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Best way to invest £100k safely

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For most of us, having £100k burning a hole in our bank account isn’t something we’re used to. Either we’ve gradually built it up through our hard work, or it’s arrived in a lump sum from bereavement, pension commencement or perhaps even lottery win (we can dream).

But with the UK savings protection limit being £85,000 this amount of money sitting in the bank suddenly feels like more of a weight than we were expecting. Combined with historical low interest rates – they were recently cut to 0.1% to try to stimulate the economy during the Coronavirus pandemic – and keeping money in the bank doesn’t look like the only safe option.

But with an economy in turmoil – potentially even downfall, the Bank of England is predicting a 30% drop in output, the worst in 300 years – are even traditional investments safe? If you read an article like this in January, the chances are it would have suggested property investment – but now it looks like we’re in another 2008 where values plummeted.

What is the best investment right now?

The investors who get the highest return on capital are always those who outsmart the market. Knowledge is key, and we can’t all be experts at everything. If you know one market particularly well, you stand a better chance of beating the market. That’s why Warren Buffet reads for five to six hours daily. If you already know property for instance, sticking within that investment strategy will likely lead to better results than branching out into an area where others you’ll be competing against for the same assets know their game.

If you’re completely new to investing, then it’s advisable to first take in as much information as you can. Investing £100,000 might be something you can do with a click of a button, but for the average person that is equivalent of over three years of pre-tax earnings. View choosing your investment as a job, it’s likely going to be the highest per hour rate you’ll ever earn, and as part of the job study. Every area of investment has multiple books by experts written in it, taking a day to read a book on your chosen strategy will help you avoid pitfalls that often befall amateur investors and give you some insight from those who invest professionally into high growth, high yield safe investments for the lump sum burning a sitting in your bank account.

Safety First

Before taking the plunge and making your investment, let’s first put on our safety belts. If you’ve got £100,000 sitting in one bank account, perhaps because your pension provider just paid the 25% lump sum you’re entitled to upon retirement, you should consider splitting that money between financial institutions in order to be under the £85,000 FSCS (Financial Services Compensation Scheme) guarantee (double that on joint accounts). Make sure the banks you opt for are separate, some banks operate more than one brand. Not only does splitting the money save you from losses in case a bank fails – which in a recession as deep as the one we’re entering might become, cannot be ruled out – it also helps protect you from fraud and encourages you to diversify your investment portfolio. Don’t worry about doing this this second though, there’s a temporary six month higher protected limit of £1 million for lump sums from property sales, retirement, inheritance, divorce and a few other significant life events. Take your time and choose your bank wisely.

Diversity in investment is key to long term safety. If your investment plan only includes money investment you’ll lose out due to inflation. If you only invest in the stock market and invest at the peak of a market, you’ll suffer the inevitable losses that the bear market brings – even if you chose a comparatively safe options like a stocks and shares ISA. Safe as Houses might be the saying, but tell that to those who invested just before the 2008 crash on highly leveraged investments leaving them with negative equity. And we cannot always rely on future house price growth to save us.

There’s safety in diversification – you may suffer losses in some investments, but these won’t be catastrophic and will help you protect yourself the the slow erosion of money not investing brings.

Don’t just bank it

Keeping money in your savings account or in cash ISAs might seem like the safest option, especially after splitting the sum between banks, but it’s likely making you poorer.

The best savings accounts in 2020 only pay between 1 and 2%. Easy access savings hover just above 1%, at the time of writing three banks are offering 1.2%, and that’s only boosted up to 1.45% with a four month notice. Even committing your money for five years to bank will only yield a maximum of 1.9% annual interest currently. So why are money investments such bad interest payers? The truth is that banks don’t need your money, they have an alternative cheap source of capital from central banks who are flush with money from quantitive easing. If you could borrow money for 0.1%, why would you pay someone else 1.9%?

Then comes that old bug bear of inflation. Inflation hasn’t been in the spotlight as much as it used to be, and that’s because it’s been fairly low in historic terms. However even at current consumer price index levels of 1.5%, you’ll need to put your money into a savings account paying at least this level just to break even. If you have £100,000 now, you’ll need £116,000 in 2030 in order to buy the same goods at current inflation rates. If you invest into a easy access high paying savings account with 1.2% interest you’ll only have £113,000 in 2030, meaning you’ll have actually lost £3000. Even the best paying 1.9% rate on a five year fixed investment would only yield you a £5000 profit, hardly something to shout about.

How to invest £100k into shares safely

We all know how volatile the stock market can be, so at first glance this doesn’t seem like a safe investment. Looking at just the FTSE 100, considered to be one of the safest parts of the stock market composed of just the largest companies – and you’ll see growth of 19.07% in some years and losses of 8.73% just two years before that. Investing in individual companies is even more risky, and can wipe out your entire savings if you choose poorly.

Making smart investments into the stock market can be a comparatively safe way of investing though. Average returns on the FTSE 100 are around 7%, some American stock markets have average performances of 10%. In good years things are even better, in the decade after 2008 close to 15% was achieved in the S&P 500 and just over it in the Dow Jones Industrial Average. Shares are global too – there’s nothing stopping a Brit investing in the American or even Australian stock markets.

Stocks: When and how

The key with shares is choosing when to invest. Putting money into stocks and shares at the peak of a market might still pay off in the long run, but it isn’t a safe investment and will lead you to lose money in the short term. To get the best return it is typically advised to wait until a bear market is turning the tide and becoming a bull market. Figuring out when this is happening is the £1m question, especially as stock markets tend to fluctuate between mini rises and falls frequently.

The most common advice for those looking to invest with minimum risk would be to take out a product that exposes you to the entire market. A shares ISA can do just this, and also benefits from tax-free allowances. The downside to a stocks and shares ISA is that your money is still at risk form falls, while you don’t get the upside that investing in growth stocks can bring.

Remember that you should only take financial advice on specific investment from those who are regulated to do so, and you should always ask if someone has an interest in a share themselves if they are promoting it. Even independent and regulated advice won’t always be a winner though, so think wisely before going down this route.

Safe as Houses? Investing £100k into property

In some parts of the country, £100,000 won’t even you buy you the cheapest home. Even studio flats in ex-local authority buildings will often sell for double that in London. However elsewhere you’d be able to buy two Victorian houses for that money.

Buy to Let has been the go-to option for many amateur investors for over a decade now, and given how poorly other investments have performed they seem to have made the right choice. Rental yields even in the lowest performing areas such as London are typically over 4%, double what you can get in a bank, plus most investors have seen their asset value increase by even greater proportions.

All great on paper. But it is just on paper. The current coronavirus pandemic has frozen the housing market, and while there’s no consensus on what will happen after it restarts some housing experts are predicting a crash as bad as 2008 which could wipe off all paper gains. Don’t bank on house price growth until you’ve banked the cash from the sale, the risk is great.

Investing in housing is like picking a single share on a stock market. It could go up considerably more than the market, but it could also fall even when the rest of the market climbs. Single industry towns that have suddenly had their largest employer pull out have seen isolated house price crashes, just as investors into housing in Detroit.

It’s possible to get average yields of 7% in parts of the North, and if you choose the right property double digit yields aren’t uncommon. However this is gross yield, and if you’re investing from another part of the country you’ll need a managing agent. With rents generally lower, this cost will take up a higher proportion of your income leaving you with true yields significantly lower.

Leveraging Your £100,000

Most investors take extra risk and leverage their funds, with some mortgages requiring capital of just 25% of the house value. That would mean £100,000 could extend to £400,000 in property. While leverage is great for growth periods, allowing you to increase your earnings significantly, it also adds extra risk. If you bought a £100,000 house without a mortgage and the market fell by 10%, you’d lose £10,000. If you bought four houses using mortgages, you’d lose £40,000. Of course these are paper losses until you actually sell, and most investors will avoid pulling out during crashes.

Is housing a safe option right now? Perhaps in high value areas especially the risk is too great, but if you want to invest in property and you live in an area with low house prices, it might be good advice to buy up properties cheaply if the market does fall. Even then possibly only if feel you can manage property and tenants with the help of a managing agent, to keep yields high.

Where to invest £100k: Start a business

Property, shares and the bank have been the go-to option for new investors for decades. They all involve risk, but it’s a managed risk with predictable outcomes. If you’re able to keep the money in any of these assets in the long run, the data suggests if you lose out it will be mostly down to inflation. They are perhaps still the best way to invest if your aim is long term stability.

But what if you’re wanting something other than stability. Maybe you even have dreams of finding out how to invest £100k to make £1 million. If anyone had advice on how to do that they’d keep it that information to themselves, but entrepreneurs do this consistently. Just look at the back story of the Dragons from the hit BBC show and you’ll see that many of them have invested into projects that have 10x their money. Dig deeper and you’ll see they’ve sometimes lost investment entirely.

Starting a business can be a great way to invest your £100,000 if you have the expertise, contacts, and drive to make it work. The safe option is to stick to what you know – if you work for a company and know the financials and the trade, then starting out as an independent operator in the same field is more likely to work out than switching to a business thats new.

You’ll also need to make the right decisions when starting up. Invest £100,000 into evergreen products at wholesale prices, and you’ll likely be to sell the stock onto another business should you choose to exit the trade. Invest £100,000 into marketing and you could be pouring it all down the drain. Arguably the best advice would be to invest money in your business gradually, after proving the concept works. Bootstrapping is in vogue for good reason – for instance if you can operate from your home or from a storage unit, there’s no need to commit to spending tens of thousands on a lease until expansion has proved the business model.

How to invest £100k wisely

How best to invest £100k will depend on your goals:

  • Investing money into savings accounts will likely be the safest way to keep the bulk of your capital, although you’ll likely lose money through inflation. Low risk, poor returns.
  • Investing into shares can deliver good long term returns if you invest at the right moment and are prepared to suffer losses as well as gains. Medium risk, medium returns.
  • Investing into property is hard work and will require commitment, it’s like a part-time job that can pay very well but could also lead to loss of asset value. Medium risk, medium returns.
  • Starting a business could offer the best return, but make sure you know what you are doing and play it safe. Don’t invest £100,000 in one go, and take financial advice before starting out. High risk, mixed returns.

How I invested £100k

Personally, I’m an entrepreneur and I’d always go for the highest risk route of starting up a business. It’s a way of life that isn’t suited to all, and while you can play it safe you require experience in your field and knowledge of when to cut your losses and when to go all in.

I’ve invested over £100,000 into my business but only after over a year of testing the waters with a smaller investment of around £10k. When I proved my business model worked, I put in the rest but spent it gradually and acquiring stock at below market value. The business is showing good profits, but even so there’s risk. The product could fall in value, I could fall ill and be unable to run the business or another external shock could force us to close. It’s a risk I’m willing to take, but it isn’t for everyone.

If you don’t have the business ‘bug’ then spend time expanding your knowledge and assessing all the information you can about more traditional investments and choose the right option for what you hope to achieve.

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