Do you have £10,000 to invest and can’t decide where it should go? If you want my answer, I’ll have to ask you a couple of questions first.
Rainy day
First, how much easily-accessible cash do you have stashed away for emergencies? You know those people on the payday loan ads who have to take on super-high interest rates to get the car fixed or pay for a new boiler? You don’t want to be like them.
Suggestions range from having the equivalent of a month’s salary saved in an emergency fund, all the way up to three months’ worth. I think three months is over-cautious, but I’d definitely say at least a month — and if you don’t already have it, I’d say take that amount out of your £10k investment pot and put it in your rainy day savings.
How long?
Next, what’s your investing horizon? If it’s a short-term investment you’re thinking of, cash you’ll want to draw down and use in the next few years, I say just stick it in a savings account. Interest rates are going to be poor, but you’ll protect yourself from the short-term risk of losing money on other forms of investment.
A long-term investment is another matter, but that raises the question of what, exactly, is the long term? There’s no precise answer, but most would agree that 10 years or more is fine. Personally, I’m happy with investing for five years or more, but I’m more risk-tolerant than many. So I’d say a minimum of between five and 10 years, but you’ll have to decide that for yourself.
With those questions sorted, where should you actually invest your money?
Shares
There’s a bewildering array of options these days, but for me, it’s company shares every time. One of my favourite bits of investing statistics is that if you’d invested £1,000 in the UK stock market in 1945 and reinvested all your dividends, according to the Barclays’ Equity Gilt Study, it would have grown to £1.8m over the next 60 years, even taking inflation into account.
But what if you don’t know anything about picking shares? Well, you could always start by investing in a FTSE 100 tracker fund, or even a FTSE 250 tracker. The FTSE 250 has historically outperformed the FTSE 100, but its returns have been more volatile — so maybe the FTSE 250 is better suited to those with a longer horizon.
Funds
One thing I wouldn’t do is hand over my money for someone else to invest for me in a managed fund, even if it’s invested in shares — because fund management companies are there to maximise their owners’ profits, not their customers’. As a result, most managed funds tend to underperform an index tracker. My one exception is investment trusts, where to invest you simply buy shares in the trust company itself, thus becoming a part owner and avoiding any conflict of interest.
DIY
Finally, if you pick your own companies, a £10,000 pot is easily enough to provide a good amount of diversification for lowering your risk. I reckon £500 to £1,000 is a cost-effective minimum range for investing in a single share, so you could spread your money across 10 or more companies in different business and sectors.
