With the ongoing cost of living crisis, it can be hard to scrape together excess cash to invest in the stock market. After all, buying ASX shares can seem indulgent when there are bills to pay, mouths to feed and a roof to maintain.
But if you've got a spare $500 this March, putting it into the share market is a great move in my view. As with many things, the first step with investing is often the hardest. I can guarantee that the second $500 you invest in ASX shares is a lot easier to part with than the first. The third, easier still.
But the big decision remains: which ASX share does one spend their first $500 on? And it is probably going to be just one share, as $500 is the minimum parcel value one can directly buy on the ASX.
Here's what I'd do – speaking as someone who once struggled with this choice.
How to spend your first $500 on ASX shares this March
I would invest in a broad-market index fund or a diversified listed investment company (LIC).
One of the biggest risk factors for your first investment is picking a speculative stock in the hope that it will rocket in value. Speculative investing is a practice that is best left to professional investors. For someone starting out, boring is better.
I would also shy away from buying an individual company at all with your first $500. Even seemingly blue-chip shares can present more risk for a first-time investor than an investment that covers the whole market.
So instead, I would recommend an investment along the lines of the Vanguard Australian Shares Index ETF (ASX: VAS), the iShares Core S&P/ASX 200 ETF (ASX: IOZ), the Australian Foundation Investment Co Ltd (ASX: AFI) or Argo Investments Ltd (ASX: ARG).
The first two investments are both exchange-traded funds (ETFs) and index funds. This means that they hold every ASX share within an index. In VAS' case, this is the S&P/ASX 300 Index (ASX: XKO), and in IOZ's, the S&P/ASX 200 Index (ASX: XJO). These indexes track the largest 300 and 200 shares on the market respectively.
That means each fund holds everything from Commonwealth Bank of Australia (ASX: CBA), Woolworths Group Ltd (ASX: WOW) and Telstra Group Ltd (ASX: TLS) to JB Hi-Fi Ltd (ASX: JBH), Harvey Norman Holdings Limited (ASX: HVN) and Xero Ltd (ASX: XRO).
What are the benefits of these investments for a first-time investor?
In this way, your $500 investment is spread out over hundreds of companies, rather than just being in one specific business. This enhances your diversification while removing the risk of your investment going to zero almost completely.
The listed investment companies AFIC and Argo function very similarly. They don't blindly track what these indexes are doing and have active managers looking after your money instead. But they still spread out your investment over a huge portfolio of diverse ASX shares.
I think a $500 investment in any one of these four options is a prudent way to dip your toes into the world of investing this March. They are simple investments that all have long track records of delivering meaningful returns to their stakeholders. In hindsight, I certainly wish my first purchase of ASX shares had been one of these.
