Posted on by Damien Fahy
I have ten thousand pounds to invest what do you think is the best investment at this time?
This is a good question and a difficult one to give you a definitive answer to.
The first thing to point out is that there is no one size fits all answer to this question. The suitability of any given investment will depend on your personal and financial circumstances. For example:
- your investment timeframe
- your age
- whether you are investing to generate income or growth
- what is your attitude to risk
- your existing investments
- your tax status and available allowance
plus a swathe of other importance factors not listed. I would therefore always recommend that you speak to an independent financial adviser in the first instance who should be able to help. For help in finding a reputable financial adviser click here (and read my article 10 tips on how to find a good financial adviser). However, below I provide some insight as food for thought.
Types of investment
There’s a huge range of investments available each with their own pros and cons. At some point I will produce a complete guide to investing but this is no mean feat as I could end up writing an entire book on the subject.
But in the meantime the Daily Telegraph’s Guide to investing for income and growth is one of the better guides out there if you ignore the adverts. It covers some of the investment basics and runs through the different types of assets you can invest in, detailing the potential risks and the potential returns.
However the amount you have to invest will limit your options slightly
Investor or speculator?
One of the key factors which will determine where you might invest is your attitude to risk, as stated above. The more risk you are happy to take with your money the greater the potential returns, but you also increase the chances of losing some or all of your money. Investing is not for everyone and there is nothing wrong with that. Problems arise when people view investment as a means of getting rich. While of course it is possible to do so, trying to shoot the lights out will mean that you will likely end up speculating rather than investing.
The age guide to asset allocation
You don’t state how old you are or how long you plan to invest for. If you aren’t happy with a medium term investment timeframe of at least 5 years before you need to access your capital then investing may not be for you.
Assuming you are are happy to invest for the medium term at least, a very rough rule of thumb is to place a percentage of your portfolio in low risk investments that matches your age. The remainder can then be placed in medium and high risk assets. So a 50 year old might have 50% of assets in low risk investment funds such as bonds. The remaining 50% might go into equities. But obviously this will need reviewing as your risk profile, age and circumstances change.
How an investment is held is important
One other key point to remember is that the wrapper an underlying investment is held in will affect how it’s taxed and therefore your overall return. Without trying to oversimplify investment but think of it like a car. In order to get from A to B (ie your current situation to your desired stage in life) you need to choose a car. The car that best suits you will depend on the journey you plan to take, your current budget etc. Every car will have different running costs, tax etc and not one car suits all. Think of this as the investment wrapper (pension, Stock and Shares ISA etc). Once you have chosen a car you need to put petrol in it to get you to your desired destination. This is akin to the underlying investment choices. Clearly the petrol drives performance but the car can enhance it. But obviously it’s no good buying a Ferrari if all you plan on doing is going to the shops and back each day. It’s a similar thing with investment – excessive costs can wipe out any benefit
Holding investments in a pension or ISA can have clear tax advantages and therefore boost your returns. Again, a good financial adviser can steer you through your options.
Remember, just because you have £10,000 burning a hole in your bank account you don’t have to invest it all at once. By dripping your money into the markets over time you can reduce the impact of market timing and volatility on your returns. Let’s say that instead of investing your full Stocks and Shares ISA allowance in one lump sum you invested via monthly instalments. If the market falls during the course of the year then each of your monthly instalments will buy more shares/units for the same amount of money. Or as American’s would say ‘you get more bang for your buck’. This is known as ‘pound cost averaging‘.
Inflation beating bank accounts
But if you are asking your original question because you are fed up with high inflation while your money in the bank earns next to nothing then you can boost returns without taking undue risk. Unfortunately National Savings and Investments (NS&I )pulled their Index Linked Savings Certificates, which guaranteed inflation beating returns, due to demand. These are not only safer than holding money in a bank account (as they are backed by the Government) but returns are tax-free. At some point NS&I Index Linked Savings Certificates will likely return, so watch this space.
In the meantime there are some inflation beating accounts out there but they inevitably involve locking your money away for a few years, plus bank account interest is taxable. To find the best savings account rates click here.
So where would I invest now?
There are 3 main areas of concern right now, the eurozone crisis, America’s weak economy and China’s ability to orchestrate a soft landing for its economy. So the downside potential certainly remains
This is purely personal decision but I would favour collective investments over direct share holdings, plus I would still keep an eye on costs. A combination of bond funds and equity income funds (particularly those paying good dividends) would likely be at the core of any diversified portfolio.
I hope that helps
Money to the Masses