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How to invest £10,000

With £10,000 sitting in your bank, you’re in a good place – you’ve got three months of expenses saved up, so what on earth do you do with it now?

Whether you’ve saved hard, received an invested inheritance, or had a winning streak at the races, the chances are you’re looking for the best place to invest £10,000 to get your savings working harder for you.

How to invest £10,000: summary table

⚖️ Save it or invest it?Invest it
😕 Is £10,000 enough to invest?Yes, it’s a good start
⏲️ Long term or short term?Long term
😱 Biggest mistakeNot diversifying the portfolio
💸 CostIt depends on the service you choose

Why invest instead of saving £10,000

If you have £10,000, you might be thinking about starting a savings account or opening a retirement fund. But before you start putting your money into these accounts, you should consider whether you want to invest your money or save it. 

A savings account is recommended to save money for the future or save for a significant life change such as a new baby or moving house. Investing is a great way to build wealth over time. However, it is a long-term commitment and requires research and patience. 

The main advantage of saving is that it’s secure, but saving money doesn’t guarantee a significant increase in value. Investing gives you a better chance of beating inflation, although it does come with the added risk as the value of your investment can go down as well as up. You should consider investing if you have an emergency buffer.

Investing can be confusing and intimidating. There are many investment options out there, and they all seem to promise high returns. So, how do you choose the best ways to invest 10K?

That’s why, whether you’re a seasoned investor or a complete novice, it can be daunting investing a lump sum of £10,000 in one go.

Is £10,000 a good investment amount?

A lot of people think that £10,000 is too much to put into an investment portfolio, but actually, £10,000 is an excellent investment amount. Before you choose where to invest £10,000, it’s crucial you understand the risk and return trade-off.

As long as you leave your money invested, it will be able to grow and ride out the fluctuations in the stock market, giving it enough time to make a profit. 

Essentially, investors looking to grow their money over the long-term need to be prepared to take on more risk.

How to invest 10K: First steps and tips

Deciding the best ways to invest 10K will be personal to you. So here are six themes you should consider when looking for how to invest money and maximise your returns on the financial markets.

  1. Investor profile
  2. Time in the market
  3. Diversification
  4. Active or passive investment
  5. Management fees

Investor profile

The first step to reaching your financial goals is understanding your investor profile. Acting like your investor DNA, your investor profile influences what you should invest in, and the proportion each asset class should make up in your portfolio.

If you’re looking to grow your £10,000 over the long-term, you’ll likely have big exposure to equities in your portfolio. The value of the shares you invest in can go up and down.

Those who don’t want to take on much risk will opt for a higher exposure to bonds, which are typically seen as ‘safer’ investments. Traditionally, bond investors get regular income from their bond coupon and get their initial investment repaid to them at maturity. However, there are still risks attached to bonds.

It sounds simple enough, but getting the right mix of assets to help you reach your goals can be difficult. That’s why investment advice is crucial for those with hardly any financial confidence or know-how.

Unfortunately, without access to advice, many people fail to realise the full potential of their savings and miss out on some fantastic life events as a result. After all, investment advice allows people to make better decisions with their money, helping them lead a better life.

Thanks to innovation in the financial services industry, cost-effective investment advice is now available to those who need a helping hand. At Moneyfarm, our technology matches you with an investor profile and investment portfolio that’s built and managed by our team of experts to reflect your risk appetite, time horizon and financial personality for as long as you invest.

Whether you’re too busy juggling the school run with your career, lack financial confidence, or just want someone to do it for you, you can focus on the more important things in your life, safe in the knowledge that the experts are working to secure your financial future for you.

Choose your timeframe

As the goals behind each investment journey differ, so does each investor’s time horizon. It’s important to know when you’ll want to access your cash because it influences the assets you hold in your portfolio.

If you’re saving for retirement 30 years away, you can afford to be riskier with your asset choices. But, on the other hand, if you need this cash for next year’s summer holiday, you’ll maybe play it a bit more conservatively. However, it’s important to remember that time is indeed your friend.

The financial benefits of long-term investing are well documented; portfolios benefit from compounding over longer periods (when an asset’s earnings are reinvested to generate their own). In addition, a longer time horizon encourages investors to take more risks, as short-term losses aren’t as crucial.

Remember, it’s time, not timing, that maximises returns. For example, if an investor had stayed invested in the S&P index from 1994 – 2014, they’d have generated a 9.85% annualised return, research from asset manager JP Morgan shows. However, if this investor had missed the 10 best days of performance, they’d have made just 6.1%.

Looking at the long-term picture takes the emotion out of trading. It prevents investors from falling into the common trap of buying high and selling low, allowing them to ride the natural fluctuations of the market instead.

Try to diversify

Although investors use risk to generate higher returns, this doesn’t mean portfolios should be left exposed to a sudden swing in sentiment.

Using a diverse range of investments is one of the best ways to reduce risk within a portfolio. As the performance of the three main asset classes – equities, bonds and cash equivalents – are rarely correlated, you should look to use these as the building blocks of your portfolio. A truly diversified portfolio looks to smooth out the negative performances with the positive.

But it takes a lot of time, knowledge, skill and a decent chunk of cash to diversify successfully. The work is also never-ending; portfolios need to be rebalanced as trends change. This is why exchange-traded funds (ETFs) are so popular.

An ETF is a fund that tracks a market index (like the FTSE 100 or S&P 500), specific commodity, bond, or even a basket of assets. In an ETF that tracks an index, the fund will essentially own shares and trade them to reflect moves in the index they’re tracking.

ETFs can be traded just like individual stocks, but they offer more diversification than individual shares because they’re based on an underlying index or investment. In addition, as ETFs don’t involve active management, they are lower cost than traditional investment funds.

Decide between active and passive investment

The flexibility of choosing between active and passive investment asset classes is an integral part of investment strategy. 

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Active investments require a certain level of involvement from you, such as managing your portfolio, researching companies, and monitoring performance. On the other hand, passive investments don’t require much effort from you.

Active funds cost more because they try to beat the market. Passive funds cost less because they’re easier to manage. The UK saw an increase in passive funds due to the coronavirus pandemic and the severe volatility of the stock market. 

You can choose to invest actively by buying shares and taking part in company decisions or passively by investing in an index fund that invests in many companies at once. You can also combine both by investing actively in some areas and passively in others. 

However, you should pick the investment type based on your risk tolerance, time availability, and time horizon.

Management fees

While you expect to pay for a service, this no-hassle, hands-off approach to investing has traditionally come at a cost. Management fees are constantly under scrutiny, but they can still quickly eat into your profits.

For example, let’s say you’re charged management fees of 2% each year. If your £10,000 portfolio grows by 6% to £10,600, you’ll have to pay out £212 in charges this year. So your £600 profit is instantly slashed by a third from £600 to £388.

At Moneyfarm, you pay just 0.75% in management fees on portfolios worth up to £10,000. After that, investments up to £50,000 are charged at 0.6%. In addition, we choose to invest in exchange-traded funds to keep fund charges low, at an average of 0.2%. All this adds up to you keeping more of the returns you invested.

The best type of investment tax wrapper: From ISA to pension

Tax-free wrappers are used to protect your investments from the taxman. It would be best if you used a tax-exempt wrapper when investing. The tax benefit ensures that you don’t pay income tax, capital gains tax or dividend tax. 

Different types of tax-free investments exist, including pensions, stocks and shares ISAs and lifetime ISAs. You can choose what to invest in within these products. Each tax-free investment type comes with an annual allowance and you choose how to invest your ISA allowance

Pensions are an effective way to save for retirement. You’ll benefit from tax relief and possibly receive employer contributions too. But you don’t have access to your money until you reach retirement age. Savings accounts and other short-term investments accounts don’t offer the same tax benefits. However, you can access your money at any point without paying tax.

Stocks and shares ISAs are great for mid-term or long-term investments;  if you plan to use them in 5-10 years. They are also great if you plan to access your money in the future. Investing £10,000 in stocks and shares ISA means you’ll be able to get your money back when you need it, and you won’t have to wait until retirement age to access it.

Investing in a lifetime ISA is an easy way to save money for retirement or save towards your first home. However, there is a downside to lifetime ISAs. If you invest 10K in a lifetime ISA, you can’t take out any amount of money until you are age 60 or over. Exceptions to the rule include terminal illness or withdrawals made towards buying your first home. Any monetary withdrawal before age 60 will warrant a 25% penalty fee. 

Use your annual allowances early when investing £10,000

It’s important that you’re making the most of the annual tax allowances available to you to maximise your returns.

You can invest up to £40,000 a year or your annual salary – whichever is lower – into your pension each year to benefit from the government’s generous tax relief.

You’ll get tax relief on your contributions relative to your tax band. If you’re a basic rate taxpayer, this turns a £10,000 contribution into a £12,500 one in your pension. Don’t forget to claim back more in your annual tax return if you pay higher or additional rate tax.

This can make a real difference over the long-term and help you reach your goals quicker – which means you don’t have to work as many years to afford your retirement.

You can also invest up to £20,000 each financial year in a stocks and shares ISA and watch your money grow and any income built up is tax-free, protected in your tax-free wrapper. ISAs are a simple way to grow your money to reach your financial goals.

Understanding risks and how to minimise them

Investing 10K is risky. While savings accounts offer the most safety, you won’t get reasonable interest rates. However, if you are looking for the best place to invest £10,000, you could consider buying stocks instead of saving.

But remember, stocks are high risk, and there is the possibility of losing money. There are two ways to minimise investment risks. They are asset allocation and diversification.

Asset allocation is a strategy that spreads your investments across different types of assets classes such as stocks, bonds, and cash alternatives. It protects you from falling stock prices when the market is down. It also allows you to profit from the ups and downs of the stock market.

Diversification is another way to minimise risk. Diversification is the process of balancing different classes within an investment portfolio, so they offset each other amid changing market conditions.  

The two main underlying assets in a diversified portfolio are stocks and bonds. Stocks are for higher returns, while bonds are used as low-risk assets.

We need both asset allocation and diversification to keep risk to a minimum. A solid diversification strategy that protects you against market volatility is effectively achieved by taking in a broad spectrum of components, not only within but also across classes.

Focus on the important things in life

Building up £10,000 of savings requires hard work, dedication and sacrifice. Once you’re sitting on a sizeable cash pile, it’s time to flip the switch and make your money work hard for you.

Managing your portfolio can provide an unnecessary strain on top of your career, family life, and social life. Most investors want to grow their wealth but make memories simultaneously, so they want someone to do the hard work for them.

This is where digital wealth managers like Moneyfarm come into play. Armed with the expertise and experience, it’s their job to monitor the markets and maximise your returns on your behalf so that you can focus on the important things in life.

FAQ

How to invest 10k in stocks?

You can invest 10K in individual stocks, ETFs, mutual and index funds, and stocks and shares ISAs. You can also use a robo-advisor to invest in stocks.

How to invest 10k for the short term?

For short-term goals, you can invest the 100k in a high-interest savings account or a cash ISA.

What investments can I make with 10k?

10k investments include pensions, stocks and shares ISAs, lifetime ISAs, ETFs and other investment instruments.

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As with all investing, your capital is at risk. The value of your portfolio with Moneyfarm can go down as well as up and you may get back less than you invest.