What’s the best way to invest £50,000?
Putting £50,000 into a cash savings account will generate a steady, but very low rate of return. Investing that amount could generate higher levels of return. Here’s what you need to know.
You’ve found yourself with £50,000. You have spare cash savings for emergencies already. What are you going to do with the money? You definitely want to see it grow over time. So what’s the best way to do that? Put it into cash savings accounts? Top up your pension? Use a stocks and shares ISA? Build a general investment portfolio? Or invest in art or fine wine? There are a myriad of options.
Two things are sure though: you will need to beat inflation if you are to generate ‘real’ returns on your £50,000 pot, and you should consider carefully how fees may eat into your returns over time.
Watch Andrew Craig, author of 'How to Own the World,' explain how inflation and fees can affect your investments.
Here are some initial things you need to consider as you plan your £50,000 investment:
- Set yourself a target. Would you like to double your money in the next ten years? Do you have some plans for the money in the future? School fees for the children? University costs? A boost to your retirement pot?
- Can you afford to top up the £50,000 with regular monthly payments, further boosting your pot, your compounding returns and allowing you to smooth fluctuations in the market through pound cost averaging?
- Have you worked out your risk tolerance? For example, if you are further away from retirement you may be willing to take more risks with your money in order to try and achieve higher returns, while you will likely want to take a safer approach if you’re closer to retirement.
What are my investment options?
You could plough the entire amount into premium bonds — the maximum holding. You might win a big prize, but if not, you could expect a probable average return of around 1% a year. Locking the cash up in a two-year savings bond would earn you at best 1.7% a year. The alternative finance arena of peer-to-peer lending could earn you 5% a year or more at higher levels of risk.
If you are prepared to take medium risk, you probably want a combination of capital growth and capital protection from the stock market. So you will want to look at assets with growth potential like equities, and assets which can provide more protection such as bonds and other fixed income investments.
Pensions, general investments or ISAs?
The next thing to take into account is your tax situation as this could influence where you put your money. You may consider putting it into a pension plan or self-invested personal pension to boost your retirement pot. The attraction of this option is the tax perk from the government, which survives despite regular speculation that it will be weakened or scrapped. A £10,000 contribution to your pension will only cost a basic rate taxpayer £8000 and a higher rate taxpayer £6000, with HMRC kindly topping up the rest.
However, currently the maximum you can put into pensions during one year whilst still receiving tax relief is £40,000, or just £4,000 if you have already started drawing your pension. There’s also a current £1 million lifetime allowance, above which you’ll start paying tax on your pension savings.
You could also consider putting your investments into a tax wrapper like a stocks and shares ISA. However, the current maximum you can put into an ISA in a financial year is £20,000.
This means two partners could immediately shelter £40,000 in ISA-wrapped investments. Other tax reliefs should cover the balance, as everyone can now earn £1000 of interest tax-free with the Personal Savings Allowance, and also £5,000 in a Dividend Allowance (though that may reduce to £2000 in the next parliament).
With a £50,000 lump sum investment, you are going to have to take tax and your own tax situation into consideration and you should always get independent advice.
Which assets should I invest in?
Picking individual shares for investments requires knowledge and research. According to a recent study for Investec Wealth & Investment, 57% of investors looking to buy shares over the next 12 months admit to preferring well known UK brand names such as supermarkets and banks. The firm warns that by opting for household names, ‘investors risk overlooking the majority of listed companies and failing to build a diversified portfolio that could better suit their investment needs.’
Watch Andrew Craig explain why diversification is so important to any investment strategy and portfolio.
If you are going to build your portfolio yourself, there is a bewildering amount of choice out there, so opting for the familiar can be tempting. Individual stocks? Certain sectors? Commodities? Bonds?
Consider instead exchange traded funds (ETFs), which offer a low-cost way to invest in a wide range of stock market indices in the UK and beyond – any commodities you fancy, fixed income such as long-dated government bonds, and selected equities such as consumer stocks. Also on offer are ‘alternative indexation’ ETFs which group and track companies in an index measured not by size but by a metric such as dividends or earnings growth.
Explore ETFs using our screener.
Asset allocation is key
Professional fund managers know that their decisions on asset allocation are normally the key to the performance of their fund at any given time. For instance, any portfolio which had decided to be light on the US in recent times would have probably lagged those with a healthy US weighting.
Patrick Connolly, certified financial planner at independent advisers Chase de Vere, says: ‘You need to decide yourself how much you want to invest in different asset classes.’ For a £50,000 investment he suggests 50% in equities and the rest split between fixed income, other bond-like investments, and commercial property. For a racier mix, the equity component could be revved up to 70%.
But within that, the key decisions might be geographic — do UK investments offer enough diversity, or should they be hedged with global exposures, especially with Brexit challenges ahead?
Small companies have continued to outperform big ones, so should you be allocating a chunk of your equity investment to smaller companies?
Within fixed income, rising interest rates are the key. So it might be worth considering bond-type investments, such as infrastructure, which are designed to replicate the reliability of fixed income without the interest rate risk, as returns can be inflation-linked.
Property is a conventional component of a diversified portfolio, but care is needed on buying into too narrow an asset base, London offices for instance, in what might be an overheated market and consequently a bad time in the economic cycle.
You could allow a fund manager to make your asset and investment choices for you. Traditional wealth and asset managers charge fees with the promise of outperforming the markets and their fund benchmarks over time. However, this isn’t always the case and you always need to make sure that your ‘real’ returns, which discount the inflation rate, are really outperforming.
Alternatively, you could use an online portfolio manager using so-called robo-advice. These lower cost alternatives to the traditional asset manager will construct portfolios for you based on your targets and risk tolerance. The portfolios are often built using ETFs, giving you a balanced portfolio with exposure to a range of assets and geographies. Often, these providers will also have do-it-yourself alternatives for the more experienced investor.
Connolly says investors should not be too relaxed about performance. ‘You should review your investments regularly, say every six months or every year, to ensure they are performing as you expect and if they aren’t you need to understand why.’
He adds: ‘If this sum of money is important to you and if you’re not sure what you’re doing then you should take independent financial advice.’