The Complete Guide To Investing Â£50,000 No Matter Your Circumstanceswritten by Bella Palmer
So youâ€™ve got Â£50,000 to invest and you are wondering how where to put it to work for the best result? Investing Â£50,000 comes with a pretty wide range of options. You could do anything from ploughing it all into the latest cryptocurrency to putting down a deposit on a buy-to-let property. But option number one runs a very high risk of turning that Â£50,000 into Â£5 (look, one of these days a cryptocurrency may well appear that finally goes mainstream. But are you prepared to risk your Â£50k on finding that needle-in-a-haystack?). Option number two will involve no little amount of work â€“ both initially to find the right buy-to-let property and get it tenant ready (and yourself with landlord insurance etc. etc.) and then in subsequently managing it.
If youâ€™ve already ruled out moonshot and hands-on investments and want to invest your Â£50,000 sensibly and then have nothing to do other than a periodic review of your investment performance, what are your options? You still have plenty. In the grand scheme of things, Â£50,000 isnâ€™t a huge amount of money. But it certainly is a significant lump sum to invest and, with a fair wind, should grow significantly over years if invested wisely. So it makes sense to consider your options carefully.
In most cases, the three biggest factors that will determine how you should approach investing Â£50,000 will be your current financial situation, your investment aims and your appetite and tolerance for risk.
Do you already have investments, such as a pension, non-pension investment portfolio or both? Or will investing Â£50,000 mark your first ever investment? Thatâ€™s the first important question to consider. So weâ€™ll start there.
Letâ€™s look at the hands-off investment options available for investing Â£50,000 based on four different financial situations:
- I donâ€™t have any investments yet.
- I have investments but they are still some way off reaching my long term needs or aims.
- I have investments and I am on track to meet my long term targets.
- I already have a healthy investment portfolio I am confident will see me comfortably through retirement.
I Donâ€™t Have Any Investments Yet
If you are completely new to investing, or are in the early stages of building up the value of an auto-enrolment workplace pension, investing a Â£50,000 lump sum is a great start. But it also means you probably shouldnâ€™t overcomplicate things.
If you are laying down the foundations of a nest egg, you should focus on a cheap (low fee) core that you will build on in the future. The central pillar of any modest, new investment portfolio with a long term horizon (15-20 years+) is controlled risk and good diversification.
If you have a long term horizon and are investing for future goals, such as financially secure retirement, you will want to take on just enough risk to give your investments a good chance of growing over the years but not so much that there is much chance of them sustaining heavy long term losses.
One good way to achieve that is by investing in low-fee index tracking funds that offer diversification through exposure to the global economy. As a general rule, it is a good idea to avoid too much â€˜home biasâ€™. That means only investing in assets from your home country. Because nobody knows how the economic growth of their home country will compare to other parts of the world, the route which offers the best chance of success is to spread the risk by investing across countries and regions.
As different parts of the world also do better economically compared to others at different times, investing across all of them should reduce volatility. It will also lower the risk of geopolitical events or political instability hurting an economy all of your investments rely on â€“ something which has been shown by numerous studies to historically lead to improved long term investment returns.
There are index tracker funds cover the global economy by including companies from different parts of the world. They most commonly either cover all developed stock markets internationally, or international emerging markets. The latter tend to have higher average growth than developed markets but are also more volatile and prone to peaks and troughs in the short term. A classic â€˜simpleâ€™ portfolio model is to invest 70% to 80% of capital in a global developed markets index tracker like one that follows the MSCI World index and 20% to 30% in a global emerging markets index tracker. MSCI Emerging Markets is the most commonly followed.
Drip Feed Stock Market Investments
Another good piece of advice is to drip feed stock market investments over a period of time. If you are investing Â£50,000 that means not investing the whole lump sum at once. Rather, split it up and invest an equal sum every month over a year or two. The reasoning behind the drip feeding approach is that it is very hard to time the market. You canâ€™t know with any real certainty if stock markets will move up or down over the coming months.
Itâ€™s better to invest when stock markets are down and shares comparatively cheaper. Then reap the rewards when they rise again, rather than investing when they are up but then subsequently drop â€“ even if, as has historically been the case, they subsequently recover. But trying to forecast the optimal moment to invest is a very high risk approach indeed. Even the professionals donâ€™t often get that right. But if you drip feed a lump sum investment over a number of months, you should get as close as realistically possible to the â€˜averageâ€™ returns to be gained from investing over that extended period.
Drip feeding investment capital into stock markets is good advice to follow regardless of whether you are just starting to invest or already have a portfolio.
I Have Investments But They Are Some Way Off My Long Term Targets
If you already have an existing investment portfolio but itâ€™s still a long way from the value of your long term targets, investing Â£50,000 into it as a lump sum will give it a very nice boost to help it on its way. Keep in mind, if you are making stock market investments, rather than, for example, bonds, it still makes sense to drip feed the money into your account over an extended period of time to even out your chances of hitting upon good market timing.
You can ask yourself a few questions before deciding how to go about investing an extra Â£50,000. The first, and most important, should be â€˜how well diversified is my current portfolioâ€™?
Portfolio diversification comes in a number of forms. The first is across how many individual assets, such as stocks and bonds, your investments are spread. A good rule of thumb is to never have more than 5% of your capital tied up in any one investment that offers narrow exposure â€“ such as shares in one company. And that 5% ceiling can be dropped further as you grow your portfolio.
There is, however, also an argument that over-diversification can make it difficult to track and monitor the performance of all of the investments in a portfolio. So a good idea is to aim for a happy middle ground, where a portfolio is split between 20 and 40 or 50 different assets. An exception would be funds that track an index containing a broadly diversified collection of different stocks or bonds, which offer good diversification within a single â€˜instrumentâ€™.
Diversification also covers geographical exposure and asset classes. If your portfolio currently has a strong â€˜home biasâ€™, it might make good sense to invest your Â£50,000 across funds, either index trackers or good value actively managed funds, that offer you exposure to other international regions.
Or if almost all of your investment portfolio is in equities, you might want to consider spending at least some of your Â£50,000 on fixed income assets â€“ bonds. That will reduce your exposure to stock market slumps and again help balance out volatility. Investing in bonds neednâ€™t also necessarily mean low risk, low return bonds such as Treasuries or investment grade corporate bonds. You could invest part of it on higher risk, higher return bonds, such as junk bonds, if you are keen to drive your portfolioâ€™s growth while also diversifying across asset classes.
If you are already confident that your existing portfolio is well diversified within the context of your investment goals and tolerance for risk, your decision is easy. Simply drip feed the Â£50,000 bonus investment capital into topping up your existing investments.
I Have Investments And They Are On Track To Meet My Long Term Targets
If you are lucky enough to have an existing investment portfolio that is on course to hit its targets and offer you financial security in retirement, a Â£50,000 lump sum to invest could offer you the chance to explore some more â€˜exoticâ€™ options. But not necessarily. You should carefully consider whether youâ€™d rather simply give your existing investments a top-up or add in some additional diversity at a risk profile that is in line with how you have invested until now.
Or, you could take the view that Â£50,000 plus compounded interest isnâ€™t going to make a significant difference to your already healthy investment portfolio invested in the kind of assets your currently hold. In that case, you could take the decision to use the extra money to take on a higher risk investment that offers a very good upside if things go well â€“ on the understanding that if they donâ€™t you are ready to absorb any losses since they wonâ€™t throw your â€˜coreâ€™ portfolioâ€™ off course.
In the latter scenario you could look at investments such as a Venture Capital Trust (VCT) â€“ which also offers some attractive tax efficiencies. VCTs invest in start-ups they believe have the potential to grow into major companies. VCT investments, as long as you are investing in freshly issued shares, offer 30% tax relief on investments up to Â£200,000 a year. You do, however, have to hold onto your VCT investment for at least 3 years. Sell earlier and youâ€™ll have to repay the initial tax relief. If the VCT investment goes well, you also wonâ€™t be due any capital gains tax on returns, as would normally be the case over the Â£12,000 annual capital gains personal allowance.
A further option could be minibonds. These are unregulated bonds usually offered by SMEs that want to raise growth capital. They are risky, because there is a higher chance of minibond issuers defaulting than is the case with regulated corporate bonds, even those with a credit rating that gives them â€˜junkâ€™ status. However, they tend to offer coupons in the high single to low double figures. Spreading Â£50,000 between a few minibonds to spread the risk to a degree, could offer attractive returns if it comes off and none of the issuers default.
Hopefully thatâ€™s given you some direction on how best to invest Â£50,000 depending on your personal financial circumstances, investment aims and risk tolerance. As always, if you do not feel confident in your investment decisions, seek out professional, qualified advice.Â
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.