£20k is more than enough capital to kick-start a brand-new investment portfolio. And by following a smart and balanced strategy, investors can potentially significantly improve their financial security in the long run.
However, starting a new investment journey can be quite a daunting task, especially for beginners. So, let’s explore how investing works, what investment options there are to choose from, and what the risks and potential rewards investors can unlock.
Investing vs saving
To start things off, it’s important to understand the difference between saving money and investing it. That’s because investing isn’t suitable for everyone. And depending on personal circumstances, sticking with a saving strategy might be the smarter move.
Saving £20k is fairly straightforward. After doing a bit of research, savers can deposit their money with a bank or building society and start earning some interest. Depending on the account, this interest could be paid monthly or annually. And thanks to recent interest rate hikes, unlocking a 4% rate is relatively easy in 2025.
Thanks to strict regulations and the Financial Services Compensation Scheme (FSCS), saving is incredibly low-risk. In fact, even if a bank goes under, savings up to £85,000 are protected, meaning that savers essentially have a way to earn passive income that is almost entirely risk-free.
Investing is quite different. Instead of depositing money in the bank, investors use money to buy various assets. This could be buying shares in a business (Also known as stocks or equity) or buying debt from companies or the government and earning interest (bonds).
Unfortunately, should a business go bankrupt, both stock and bondholders aren’t protected from losses. In other words, investing is much riskier than saving. However, it also opens the door to potentially significantly higher returns.
How much money can I make by saving £20k?
Let’s say a saver puts £20k into an interest-bearing savings account paying 4% interest. After 10 years, this balance would have grown to roughly £29,820.
However, in practice, the amount earned could vary significantly. Even when ignoring account fees and taxes, there is no guarantee that interest rates will remain stable over a 10-year period. Should interest rates rise, savers could earn more. However, if interest rates fall, then savers could earn less, creating uncertainty.
How much money can I make by investing £20k?
By comparison, let’s say an investor decides to put £20k into investments. The expected return ultimately depends on which assets that investors buy (stocks or bonds).
Historically, stocks have outperformed bond returns. In the UK, the FTSE 100 has delivered annualised returns of roughly 8%. Therefore, assuming this level of gain is continued over the next decade, a £20k investment would grow into £44,390 – almost 50% more than what savers could potentially earn.
However, just like a savings account, this figure is not set in stone. The stock market is notoriously volatile. A poorly timed market correction or crash could cause a portfolio to underperform significantly. It could even end up destroying wealth rather than creating it if a portfolio isn’t constructed and maintained prudently.
High-quality government and corporate bonds offer a less volatile path to investing while still usually offering better returns versus savings accounts. However, even the bond market can suffer corrections and crashes that can adversely impact long-term wealth.
Should I save or invest?
Determining whether saving or investing is the right path ultimately depends on an individual. But generally speaking, investing money for the long run into high-quality assets (stocks or bonds) is often recommended to those with a tolerance for risk and seeking to build long-term wealth.
However, even for individuals with a high-risk tolerance, it’s still generally recommended to first:
- Pay off expensive debts (credit cards and personal loans).
- Build a cash emergency fund in an interest-bearing savings account.
- Only invest money that won’t be needed for a minimum of five years.
For individuals who aren’t comfortable with the risks that investing introduces or are more interested in protecting wealth rather than growing it, saving might be the more suitable option.
Where to invest £20k
For those who decide investing is the right path, the next step is to determine which type of investment account is most suitable.
A General Investment Account (GIA) is the most common and used by most. However, for British investors, there are two other types of investment accounts that could be a smarter place to invest money.
A Stocks and Shares ISA operates very similarly to a GIA. However, the key difference is that capital gains and dividends are entirely protected from tax. Investors can only invest up to £20,000 per year across all their ISA accounts. However, the protection from taxes can have an enormous positive impact on long-term wealth-building, especially since tax rates on investments have recently been increased.
On a similar note, investors looking to build retirement wealth may want to consider a Self-Invested Personal Pension (SIPP). Just like an ISA or GIA, SIPPs allow individuals to invest their money in the financial markets. And like an ISA capital gains and dividends are tax-free, with the annual allowance sitting even higher at £60,000.
To top things off, any deposits made into a SIPP could also be eligible for tax relief, resulting in far more capital being available for investments. However, this does come with a catch. As a pension-oriented account, investors can’t withdraw their funds until the age of 55 – a threshold that’s likely to increase in the future.
Furthermore, when money is eventually withdrawn, taxes re-enter the picture under the standard pension rules. The first 25% can be withdrawn as a lump sum tax-free, with the rest subject to annual income tax. And just like the withdrawal age threshold, these rules could change in the future.
It’s up to investors to determine which type of investment account is most suitable for their personal circumstances.
What are the best types of investments?
With an investment account selected and funded, it’s time to decide which asset classes are the best fit. Investors have a few options to pick from, and we’ve created a more detailed list here. However, the four main types include:
What are the risks of investing?
When it comes to investing, regardless of asset class, there is always an element of risk. Even government bonds, which are often considered risk-free, still carry the potential risk, albeit small, of the government going bankrupt.
There are countless risk types to consider. And each investment will likely have its own collection of threats to consider. However, some of the most common investing risks that portfolios will encounter are:
- Market Risk – includes economic fluctuations, policy changes, and natural disasters.
- Liquidity Risk – the inability to sell assets quickly without offering a significant discount.
- Credit Risk – the issuer of a bond fails to keep up with promised payments.
- Political risk – international investments in emerging markets with unstable political regimes could compromise an investment thesis.
- Fraud Risk – while uncommon, companies may be discovered to be fraudulent, resulting in significant investment losses.
Fortunately, investors can manage or mitigate some of their risk exposure with strategies like Pound-Cost Averaging and Diversification.
Tips for beginners
Everyone is in a different situation. As such, a strategy that works for one individual may not work for another. However, there are some helpful tips that most investors can use to help better achieve their goals.
- Use tax-efficient investing accounts like a Stocks and Shares ISA or SIPP.
- Establish your goals and risk tolerance before investing any money.
- Build and maintain a balanced and diversified portfolio.
- Keep emotions in check when investing in volatile assets like stocks.
- Focus on the long run.
Investing is a lifelong journey, and there is always more to learn. That’s why we’ve put together several guides to help investors on their next steps toward financial freedom.