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Have £1,000 to invest? Why I’d go for this investment held in a Stocks and Shares ISA

Good news. You’ve got £1,000 to spare and you’d like to invest it. But you’re not sure of the best option.

Everyone you speak to has a different view. Gold. Bitcoin. A ‘hot’ mining stock that’s about to rocket higher.

On top of that, there’s a niggling voice in your ear suggesting you should stick to cash. After all, investments can fail. Cash is safe.

In this article I’ll explain what I’d do with a £1,000 investment and why. My aim is to generate steady returns without too much risk, and avoid any nasty tax bills. If that sounds good to you, let’s get started.

Gold, Bitcoin, and the next big thing

I’ll be honest with you. If I had £1,000 to invest, I wouldn’t put any of it into gold or Bitcoin. These alternative assets might be worth considering as a small part of a much larger portfolio. But I think they’re far too risky and specialist to risk your whole account on.

I wouldn’t invest any cash in small, speculative stocks, either. Don’t believe anyone who tells you they’ve found a sure thing. They haven’t. Remember that if it seems too good to be true, it probably isn’t true.

The truth is that investing in any single company carries extra risk. And if it’s a small company that’s being pitched as a hot tip, then in my experience you’re likely to lose a lot of money.

What about cash?

Cash is certainly safe. But the top easy access Cash ISA rate I could find at the time of writing was 1.46%. That’s less than inflation, which is currently running at 1.7%. That means that each year, the spending power of your money is actually falling.

No – cash is great for a rainy day fund or when you’re saving for a big purchase. But in my view, it’s no good as an investment.

What I’d buy

I’d put my £1,000 into the stock market, using a Stocks and Shares ISA to avoid any future tax bills.

However, although £1,000 is a sizeable amount of money, it’s not really enough to build a diversified portfolio of individual stocks. With dealing charges typically running at about £10 per trade, I’d argue that buying more than one or two stocks is not cost effective.

What I’d do instead is to invest the cash in a FTSE 100 tracker fund. As the name suggests, this is a fund that tracks the FTSE 100 index of the UK’s largest companies. These so-called passive funds generally have very low fees and will often accept monthly payments as low as £25.

Investing in the FTSE 100 might not seem a great way to get rich. But the FTSE 100 offers a dividend yield of about 4.5% at the moment. And over the last century, the UK stock market as delivered an average annual return of about 8%.

At that rate, your £1,000 investment could double in value in just nine years. That’s not too shabby.

There’s a second advantage too – although the FTSE 100 may slump from time to time, it normally recovers after a year or two. Unlike a single company, the whole index is never likely to go bust or stop paying dividends.

Indeed, I reckon that a FTSE 100 tracker fund is the closest you’ll get to a sure thing in the stock market.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.