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£1,000 to spare! Here’s how I’d invest in the FTSE 100

macro shot of computer monitor with FTSE 100 stock market data in trading application

One of the best decisions I ever made was to start investing. It was daunting at first. I’d been so used to keeping my savings in a bank account where my money was ‘safe’. I can see how volatile stock prices can be by looking at the FTSE 100 each day. So the thought of my money potentially declining on a day-by-day basis was tough to get my head around.

But there’s also a large opportunity cost by keeping my savings in a bank as interest rates are so low. By contrast, investing my money in shares can lead to inflation-beating returns. Here’s how I’m planning my next £1,000 investment as I look ahead in 2022.

A FTSE 100 index tracker

Of course, I could use a passive investment like the iShares Core FTSE 100 ETF (LSE: ISF). This is a fund that aims to track a stock index, such as the FTSE 100 here. There’s no risk of a fund manager picking the wrong stocks with such tracker investments. But on the downside, I’m also not going to outperform the FTSE 100 index if I choose this option.

This ETF is up 13% over one year though, and has a 12-month dividend yield of 3.8%. I’ll also be diversified across 100 stocks if I invest my £1,000 in this ETF.

Nevertheless, returns for the FTSE 100 are never guaranteed, and the index could fall this year. It’s best to have a view on the index before using a passive strategy such as this.

Growth and income stocks

Today, my portfolio is diversified across a number of stocks. So this year I’ll look to add more using that £1,000 investment. My preferred strategy is to buy companies with strong prospects for growth in the years ahead. Auto Trader and JD Sports are expected to grow earnings by 86% and 69%, respectively, in their upcoming full-year results. Rightmove is another company with attractive growth potential as the UK housing market is booming right now.

But I also like diversifying my portfolio with income stocks. These are investments in companies that generate above-average dividend yields. They may not offer the best growth potential, but they can be a great way to increase my passive income stream. I’ll look to invest part of my £1,000 in Legal & General and Vodafone as these companies have achieved some of the highest 10-year average dividend yields in the FTSE 100. This shows me that the dividends from these companies have been dependable over the years. I also like the look of Aviva as it’s planning on returning significant cash to shareholders in the months ahead.

It’s important for me to keep in mind that any of my investments can decline in price, so it’s good to keep at least some savings aside. Nevertheless, long-term investing using these ideas can be a great way for me to build wealth.

The post £1,000 to spare! Here’s how I’d invest in the FTSE 100 appeared first on The Motley Fool UK.

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Dan Appleby owns shares of Auto Trader, Rightmove, JD Sports, Legal & General and Aviva. The Motley Fool UK has recommended Auto Trader, Rightmove, and Vodafone. 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.