If I had a lump sum of £10,000, I would invest it in the stock market. And with that in mind, today I’m going to explain how I’d invest in 2021 to build a £1m nest egg.
How I’d invest £10k
A lump sum of £10k is a great starting point to build a sizeable financial nest egg. It’s large enough to create a diversified portfolio without taking on too much risk. Owning just one or two stocks or funds in an investment portfolio, for example, can expose one to a great deal of risk. If only one of these investments starts to struggle, it can have a disproportionate impact on overall performance.
As such, I think it’s better to own at least five individual funds or a similar amount of stocks in different sectors and industries. I reckon this approach offers the best trade-off between risk and diversification.
There are a couple of trusts I’d invest in for a portfolio. These include RIT Capital Partners, the Scottish Mortgage investment trust and the Scottish American Investment Company.
Each of these investment trusts provides something different. RIT is focused on delivering positive returns for investors in all market environments. To this end, the investment trust owns a portfolio of alternative assets such as hedge funds, private equity funds, private businesses and real estate.
In comparison, Scottish Mortgage prides itself on its ability to find growth companies. It has a tremendous track record of finding growth stocks and riding them to profit.
And finally, Scottish American is focused on finding income and growth stocks. To that end, its portfolio is a bit more conservative than that of Scottish Mortgage, and it offers more in the way of income with a dividend yield of 2.6%.
The road to £1m
According to my calculations, over the past five years, an equally weighted portfolio of these three investment trusts has produced an annual return of around 20% for investors.
To make up the balance of the five funds, I’d also invest in two index tracker funds. The FTSE All-Share, which tracks the performance of the largest 600 listed UK corporations. And the S&P 500, which tracks the performance of the 500 largest listed companies in the United States.
My figures show a portfolio of all the investments listed above would have produced a mid-teens annualised return for investors over the past five years.
At this rate, I reckon it would take just 31 years to turn an investment of £10,000 into £1m. With additional contributions of £200 a month along the way, it may be possible to hit this target in just 25 years, according to my calculations.
So that’s how I’d invest £10,000 in 2021. Of course, this isn’t the only strategy available. A diversified portfolio of high-quality growth stocks may be able to achieve the same returns over the long term.
