, and the FTSE 250 is on the verge of surpassing the 20% threshold, marking the start of a new technical bull market.
Seeing such a terrific performance following the dire 2022 correction is hardly a surprise. UK shares have a long track record of bouncing back from even the most catastrophic of financial disasters. And that’s why I’ve been steadily drip-feeding money into the stock market since mid-2022, finally reaping some tasty profits these past few months.
However, this recent surge in performance may be just the tip of the iceberg. For many businesses, a full recovery has yet to be completed. And while not all British enterprises will be able to bounce back, the few that do continue to offer investors some lucrative opportunities today.
With that in mind, let’s explore how I’d go about investing £5k in January to capitalise on the rally.
Continue pound cost averaging
During times of volatility, it’s generally the smarter move to drip-feed capital over time rather than invest in large lump sums. Why? Because should things take a sudden turn for the worse, investors still have sufficient capital at hand to capitalise on new bargain opportunities.
Timing the market is notoriously difficult, verging on impossible. So while it’s easy to say in retrospect that I should have invested all my capital at the end of last October, there was no way of knowing this was the smart move at the time.
In fact, most investors were busy predicting a complete collapse of the economy only a few months ago, making the prospect of investing giant sums a ludicrous idea.
This is why pound cost averaging is so powerful. It allows investors to capitalise on bargains without having to perfectly time unpredictable short-term movements in stock prices.
As previously mentioned, should a top-notch stock continue to drop, investors can now top up their position at an even better price, bringing their average cost per share down.
In 2024, I’ll still be using this technique. Recoveries can be just as volatile as tumbles. And while it’s encouraging to see valuations start moving in the right direction, this momentum may be short-lived should the British economy take a sudden turn for the worse.
Large-cap or small-cap?
The London Stock Exchange is home to thousands of British businesses across a wide range of sizes. Some are industry titans dominating the headlines, while others are tiny start-ups attempting to become disruptive. The latter was particularly hit hard lately. Given their small size makes securing financing far more challenging, especially in a higher interest rate environment.
But does that make them the better investment for my £5k in 2024? Not necessarily. Small businesses might be small for a good reason. And while there are plenty of examples of start-ups popping up to decimate an industry, there are countless others that fail miserably, falling to zero.
By comparison, large-cap enterprises tend to be more stable, albeit with more muted returns. Yet, even these businesses can find themselves in hot water on occasions. We’ve already seen multiple enterprises exit the FTSE 100 since the 2022 correction began, and more might soon follow.
So which one is the best investment? The answer ultimately depends on the individual and their personal risk tolerance. Regardless, capitalising on bargains today can still help propel a portfolio to new heights. At least, that’s what experience has taught me.
The post Stock market rally: how I’d invest £5k in British shares right now appeared first on The Motley Fool UK.
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