Posted in:

What’s the best way to invest £10,000?

With £10,000 sat 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 inherited it, saved hard, or had a winning streak at the races, the chances are you’re looking to invest your £10,000 to get your savings working harder for you.

Investing gives you a better chance of beating inflation, although it does come with the added risk that the value of your investment can go down as well as up. 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.

Before you choose where to invest £10,000, it’s crucial you understand the risk and return trade-off. Essentially, investors looking to grow their money over the long-term need to be prepared to take on more risk.

Deciding the best way to invest £10,000 will be personal to you, so here are six themes you should consider when looking to maximise your returns on the financial markets.

  1. Investor profile
  2. Time in the market
  3. Diversification
  4. Hassle-free investing
  5. Management fees
  6. Making the most of your annual allowances

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 a big exposure to equities in your portfolio. The value of the shares you invest in can go both 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’s still risk 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 so crucial for those with little 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 great 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, we use algorithms to match 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 the more important things in your life, safe in the knowledge that the experts are working to secure your financial future for you.

Time in or timing the market?

As the goals behind each investment journey differs, so does each investor’s time horizon. It’s important to know when you’ll want to access your cash, as this 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. If you’ll need this cash for next year’s summer holiday, you’ll maybe play it a bit more conservatively. It’s important to remember, however, that time really is 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) and a longer time horizon encourages investors to take more risk, 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. If this investor had missed the 10 best days of performance, however, they’d have made just 6.1%.

Looking at the long-term picture takes the emotion out of trading and 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.

Get investments and saving tips straight to your inbox

Join our FREE newsletter to get weekly tips and advice

By making an investment, your capital is at risk.

Diversification

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 successfully diversify. The work is also never ending as 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 because they’re based on an underlying index or investment, they offer more diversification than individual shares. As ETFs don’t involve active management, they are lower cost than traditional investment funds.

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, however. Most investors want to grow their wealth but make memories at the same time, so 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 you can focus on the important things in life.

Management fees

Whilst 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 easily eat into your profits.

For example, 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. Your £600 profit is instantly slashed by a third from £600 to £388.

At Moneyfarm, you pay just 0.7% in management fees on portfolios worth up to £20,000, after which investments up to £100,000 are charged at 0.6%. We choose to invest in exchange traded funds to keep fund charges low, at an average of 0.3%. In this example, you would pay just £106 in one year including both the management fee and underlying fund charge.

Use your annual allowances early when investing £10,000

It’s important 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, This turns a £10,000 contribution into £12,500 one in your pension if you’re a basic rate taxpayer. 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 an ISA and watch your money grow and any income build up tax free, protected in your tax-free wrapper. ISAs are a simple way to grow your money to reach your financial goals.

Try MoneyFarm for free


Simple, efficient and tailored to your profile. The MoneyFarm investment plan maximises your long-term returns whilst protecting your wealth.

Sign up to MoneyFarm now: get access to your investor profile and discover the portfolio that is right for you, free of charge.

Get started