If you have £10k to invest, but you cannot decide where to put that money, especially with the low-interest rates offered by the banks and the unpredictable rates and effects of inflation, we’ll help you make the smart move. But before we look at some of the potential places you’d invest in, we have a couple of questions for you to answer.
While it’s understandable and tempting to find the best ways and places for your money to work for you, the truth is that you must be smart and honest about why you are putting that money away and if the options available at the time are suitable for you, or not.
Here are the questions you need to answer;
Best Places to Invest £10,000 in 2021
Do you have a rainy day fund?
While most of us think about investing our money somewhere when we come across £10k or even less, we often fail to recognize the importance of putting money away for rainy days. Some investments are limiting in terms of access to finances when the need arises, and you need to avoid such options.
So, before settling on an investment option, think about how much of your emergency fund cash is easily accessible should an emergency arise? Before investing your money, especially in a long-term investment instrument, your emergency stash should have enough zeros to carry you through emergencies. You don’t want to be one of the guys who run for the high-interest payday loans because you have a car or home repairs emergency.
How much money do you need in your emergency fund? Well, this amount is variable for most people, but we recommend having an equivalent of one month’s salary saved up in the emergency fund. Note, however, that having 3 months’ worth of savings in your emergency fund is the smarter move, particularly for the overcautious.
What all this emergency fund talk means is that if you have £10k at hand to invest with zero or less than your one month’s worth in salary stashed away, then it would make more sense for you to put the £10k in your emergency fund instead of investing it.
How long can you keep the money for?
Besides confirming that you have enough money stashed away in your emergency fund account, you must determine whether your current financial state allows you to invest in a short-term or a long-term investment instrument. So, what does your investment horizon look like?
A short-term investment option means that you’d like to get back your principal plus interest in the next few years; this would make savings account an excellent alternative for you. However, if you can stay without the £10k for more than 5 years, then you’d be looking at the long-term investment options/ instruments.
What’s your risk profile?
Your risk profile is different from the risk profile of your friend or partner. But how do you know your risk profile?
An individual’s risk profile is determined by the individual’s risk appetite, as well as the individual’s capacity for loss.
The risk appetite represents the amount of risk you’d be comfortable taking. And you may not like to hear this, but not everyone is built for the risks of investment. For example, if you are in a constant state of anxiety, then investing, especially in the long run, might not be for you. So, to understand your risk appetite, think of the unpredictability of investments, and determine If you will be comfortable with the discomfort.
The capacity of loss, on the other hand, means how much you’d afford to lose. Investment returns are unpredictable, often going up and down, meaning that if you have to get your money out when the market returns are too low, you will get less money than you put in. So, are you willing to lose some money, and how much can you lose?
A review of your portfolio would allow you to determine exactly how much you can lose comfortably, or if you are willing to lose any money.
Find an investment adviser if you are having a hard time determining what your risk profile is.
Remember that for you to invest £10k and get good returns from the investment, you need to consider these factors:
The time-frame of the investment
Strategies that would minimize the investment costs and fees
Your investment goals
Which are the best places for you to invest £10k in 2020?
While there is a huge array of share options that you could invest in today, but to be on the safer side, you should consider investing in companies that have been on the market for a long time. Despite the unpredictability of the market, established companies that trade in stocks are rather stable, and even when you factor in inflation, you’ll still earn something if you put in the money for a long time.
So, how do you pick the shares to invest in? Well, start by investing in the FTSE 100 Tracker Fund. FTSE 250 is also a good option with historical reports indicating that FTSE 250 often outperforms FTSE 100. You should beware, however, that the FTSE 250 shares are rather volatile, and you should only choose it if you are looking at a long-term investment option.
We recommend investing 40% of your £10k in the FTSE 250 shares. The rule of the thumb in investments is never to invest everything in one kind of investment class. Diversification spreads your risks by mitigating any effects of downturns in the markets you invest in.
While most funds around tend to under-perform, you could invest your £10k in a high-quality fund, an EFT, or in investment funds. The trick is to identify the encapsulating investment strategies in addition to the investment markets in the active and the passive investment range to identify the options that work best for your portfolio.
A good example if you are looking for a specific investment fund to invest in would be the Fundsmith Equity, which is not only a performer but also allows investments wherever the fund wishes to invest. Launched in 2010, this fund has performed well over the years, across a number of asset classes and sectors.
On the other hand, if you are looking for investment exposure in the UK markets, you’d have to opt for companies like the Lindsell Train UK Equity, whose fund managers operate a rather high conviction and a low turnover approach.
And if you’d rather the emerging markets and willing to deal with the associated high investment risk (with the promise of high returns), then you’d want to try investing in the emerging markets such as the JPM Emerging Markets Trust, the largest, most competitive global emerging markets trust that invests in the biggest emerging markets from China and India to Brazil and South Africa.
If you are thinking about the safety of your investment, you might want to invest 40% of your £10k in two of the most reputable low-cost bonds. Besides the reduced investment risk, the investment in bonds would also form a great base for your portfolio.
Generally speaking, bonds are safer than stocks, with the best part being the fact that the bonds offer a steady and fixed income source while remaining one of the least volatile investment options.
Bonds also move in the opposite direction to investments in stock, meaning that the bond prices go up when the stock markets crash. Given the direction of the bonds, your portfolio will remain safe from market volatility.
The cherry on the cake is that there is a huge range of reliable, low-cost bond funds that you could invest in.
If you are unsure about the best bonds to invest in, opt for the government bonds for an investment safety net or funds that invest in the corporate debt for a high-interest investment.
Now that you have an investment portfolio base in place, you might want to add some risk to your investment portfolio. Besides the local markets, you could also invest in the global markets through an international stock fund like an EFT. iShares MSCI World GP Hedge UCITS EFT is one of the stock funds you could invest in to boost your global portfolio. Note that this EFT is hedged in the sterling, saving you from fluctuations in foreign currency. These stocks are invested in UK equities, US, and Japanese markets. Despite the potentially good returns from such investments, you’d be wiser investing only 20% of your £10k in the stock funds.
Some of the reasons why stock funds make a good investment option include the fact that the stocks are a form of paper investment, and you don’t have to manage the investment. Also, the stocks often represent having an ownership stake in the profit-generating company. Stocks pay dividends, they are quite liquid, the stocks may rise in value, and you can invest across the borders. Consider investing in high-dividend stocks like Ally Invest, E*TRADE, or TD Ameritrade.
The Lifetime ISAs refer to the ISAs that are designed to help out younger folks trying to save for a first home or the ones trying to put away retirement money. If ISA sounds like something you’d be interested in, then you could save up as much as £4,000 annually in investments or cash. The best bit about the ISAs is that the government offers incentives in the form of a 25% top-up for all new contributions. In this case, an investment of £4,000 means getting £1,000 as free cash from the government. The only catch is that the bonuses stop when you hit the big 50.
The other alternative you could try is the Cash ISA. Like the lifetime ISA, the cash ISA is a form of savings product. It pays the interest while protecting your money from taxes – you won’t have to pay tax on earned interest from Cash ISA. Note, however, that you have to lock away your money in the ISA account for some time.
How is Cash ISA different from a normal savings account? Well, the savings accounts earned interest is less, and the money is not kept away from the taxman.
Pension products are designed to fund your retirement. The contributions into the pension fund are designed to benefit from tax reliefs at the highest marginal rate, and the best part is that all the investments that are held in the account will have a tax-free growth rate.
Robo-Advisers/ Digital Wealth Managers
Thanks to technology, new investors have access to many low-cost investment options. All you need to do to enjoy these options is to identify the best digital wealth manager to invest with. The Robo-adviser you choose will invest and manage your investment for you, often through investments in pensions, shares, and stocks. You can monitor your investments from your smartphone. Examples of Robo-Advisers include investors, Nutmeg, and Vanguard.
If you cannot handle the investment risks or if you have a very low-risk profile, then you’d want to put your money away in a simple savings account. The savings account should earn you a predetermined amount periodically while your cash is nestled away from the unpredictability of the investments market. The other advantage of saving in a savings account is that even if the bank goes bust, your money will be safe, thanks to the protection of the Financial Services Compensation Scheme.
The biggest drawback of putting money in a savings account is that the interest rates are extremely low.
At the end of the day, the best place for you to invest £10,000 depends on your risk profile, how much you can invest, how long you can keep that money invested elsewhere, and the investment instruments you are most comfortable with. The best investment option for you should also be an affordable one. But don’t forget that in other cases, that £10,000 is better kept in your emergency fund than in stocks if you don’t have money stashed away for rainy days.