How I’d invest £5k in a Stocks and Shares ISA

This Fool explains how investing in funds can give you the diversification your portfolio needs.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The investment world can be a confusing place to navigate. There are thousands of stocks to choose from on the market as well as hundreds of investment funds. That’s without including international investments.

Trying to understand the ins and outs of it all when you first start investing can be quite daunting. So, to help you navigate the investment world, I’m going to explain how I would invest a lump sum of £5,000 in a Stocks and Shares ISA.

Laying the foundations

An initial investment of £5,000 is a sizable sum, but it isn’t enough to build a diversified portfolio of single stocks. In theory, you need around 20 to 30 shares in a portfolio to be truly diversified, which would leave you with just a couple of hundred pounds invested in each equity out of that total sum.

The other option is to use funds. These are an excellent tool for those who want to invest in the stock market but don’t know where to start. Investment funds are run by experienced individuals and pool investors’ money, allowing them to invest in a broad range of businesses. Investment trusts also operate the same kind of model, but have more options as to where they can invest.

If you are starting with £5k, I recommend owning two or three investment funds. These will form the foundation blocks of your portfolio, which you can add to at a later date.

Fund selection

One fund I think you should definitely include in the portfolio is a low-cost FTSE All-Share tracker. The FTSE All-Share is an index of the 600 largest companies traded in London. Together these companies account for around 90% of the UK stock market, giving you an instantly diversified portfolio at the click of a button. 

As well as this domestic-focused index, I recommend investing in an international index fund such as the FTSE All-World UCITS ETF offered by fund management giant Vanguard. The index is a world tracker fund, but most of its assets are invested in developed markets because these are the biggest and most liquid. US stocks, for example, make up just over 50% of assets.

As well as these two equity-focused funds, I’m also going to recommend adding a bond fund to your £5,000 portfolio. Bond funds add a degree of stability to any portfolio as well as a steady income stream.

The prices of bonds also tend to move in the opposite direction to equities. So if the market crashes, bond prices should rise, offsetting the losses in the rest of the portfolio. There are hundreds of these to choose from, but I recommend picking a government bond fund as these tend to be the cheapest. 

The bottom line

That’s how I’d invest a £5k lump sum in a Stocks and Shares ISA today. The combination of the three funds should allow you to build an internationally diversified portfolio with relative ease without incurring hefty commission charges. There’s also no need to research each stock in these tracker funds.

All you need to do is sit back, relax, and watch your money grow.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share 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.

More on Investing Articles

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »

Investing Articles

Down 78%, is this once-hot AI growth stock set to explode like the Rolls-Royce share price?

Our writer asks if he should invest in Super Micro Computer (NASDAQ:SMCI) following the growth stock's massive recent decline.

Read more »

Investing Articles

Is it madness to buy Palantir shares after Q3 earnings?

Palantir stock's surging again after the firm's Q3 earnings report. But after a 150% gain, is it too late to…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£6,000 in savings? Here’s how I’d aim to turn that into £1,032 a month of passive income!

A small investment in high-dividend-paying stocks with the returns used to buy more shares can generate big passive income over…

Read more »