How to Invest £10,000 – Forbes Advisor UK

You may have recently had a windfall bonus, an inheritance or even been lucky enough to win a prize draw where a lump sum of £10,000 burned a hole in your pocket.

If you already have cash on hand beyond your daily living expenses and a nest egg for emergencies, investing is one way to help you meet your long-term financial goals.

An amount like £10,000 is not a life-changing sum of money. But invested wisely, it could turn into a useful nest egg. Here’s a look at some of the options available.

Remember that investing is speculative, is not suitable for everyone and it is possible to lose some or all of your money.

1. Consider collective investments

Funds, mutual funds and exchange-traded funds (ETFs) all come under the term “collective investment scheme”.

In other words, each pools the contributions of numerous investors so that the entire pot of money can be invested by a professional fund manager in a ready-made portfolio across different asset classes. These include bonds, real estate, commodities and stocks, or a combination of both.

Ryan Lightfoot-Amoff, senior research analyst at research provider FundCaliber, points to the benefits of outsourcing investment decisions to a professional fund manager, “who will seek to strike a balance between different companies, industries and revenue drivers in order to generate returns that be above the market.”

He adds: “Investors can also benefit from economies of scale in fees

can often be prohibitive for investors who trade regularly.”

Collective investment schemes can be divided into two parts depending on how they are managed:

  • Passively Managed: Also known as trackers or index funds, these funds aim to replicate the performance of a specific stock index. For example, by buying shares in the companies that make up the UK FTSE 100 index.
  • Actively Managed: These funds aim to outperform a benchmark (such as a specific stock index) by selecting a basket of stocks.

Because of the way they are managed and operated, active funds tend to be more expensive to invest compared to their passive counterparts.

As a rule of thumb, passive funds require between 0.1% and 0.2% of an upfront investment, while the figure for active funds is closer to 0.5% to 1%.

For passive funds this equates to £10-20 for a lump sum of £10,000 compared to £50-100 for an active fund.

Passive and active funds diverge, and it’s a hotly debated topic whether active funds outperform their passive counterparts to justify their higher fees.

It is worth taking the time to find the best trading platform to buy and hold these assets as trading and platform fees can vary significantly.

Investments can also be held in tax-friendly wrappers such as Individual Savings Accounts (ISAs).

2. Invest in stocks

Buying individual stocks is riskier than investing in funds, but it can be a great way to invest £10,000 if investors have the time and knowledge to research public companies.

FundCaliber’s Mr. Lightfoot-Amoff says, “Investing in individual stocks can have much greater upside potential.” But he goes on to warn potential investors that “you’re taking a significantly higher risk.”

It’s still important to diversify your portfolio, which means spreading your investment across a mix of companies from different sectors. Hopefully, if one company or sector underperforms, this will be offset by a good performance in another sector.

As with mutual funds, shares can be held in tax efficient ISAs. Likewise, they should be viewed as a long-term investment of at least five years to offset any rises or falls in the stock markets.

3. Invest in bonds

Investing in bonds could be a useful way to generate income and a return on investment with your £10,000.

Bonds are a form of loan that typically pay interest once or twice a year in the form of a “coupon.” At maturity, the issuer of the bond repays the original “par value” of the bond. Once a bond has been issued, it can be traded in a market.

Noelle Cazalis, manager of the Rathbone High Quality Bond Fund, says: “Bonds tend to be less volatile than stocks, which is why they are often favored by conservative investors.”

Ms. Cazalis adds, “Bonds also often show low correlation to stocks.” This means that they tend to behave differently at the same times in an economic cycle. As such, bonds can therefore be used for diversification versus an existing equity portfolio.

There are two different types of bonds:

  • Government: known as “gilts” in the UK and “treasuries” in the US. Government bonds are generally considered a safer investment than corporate bonds (see below) and therefore tend to pay a lower interest rate, typically 1-2% over the past five years.
  • Company: These bonds are issued by companies looking to raise cash. Investment grade bonds are considered safer than junk bonds as measured by independent rating agencies such as Moody’s. Investors can therefore expect a higher interest rate from companies offering the latter to compensate.

Although neither the UK nor the US government has ever defaulted on any of their bonds, they are not a risk-free investment. It is possible for the bond issuer to default on interest or the final payment in the event of payment difficulties.

As with stocks, the price of bonds fluctuates once they start trading, allowing them to trade at a premium or discount to their “par value”. Interest rates have a strong impact on bond prices – when prevailing interest rates rise above a bond’s coupon, the bond becomes less attractive to investors and its price falls.

As a result, this means that the “yield” (calculated as annual interest divided by the market price of the bond) will increase. Yield is an approximation of the effective interest rate you will get on a bond based on its current price.

Although rising rates have taken their toll on bond prices this year, bonds could become increasingly attractive once rates start falling again.

Hal Cook, senior investment analyst at Hargreaves Lansdown, comments: “To emerge from a recession, central banks are likely to cut interest rates to stimulate economic activity. This should lower bond yields and increase capital values.”

4. Invest in real estate

Alternatively, you could invest the £10,000 as a down payment on the purchase of a home, but with the boom in house prices in recent years it can be difficult to get up the property ladder.

Another option is to invest in real estate indirectly through a Real Estate Investment Trust (REIT).

REITs are similar to mutual funds in that they pool investors’ money but invest it in a real estate portfolio rather than stocks.

Laith Khalaf, Head of Investment Analysis at AJ Bell, says: “REITs offer investors a convenient way to enter the commercial real estate market that can be held in a SIPP or ISA. The commercial real estate market includes office buildings, retail spaces such as shopping malls, and industrial units such as warehouses and distribution centers.”

Mr Khalaf adds, “Investors may choose to invest in REITs to generate income as commercial property tenants pay regular rents which REITs can then convert into dividends for investors.

However, Mr Khalaf also warns: “While the price of underlying commercial property may not be as volatile as stocks, REITs are traded in the market so they are highly correlated to stocks, reducing their ability to diversify.

“Commercial real estate is an asset that is clearly sensitive to economic developments and will face challenging times as we enter an economic slowdown, but a lot of bad news is already reflected in the prices at which many REITs are trading.”

5. Invest in an annuity

Investing for retirement is a tax-friendly way to save for retirement because the government “tops” your contributions in the form of tax breaks. According to HMRC, contributions to private pensions reached a record high of £12bn in 2020-2021, with an average contribution of £1,700 per person.

The amount of tax relief depends on the income tax rate you pay (all figures refer to the current tax year 2022-2023):

  • If you’re not a taxpayer, you can pay up to £2,880 into a pension, which the government tops up by 20% to £3,600.
  • If you’re a property taxpayer, you can get the same 20% surcharge from the state, up to 100% of your annual income (subject to certain conditions).
  • Taxpayers with higher and additional tax rates may receive tax relief of 40% and 45%, respectively, subject to certain annual limits.

The advantage of investing in an annuity early is that you benefit from the power of compounded returns, giving you a return on your original investment plus the previous year’s return.

If you invest £10,000 in a 10-year pension at a 5% annual return, your pension pot would be worth £16,000. However, it would grow to over £70,000 if you invested the same amount and left it for 40 years.

You can invest in a pension through a workplace system or privately through a self-invested personal pension plan.


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