Reader Question: Where is the best place to invest £10,000?
I have £10,000 pounds to invest what do you think is the best investment at this time?
My response:
This is a good question and a difficult one to give you a definitive answer to.
The first thing to point out is that there is no one size fits all answer to this question. The suitability of any given investment will depend on your personal and financial circumstances. For example:
your investment timeframe
your age
whether you are investing to generate income or growth
what is your attitude to risk
your existing investments
your tax status and available tax allowances
plus a swathe of other importance factors not listed. I would therefore always recommend that you speak to an independent financial adviser in the first instance who should be able to help. For help in finding a reputable financial adviser click here (and read my article 10 tips on how to find a good financial adviser). Having said that, most financial advisers are unlikely to be keen to offer their services to invest a sum of £10,000. That is because they now have to be explicit about their charges and fees. As a result many deem the level of remuneration they would receive from providing advice on your investment not to be cost effective. The alternative is to run your money yourself (often called DIY investing) and I explain how to do that later in this article.
But first I want to run through some important points for you to understand
Types of investment
There’s a huge range of investments available each with their own pros and cons. Whether you are investing for income or growth here is one of the best free investment guides* I’ve found online. It covers the basics of understanding investing and your own risk profile. It also provides a great checklist of questions you should ask before you make an investment. Best of all you can download it for FREE.
Investor or speculator?
One of the key factors which will determine where you might invest is your attitude to risk, as stated above. The more risk you are happy to take with your money the greater the potential returns, but you also increase the chances of losing some or all of your money. Investing is not for everyone and there is nothing wrong with that. Problems arise when people view investment as a means of getting rich. While of course it is possible to do so, trying to shoot the lights out will mean that you will likely end up speculating rather than investing.
The age guide to asset allocation
You don’t state how old you are or how long you plan to invest for. If you aren’t happy with a medium term investment timeframe of at least 5 years before you need to access your capital then investing may not be for you. Instead you should look to get the best interest rate on your money. I cover this in detail later in this article.
However, assuming you are happy to invest for the medium term at least, a very rough rule of thumb is to place a percentage of your portfolio in low risk investments that matches your age. The remainder can then be placed in medium and high risk assets. So a 50 year old might have 50% of assets in low risk investment funds such as bonds. The remaining 50% might go into equities. But obviously this will need reviewing as your risk profile, age and circumstances change.
How an investment is held is important
Another key point to remember is that the wrapper an underlying investment is held in will affect how it’s taxed and therefore your overall return. Without trying to oversimplify investment but think of it like a car. In order to get from A to B (i.e. your current situation to your desired stage in life) you need to choose a car. The car that best suits you will depend on the journey you plan to take, your current budget etc. Every car will have different running costs, tax etc and not one car suits all. Think of this as the investment wrapper (pension, Stocks and Shares ISA etc). Once you have chosen a car you need to put fuel in it to get you to your desired destination. This is akin to the underlying investment choices (such as funds). Clearly the petrol drives performance but the car can enhance it. But obviously it’s no good buying a Ferrari if all you plan on doing is going to the shops and back each day. It’s a similar thing with investment – excessive costs can wipe out any benefit.
Holding investments in a pension or a Stocks and Shares ISA can have clear tax advantages and therefore boost your returns.
Market timing
Remember, just because you have £10,000 burning a hole in your bank account you don’t have to invest it all at once. By dripping your money into the markets over time you can reduce the impact of market timing and volatility on your returns. Let’s say that instead of investing your full Stocks and Shares ISA allowance in one lump sum you invested via monthly instalments. If the market falls during the course of the year then each of your monthly instalments will buy more shares/units for the same amount of money. Or as American’s would say ‘you get more bang for your buck’. This is known as ‘pound cost averaging‘.
Inflation beating savings accounts
But if you are asking your original question because you are fed up with inflation while your money in the bank earns next to nothing then you can boost returns without taking undue risk. Unfortunately National Savings and Investments (NS&I ) pulled their Index Linked Savings Certificates, which guaranteed inflation beating returns, due to demand. These are not only safer than holding money in a bank account (as they are backed by the Government) but returns are tax-free. At some point NS&I Index Linked Savings Certificates might return, so watch this space. Having said that, over 65s are now able to put their money into 65+ Guaranteed Growth Bonds (commonly called pensioner bonds) which are available from NS&I. There are two versions, a 1 year and a 3 year version, which offer 2.8% and 4% annual gross interest respectively. However the interest is taxable and you can put a maximum of £10,000 into each.
Assuming you are not eligible to take out a pensioner bond here are the best cash ISA rates and the best savings account rates available at the moment. The longer you lock your money away the higher the interest you will generally receive. But be realistic about your possible timescale because if you withdraw money early from a savings account with an agreed term then you will lose interest and at worst get back less than you put in. Don’t forget interest from ordinary savings accounts is taxable. So unless you are a non-tax payer putting your cash in an ISA will mean that you can avoid paying tax on your interest. Having said that, a number of current accounts pay generous interest rates which, even after tax, can mean you make more money than saving via an ISA.
So where should I invest my Stocks and Shares ISA now?
This is purely personal decision but I would favour collective investments (funds) over direct share holdings. Therefore I suggest that you download this FREE guide to investing in funds*. It is the best guide I’ve found on the topic and tells you how to get started with buying funds.
To help people decide what to invest in (i.e. how to find the best ISA funds) I’ve created a FREE short series of emails
that show you the techniques and tools that can teach you how to be a successful investor in just minutes a month. It’s FREE for a limited time only. Each of the concise emails will take you just 2 minutes to read and will tell you the simple techniques and tools the City fund managers use – which you can now use too.
Another option is to have someone else manage your money on a discretionary basis. Nutmeg.com*, is one of the few companies that run a series of portfolios where they manage the underlying investment fund selection for sums as small as £10,000. You just use their tool to choose a portfolio that matches your attitude to risk and aims. They claim to be able to offer a managed service for the cost of doing it yourself without investment advice from a financial adviser.
Regardless of the size of your investment keeping costs low (be it from the investment or the company administering it) will mean you make more money in the long run.
I hope that helps
Damien
MoneytotheMasses.com
Website: www.moneytothemasses.com
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