Small savings can often add up remarkably fast. During the pandemic, like many, I found myself using my car less and going on fewer holidays. I’d like to use some of that extra cash to earn some more money. And I’d aim to do so by investing in UK shares.

Making money work harder

With a £1,000 lump sum, I could put it in a bank savings account. But with interest rates so low, I’m unlikely to earn much. Instead, I’d prefer to buy some carefully chosen UK shares. Yes, there are more risks involved with shares and putting it in the bank would be safer. But I want my money to work harder for me, and I’d rather take some risk to earn a potentially much greater reward.

Often the best time to invest can be in a crisis. Shares can fall for many reasons including when the future is less certain. But timing when to buy and sell shares is very difficult. Instead, I’d just get started now. There is a well-known investment saying, “Time in the market beats timing the market”. Over time, I’d expect my companies to grow. So as long as my time horizon is long enough, I’m confident my shares can weather any short-term storms.

Investing £1,000 in UK shares

To start, I’d split my £1,000 equally into five shares. By investing in a diversified group of shares I’d aim to spread my risk and hope to benefit from a range of features. But by owning just five shares, each one should still have a meaningful impact on my total performance.

When picking the best shares, here are the features I want to look out for. UK shares can be grouped into small-cap, mid-cap, and large-cap. They can also feature different styles including growth, value, income, and quality. Finally, I’d consider spreading my shares across several sectors.

Favourite sectors

One sector that I like right now is consumer staples. Companies in this sector typically have a relatively long track record. They also tend to own popular brands that customers frequently purchase. Examples include Unilever and Diageo.

I’d also like to own some faster-growing shares, for instance from the technology sector. Although there can be more competition in this space, several UK tech stocks still look appealing. Currently, I’d consider Computacenter and Experian.

Finally, I’d want to own some dividend shares. Dividends are regular payments to shareholders from a part of the profits. Over time, these small payments can add up and can make a meaningful contribution to my total return. Financials and utilities typically have above-average dividend yields. For instance, insurance group Legal and General currently pays a 6% dividend yield. And utility provider SSE pays 5%. Both are well above the FTSE 100 average yield of 3.3%.

Overall, I’d hope to earn a decent return on my investment. There are no guarantees when it comes to shares. But by owning a selection of stocks across sectors and styles, I should be able to create a reasonably balanced portfolio for my £1,000.

Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo, Experian, and Unilever. 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.

I like the idea of making a passive income from the stock market, if and when I retire. I’d want my basic standard of living covered by pensions and low-risk investments. But I could invest surplus cash in the stock market, targeting extra income from dividends.

I’ve been looking at four approaches I could use. Of course, with all stock market investments — including these approaches — there’s a risk to my capital. Dividends aren’t guaranteed either. In addition, I can see different advantages and disadvantages to the four approaches I’ve been looking at.

Low-cost passive income

An index tracker, such as iShares Core FTSE 100 UCITS ETF, is one option for me. This simply holds the UK’s 100 biggest companies in the same proportions as the index.

The top five holdings are currently Shell (7.4%), AstraZeneca (6.7%), HSBC (5.4%), Unilever (4.8%), and Diageo(4.3%). And the running dividend yield is 3.7%.

One advantage of this iShares ETF is its low cost. It only has to trade occasionally when a company drops out of the index and a new company comes in.

One disadvantage is that the FTSE 100 includes some companies that don’t pay dividends. This pulls the overall yield down a bit.

Shooting for a higher yield

An alternative to a FTSE 100 tracker for me might be iShares UK Dividend UCITS ETF. This holds the 50 highest yielding companies in the FTSE 350 index and is rebalanced semi-annually.

With yield being a key factor in the weighting of the companies, its top five holdings are somewhat different to the FTSE 100’s. They’re currently British American Tobacco (5.9%), BP (5.1%), HSBC (4.9%), Rio Tinto (4.9%), and Vodafone (4.7%).

One advantage of this ETF is its high running yield of 5.3%

One disadvantage is that its mechanical focus on yield takes no account of dividend sustainability.

One eye on income growth

Another approach I could take for a passive income would be to entrust my money to the manager of an equity income investment trust, such as City of London.

This trust has a running yield of 4.7% and has increased its dividend for 55 consecutive years. Its current top five holdings are Diageo (4.4%), British American Tobacco (3.9%), Relx (3.4%), Tesco (2.8%), and Unilever (2.7%).

One advantage is that City of London, like a lot of investment trusts, maintains a revenue reserve. This has enabled it to keep its own dividend ticking higher, even in years when some of its underlying holdings have suffered dividend setbacks.

One disadvantage is I’d be relying on the trust managers to maintain their past performance.

DIY passive income

A fourth approach I could take is one I currently favour. Namely, build a portfolio of dividend stocks and a revenue reserve myself.

One advantage is I’d be free to choose exactly what companies I invest in and the weighting I give them in my portfolio.

One disadvantage is, compared with the other approaches, I’d have to spend a bit more time keeping up to date with companies’ results and so on.

But then, as a long-time Fool, that’s something I’ve always enjoyed!

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco, Diageo, HSBC Holdings, RELX, Tesco, Unilever, 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.

With the Stocks and Shares ISA deadline (5 April) fast approaching, I have been looking for investment trusts to buy for my account. 

I believe these companies are one of the best ways to invest in the stock market. They give me the option to invest and a diverse portfolio of stocks managed by experienced investment professionals at the click of a button. 

Unique qualities 

What’s more, investment trusts can also hold back 25% of the revenue every year. This revenue cushion can then be used to make up for revenue shortfalls in periods of economic and stock market volatility.

By using this reserve, these corporations can maintain their dividends to investors, whereas many other companies and investment vehicles may have to reduce their payouts if profits fall.

Unfortunately, there is a drawback to owning investment trusts in my Stocks and Shares ISA. These companies usually charge a management fee. This fee can eat into investor returns. Some even charge a performance fee on top of the regular management fee. This can have an even more significant impact on shareholder returns in multi-year periods. 

Despite this drawback, I believe the benefits of investment trusts outweigh the negatives. And I would buy both of the trusts below for my Stocks and Shares ISA, considering their attractive qualities. 

Stocks and Shares ISA investment trust buys 

The first on my list is the Polar Capital Technology Trust. This company specialises in finding technology investments around the world. I think it is a great way to build exposure to this fast-growing industry, although the single sector exposure could be a risk. If technology stocks suffer a significant sell-off, this trust may underperform the market. 

Still, it looks as if the world is only becoming more reliant on technology, and I want some exposure to this trend. I believe Polar Capital’s offer provides an excellent opportunity to build exposure to this fast-growing sector. The trust is also managed by an experienced team of professionals who have a deep understanding of the technology sector. 

HarbourVest Global Private Equity allows individual investors to build exposure to private equity investments. This industry is usually off-limits to anyone but high net worth individuals.

HarbourVest strategy is designed to give investors “part-ownership of a diversified portfolio of underlying private companies, spanning investment stages from early venture to large-cap buyouts“. 

This is a unique strategy, but it comes with a cost. The company charges an annual management fee of more than 2%. This could really eat into returns, especially if the trust’s choices turn sour.

Despite this fee, the trust has been a winner. It has added 120% over the past five years. While past performance should never be used as a guide to future potential, I reckon this track record shows the team at HarbourVest is earning its fee. As such, I think it deserves a place in my Stocks and Shares ISA. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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With impending rate hikes approaching, investors are becoming increasingly wary of earnings potential being stifled. These concerns are even more pronounced around companies with high levels of debt as a high interest rate environment may damper their ability to repay their liabilities.

Thankfully, Alphabet (NASDAQ: GOOGL) does not have to worry about such an issue, as the world’s third largest technology company has a rock-solid balance sheet. It boasts an extremely healthy 5.1% debt to equity ratio, $188bn in short-term assets ($64bn in short-term liabilities), and $171b in long-term assets ($43bn in long-term liabilities). It has almost $140bn worth of cash and equivalents, giving it plenty of capital to continue investing in future growth.

High-quality earnings

As lower profit margins in a high inflation environment continue to hit company margins, Alphabet defies the trend with an increasing profit margin of 29.5% in Q4 2021; this is an increase of 7.4% Y/Y. Such high-quality earnings give me a tremendous amount of confidence as it demonstrates the company’s ability to maintain high profitability in times of difficulty.

As such, I continue to place confidence in Alphabet’s management, and specifically CFO Ruth Porat, who has shown her financial acumen since she took the reigns in 2015. Having had experience on Wall Street as CFO of Morgan Stanley, I have no doubts that Alphabet will be able to weather the storm of a high inflation environment, and potentially a slower economy to come by allocating capital efficiently.

Cheap valuation

At the time of writing, Alphabet has a price-to-earnings (P/E) ratio of 23.63. This makes Alphabet’s stock reasonably priced considering that the tech sector’s average P/E ratio is currently at 27.2. The stock price screams better value when looking at analysts’ price targets for the stock, with an average price target of $3500, presenting a 32% upside to its current share price.

Although Alphabet’s shares popped over 7% after its stellar earnings report at the beginning of the month, it has fallen 10% since due to macroeconomic influence. Therefore, as a long-term shareholder, I see this as an opportunity for me to buy more shares for my portfolio at an extremely reasonable price. Additionally, the board’s decision to make a 20-1 stock split to lure smaller investors and encourage higher trading volume in June will do the stock a lot of good as it shows that the company is thriving.

One thing to look out for

Although Alphabet possesses rigorous fundamentals, a huge majority of its revenue stems from Google and YouTube, by the way of search and video advertisements. Whilst the two platforms have a monopoly in their respective spaces, there is always a risk that a change in sentiment within the advertising industry could put a big dent in Alphabet’s profit margins. Nevertheless, I am confident that just like utilities, energy, and consumer staples, Alphabet’s business model makes it a hybrid defensive-growth stock as technological adoption continues to increase across many industries today.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Choong owns shares of Alphabet (Class A Shares).  The Motley Fool UK has recommended Alphabet (A shares) and Alphabet (C shares). 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.

The investments of a billionaire investor like Warren Buffett can be massive. That can seem a far cry from the more modest sums put into shares by most private investors. But, just as a weekend runner can learn lessons from an Olympian, a private investor like myself can draw on the investment choices of Buffett to improve my own chances of success when picking shares for my portfolio. Indeed, Buffett himself has explained that he reckons he could significantly improve his investment returns if he was investing much smaller sums.

If I had £500 to invest right now, I would draw on Buffett’s wisdom in deciding what shares to buy with it. Here is how.

Invest for the long term

With £500 to invest, it can be easy to be impatient. Even a 20% return would only give me £100. An average rate of return would mean I need a very long time to get rich from my £500!

But impatience can be a huge mistake when it comes to investing. Having a short-term focus can lead me into bad decisions. Often it would mean I was thinking more like a trader than an investor.

Buffett does not go in for that at all – and for a reason. His investment philosophy is built on buying a stake in promising businesses at an attractive price, then sitting back and letting time work its magic. That approach relies on having the patience and nerve to take a long-term view. Buffett has said that his preferred holding time for shares is “forever”. In practice that may be an exaggeration, but many of Buffett’s shares have been held for years or decades.

Actually I think this is a useful acid test of a lot of things, from buying shares to choosing a career or neighbourhood. If I ask myself the question, “would I be happy with this position in a year?” I may answer positively. But posing myself the tougher question “would I be happy with this position in a decade?” can focus my mind. That could help me only to go for the opportunities I am deeply enthusiastic about. That could help boost my investment returns. As Buffett says, if someone would not be willing to hold a share for 10 years, they should not think about holding it for even 10 seconds.

Circle of competence

Buffett is emphatic about the importance of only investing in businesses and industries he feels he understands. That means that he misses out on some great opportunities. On other occasions, even when he finally gets into a company like Apple, Buffett misses out on large gains he could have had by investing earlier.

So, why is Buffett so insistent on sticking to his knitting? In short, he sees his job as allocating capital. To do that, he looks at the prospects for a company in future. He then compares that to its current valuation. If he sees a sizeable gap between what he thinks the company can earn in future and its valuation today, Buffett may decide to invest.

But estimating a company’s future earnings potential can be hard enough even when one understands it. For example, what will the smartphone market look like in a decade? Will Apple remain an important player? Or will competitors have eaten into its revenues and profit margins?

Buffett is smart enough to realise that it is difficult enough to assess the outlook for a company when he understands its business model well. Like the rest of us, he has little or no chance of doing it well when he does not understand the business in the first place. The Buffett lesson here is relevant to me as a long-term investor rather than a trader or speculator. I focus my investment activities on companies in business areas I think I understand well enough to make an assessment on future prospects.

Warren Buffett thinks like an owner

With £500 to invest, my stake in a company is probably going to be tiny. Apple has a market capitalisation of more than £2 trillion, for example. So realistically, I will be a very small fish as an investor.

But I think it still makes sense for me to follow Buffett’s approach when it comes to assessing possible investments for my portfolio, by thinking like an owner. For example, if I look at a company and feel its bloated cost base would not be acceptable to me if I owned it, then I would probably not be willing to buy shares in it. As an owner I could at least try to tackle bloated costs, but as a small shareholder I could not. Similarly, a company sacrificing long-term potential for short-term profits would not sit well with me if I owned the whole company. I would not want to buy shares in such a company, either.

Buffett owns many companies outright, but he is also just one shareholder among many in companies such as Coca-Cola and Bank of America. Yet the approach he takes as a shareholder is the same as the one he takes as an outright owner. He looks at a company’s business model, how it is being run and how likely it is to maintain or grow its free cash flows. Thinking like an owner does not mean being misguided about my role as a small shareholder. Instead, it involves applying the same sort of analytical approach to assessing an investment one would use if looking at buying the whole business. Not only do I think that can help me invest with £500, I hope it might also improve my business analysis skills to help me become a better investor in future.

Christopher Ruane has no position in any of the shares mentioned. Bank of America is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool UK has recommended Apple. 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.

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Warren Buffet knows the importance of passive income. The Oracle of Omaha is famous for saying that if you don’t find a way to make money while you sleep, you will work until you die. Like Buffett, I generate passive income by owning shares in companies that pay dividends. But Buffett has two important warnings about trying to get rich like this. The first is that dividends don’t make people rich. The second is that assessing opportunities to make money while I sleep requires caution.

Dividends don’t make people rich

Buffett’s first piece of advice is to stop thinking that dividends make investors rich:

We don’t get rich on our dividends that we receive, although we’re happy to receive them. We get rich on the fact that the retained earnings are used to build new earning power, repurchase shares, which increases your ownership in the company and Berkshire has retained earnings since we started. That’s the only reason Berkshire is worth a lot more—it’s that we retain earnings.

What makes investors rich, according to Buffett, is not receiving dividends. Rather, it’s retained earnings being used to generate future earnings and reduce the company’s share count. This makes investors rich by giving them a larger share of a larger company.

Don’t reach for yield

Buffett also says that I should be conservative when assessing passive income opportunities:

People say, “Well, I’ve saved all this money all my life and now I can only get 1%. What do I do?” The answer is you learn to live on 1% unfortunately. And you don’t go and listen to some salesman come along and tell you, “I’ve got some magic way to get you 5%“.

Buffett is very clear here that I should stick to high-quality investments even if dividend yields are low. This advice is particularly relevant at the moment. Interest rates have come down, resulting in stock prices climbing and dividend yields falling. Apple, for example, had a dividend yield of 2.4% in 2016, has a dividend yield of 0.5% today.

Following Buffett’s advice

I don’t want to make low-quality investments. But I also don’t want to settle for a 0.5% return. So what should I do to follow Buffett’s advice and make money while I sleep? 

The answer is to look beyond the company’s dividend yield for a return on my investment. Instead of evaluating an investment using the money that a company pays out, I should do it by looking at how the company retains its earnings and uses them to make more money and buy back shares. Buffett’s point is that passive income doesn’t have to be distributed. I can make money while I sleep by having a company that I own growing its earnings and using the cash it generates to buy back its own stock.

I’ve been following Buffett’s advice to make money while I sleep. That’s why I’ve been buying shares in Citigroup, which has an opportunity to repurchase shares at advantageous prices. It’s also why I’ve been buying Meta Platforms, which retains its earnings and uses them to grow efficiently. And it’s why I’ve been buying Berkshire Hathaway, which is run by Buffett himself. The steady process of having companies retaining and compounding their earnings while repurchasing shares is how I plan to make money while I sleep.

Stephen Wright owns shares in Berkshire Hathaway (B Shares), Citigroup, and Meta Platforms. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Citigroup is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool UK has no position in any of the shares mentioned. 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.