How to invest $500 in ASX shares today

If you've saved up some cash but don't know how to invest in ASX shares, here are some tips on where to spend $500 today.

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It's easy to think you need to be rich to invest in ASX shares, but you can start with as little as $500. While you might dream of building a multi-million-dollar share portfolio, sometimes it's good to start small.

Every little bit of cash invested can help to build your financial future. Here's how to get started and invest $500 in ASX shares today.

Diversification, diversification, diversification

Before you dive into investing today, it's best to remember diversification is key. If you invest $500 into one ASX share like Altium Limited (ASX: ALU), that could have a big payoff. However, if that one company starts to have problems, your portfolio will be at risk.

Diversifying means you can reduce your risk exposure to one company. That means you still take on market risk, such as the economy falling lower, but individual company risk is minimised.

So can you really diversify with just $500?

Invest $500 in ASX shares today

The short answer is yes. The best vehicle for instant diversification is an exchange-traded fund (ETF). ETF providers create portfolios that track a benchmark like the S&P/ASX 200 Index (ASX: XJO). There are many ETF providers available including Blackrock, State Street, BetaShares and Vanguard.

That means that you can invest $500 into an Australian ETF and get diversified exposure to a huge number of shares. Essentially, one of these managers invests your money into funds that are designed to replicate the benchmark index, meaning you own a tiny proportion of many companies.

If you want diversified exposure to ASX shares, 2 good options could be Vanguard Australian Shares Index ETF (ASX: VAS) or BetaShares Australia 200 ETF (ASX: A200).

What you want to watch out for with ETFs is the management fee and the tracking error. Tracking error measures the difference between the benchmark the manager is trying to replicate and the actual ETF performance.

Foolish takeaway

Of course, ETFs are not the only way to invest $500 in ASX shares. The key advantage they offer is diversification, but perhaps you're particularly bullish on 1 ASX share and its future prospects.

Whatever your approach, only invest what you can afford to lose and make sure you're not gambling on short-term returns. Buying high-quality companies and holding for decades is a tried and tested strategy that has delivered for many investors.

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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