If you’re lucky enough to have £5,000 to invest, you have plenty of options these days. Shares, investment funds, gold bullion, cryptocurrencies, and peer-to-peer (P2P) loans are just some of the assets you could invest in.
Personally, I believe that funds are your best bet for a £5k investment, assuming you’re investing for the long term. They’re less risky and more cost-effective (for a £5k investment) than investing in individual shares, more liquid and less hassle than physical gold, and more proven as a long-term wealth generator than cryptocurrencies and P2P.
That said, if you’re thinking about investing £5k in funds, you’ll want to be strategic about your approach. A few simple moves could make a big difference to your wealth over time.
Invest in an ISA
The first thing I think you should do if you’re investing £5k is open a Stocks and Shares ISA with a reputable provider such as Hargreaves Lansdown, AJ Bell, or Interactive Investor. This type of investment account – which lets you contribute £20,000 per year – offers a number of advantages:
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You’ll have access to hundreds of different funds
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You can withdraw your money at any time
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All your capital gains and income will be tax-free
It’s the last point, in particular, that’s important. By protecting your investment gains from the taxman, your money will grow a lot more over time.
If you’re aged between 18 and 40 and happy to lock your money away until you’re 60, you could also consider investing £4k of your £5k within a Lifetime ISA (the annual allowance here is £4k). Put £4k into this ISA, and the government will hand you £1k for free, giving you a total of £6k to invest.
Pick the best funds
Once you have an ISA open, the next thing I’d do is pick some high-quality funds that have excellent performance track records and are suited to your financial requirements and risk tolerance. I’d invest in a few different funds, in order to lower overall portfolio risk.
Now, everyone’s financial goals and risk-tolerance are unique, so I can’t tell you exactly which funds to invest in. However, if I was investing £5k today for the long term, I’d want to have exposure to both high-quality UK companies (large and small) and top companies listed internationally. So I’d choose a selection of UK-focused funds, as well as some global equity funds. You can find more information on six funds I like for 2020 here.
Average in over time
Finally, once I’d chosen my funds, I’d drip-feed the £5k into the funds on a monthly basis, instead of investing it all in one lump sum. The reason I’d do this is that it would minimise the chance of investing a lump sum at the top of the market and losing money if stock markets were to fall significantly. There’s nothing worse than investing a large amount of money and seeing the value of your investment drop 10% or 20% immediately.
So, that’s my take on how to invest £5k in the UK. If you’re looking for more investment ideas, you’ll find plenty of great information at The Motley Fool.