I’ve previously offered some thoughts on investing a sum of £10,000, a very nice amount to get you started. Perhaps it’s a windfall, or some money you’ve saved in the bank over the years and you’re thinking about a better home for it? Today I want to look a little again at some options.
First, I want to stress how important it is to have some easily accessible cash stashed away to deal with emergencies, because you really don’t want to end up having to take something like a payday loan if you can’t arrange cash quickly enough. I’m surprised how often people are totally unprepared for the unexpected to happen, because the unexpected happens every day.
So, assuming you have an emergency cash reserve, are there any specifically good and bad ways to invest in 2020?
Cash ISA? No way
My first thought is that a Cash ISA is likely to be even worse value than it has been in recent years — and they’ve never been a good deal even at the best of times. Looking around at long-term easy-access interest rates at the moment, the best I can find is 1.31% — you can get a little more by tying your money up for a fixed term, but not a lot.
Though the UK inflation rate dropped to an annual 1.5% in November (down from a longer-term trend at around 2%), that’s still higher than Cash ISA interest rates. So that means a Cash ISA will actually lose you money in real terms, which is a pretty lousy investment outcome. There’s talk now of a further cut in the Bank of England base rate, and that would drop Cash ISA rates even lower.
Big share profits
So shares in UK companies it is then, and I’ll repeat once again that if you’d invested £1,000 in the UK stock market in 1945 and reinvested all your dividends, according to the Barclays’ Equity Gilt Study, it would have grown to £1.8m over the next 60 years, even taking inflation into account.
Many newcomers to investing find the whole prospect of picking their own individual shares rather daunting, and I can understand that — it took me a while (and a few successes and failures) to become comfortable with it. But one thing I’ll always recommend for someone just finding their feet is an index tracker.
That’s a fund (with typically very low charges) that follows a stock market index — like the FTSE 100 or FTSE 250. Right now at the start of 2020, I can’t help thinking the FTSE 250 (which contains the 250 next biggest stocks below the biggest 100) looks better value.
Smaller stocks to outperform?
The FTSE 250 index typically outperforms its bigger sibling (though with more risk), but the two have been neck and neck for a while and the FTSE 250 has only recently started pulling ahead again. It’s all about the long term, of course, but if the FTSE 250 is set to pull further ahead in 2020, it could give you a nice start.
This year, I’d be tempted to spread any investments 50/50 across the two. Personally, I would put £1,000 into each of 10 individual stocks from the FTSE 100 and FTSE 250. But I think trackers are a great alternative if you don’t want to pick individual shares.