Maybe you’ve recently received a work bonus, financial gift or inheritance, or have hit your savings targets and now want to do something more with any excess money. Whatever the reason you’re now sitting on some cash, if you won’t need it for at least five years, then investing is an effective way to help it grow.
A stocks and shares Isa allows you to invest up to £20,000 each tax year in stocks, shares and other investments without having to pay tax on any returns. With this allowance resetting soon, it’s a smart place to start. But should the size of your pot determine the approach you take to investing in an Isa – and how?
Firstly, whatever figure you’re starting out with, there are some “golden rules” of investing that never change.
Diversification is a key one. In other words, ‘don’t put all your eggs in one basket.’ Investing entirely in AI, for example, may seem tempting given the current buzz around it, but investing all your cash in just one industry puts you at risk of big losses if that market doesn’t reach expectations.
Investing instead across different asset classes, geographies, sectors or companies means if one of your selections suffers a dip in performance, it will stand more chance of being evened out by the rest of your portfolio.
Also, think honestly about your attitude to risk. You might be the adventurous type in your spare time, but with investing it’s less about how likely you are to do a bungee jump and more about how you would feel losing a chunk of your money. Time frame is also important to consider.
If there’s one certainty in investing, it’s that the path to strong returns won’t be straight. Whether you have £2,000, £10,000 or £20,000 to invest, it’s wise to stick to these basic ground rules. However, there are some different starting points you could consider depending on the amount you have to invest – and remember, any gains like dividends or capital growth are tax-free when you invest inside an Isa.
£2,000: Entry ideas
With £2,000, your instinct might be to google “top cash savings accounts”. However, interest rates on savings are falling as banks and building societies react to Bank of England base rate cuts. With experts predicting two to four further rate cuts this year, it’s unlikely your £2,000 will bring exciting returns – or even beat inflation – over time by sitting in a savings account.
Once you have an easy-access pot of three to six months’ wages for emergencies, putting your money to work in the stock market is generally a better bet for growing your wealth over the long term.
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When investing smaller amounts, it’s worth keeping things simple – and keeping fees down.
Zoe Brett, a financial planner at EQ Investors, recommends looking for a low-cost exchange traded fund (ETF) from a ‘robo-adviser’. These automated online platforms use algorithms to match investment portfolios with your appetite for risk and investing goals, and usually track a particular market index like the FTSE 100 or S&P 500.
Ms Brett says: “These come with diversification built in as they represent the top companies within the area the index is tracking. They are also very cheap so a good starting point for investing where paying higher fees doesn’t make sense.”
£10,000: Diversify – but in the right way
With £10,000 to invest, you could be tempted to take a more hands-on approach by researching and monitoring your own portfolio. DIY investing means you are in control of where your money goes, which can be fun – but you’re also responsible for picking all your investments, diversifying and changing strategy when needed.
Be honest with yourself here. Ms Brett explains that “a quick Google search tells an alarming story of studies showing approximately 90 per cent of amateur investors lose money over the long term. This is a stark reminder that the risks of investing are real, and a thoughtful approach is a necessity.”
If you’d rather leave things to the experts, then ready-made funds, which are collections of investments curated and managed for you by professionals, are a safer bet.
A ‘multi-asset’ fund with a mix of equities (shares in companies) and bonds (loans usually from governments or corporations) is a good place to start.
Equities tend to bring higher returns while bonds add stability – your attitude to risk will determine the ratio of these in your fund. Typically, multi-asset funds are actively managed by an experienced fund manager or team.
Victoria Hasler, head of fund research at Hargreaves Lansdown, says: “Here the manager makes decisions not just about which underlying shares and bonds to own, but also about which asset classes and in what proportions. It is an easy way to get exposure to a range of shares and bonds in one fund without having to make complicated asset allocation decisions yourself.”
£20,000: Balance your risk and reward
With the full ISA allowance to work with, you might feel you can afford to take a little more risk (with the potential reward of higher returns) with a portion of it.
A strong approach here is to keep the foundation as above with passive and/or active funds as core holdings – then add in some specialist funds or individual stocks for diversification and extra growth.
The ratio of these should depend on your attitude to risk and other factors such as your timeline for investing. However, as a guideline, you could look to allocate around 10 per cent of your portfolio to specialist funds and/or stocks.
For specialist funds, Hasler suggests a US Smaller Companies fund given how Trump’s tariffs could favour domestic businesses in the coming years. Or, this could be your chance to invest in AI or another modern theme with either a technology-focused fund – or by buying shares in companies leading this field (for example, Nvidia, Alphabet, or Microsoft).
Whatever sparks your interest, investment research firm Morningstar recommends only investing in areas you understand and will want to stay invested in for the long term.
When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
