If you’ve got £5,000 to invest you’ll want to make that money work as hard for you as possible. That might mean getting growth from it as quickly as possible, but it might also be about using it as a foundation for your longer term financial wellbeing or perhaps to save for something specific.
Whatever it is, you’ll be wondering how best to put it to use. So, here are a few pointers to help you put that £5,000 to good use.
Start at the end: what are you investing for?
Do you have a particular goal in mind for the money you invest? Is it for something specific in the medium term, such as a home deposit, or a longer term goal related to later life or financial independence? The answer to these questions will help dictate the vital matter of how long you intend to stay invested and how much growth you expect.
In simple terms, if you want your money to grow as much as possible, you can do two things. Firstly, leave it invested in the stock market for as long as possible – at least five years – and only withdraw when it’s doing well (i.e. don’t panic when it’s not). Secondly, lean towards investments with the greatest potential for high growth. This will mean investing in higher risk assets and sectors, such as emerging markets. But remember, nothing is certain and some investments fail, so only take on risks you are comfortable with.
Understand the risks and rewards of investing £5,000
There’s always some degree of risk in investing – without it, there would be no reward. For example, if you started with £500, you might end the year at £550 or even £450 if you leave it in a cash account, while a higher risk stock market-based investment might end the year at £700 or £300. This is why it’s generally better to stay invested over a longer timeframe, giving any bad years the chance to rebalance in following good years.
The level of risk you take will be dictated by factors including your age, circumstances, capacity for risk and appetite for risk. But if the idea of losing any money while investing is likely to cause sleepless nights, you might need to favour lower risk assets such as cash and government bonds.
Diversify to spread the risk
One way to manage investment risk without giving up on growth is to diversify. This simply means spreading your money across different assets and fund types to ensure you’re not overexposed to one company or sector (as opposed to putting all your £5,000 into one or two stocks or funds). Many investment platforms offer risk assessment tools that help investors get an idea of their risk profile. Check out more on risk and reward in investing and how to manage risk in your portfolio.
Stick to funds
When you invest in funds – such as mutual funds, Exchange Traded Funds (ETFs) and investment trusts – you’ll already have a degree of inbuilt diversification. This is because each fund is effectively a basket of other investments, from company shares to government bonds to property, gold and more. They’re great for beginners and, with £5,000 to invest, you can afford to buy a good selection of them.
Wrap it all up in a stocks and shares ISA
Like a current account for your cash, you need something to keep your investments in. With £5,000, it makes sense to open a stocks and shares ISA so you can benefit from the annual £20,000 tax-free savings allowance. Where can you open the account with and buy investments from? You can take professional advice, which is a particularly good idea if you want to put a broader financial plan together. Or you could take the approach favoured by most investors these days and use an investment platform. We explain the basics of investment platforms to help you get started.
Find the right platform for you
To inform your decision, consider how much support you’ll need and how much choice you’d like when choosing investments. Do you want recommended fund lists, learning materials and a professional advice service, for example? Think about what you really need and avoid paying extra for anything you won’t use – it will all be reflected in the fees you pay.
You could use our investing app comparison tool to explore the robo-advice options available to you, while our investment fees comparison tool makes it especially easy. We begin with a mini questionnaire to determine what’s important to you and filter the market, then calculate how much they would charge you to invest with them. We also share our own expert view on each platform, based on decades of experience and without a trace of favouritism.
Ready to have a go? Then head over to our free comparison tools. Or, if you feel like learning a bit more about the specific types of investment we’ve mentioned today, there are plenty of how-tos and explainers in our Learn section. Happy investing!
