What To Do with £10,000 – ISA, Property or Shares?
At the moment how to spend £10,000 from say inheritance or another windfall is a surprisingly hard question. The classic answers such as ISAs, property or shares have all taken a pounding in these last few months.
ISAs
These are tax free accounts which typically have high rates of interest to encourage you to put the money away for 12 months. At the moment these are looking around the 3.5% mark, if you leave it in for a year. If you draw out the money in the 12 months, a lot of accounts will only pay you around 1% on your money.
This is not just a low rate, you could actually lose money in real terms – with inflation running at 3.2% any money put aside not earning any interest will devalue that amount.
Inflation figures April 2009
Taking inflation into account your 3.5% ISA could in fact only be getting 0.3% a year in real terms! On £10,000, you would earn a paltry £30.
This would be better than leaving it under the mattress though, but only just! Its all to do with the government trying to encourage you to spend your money on goods to help kick start the economy.
Property
For so long the easy option if you had the money, property prices have plummeted over the last 12 months, with some predictions saying houses will lose 50% from their peak. Even if the house price crash had never happened £10,000 wasn’t enough for a sensible deposit if you wanted to stay away from the 100% mortgages (which with the hindsight of history would have been a GOOD thing).
Suffice to say, if you can buy at the moment you may pick up some bargains compared to recent years, but don’t expect your property to be sold for profit for a good few years, maybe even 10 years. This will probably mean you buy to live in the house, which is really what buying a house should primarily be for; the culture of get-rick-quick by investing in property must be held accountable for half the trouble of what we’re in at the moment.
Shares
If property prices are bad, then shares are an even more tragic affair. The FTSE which tracks the 100 best performing companies in the UK has crashed from peaks of 6500 to around 4000 today, and no one knows if that is the end of it. Saying that there are some shares thatt have bucked the trend, so if you’re a financial wizard or someone who knows something every other share trader doesn’t, you may still have a chance to make some money, especially if you manage to buy a stock at a current low and it soars upwards over the next few years – but with the current climate that £10,000 invested could equally end up as £0 once the company goes bust.
A good overview of shares verses house prices over the last 20 years is found at Fool’s new site, LoveMoney, which states:
If I were to summarise these results, I would say that both asset classes have produced useful returns for investors since 1984, with shares winning by a nose. However, the FTSE 100 is considerably more volatile than house prices, so investors in shares need to be patient in order to ride out the fairly frequent setbacks which the stock market springs on us.
So, all being told, where would my £10,000 go?
- I’d concentrate on clearing all debt, thats a no-brainer these days. Why pay 7+% on a loan if any saved money is only getting 0.3%?
- Buy anything you’ve been thinking of getting for a while, taking advantage of the temporary 15% VAT (and also do your bit to save the country from financial Armageddon)
- Look to invest in people or business – if you’ve got a good idea, now may be the perfect time to lend money to an idea you think will succeed, since banks are being so tight with their money.
- Buy things that will increase in value over time – antiques? Limited edition items? Art?
- Go on that holiday trip of a lifetime. May as well enjoy the world in a cheaper country whilst you have the chance.
- If you have a mortgage, try and overpay as much as possible for when those interest rates will rocket up in the future
Those are my suggestions, if you have any other bright ideas, feel free to say underneath – I think we could all do with some!
I agree – priority first must be to pay off or reduce any expensive debts – in this low inflation environment the real value of debts is not going to fall quickly with low wage inflation.
I personally am liking the stockmarket at the moment – with the FTSE100 around the 4000 mark, off a high of around 6700 in mid-2007 (a fall of 40%), there is certainly a lot of “long term value” out there – notice I said long-term – I figure a minimum of 5 to 10 years.
Also remember that the FTSE100 is an “index” of share PRICES and takes no account of any dividend income from holding those shares – you can gain from shares in two ways – appreciation in price and from the dividend income.
If you’re concerned about stock-market volatility you could consider dripping in your money over time – this is known as “pound cost averaging” and reduces your risk over time.
Yes I must say I’m eyeing the stock market more than ever before at the moment, there must be some deals out there if you’re ready to take the long view. Thanks for your thoughts, Simon.
I agree with the basic themes overall, however with regard to the comment ‘…but with the current climate that £10,000 invested could equally end up as £0 once the company goes bust…’, I don’t think this type of comment is necessary or constructive. No-one should invest in equities with out at least a small amount of advice, and the smallest level of advice would include the concept of diversification of an equity portfolio. i.e. £2,500 FTSE100, £2,500 S&P500, £2,500 BRIC50 and £2500 Something else.
Thanks for the comment Tate, that is a fair point. I’ve been a little bitter against the shares recently which lost thousands in the recent troubles, even though it was diversified. But it wasn’t zero as you say.
I agree with the clearing off debt point.
Even more important, if you have a mortgage, use the money to pay down the loan – interest rates will rise again as surely as day follows night.
Investing in stocks – yes, but not in trackers, which seem to perform poorly (if you bought a tracker in 2000, you would have lost money in the following nine years!).
I would say, sit down and stock pick the hard way – learn to read company accounts, learn what all the ratios mean, crunch the numbers yourself, look for the gems amid the dross. It’s very hard work, but definitely better than following tips in the newspapers or blindly giving the money to fund managers. Also work out the point at which you should sell the shares, and stick to it. People lose money because they wait for the top, but hardly anyone actually manages to catch the top. Most miss it and end up losing money. Better to sell early and bank actual profits (was it the Rothschilds who said that their secret was that they sold too soon?)