Should you receive an unexpected windfall or have surplus funds in your bank account, you may wish to invest them
We hear from three financial professionals about their investment strategies for 50,000 pounds.
According to Warren Buffett, "never lose money" is the first rule of investing. His second investing rule is to always remember Rule No. 1". Putting your money in the bank might seem like the only surefire way to follow Buffett's first rule if you suddenly find yourself with £50,000. Sadly, though, you would be wrong.
A stealthy thief, inflation will gradually eat away at your savings. The value of your nest egg would only decrease by half in 36 years, even if inflation were to reach the Bank of England's target of about 2 percent. This is bad news if you intend to save your nest egg for retirement.
The rate of inflation has, of course, been much higher in recent years. Inflation in the UK peaked in October 2022 at 11.1 percent. It would only take about six and a half years for the value of your money to drop by half at this high level. Suddenly, cash doesnt seem quite so safe after all.
With the Bank of England's base rate at 4.25 percent, many savings accounts are providing real returns, and fortunately, inflation has significantly decreased since this peak. Cash is still a whimsy king, though.
If the Bank of England keeps lowering interest rates in the upcoming months, higher savings rates aren't likely to last. Additionally, inflation is predicted to increase once more in the upcoming months, possibly reaching 3 to 5 percent in the third quarter of this year. This might further reduce the actual returns that cash savings provide.
In light of this, now might be a good time to learn more about investing. Investment markets typically outperform cash returns in the long run. It is generally advised to have an investment horizon of at least five years, but a longer time frame would be ideal to help reduce volatility.
Recognizing the value of investing is undoubtedly an important first step, but it is only half the fight. Knowing where and how to invest is the more difficult part. To ascertain where they would invest their money, we therefore convened with a number of experts.
Previously, we examined how to invest £1,000; however, in this article, we examine a larger amount: £50,000. Whom did we speak with?
Andrew Craig, the founder and investment manager of Plain English Finance; James Mackreides, editor at BFIA.com and author of Invest Now: The Simple Guide to Boosting Your Finances; and Damien Jordan, the creator of the content for the regular newsletter Financial Interest and the YouTube channel Damien Talks Money.
Andrew Craig discusses the 100 minus your age rule.
Andrew Craig, the founder and investment manager at Plain English Finance, asserts that there is no magic bullet when it comes to investing. It is contingent upon your particular set of circumstances.
Important things to consider before making financial decisions include: how old are you? Do you own your home? Are you paying off debts or providing for dependent children? Is the £50,000 your entire life's savings or is it an inheritance you recently received?
The factors don't stop there, either. You should think about your own preferences in addition to your unique situation, which determines your risk tolerance. For instance, are there any investments that you would especially like to encourage or discourage, possibly for ethical or environmental reasons?
You can get financial planning assistance from an advisor, but this can be costly and deduct from your £50,000 total. Craig emphasizes this in Plain English Finance, his platform for investment education.
"At best, good personal financial advice costs hundreds of pounds," he says. In reality, it can frequently cost thousands of pounds. Because of this, it is essentially only accessible to those who already have a sizable fortune. For everyone else, this is clearly a major issue.
Craig points out that the "100 minus your age" rule is "about as close to a panacea as you can get" without spending hundreds of pounds. Whether you are investing 50,000, 10,000, or even 1,000, this rule is a good place to start.
The "100 minus your age" rule: what is it?
One of the individuals who developed the "100 minus your age" rule was the late Vanguard group founder and CEO John Bogle. Modern portfolio theory and the 60/40 asset allocation rule, which advises investors to allocate 40% of their portfolio to bonds and 60% to stocks, are popularly reinterpreted in this way.
The premise of the 60/40 split is that since stocks and bonds have an inverse relationship, one should increase when the other decreases. The drawback is that, in recent years, this relationship has dissolved. For instance, when interest rates sharply increased in 2022, both asset classes experienced a simultaneous decline.
Furthermore, there is not much leeway in the 60/40 rule. It implies that your portfolio should remain the same whether you are 20 or 60, but the majority of experts concur that you should take on greater risk when you are younger.
The "100 minus your age" rule, on the other hand, provides more latitude. "The concept is that at the age of 20, you allocate 80% of your portfolio to stocks and 20% to bonds or other defensive assets," explains Craig.
"At the start of your investment journey, you have plenty of time to ride out any ups and downs before you need to access the money," he continues. "This allows you to take on more risk. This is the ideal time of year for the majority of people to be exposed to the stock market.
What about the longer lifespans of people today?
However, even with this more flexible approach to asset allocation, there are still issues, especially given that people are living longer than ever. Craig says that if you were not exposed to the stock market early in your investing career, you might run out of money as you get older.
He therefore suggests a change to "120 minus your age," a notion he delves into in his second book, Live on Less, Invest the Rest. The fact that many people now spend about a third of their lives in retirement may be explained by this. Given this, premature de-risking carries its own set of risks.
Stocks to think about for your portfolio's equity component.
Determining the appropriate asset allocation is crucial, but how do you choose where to allocate the equity portion when each investment platform offers thousands of stocks?
Many do-it-yourself investors find that tracker funds are a good option because they can provide you with immediate diversification. In recent years, DIY investors have favored US trackers that track indices such as the S&P 500. However, considering the recent volatility of the US stock market, a global equity tracker may provide superior regional diversification.
Craig claims you can "own the world" with a global equity tracker. Whichever option you select, you will have effective and affordable access to thousands of businesses in both developed and emerging markets.
According to data from two significant global indices, the MSCI World and the FTSE All World, global stocks have, on average, returned about 7% annually over the last 25 years (Source: Lipper and Hargreaves Lansdown, 1 January 2000 to date).
Although past performance does not guarantee future returns, your initial investment of £50,000 could increase to approximately £1 million over the course of 45 years if you were to match this return in the future.
This computation is only meant to serve as an example and does not account for factors such as investment fees or inflation. However, as you can see, compared to cash, equity markets typically yield better long-term returns, which means they have a higher chance of staying ahead of inflation.
Craig asserts that "ordinary people can become millionaires by understanding finance and investing sensibly over sufficiently long periods of time." Stated differently, your wealth encompasses more than just your income or the amount of money you receive or inherit. A £50,000 pot is an excellent starting point for investing, which can have a significant impact.
The key is diversification, according to James Mackreides.
James Mackreides, editor at BFIA.com and author of Invest Now: The Simple Guide to Boosting Your Finances, says, "We all know the importance of not putting all your eggs in one basket."
Like Craig, Fitzpatrick emphasizes the value of holding a diverse mix of defensive assets like cash and bonds in addition to stocks. She also stresses how crucial it is to have a long-term perspective and use tax-efficient vehicles in order to keep more of your money.
She explains, "I would first use up my 20,000 ISA allowance and place it into several index funds like the iShares S&P 500 ETF or the Vanguard LifeStrategy, with no expectation to touch it for the next 10 years or so."
The 20,000 allowance is renewed every tax year, and any investments made in an ISA wrapper are protected from both income and capital gains tax. By purchasing new assets or employing a "bed and ISA" strategy, you can gradually accumulate more assets in your ISA account.
Additionally, Fitzpatrick says, "I would invest 10,000 in some active investments, such as the Scottish Mortgage Investment Trust, FundSmith Equity, and the Polar Capital Global Technology."
An investment expert oversees active funds and strives to beat a market benchmark. They usually have higher fees than passive funds, so before purchasing any fund, find out if the fees are reasonable by looking at its performance history.
After that, Fitzpatrick says, she would "use 5,000 to buy a stock or two." Although funds provide me with a broad exposure to different stocks, she adds: "A small portion of carefully chosen stocks are a fantastic addition to any portfolio.
By putting on your consumer hat, you can determine which stocks would be a good investment. Therefore, Tesco is my personal choice because we always need a supermarket and I frequently shop there, along with LOreal. Yes, I adore my makeup, and I always have space in my portfolio for a lipstick stock.
Fitzpatrick claims she kept the rest of her portfolio simple after allocating the equity portion, placing £8,000 in a 12-month fixed-interest account. In light of the anticipated further decline in interest rates in the upcoming months, she explains, "Now really is the time to lock in the yield for cash savings accounts."
"I would also put £5,000 into an easy-access savings account (again, check the rates)," she continues. Accounts that are easy to access are crucial if you anticipate needing the money in the near future.
After that, I would most likely purchase 2,000 National Savings & Investment (NS&I) Premium Bonds in the hopes of winning the lottery.
Since any profits from premium bonds are tax-free, they are yet another investment that is tax-efficient. Winners of the monthly prize draw could get anywhere from £25,000 to £1 million.
Premium bonds, easy-access cash savings, and fixed-rate savings are all very defensive assets that can help offset the more erratic equity component of your portfolio.
Up to 85,000 in cash savings are safeguarded if you select a provider that is covered by the Financial Services Compensation Scheme. This implies that you will receive payment in the event that your provider fails.
Meanwhile, the UK government backs NS&I Premium Bonds. Once more, this indicates that they are as safe as they get.
Damien Jordan advises investing not only in the market but also in oneself.
Damien Jordan, one of the most popular financial YouTubers in the UK, states that "three factors will determine how much money you end up with in the end: the time you have, the amount you pay in, and the return you achieve."
"Getting consistently market-beating returns will be difficult unless you're Warren Buffett, and getting more time will be even more difficult unless you're Marty McFly," he continues.
So, as investors, we should pay attention to what we can control. Earning more money is the best way to raise that number as much as possible.
Jordan's Damien Talks Money channel, where he offers financial improvement advice, has nearly 300,000 subscribers. Additionally, he regularly offers insights in his newsletter, Financial Interest. Among the most important things he tells BFIA is the value of investing in oneself.
Upskilling can help increase your regular income, which will give you more money to invest in the first place, he says, adding, "It sounds cliche, doesn't it". As a result, Jordan claims he would use 10% of the £50,000 pot to increase his earning capacity.
He explains, "I used an iPhone and a 200 roll of filming paper to launch my YouTube channel, which I then hung up in my loft to conceal the exposed beams." "My life and the amount of money I invest each month were completely transformed by that small investment.
Which path is better, global or US stocks?
Jordan suggests looking to equity markets after allocating 10% of the pot to yourself, your side project, a promotion, or a qualification. Craig's idea of "owning the world" is one he supports.
According to new data from investment platform Interactive Investor, US trackers remain among the most popular funds among do-it-yourself investors, despite recent volatility brought on by tariffs. In general, though, Jordan favors international trackers over US trackers due to the wider variety they provide.
He states: "I purchase a global index because, although I concur that the American economy is remarkable and has produced fantastic returns, I am British. I thus reside in a country that, although it now only accounts for about 4% of the world stock market, once held the top spot in terms of global influence.
Jordan notes that a global index already exposes him to a respectable amount of US exposure (about 65p in every pound), but he does not say that this will inevitably happen to the US.
He claims that "the long-term returns that global markets have generated are sufficient for me to reach my financial objectives." "As I own a portion of it all, I won't be losing sleep at night wondering if I should be investing elsewhere if the United States experiences a period of persistent underperformance, like the 1930s, 1970s, or 2000-2009.
You might want to look into the FTSE All World if you're looking for a global equity tracker. When selecting between funds, be sure to consider the fees.
Invest in ways that minimize taxes.
Jordan says the answer is straightforward: the best place to put the money is in a tax-efficient account, such as an ISA or pension.
He states that "the pension structure tends to be the best overall for most people because of the tax relief you get on the way in and the ability to decide when you take the money on the way out," respectively.
"Yes, it is taxed on the way out and the ISA is not," he continues. "However, most people fall into a lower tax band in retirement, so you may receive higher-rate relief but ultimately only pay basic-rate tax."
The primary advantage of an ISA, on the other hand, is that it gives you greater flexibility, enabling you to access the money whenever you want rather than waiting until you reach retirement. To help achieve a variety of objectives, Jordan states that he would divide the money between the two.
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