£25k is a decent pile of cash, and if you suddenly find yourself in possession of such a sum, you have a shot at doing something great with it.
And the great thing I’d try to do would be to turn it into £1m. With that amount of money, I’d really have some options!
Two important factors
To make the money work hard for me I’d aim to compound the returns it earns. Two factors would influence the eventual outcome. Firstly, the annualised percentage return I can achieve, and the higher the better. Little differences in that percentage can make big differences to the final sum over time.
And time itself is the second factor. The longer I can earn those annualised returns, the bigger the compounded sum will become. And because compounding works exponentially with accelerating returns over time, the biggest absolute returns will arrive in the later years. You could be amazed by how much you’re earning on your investments each year after a few decades of consistent compounding.
So, I’m looking for high annualised returns and a long investing period. And I know that, historically, the highest returns among all the major asset classes have come from stocks and shares. Over the long haul, shares have outpaced things such as cash savings, bonds, property and commodity prices.
It’s shares and share-backed investments all the way, for me. But where should you start? I’d begin by considering the tax advantages of investing in a Stocks and Shares ISA and pension schemes such as a Self-Invested Personal Pension (SIPP). Such ‘wrappers’ can make a good home for your investments.
Pensions, for example, boost your money on the way in because the tax relief on your pension contributions means the money you would have paid in tax on your earnings goes into your pension pot rather than to the government. And ISA accounts allow you to withdraw the money in the end without being taxed on it, so it’s tax relief on the way out.
Capturing stock market returns
To capture the returns available from the stock market you could invest in managed funds, which are run by an investment manager or a team of professionals who aim to beat their benchmark with their share picking. But the ongoing fees can be quite high and there’s no guarantee that the fund’s performance will be any good. Sometimes it can be disastrous, such as with the Woodford funds recently.
You could go down the passive index tracker route. These are low-cost funds that mechanically aim to mimic the returns of indices such as the FTSE 100, FTSE 250, S&P 500 and many others. And you could also aim to juice up your overall returns with some careful individual share picking of your own.
I reckon it would be a reasonable strategy to spread your £25k between active funds, passive funds, and individual shares as long as you avoid speculative and high-risk investments of all kinds. Remember, if you lose it, you can’t compound it!
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Kevin Godbold has no position in any share 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.