You may have recently received a stellar bonus, inheritance or even been lucky enough to win a sweepstakes that left a lump sum of £10,000 burning a hole in your pocket.
When you already have money at your disposal in addition to your day-to-day expenses and an emergency fund, investing is one way to help you reach your long-term financial goals.
An amount like £10,000 is not a life changing sum of money. But, invested wisely, it could become a useful nest egg. Here is an overview of some of the options available.
Remember that investing is speculative, not for everyone, and it is possible to lose some or all of your money.
1. Consider collective investments
Funds, investment funds and exchange-traded funds (ETFs) each fall under the “collective investment” regime.
In other words, each pools the contributions of many investors, allowing a professional fund manager to invest all the money in a ready-made portfolio across different types of assets. These include bonds, property, commodities and stocks, or a combination of each.
Ryan Lightfoot-Aminoff, principal research analyst at research provider FundCalibre, points to the benefit of outsourcing investment decisions to a professional fund manager “who will seek to strike a balance between different companies, industries and revenue streams. to generate above-market returns.
He adds: “Investors can also benefit from economies of scale in fees, which
can often be a hindrance for investors who trade regularly.
Collective investments can be split into two depending on their management method:
- Passive management: also known as index funds or trackers, they aim to copy the performance of a particular stock market index. For example, by buying shares in the companies that make up the UK’s FTSE 100 index.
- Actively managed: these funds aim to outperform a benchmark (such as a certain stock market index) by choosing a basket of stocks.
Due to the way they are administered and managed, active funds generally tend to be more expensive to invest in than their passive counterparts.
Passive funds typically charge between 0.1% and 0.2% of an initial investment, while the figure for active funds is more likely to be 0.5% to 1%.
For passive funds this equates to £10-20 for a lump sum of £10,000, compared to £50-100 for an active fund.
Passive and active funds divide opinion and it is a hotly debated topic whether active funds beat their passive counterparts in order to justify their higher fees.
It is worth taking the time to find the best trading platform to buy and hold these investments, as trading and platform fees can vary widely.
Investments can also be held in tax-advantaged envelopes such as Individual Savings Accounts (ISAs).
2. Invest in stocks
Buying individual stocks is riskier than investing in funds, however, it can be a good way to invest £10,000 if investors have the time and knowledge to research public companies.
FundCalibre’s Mr. Lightfoot-Aminoff says, “Investing in individual stocks can come with a lot more upside potential.” But he goes on to warn potential investors that “you’re taking much bigger risks.”
It is always important to diversify your portfolio, ie to spread your investment over a mix of companies from different sectors. If a company or sector is underperforming, this will hopefully be compensated by another performing sector.
As with funds, stocks can be held in tax-efficient ISAs. Similarly, they should be viewed as a long-term investment of at least five years to smooth out stock market ups or downs.
3. Invest in bonds
Investing in bonds could be a useful way to generate income and capital return from your £10,000.
Bonds are a form of loan that pays interest in the form of a “coupon”, usually once or twice a year. At the end of the term, the bond issuer will repay the initial “face value” of the bond. Once a bond has been issued, it can be traded on a market.
Noelle Cazalis, manager of the Rathbone High Quality Bond Fund, says: “Bonds tend to be less volatile than stocks, which is why they are often favored by conservative investors.
Ms. Cazalis adds that: “Bonds also often have a low correlation with equities.” This means that they tend to behave differently at the same times in an economic cycle. As such, bonds can therefore be used to diversify against an existing portfolio of stocks.
There are two different types of bonds:
- Government: known as “gilts” in the UK and “treasuries” in the US. Government debt is generally considered a safer investment than corporate debt (see below) and therefore generally pays a lower interest rate, typically 1-2% over the past five years.
- Company : these bonds are issued by companies seeking to raise funds. Investment grade debt – as measured by independent rating agencies such as Moody’s – is rated safer than so-called junk bond status. Investors can therefore expect a higher interest rate from companies that offer the latter to compensate for this.
Although neither the UK nor the US government has ever defaulted on any of its bonds, it is not a risk-free investment. It is possible that the issuer of the bond will default on interest or final repayment if it encounters financial difficulties.
Like stocks, the price of bonds fluctuates once they start trading, allowing them to trade at a premium or discount to their “face” value. Interest rates have a strong influence on bond prices – if prevailing rates exceed a bond’s coupon rate, the bond will become less attractive to investors and its price will fall.
Therefore, this means that the “yield” (calculated as the annual interest rate divided by the market price of the bond) will increase. The yield is an approximation of the effective interest rate you will receive on a bond based on its current price.
Although rising interest rates have weighed on bond prices this year, bonds could become increasingly attractive once interest rates begin to fall again.
Hal Cook, Principal Investment Analyst at Hargreaves Lansdown, comments: “To exit a recession, central banks are likely to cut interest rates to stimulate economic activity. This should reduce bond yields and increase capital value.
4. Invest in real estate
Alternatively, you can use the £10,000 for a down payment to buy a house, however, getting onto the property ladder can be difficult given the surge in house prices in recent years.
Another option is to invest in real estate indirectly through a real estate investment trust (REIT).
REITs are similar to funds in that they pool investors’ money but invest it in a portfolio of assets rather than stocks.
Laith Khalaf, Head of Investment Analytics at AJ Bell, says: “REITs offer investors a convenient way to buy into the commercial real estate market, which can be held in a SIPP or ISA. The commercial real estate market includes office buildings, commercial spaces such as shopping malls, and industrial units such as warehouses and distribution centers. »
Mr. Khalaf adds: “Investors may choose to invest in REITs to generate income, as commercial property tenants pay regular rents which REITs can then turn into dividends for investors.
However, Mr. Khalaf also cautions: “Although the price of the underlying commercial real estate assets is not as volatile as stocks, REITs trade in the market and will therefore be highly correlated to stocks, which diminishes their ability to act as diversifiers.
“Commercial real estate is an asset that is clearly sensitive to economic developments and will face tough times as we enter an economic downturn, but a lot of the bad news is already reflected in the prices at which many REITs are trading. “
5. Invest in a pension
Investing a lump sum in a pension is a tax-efficient way to save for your retirement because the government “tops up” your contributions in the form of tax relief. According to HMRC, personal pension contributions hit a record high of £12billion in 2020-21, with an average contribution of £1,700 per person.
The level of tax relief depends on the income tax rate you pay (all figures shown are based on the current 2022-2023 tax year):
- If you’re not a taxpayer, you can contribute up to £2,880 into a pension, which the government tops up by 20% to £3,600.
- If you are a basic rate taxpayer, you can benefit from the same 20% top-up from the government, up to 100% of your annual income (under certain conditions).
- Higher rate and additional rate taxpayers may receive tax relief of 40% and 45% respectively, subject to certain annual limits.
The benefit of investing in a pension early is that you benefit from the power of compounding returns, whereby you receive a return on your initial investment plus the previous year’s return.
If you invested £10,000 in a pension for 10 years with an annual return of 5%, your pension pot would be worth £16,000. However, it would reach over £70,000 if you invested the same amount and left it for 40 years.
You can invest in a pension through a company plan or privately through a self-invested personal pension.