I’m 22 and have recently been gifted £10,000, which is by far the single largest amount of money I’ve ever had to deal with.
I know investing can give you better returns than saving in cash, but I have no idea where to start.
It’s overwhelming to read all the different opinions on internet forums about which platforms to use, where to invest, and which account is best.
I’m confused about whether to put it all into a stocks and shares Isa, whether to stash it all or invest in smaller amounts, or use a different approach. How do I decide what’s best for a beginner?
D.L., via email
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The array of options when investing can be dizzying (stock photo)
Sam Bromley, of This is Money, replies: It’s natural to have questions like yours when coming into a significant sum of money at a young age. In fact, you’re ahead of the game by wanting to save rather than spend in the first place, and recognising that investing can beat cash over the long term.
At 22 you have time on your side, whatever your financial goals. But you should think carefully about those financial goals and your appetite for risk – essentially, how comfortable you are with the fact that you can lose money when investing.
There are two parts to your question: how to invest and where to do it?
We spoke to an investing and personal finance expert to get their take on the former and then give some options for investing platforms to consider.
> Read more: Investing for beginners
How could you invest £10,000?
Craig Rickman, personal finance editor at Interactive Investor, replies: I should start by saying your confusion here is perfectly understandable. The online investing discourse, notably in forums, can be dizzying at times.
Unless you have plenty of skin in the game, discerning whether tips and guidance are either sound or harmful can be tricky.
Moreover, there’s no one-size-fits-all approach when investing for the future – what’s right for someone else might not be right for you. The key is to make decisions based on your specific circumstances.
Here’s some good news. Investing can often seem complicated, but it doesn’t have to be. In fact, keeping things simple when you’re starting out is often the savviest approach.
While you may be itching to invest your windfall, first take a step back and think about what you’d like this money to achieve. In reality, people don’t want an Isa or a pension; they want to buy their first home or live comfortably in retirement. The product is purely the mechanism that allows you to reach your goal in the quickest way possible. We’ll return to tax-wrapped accounts later.
There are a few other things to tick off before taking the investing plunge. Make sure you have three to six months’ outgoings in an easy-access account to cover emergencies, and consider clearing any short-term, expensive debts, like credit cards.
Something else to nail down is your timeframe. As you wisely note, investing in the stock market offers the potential for better returns than cash savings, but it’s important to have at least five years on your side to ride out the inherent ups and downs.
That leads us neatly onto investment risk. There’s no right or wrong answer here: some are happy to suffer heavy losses to chase big gains, others crave certainty, many are somewhere in the middle. Whatever your preferred approach, diversifying investments – in other words, spreading them across different asset classes like shares and bonds around the world – is an effective strategy to manage risk.
If you’re stumped about the risk level that’s suitable for you, completing a free, online questionnaire – where you answer 10 to 12 statements and receive a personalised risk score – can provide some useful steer.
You may be wondering whether to invest your sum in one hit or drip feed money into the market over time. There are pros and cons to each. The latter can smooth out returns as contributions are staggered over several months instead of entering the market at a single point when it could be high or low. The drawback with drip feeding is that if markets rise sharply over the period in question, less of your money will capture the upswing.
The final task is to select a suitable product. You mention Isas, which can be a prudent choice as any growth and income are shielded from tax and you can access the money whenever you like.
As the maximum amount you can pay into Isas annually is £20,000, you have scope to commit the full sum straightaway.
For even greater tax perks, you could beef up your pension but be aware your savings are tied up until age 57. The differing rules illustrate why it’s crucial to decide your investing goal from the outset, as it will guide you towards the most suitable tax-wrapped account.
One concluding tip: keep costs low where you can. Every pound you pay in fees that doesn’t translate to better performance is a pound less for your future.
> Investing for beginners: The basics and best platforms to try
Where to invest – platforms to consider
Sam Bromley, of This is Money, adds: Investment risk isn’t simply about your stamina for riding out short-term fluctuations in the value of your money. It’s important to consider the possibility that when it comes to withdrawing money, your investments have performed worse than expected, either stagnating or dropping in value.
This is why most experts recommend investing for at least five years, a timeframe that gives your investments a better chance of growing on average.
A stocks and shares Isa is wise as your first port of call. The below isn’t advice specific to your circumstances, and are just options to research further.
Generally, higher-risk investments can provide greater returns. These include investing directly in companies by buying shares, or by buying investments that track the performance of companies – such as certain exchange-traded funds (ETFs).
If you’re more cautious, or have shorter-term goals, you could invest in bonds alongside shares. These are issued by governments and companies, paying you a fixed income for a set time in return for you lending them money. Again, you can buy these directly or through other products, such as funds.
For beginners, exchange-traded funds (ETFs) have exploded in popularity as an easy way to build a set of investments that’s readily diversified – meaning your risk is spread across lots of different investments.
Essentially, if one sector (such as technology) is experiencing a poor run of performance, another sector (such as banking) could be faring better. ETFs give you access to all the companies that make up the market it tracks, such as the UK’s FTSE 100 or the US’s S&P 500.
These examples are simplified and generalised, and the right way forward depends on your own situation. The good news is that investing platforms have a range of research and educational content to help you choose your investments and account, and there’s plenty of financial experts who share tips online too – just be sure to check their credentials.
> Read more: The best stocks and shares Isas
If you’re particularly cost-conscious, check out Prosper*. Even when a platform has no account fees, there will be costs for the underlying investments. But Prosper refunds the underlying fees on 30 index funds, potentially letting you invest at zero cost. Index funds are particularly useful for beginners, because they provide easy diversification and need little ongoing input. Read our Prosper review.
Another platform worth considering for beginners is AJ Bell Dodl*, which also pays a competitive 4.06 per cent interest on uninvested cash. You can choose an AJ Bell ready-made fund based on your attitude to risk, which AJ Bell’s experts manage – just keep in mind it charges account fees of 0.15 per cent and there will be underlying fees for the funds.
It’s also worth looking at InvestEngine, which simplifies investing by only offering ETFs. It’s very low cost too, with no account fees to pay. In my InvestEngine review, I noted that it has a range of engaging educational content which should help you on your investing journey.
For more investment choice have a look at Trading 212*, which allows you to invest direct in company shares, along with ETFs, and offers help through its handy investment pies feature. However, you should think carefully about what you’d like to invest in, because the sheer range of options can be overwhelming. Read our Trading 212 review.
Another platform I like for its simplicity is Freetrade*, but there’s not as much in the way of educational support. Read our Freetrade review.
We have a full round-up of the best investment platforms if you’d like to find out which one suits you best. Whatever you decide to do next, I wish you luck.
SAVE MONEY, MAKE MONEY
4.52% cash Isa
4.52% cash Isa
Trading 212: 0.67% fixed 12-month bonus
Sipp cashback
Sipp cashback
£200 when you deposit or transfer £15,000
Top Isa without bonus
Top Isa without bonus
Straightforward 4.55% cash Isa with no boost
£100 cashback
£100 cashback
5% cashback on investments, up to £100
£20 gift card
£20 gift card
Hold £1,000 after three months in Plum’s cash Isa
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