Table of Contents
Show more
Show less
Capital at Risk. All investments carry a varying degree of risk and it’s important you understand the nature of the risks involved. The value of your investments can go down as well as up and you may get back less than you put in. Where we promote an affiliate partner that provides investment products, our promotion is limited to that of their listed stocks & shares investment platform. We do not promote or encourage any other products such as contract for difference, spread betting or forex. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK. Correct at the time of writing.
Tips for investing £20,000
- Have clear goals: your investment goals define your strategy so it’s important to be clear on what you’d like to achieve before getting started.
- Diversify your portfolio: diversifying your portfolio helps to limit the impact of losses that may affect certain holdings in your portfolio at different times.
- Consider drip-feeding your investments: investing smaller, regular sums of money over a longer period may suit investors who feel uneasy about parting with £20,000 in one go
- Keep an eye on charges: whether you decide to use an investment platform or an independent financial advisor, fees and charges can eat into your returns. It’s important to get a clear understanding of the fees you’ll need to pay to make sure you retain the most from your investment.
- Be tax-efficient: using tax-efficient wrappers such as self-invested personal pension or ISAs, can help you shield the returns you make on your investments through tax relief.
- Regularly review your portfolio: monitoring your investments is essential for making sure you’re on the right track to achieving your goals. You should aim to review your holdings at least once a year to check that your investments are balanced and aligned with your objectives.
- Think long term: investments fluctuate so it helps to think about the process over a longer time frame of five years or more. This gives your holdings time to recover from market shocks and dips that may affect the value of your portfolio.
Deciding how to invest £20,000 may feel overwhelming with so many options to consider.
Whether you’ve received an inheritance or a payout or perhaps want existing savings to work harder, this is a substantial sum. It’s worth taking the time, therefore, to weigh up options and ask what you hope to gain from going down the investing route.
Here’s a closer look at the options to consider for investing £20,000 to achieve your financial goals.
Are you ready to invest £20,000?
Before embarking on an investment endeavour, it’s important to ensure that you’re in a solid position, whether you have £10,000, £20,000 or even £100,000 to hand.
For example, if you’ve received a bonus, start by checking that you don’t have to pay tax on it. Look, also, to clear any existing debts (starting with the most expensive ones) and make sure you’ve got emergency savings tucked away (aiming for between three and six months’ salary in cash.)
You can make your own financial plan to help you decide your financial priorities and goals. However, in some cases, it may be helpful to speak with an independent financial advisor to make sure you’re on the right track, although you’ll need to factor in a fee if you take this route.
It’s important to be aware that investing works differently from saving. Saving involves setting aside some of your current income or a lump sum for the future. You can earn varying degrees of interest depending on the type of savings account you use.
Investing, on the other hand, is the process of buying assets with the aim of making a profit if they increase in value over time. The return you can make on your investment varies depending on how well the products you choose perform.
The extent to which you can grow the value of your money through saving or investing is affected by the rate of inflation – which measures how quickly the cost of goods and services increases.
Unless the return you make is the same as, or outpaces the rate of inflation, your money loses value in real terms. This means that you won’t be able to buy as much with your cash as you could in the past.
Generally speaking, investing offers more opportunity to generate returns that beat inflation because it involves a higher level of risk than putting money into a savings account – we talk more about the balance of risk and reward below.
Finding the right balance
Creating a portfolio with the right balance of investments is key to achieving your financial goals.
Higher-risk investments tend to have greater volatility and include assets such as shares, which tend to fluctuate more frequently due to market conditions and geopolitical events. Lower-risk investments tend to be those which are less volatile and offer more stability, such as bonds.
As a general rule of thumb, investments with a higher risk have the potential to offer greater returns over time, while lower-risk investments tend to yield more moderate returns.
Paying particular attention to the overall risk profile of the portfolio rather than the individual assets could also help ensure you stay on track to reach your investment goals.
James Norton, senior investment planner at Vanguard, says: “As a basic principle, all investors should ensure they have a broad, diversified portfolio made up of bonds and equities spread across different sectors and geographies which they plan to hold over the long-term [generally agreed to be three to five years or more].
“The key point is that all investors should consider risk at the portfolio level rather than in regard to particular investments. The proportion of bonds to equities can then be shifted depending on financial goals and risk tolerance.”
While your risk appetite may influence the types of investments you prioritise, ensuring that you have a balanced selection will help maximise your returns.
Norton continued: “Someone with a high-risk appetite, and time on their side, may want to consider a portfolio made up of 80% equities and 20% bonds, while someone with a lower risk appetite may do the reverse as equities can be more volatile than bonds and cash in the short-term, meaning prices can fall as well as go up.”
Different ways to invest £20,000
Some of the options to consider if you’d like to invest £20,000 include:
Collective investments
Collective investment schemes allow you to pool your money together with other people to invest in one or more types of assets. In general terms, they are also referred to as investment funds and choices include: unit trusts, investment trusts, and exchange-traded funds (ETFs).
Collective investments can be split into two groups depending on how they are managed:
- passively managed – these are also known as tracker or index funds and aim to replicate the performance of a particular stock index, such as the UK’s FTSE 100, FTSE 250, or the US S&P 500. The average annual management fee for a tracker fund sits between 0.05% and 0.2%. A £1,000 investment into a fund that charges 1% would cost £10.
- actively managed – these types of funds aim to outperform a particular benchmark, for instance, the return on a certain stock index, by choosing shares to achieve that goal. Active funds tend to have an average annual management fee of between 0.5% and 1.5%.
Collective investments can be held in tax-efficient wrappers, such as self-invested personal pensions (SIPPs), stocks and shares Individual Savings Accounts (ISAs) and Lifetime ISAs.
If you’d like more support with deciding which collective investment is right for you, speaking with an independent financial advisor (IFA) could help direct you to the best option for your circumstances.
Investment platforms or fund supermarkets offer a do-it-yourself (DIY) alternative where you get to choose which funds to invest in. Robo-advisors provide a combination of the services offered by IFA and DIY providers. They use an algorithm to help you build a portfolio that suits your investment goals.
Each route into the investment market comes with fees which vary between providers and according to the amount of money you invest. It’s important to research the cost of using a firm or platform before investing to ensure you understand how it may affect your overall return.
Bond funds
Bond funds offer investments in government or corporate bonds – or a mixture of the two.
A bond is a form of debt, or IOU, issued by governments or companies when they want to raise money. Investors receive interest on their bond investment once or twice a year, which is referred to as a coupon.
Rob Morgan, chief analyst at Charles Stanley, says: “There are a wide variety of options for investors wishing to invest in bonds, and many different types of funds available: government, corporate, strategic, emerging markets and high yield.”
Generally speaking, bonds tend to perform well when the stock market dips which helps to offset the impact of share prices if they fall.
Morgan continued: “[Bonds] should provide useful diversification from share markets that might be buffeted by the headwind of an economic downturn constraining earnings.”
Discover more about how to invest in bonds in our guide.
Individual shares
Buying individual shares is another option to consider for investing £20,000. But be aware that buying one, or even a handful, of stocks is higher-risk than investing in funds, which tend to spread your money across dozens of holdings.
Colleen McHugh, chief investment officer at Wealthify, says: “The trick is to invest in a pot of assets with negative correlations so that if stocks have a bad year, bonds should have a good year, and therefore negate some of your downside risk.”
Picking a wide range of companies from divergent sectors to invest in is known as ‘diversification’ and can be an essential tool for limiting the impact of share value fluctuations.
Should I put £20,000 in my pension?
Pensions offer a tax-efficient way to earn a return on your money. Whether you should use them as part of your strategy for investing £20,000 depends on your circumstances and financial goals.
Putting £20,000 into your pension pot could earn a boost through tax relief, which is extra money the government gives you each time you pay into your pension.
The current rate of pension tax relief is 20% for basic rate taxpayers, while higher and additional rate taxpayers could get an added boost of 40% or 45% respectively.
The maximum amount you can save into your pension in a tax year and still receive tax relief is £60,000 or the amount of your annual qualifying earnings, whichever is lower. This is called your annual allowance.
It’s important to note, however, that you won’t be able to access your pension pot until the age of 55 (which is due to rise to 57 in 2028) without paying a punitive 55% rate of tax.
