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Investment options for all budgets

06 April 2019

4 minute read

Do you only have a small or a large amount to invest? We consider your options, whether you have £100 a month to spare or a big lump sum.

Who's it for? All investors

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • How regular investing can help smooth stock market volatility.
  • Why a mix of funds may help reduce portfolio losses.
  • The importance of tax-efficient investing.

Investors will generally have a different amount available that they can afford to invest every year. Some will be able to invest significant sums every month, while others may be on a tighter budget.

It’s a common misconception that you need large sums of money to start investing. Whether you have £100 a month or thousands of pounds to spare, you can pick from a range of investments which you might be able to match to your attitude to risk.

Before investing any amount, large or small, you must consider the potential pitfalls. You could get back less than you originally put in, and you should only invest money you can afford to lose. If you’re unsure, seek professional financial advice.

Remember too, that if you need access to your money within a few years, investing in the stock market will not be right for you. Investing is generally only appropriate for people who are willing to leave their money in the stock market for five years, or longer. This should hopefully give your investments time to recover from any downturns in the market, although there are no guarantees. We don’t offer personal advice; If you’re unsure seek it independently.

Here, we consider some investment options for different budgets.

£100 a month

You can start investing from just £50 a month with Barclays. However, what you choose to invest in will depend on your investment goals, how long you plan to remain invested, and the amount of risk you are comfortable accepting.

Investing a small amount each month could help to smooth the impact of stock market fluctuations on your investments. By drip-feeding your money into the market, if prices fall one month, your investment buys more units or shares, and if they rise, you buy fewer. However, remember that this strategy may not always work in your favour; for example you could lose out if each time you invest the market is up and then falls. You should also remember the impact of transaction charges, or buying costs, on the value of your investment which may be greater when you invest regularly.

One potential option for first-time investors or those with a small amount to invest is a multi-asset fund, which invests in a variety of asset classes, therefore providing diversification. While some funds may for example only invest in shares or bonds, a multi-asset fund will typically hold both of these, as well as property, cash and potentially even alternative assets such as gold. Seek professional advice if you’re not sure where to invest.

Find out more about multi-asset funds

Hundreds of pounds a month

If you have a larger sum available to invest each month, you could still opt for a single fund, such as a multi-asset fund. However, you may want to invest in more than one fund.

Regularly investing money and splitting it between different funds is sensible to help diversify your portfolio, and avoid trying to time the market.

A basket of funds should hopefully provide some diversification, with assets that will not all move in the same direction at the same time, whatever happens to the economic environment. For example, UK government bonds typically perform well in a poor economic climate as investors seek safer assets offering a steady income stream. Shares generally perform better during periods of economic growth, when company profitability is boosted, and shares become more appealing to investors.

You may want to consider investing in individual company shares, but bear in mind that putting your money into a small number of shares is a risky investment approach. If something goes wrong at the company you’ve invested in, you could lose your entire investment. Pooled funds, such as unit trusts and Open Ended Investment Companies (OEICs), and investment trusts, can give exposure to a wide range of companies to help reduce this risk, although you could still get back less than you invest.

How you divide your money depends on your financial goals and attitude to risk. If you are prepared to take greater risk, you may choose to pay, for example, a portion of your money each month into emerging markets or smaller company funds, which are typically among the more volatile sectors. Emerging market funds tend to focus on countries with economies which are still very much in the development phase, and therefore potentially riskier than more advanced nations such as the US and UK. Smaller company funds can include companies which have only been around for a very short period of time, or which may not have a trading record. Although they might end up being next big growth story, they could equally end up being worthless.

If you are more cautious, you may prefer UK equity income funds, or if you have a shorter timeframe, funds that invest a large portion in bonds. Aim to remain invested for at least five years, but preferably longer, as this should hopefully give your investments enough time to recover from any downturns in the market. Of course, this isn’t a guarantee – you can still get back less than you put in after this time.

Whichever investments you choose, it’s generally considered wise to review your choices regularly, say around every six months, so that you can be certain your portfolio still matches your appetite for risk Remember that your circumstances may change over time, affecting your financial aims and risk profile.

A lump sum

What investment you choose to make with a lump sum, whether £1,000 or £50,000 is dependent on a number of factors, including time horizon and your investment goals. Generally, the longer you have to invest, the more risk you can afford to take, because you have more time to recoup any losses.

If you are new to investing, or don’t already have an investment portfolio, you might want to avoid taking too much risk. Your investment can fall as well as rise in value, and you may get back less than the original sum invested. We don’t offer personal advice; if you’re unsure seek it independently.

Whether you opt to invest a lump sum or regularly, it’s important to consider how tax-efficient your investments are.

For example, if you have built up a large portfolio over time and your investments aren't held in a tax-efficient wrapper, such as an Individual Savings Account (ISA), you'll be taxed on profits above the annual Capital Gains Tax (CGT) allowance, which in the 2019-20 tax-year is £12,000. The standard CGT rate is 10%, while the higher rate is 20%.

UK investors currently benefit from a tax-free £2,000 Dividend Allowance. Basic-rate taxpayers must pay 7.5% on dividend income beyond the annual allowance, higher-rate taxpayers pay 32.5% and additional-rate taxpayers pay 38.1%. There is also a Personal Savings Allowance (PSA), which enables basic-rate taxpayers to earn up to £1,000 in savings income a year tax-free outside an ISA, or £500 for higher-rate taxpayers. Additional rate taxpayers aren’t entitled to this allowance. Savings income includes interest from bank and building society accounts and interest distributions from investment funds such as authorised unit trusts (AUTS) and Open-Ended Investment Companies (OEICS).

If your portfolio ends up generating more than the Dividend Allowance or the PSA each year, ISAs are important because if the rules don’t change they will protect your assets from tax over the long-term, enabling them to grow free of income tax, tax on dividends and Capital Gains Tax (CGT).

This tax year (2019-20) you can invest up to £20,000 into ISAs.

You can use your ISA allowance in a cash or investment ISA, or an Innovative Finance ISA which invests in peer-to-peer lending, where you’re effectively a lender and the money you invest is lent directly to borrowers via a peer-to-peer platform. Interest on these loans is tax-free when held within the tax-efficient ISA wrapper. Bear in mind that Innovative finance ISAs present special and higher risks including adverse tax consequences if a P2P loan isn’t repaid or if an operator becomes insolvent.

There is also the Lifetime ISA, which can accept up to £4,000 of your £20,000 annual allowance. Alternatively, you can invest in a combination of these, but you can only pay into one ISA of each type each tax year.

Remember that the favourable tax treatment associated with ISAs and all other tax rules may change in the future and that the value of this tax treatment to you will depend on your individual circumstances, which can also change.

Generally, investing for the long term, spreading risk, staying calm in the face of market volatility, and diversifying your portfolio among different assets is considered a sensible approach, however big a budget you have.

If you’re unsure about investing, seek professional financial advice. No matter how much you diversify, your investments can still fall in value and you may get back less than you invest. Past performance is not a reliable indicator of future performance.

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