How to Invest £5,000 Right Now
There are different options when it comes to investing and in this article we explore the best way to invest £5,000.
Key Takeaways
- The best way to invest will depend on your personal goals.
- Diversification and investing at a low cost should be the goal.
- A passive approach to investing can help you better understand this.
- An ETF tracks an Index at a low cost and provides diversification.
- ETF providers such as Fidelity, Blackrock and Vanguard have ETFs that track different Indices.
A passive approach to investing has been shown to produce better results than active investing in the long run.
Diversification coupled with lower costs provided by some asset classes, can allow you to achieve better returns when compared with Active Investing or buying an individual stock.
The best way to invest any sum of money is to place it in an Index Fund or an ETF that tracks an Index.
That is the general principle as a start and you may choose to be a bit more specific by investing in Sector ETFs or any other Investment Themes while using ETFs as the asset class.
Now let us explore how we got here.
Things to consider before you proceed
There are a number of things to consider before investing £5,000 in our example.
- Since different people invest for different reasons the best way to invest will depend on their short, medium and long term goals.
- This article does not cover any aspects of paying off high interest debts or putting money aside for emergencies. It is important to have a rainy day fund, pay off high interest debt and save some money – basically budgeting.
- There are a number of asset classes to consider when investing such as Property, Collectibles, Commodities and Forex but that is beyond the scope of this article.
A better way to phrase this will be how to invest £5,000 in the stock market.
How to Invest in the Stock Market
If you are looking to invest in the Financial Market, especially as a beginner, there are a number of important things to bear in mind.
Adopting a passive approach to investing as opposed to an Active approach will save you time and money. It is tempting to thing you can beat the market over time but studies have shown many Fund managers with more resources have not managed to. You can read more about these investing styles.
In simpler terms, if you are Fund Manager with access to Investment Research and all the trading tools, over a period of time, data has shown that your performance will not surpass a benchmark such as the S&P500, NASDAQ100.
Your aim should be Diversification and Low Cost. This means your money is invested in an asset class that allows you to benefit from the performance of a large number of stocks, at a low cost.
Time in the market is more important than timing the market so it is wise to have a medium to a long term approach. Investing any sum of money with the intention of selling your position in a few months means you have not allowed your investments to grow and compound and this is an important aspect of investing.
Bringing it together, we have narrowed down what we are looking to accomplish so it is easier to decide what asset class to purchase.
We are looking to invest in an asset class that provides the opportunity to benefit from the performance of a wide number of stocks, at a low cost. And we are keeping this money for at least three to five years.
What are the different ways to Invest
Here are the different ways you can invest £5,000 from a range of sources on the Internet.
- Bonds
- Cryptocurrency
- Index Funds and ETFs
- Sector ETFs
- Individual Stocks
- Use a Robo advisor
Considering these options and looking at the cost of buying each of these, you will see the money may not stretch long enough. How many blue-chip individual stocks can you purchase for £5,000 and what are the risks if that company fails?
Based on that fact that we want diversification at a low cost, the options we now have can be narrowed down to the Index Funds and ETFs and in the rest of this article we will look into what they are and how they can be purchased.
What is an Index Fund
When you purchase an Index Fund, you are purchasing an asset class (portfolio) that has been put together to match the performance of a financial benchmark. This could be a Mutual Fund or an Exchange Traded Fund.
An Index fund that tracks the FTSE100 for example will purchase shares in all of the companies in the FTSE100. The obvious benefit here is that by owning a certain amount of all the shares in the Index, you are not missing out on performance.
There are many Index Fund providers with Vanguard and Blackrock being the most recognisable.
Remember there are many indices around the world so you can have an Index Fund that tracks the DAX40, FTSE100, S&P500, Russell 2000 and CAC40 to name a few.
What is an Exchange Traded Fund – ETF
An ETF is an Exchange traded fund and it accomplishes the same purpose as an Index Fund where the creator of the ETF purchases shares in all the companies in the given benchmark.
To expand this a bit further, a provider like Blackrock or Vanguard will purchase the individual shares of the stocks in the Index and provide a financial product which is the ETF.
The main difference when compared to an Index Fund is that you can trade an ETF and know the value of the fund through the day as opposed to a Mutual Fund that trades once a day.
Sector ETFs are ETFs in an Index that are more focused on a sector. For example, the S&P500 Index has companies in a wide range of sectors and there are ETFs that can track specific sectors within that S&P500 rather than the whole Index.
XLY, XLK, XLE and XLB are examples of sector ETFs that are on the S&P500 and here are a few examples from State Street.
One of the reasons you may consider purchasing Sector ETFs is to concentrate your portfolio or if you are investing in a Theme. More on Thematic Investing later.
How do you buy an ETF or Invest in an Index Fund?
There are two main ways to consider. The first method is through a Robo Advisor. A Robo Advisor for a small fee, invests your money in a financial product such as an ETF or an Index Fund.
I suggest to read more about Robo Advisors to better understand if a Robo Advisor is more suitable to your investment style.
The other way to consider is by doing yourself – yes and Google is your friend. A good place to start is by finding the different indices, and the ETFs that track them.
There are some terms you will come across as you embark on this new discovery of ETFs – terms such as Expense Ratio, ETF Replication Methods, Inflows and Outflows. These are all part of the learning process.
Here is an example of some indices and the and ETFs that track them. Some of these name you may not recognise but that is all part of the learning process.
For the S&P500, here are some of the ETFs that track that Index. IVV or SPY are examples of ETFs that track this Index.
For the FTSE 100, here are some of the ETFs that are applicable. ISF and CUKX are examples of ETFs that track this Index.
Finally, for the NASDAQ, these are the ETFs you can purchase that track this Index.
Which ETF Provider should you Use
The next thing is to find out where you can purchase these ETFs. From your research you will see Vanguard, State Street, Blackrock and Fidelity do not all have the same ETFs but ideally they do the same – they provide an asset class that tracks an Index.
For example, if you want to track the S&P500, there are a number of providers that have asset classes that will allow you to purchase these. Vanguard have a product for this which you can buy on their platform.
Blackrock has a product for this as well but you cannot buy it from their platform – you can purchase it from Brokers such as Trading212 or IG Index for example.
A better way to approach this section is to narrow down the ETFs you wish you purchase, get the ticker symbol and see which platforms allow you to purchase it.
In Europe, there are some restrictions on the ETFs available to you (for a number of reasons) and what you will find is that Vanguard has a smaller offering of ETFs.
Here are some ETFs you can purchase from iShares – which is Blackrock. Amundi is another provider in Europe and here are their ETFs.
Remember, this is not financial advice and you should always seek expert opinion. You can contact WealthSigma on Instagram or TikTok and leave a message in the DM.
