I think the best way to invest £20k is in the stock market, particularly if I hope to make a million. I like to follow in the footsteps of billionaire investor Warren Buffett. Both he and his friend and colleague, Charlie Munger, advocate a buy and hold approach to investing. This is a tried and tested method first made famous by value investor Benjamin Graham in his 1934 book, The Intelligent Investor.
Deciding where and how to invest £20k
£20k is a lot of money, so to put it to work I need to consider my options. I’d begin by deciding where to buy my stocks. I think a Stocks and Shares ISA or Self-invested Personal Pension (SIPP), through a reputable broker such as Hargreaves Lansdown or AJ Bell, is the best starting point.
There will be fees incurred on each transaction, but fees on funds are lower than on individual equities. I’d probably allocate £3,000 to five individual stocks and the remaining £5k I’d split into five funds. If I hope to make a million, these need to be held for a minimum of five years, preferably many more.
Make a million
If I could guarantee a 12% effective annual return on my investment, I could invest £20k, leave it for 35 years and I’d be a millionaire, with a total sum of £1,055,992 accumulated. However, 12% every year for 35 years is pretty difficult to achieve. Therefore, if I could afford to top up my initial £20k investment, with a regular monthly sum, then I could achieve the millionaire mark at a lower interest rate.
With a 9% effective annual rate, £230 a month deposit for 30 years, on top of my initial £20k investment, would result in a final sum of £1,032,282. Or, by upping the timeline and monthly amount to 43 years at £450 respectively, I’d bring the interest rate right down to a very achievable 5% and the final sum would be £1,008,775.
While time, patience, and cash are a given, this goes to show it’s possible for ordinary people to become ISA millionaires.
What stocks should I buy in 2021?
With the likelihood of a vaccine rollout and normality returning in 2021, there may be less volatility in the UK stock markets. However, I don’t think that will be the case until later in the year. I believe the best way to invest £20k is to diversify my portfolio with a mixture of sectors and possibly countries, which may mean choosing an emerging markets fund or solid US stock. But with Brexit out of the way, the UK government wants to focus its efforts on ensuring the UK remains a financial hub of excellence. For this it will encourage investment in technology and financial stocks.
Micro Focus is a tech company that helps companies upgrade and secure their systems. Security is a big issue as cyber attacks have massively increased during the pandemic and I think this will continue to be an area of growth next year. Augmentum Fintech is a venture capital company investing in fast growing fintech businesses. So, I might consider one of these.
It can be difficult to know the best UK shares to buy now on my quest to make a million. I’d probably choose to invest £20k across fintech, oil, pharmaceuticals and emerging markets to ensure diversified exposure to several areas of growth.