The below is an excerpt from a response by Darren Amos to a request submitted using the red box:
Reader Question:
I've just turned 17, and when I turn 18 next year, I am going to receive a windfall of around £10,000. I don't want to let this money go to waste, and I want to get as much out of it as possible. I was wondering what the best thing to do with it would be when I receive it. I have been reading up on ISA's and investment of money in shares etc, but because I haven't dealt with anything like this before, I'm a bit lost. I'm looking to see what I can do with it to get maximum profit for little risk. So, I suppose my question is. What would be the best way to invest £10,000?
Darren's response:
Hi, thanks for the question. First of all my answer below is only guidance and not a personal recommendation.
Given your age I assume this is a significant amount of money for you, and you are right to make the best use of it. What you do really depends on your plans for the next few years. When you will need to use the funds, and what for, will help decide the best option for you. That said I would always recommend that you set aside a fund for emergencies (e.g. car breakdown)
This should be any amount that you decide, but a good guide would be £2,000/£3,000.
This doesn't necessarily need to be kept separately, but many people prefer to open an account just for this so it doesn't get touched. A Cash ISA would be ideal (see below), or any other savings account. The key point is that it must be easily accessed in event of an emergency.
If you are going to University or similar then you might need to use the funds to support you. However, if you don't need it for that then you should consider what you might need it for. For most young adults, after buying a car, their first major commitment is to buy a home of their own. This requires a large cash deposit, usually 5/10% of the property purchase price.
To start we need to clarify what we mean by Investment. This is split into two areas:
- Cash Based Deposits - these are accounts that pay Interest. Your original capital remains safe and there are usually no charges levied. Typically we are talking about Savings accounts, Cash ISAs, and Fixed rate bonds
- Asset Investment - typically these are funds where you "buy" other assets that you then hope to sell at a later date for a profit. Typically these could include property, or shares on the stock markets, or gold etc.
Cash Based Deposits
Let's assume it's University, so you'll need to have access to the funds over the next 3/4 years on a regular basis. This means that the money should be held in Cash deposit based accounts, which pay interest.
You mention ISAs, I presume you have looked at the various Cash ISAs available, most of which pay interest of a higher rate than other accounts on offer. The benefits of an ISA are that the interest is not taxable, so you receive it all.
If you shop around you'll find several currently paying around 2% per annum, which is about as good as it gets at the moment. You can only have one ISA in any tax year.
In the current tax year you can put £5,760 into a Cash ISA, so if you receive your funds before April 2014 you can put that amount in. As soon as the new tax year starts in April 2014 you can put a further similar amount into the ISA (the actual amount may increase depending on the Government).
However, you could consider putting some of the funds into a 1 year or 2 year Fixed rate bond. Whilst these are taxable it is unlikely that you will be taxpayer, so can fill in a form at the bank to have the interest paid tax free. These can also be found paying around 2% (You can find the current best fixed bond rates here).
The difference is that if you withdraw your money before the Fixed rate period ends then you lose some of the interest, so don't put all of your money in one of these, in case you need some.
Asset investing
If the need is a house deposit (or other longer term goal) then you can consider other Asset investment options (and a Stocks and Shares ISA would be a good vehicle for this).
You'll need to be sure that it is unlikely that you will need access to the funds for at least 5 years, preferably longer. This is because investments, other than cash based deposits, are likely to fluctuate in value. In addition there are charges involved that have an impact on the value.
For example if you invest £10,000 it might cost you 3/5% (£300-500) to start, plus another 2% (£200) per year if you seek advice. Such investments could realistically offer returns of 5/7% per annum, so in the first year you would be lucky to break even.
In year 2 you would only have seen a small increase, in year 3 it begins to look better, year 4 even better..... assuming markets go up. You should note that charges on different investments may be higher or lower than my example AND growth rates are not a set fixed figure. There may be years where the growth is 9% or more, and other years might be MINUS 3% or much worse. If the MINUS figures occur in the first few years you might have to wait for a few years for the funds to regain their value.
DIY investing
Of course it is possible to keep investing costs low by Doing-It-Yourself. DIY-investing is suitable for people who have experience of investing and as they do not require professional advice they can keep the charges they pay low (especially the initial charges) as there is no advice fee/charge.
MoneytotheMasses.com provide a FREE short series of emails which teaches you how to unlock the DIY Investor in you within minutes. The emails will take you 2 minutes each to read and will show you the simple tools and techniques successful investors use - which you can too.
Interestingly there are one or two companies who will now manage stocks and shares ISAs on a discretionary basis for a relatively low annual fee. Their aim is to target those who are attracted by the low charges associated with DIY investing but don't actually want to pick and choose their own funds. Bestinvest runs a selection of four portfolios (Aggressive Growth, Growth, Defensive and Income) which are tailor-made based on their in-house investment research. They have produced a useful guide which explains how they run each portfolio and it will help you decide which is appropriate for you.
However, given your lack of experience with investment, I would suggest that you seek independent financial advice before doing anything once you receive your windfall. A financial adviser (such as myself) will assess your personal attitude to risk and recommend the most suitable investments to meet your needs, taking into account your personal circumstances.
I hope that answers your query clearly, but feel free to contact me further if you require more details.
Darren Amos
Financial Planning Designer
If you would like to contact Darren for help with your financial affairs click here.
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