How to invest £10k and get the best return

14 min Read Published: 07 Aug 2020

How to invest £10k and get the best returnIn these days of low interest rates and unpredictable inflation, it is understandably tempting to try and make your money work a little harder than it probably is if it’s languishing in a regular bank account.

You might be considering taking the plunge and investing a few thousand pounds to grow your nest-egg. These days there are more options for the first-time investor than ever, which is a good thing for consumers but can also be daunting when it comes to deciding to take your first steps.

Below, we look at the different options available to you if you want to invest £10,000, the things you should consider before putting your money at risk, and some first-time investor dos and don’ts.

The importance of understanding risk

If you are determined to hand-pick which investments you are saving into, it is crucial that you understand the concept of risk profile. Everyone’s risk profile is different. Risk profile comprises two main parts: your risk appetite and your capacity for loss.

Risk appetite

Risk appetite is the amount of risk you are comfortable taking. If you are in a constant state of anxiety over the ups and downs of your portfolio, any returns you make may simply not be worth the aggravation you feel. Remember, investing isn't for everyone. Any investment will rise and fall unpredictably, but some are typically thought of as riskier than others.

Capacity for loss

Capacity for loss is how much you can afford to lose. When you invest, the prices of the assets you hold will rise and fall. If you are forced to take out your money when the markets are low, you may get back less than you put in. If you can’t afford to lose any money, again, investing may not be for you. If you hold a diverse range of asset types (also called asset classes) and funds, it is very unlikely that the value of your portfolio will reduce to zero. However, it is not unheard of for stock markets to rapidly lose large swathes of value in a crisis.

Your portfolio should ideally be as risky as it can be without exceeding either your risk appetite (how much risk you are comfortable taking) or your capacity for loss (how much you can afford to lose).

This is an easy principle to read but a much more difficult one to put into practice. If you are not comfortable making your own investment decisions then it could be a good idea to either speak to a financial adviser. Check out our 10 tips on how to find a good financial adviser. Alternatively, you could use a digital wealth manager (see the foot of this article) who will invest your money for you.

How to invest £10k and get the best return

Let's say you are looking to invest £10,000 there are a number of considerations. Some of the most important ones include:

1. Determine your investment timeframe

Remember, investing is for the long-term. If you think you’ll need your money in fewer than five years, investing may not be for you. The longer you save, the more time you’ll have to let returns compound as share prices rise. Any shorter than five years increases the risk of your portfolio going through a period of loss from which it cannot recover within your timeframe. In this instance, you would be better off putting your money into a high-interest savings account.

2. Minimise costs

When you invest, how much you pay in fees is one of the only factors you can control and predict. It’s important to remember that fees present a direct drag on any returns you make – and they’ll be taken out whether you make money or not. This means that in a year where your portfolio loses money, the subtraction of fees could actually increase that loss. Look for funds that have low fees – anything from 0.75% or below.

3. Diversify

Diversification is sometimes called the one free lunch in investment. By saving into many different types of asset (corporate and government bonds, shares, property and so on) you can possibly mitigate the effects of downturns in certain markets. Even within shares, those from different regions and business types don’t necessarily move up and down together, so holding many can protect you from the worst losses.

4. Build a portfolio

Taking costs and diversification into account, you can build a portfolio. We recommend using low-cost funds and trusts rather than picking your own stocks – a risky practice even professionals struggle to do well. Divide your money between a handful of different low-cost funds: UK equity, UK corporate and government bonds, US equities, emerging markets, European equity, and maybe property. Remember, diversification and low costs are the keys here.

5. Choose between active vs passive investing

One way to keep costs down is by using passive funds, also known as index funds. Rather than employing an expensive manager and research team to pick stocks, an index tracking fund just aims to deliver the same returns as its target index (the FTSE All Share or FTSE 100, for example). These can be purchased for a fraction of the cost of actively managed funds, the latter which often underperform the index anyway.

6. Cash can be a destination

Good savings rates can yield ok returns. Depending on your risk profile, you may wish to keep some of your savings in cash. This is fine. Although the buying power of your savings may diminish due to the effects of inflation, you will not lose any of your capital and may even make a bit of interest. If you are willing to lock your money away for a while you may be able to find a savings account that pays a decent interest rate while keeping your nest-egg safe. See our savings account best-buy tables.

Types of investment and savings for £10,000

We've discussed the things to consider when investing but what types of investment products can you use to actually start investing? Below we list the main investment products/services someone investing £10k would consider using:

1. Savings accounts

Savings is about as plain as you can get with your nest-egg, although that’s not necessarily a bad thing. With a savings account you’ll get a pre-determined interest rate paid in periodically, and your cash will not be exposed to the ups and downs of investment markets. In fact, even if your bank goes bust much of your money will be protected by the Financial Services Compensation Scheme. Keep in mind that savings rates tend to be relatively stingy – so you probably won’t earn more than a couple of per cent. Compare what’s on offer with our savings best-buy tables here.

2. Cash ISAs

Cash ISAs are savings products that not only pay a little interest, but also protect your money from the tax-man. You won’t have to pay tax on any interest you earn on the money in your ISA. Cash ISAs often require you to lock your money away for a period, but they will typically pay more than a normal savings account. Compare cash ISAs with our best-buy tables here.

3. Stocks and Shares ISAs

Savings accounts and cash ISAs are savings products, not investments. You won’t lose any money you keep in them. A stocks and shares ISA, on the other hand, allows you to buy units in a fund, shares in companies, bonds, or other investment assets. The prices of these assets can fall or rise, so you will be taking on more risk than you would with cash. Instead of earning interest however, your returns will depend on rises in the asset prices combined with any coupon or dividend payments you receive. In other words, you have a chance to make more than you would with cash, but also a chance to make less or lose money. As with a cash ISA, holdings in a stocks and shares ISA are not subject to tax – in this case, either dividend tax or capital gains. Here you can compare costs and pick a stocks and shares ISA provider.

4. Lifetime ISAs

Lifetime ISAs are ISAs designed to help young people save for their first home or put away money for retirement. You can save up to £4,000 per year in either cash or investments. The government then adds a 25% top-up to new contributions, equal to up to £1,000. The bonus stops when you turn 50. Check out our article Compare the best and cheapest Lifetime ISA. If you are in the process of buying your first home, then check out our 'First-time buyer guide'

5. Pension

A pension is a product designed to help fund your retirement. Contributions into the pension receive tax relief at your highest marginal rate and all investments held within it grow tax-free. From an investment perspective (the types of investments you can hold) they offer the same flexibility as a Stocks and Shares ISA. However, money put into a pension cannot be accessed until you are aged 55. If you want to find out more you can read our guide 'How do I set up a pension? Everything you need to know'. If you are unsure of whether you should invest in a Pension or an ISA, check out our article Pension vs ISA - Which is the better investment?

6. Digital Wealth Managers (Robo-advisers)

In this digital age, there is now a myriad of low-cost options for the new investor. Over the last few years using a digital wealth manager (aka a robo-adviser) such as Wealthsimple has become one of the most popular and cost-effective options for someone looking to invest £10,000. Check out our Wealthsimple review to find out how you can get your first £10,000 free for a year. The robo-advisor manages your investment for you (in their own pension or a stocks and shares ISA product) and you can monitor everything via your smartphone. Alternatives include Nutmeg and Moneyfarm which both offer advice services as well.

Another low-cost investment provider is Vanguard, which is famous for its ultra-cheap index-tracking funds. Vanguard now has a direct-to-consumer investment site, however one of the drawbacks is that you still have to build your own investment portfolio (unless you decide to simply choose one of their Lifestrategy funds). If you are a fan of Vanguard's funds and low fees then one of the cheapest ways for most investors to hold Vanuard funds would actually be via Interactive Investor (known as ii). Interactive Investor is the second largest investment platform in the UK and is the largest to operate a fixed fee model. Check out our Interactive Investor review to find out more.


Looking for a financial adviser near you?

Do you need financial advice? An independent financial adviser can show you how to make the most
of your money. Find your nearest qualified and regulated adviser using this VouchedFor search tool.

Alternatively, Hargreaves Lansdown, one of the UK’s largest firms providing restricted financial advice, is offering a £200 John Lewis voucher* to new clients.