Picture it: you have £2,000 spare. No small amount by any means.
Certainly, it’s too much money to gamble away. You’ll want to make sure that this much cash is working for you, invested with a level of risk-to-reward ratio that you’re comfortable with.
When it comes to investing, there are many options. I’ve broken down some of the most common, and what I think could be the best solution for this amount of money.
A tax-efficient Cash ISA is often hailed as being one of the safer places to stash your money.
It’s true that you probably won’t make a paper loss by putting your money into a Cash ISA. But the danger here comes from somewhere else.
Quoted interest rates for Cash ISAs have been so low, for so long. My concern is that any money stuck in a Cash ISA won’t keep up with the rate of real-life inflation. This is especially important for those of us who are investing for the long term.
Although a Cash ISA might be deemed a low-risk form of investing, I think this is a red herring. The level of reward is so low that your buying power in the long term could be eradicated. I believe this makes it quite risky.
Bitcoin sits at the other end of the spectrum. Its risk-to-reward ratio is incredibly high.
That’s because it has no tangible assets, making it incredibly difficult to value. Buying it is pure speculation.
I believe that Bitcoin is a bubble, just waiting to burst. This was highlighted in 2017, when its value soared as more and more people jumped aboard the bandwagon.
Bitcoin could be a dangerous asset, and with a nice sum like £2,000, I think the money is better suited elsewhere.
Stocks and Shares ISA
Although still tax-efficient, a Stocks and Shares ISA is quite different from the cash variety.
As the name suggests, an investor is able to invest their money in stocks and shares in this account, and the first £20,000 in the year is tax-free.
The benefit here is that the investor can pick their own stocks and funds, hopefully out-growing the low interest rates from a Cash ISA, but at a lesser risk than Bitcoin.
With a sum like £2,000, picking individual shares might be unwise, as it will be hard to build up adequate diversification. The transactional fees can soon add up too, eroding any return on investment.
The best idea might be to invest in index funds. These can track your chosen market, aiming to replicate its returns.
Another idea would be to invest in something like Vanguard’s LifeStrategy 80/20 fund, which is modelled on a portfolio of 80% worldwide index funds and 20% bonds.
When it comes to putting £2,000 to work, I believe the best idea for the long term is to invest in a Stocks and Shares ISA. Chosen right, it could have your desired risk-to-reward ratio.
T Sligo 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.