Warren Buffett’s first rule of investing is “never lose money”. His second rule of investing is “never forget Rule No. 1”. If you suddenly come into £50,000, you might think the only sure way to abide by Buffett’s first rule is to stash your cash in the bank. But you would be sadly mistaken.
Inflation is a quiet thief, but it will gradually erode your savings. Even if inflation were to sit at around 2% (the Bank of England’s target), it would only take 35 years for the value of your nest egg to halve – not great news if you’re planning to stash it away for use in retirement.
Of course, over the past few years, the rate of inflation has been far higher than this. UK inflation peaked at 11.1% in October 2022. At this elevated level, it would only take around six years for the value of your money to halve. Suddenly, cash doesn’t seem quite so safe after all.
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Thankfully, inflation has fallen considerably from this peak and, with the Bank of England’s base rate at 5%, many savings accounts are offering real returns. However, even now, cash is a fickle king.
Higher savings rates aren’t likely to hang around for long, if the Bank of England continues to cut the base rate over the months to come. Over the long run, investment markets almost always beat cash returns.
Of course, understanding the importance of investing is a crucial first step – but it is only half the battle. The harder part is knowing how and where to invest. That’s why we sat down with a series of experts to find out where they would put their money.
We have previously looked at how to invest £1,000, but in this piece we look at a larger sum: £50,000. We spoke to:
Consider the 100 minus your age rule, says Andrew Craig
“There’s no panacea approach when it comes to investing,” says Andrew Craig, founder and investment manager at Plain English Finance. It all depends on your unique set of circumstances.
Indeed, before you decide what to do with your money, important questions include: how old are you? Is the £50,000 your entire life’s savings or is it an inheritance you recently came into? Do you own your house? And are you paying off any debts or supporting financially-dependent children?
The considerations don’t end there either. As well as thinking about your personal circumstances (which define your ability to take risk), you need to consider your personal preferences too. For example, are there any investments you particularly want to support or avoid, perhaps on environmental or moral grounds?
There’s no panacea approach when it comes to investing.
Andrew Craig
Of course, an advisor could help you plan your finances but this is expensive and could take a hefty chunk out of your £50,000 sum. This is something Craig highlights through his investment education platform, Plain English Finance.
He says: “Good personal financial advice costs hundreds of pounds at best. More often than not, it can actually cost thousands of pounds. As a result, it is only really available to people who have quite a lot of money already. This is obviously a big problem for everyone else.”
With this in mind, Craig highlights the “100 minus your age” rule as being “about as close to a panacea as you can get” without having to shell out hundreds of pounds. This rule is a good starting point, whether you are investing £50,000, £10,000 or even £1,000.
How does the “100 minus your age” rule work?
One of the people who came up with the “100 minus your age” rule was John Bogle, the late founder and chief executive of the Vanguard group. It is a popular retake on modern portfolio theory and the 60/40 asset allocation rule, which suggests investors put 60% of their portfolio in stocks and 40% in bonds.
The idea behind the 60/40 split is that stocks and bonds are inversely correlated, so one should rise when the other falls. However the downside is that this relationship has fallen apart in recent years. For example, when interest rates rose dramatically in 2022, both asset classes tumbled in tandem.
What’s more, the 60/40 rule offers very little flexibility. It suggests your portfolio should look the same whether you are 20 or 60 – but most experts agree that you should take on more risk when you are young.
Meanwhile, the “100 minus your age” rule offers greater flexibility. “The idea is that when you are 20, you invest 80% of your portfolio in stocks and 20% in bonds or other defensive assets,” Craig explains.
He adds: “At the beginning of your investment journey, you are more able to take on risk as you have plenty of time to ride out any ups and downs before you need to access the money. For most people, this is the best time to be exposed to the stock market.”
What about now that people are living longer?
Even this more flexible asset allocation approach isn’t perfect, though, particularly now that people are living longer than ever before. “Being underexposed to the stock market earlier on in your investment journey could leave you running out of funds in old age,” Craig explains.
As a result, he proposes a shift towards “120 minus your age” – a concept he explores in his second book, Live on Less, Invest the Rest. This can help account for the fact that many are now spending around a third of their life in retirement. With this in mind, de-risking too soon is a risk in its own right.
Stocks to consider for the equity portion of your portfolio
Determining the right asset allocation is essential – but with thousands of stocks available on each investment platform, how do you decide where to invest the equity portion?
Tracker funds are a popular choice among DIY investors today, and can give them instant diversification. “If you believe in American exceptionalism and think the US market will continue to race ahead, you might choose an S&P 500 tracker,” Craig explains.
US equities have averaged a return of around 10% per year over the long term. If you were to put £50,000 in US equities today and the market returned 10% per year, you would be a millionaire within 33 years.
Meanwhile, if you’re looking for greater diversification still, a global equity tracker will allow you to “own the world”, he adds. Depending on which one you choose, you can enjoy cheap and efficient access to thousands of companies across developed and emerging markets.
“By understanding finance and investing sensibly over sufficiently long periods of time, ordinary people can become millionaires,” Craig concludes. In other words, it’s less about income than investing – and a £50,000 pot is a great place to start.
Diversification is key, says Kalpana Fitzpatrick
“We all know the importance of not putting all your eggs in one basket,” says Kalpana Fitzpatrick, editor at MoneyWeek.com and author of Invest Now: The simple guide to boosting your finances.
Like Craig, Fitzpatrick highlights the importance of having a diversified mix of equities and defensive assets like bonds and cash. She also emphasises the importance of adopting a long-term outlook and taking advantage of tax-efficient vehicles so that you can hang onto more of your money.
“[Firstly,] I would first use up my £20,000 ISA allowance and place it into several index funds like the Vanguard LifeStrategy or the iShares S&P 500 ETF, with no expectation to touch it for the next 10 years or so,” she says.
Any investments held in an ISA wrapper are shielded from income and capital gains tax – and the £20,000 allowance renews each tax year. This means you can stash more assets into your ISA account over time, either buying new assets or using a “bed and ISA” strategy.
“I’d also place £10,000 in some active investments, like the Scottish Mortgage Investment Trust, FundSmith Equity and the Polar Capital Global Technology,” Fitzpatrick adds.
Active funds are managed by an investment professional who tries to outperform a market benchmark. They typically come with higher fees than passive funds – so it’s worth checking the performance track record of any fund before buying it to see whether the fees are justified.
Fitzpatrick adds that she would then “use £5,000 to buy a stock or two”. She says: “While funds give me a diversified exposure to various stocks, a small percentage of well-researched stocks are a great addition to any portfolio.
“It’s easy to work out which stocks are a good buy by putting on your consumer hat. So, for me personally, it is Tesco – because we always need a supermarket and this is one I use often – and L’Oreal. Yes, I really love my make-up and there’s always room for a lipstick stock in my portfolio.”
I really love my make-up and there’s always room for a lipstick stock in my portfolio.
Kalpana Fitzpatrick
Having allocated the equity portion of her portfolio, Fitzpatrick says she’d keep it simple with the rest, putting £8,000 in a 12-month fixed-interest account. “Now really is the time to lock in the yield for cash savings accounts,” she explains, with interest rates expected to fall further over the months to come.
She adds: “I’d also add £5k into an easy-access savings account (again, rates are worth a look). Easy-access accounts are important if you think you may want to use that money at any given notice in the short term.
“And then I’d probably buy £2k of National Savings & Investment (NS&I) Premium Bonds in hope of hitting the jackpot, of course.”
Premium Bonds are another tax-efficient investment as any winnings are tax free. Every month, there is a prize draw with winners receiving anything between £25 and £1 million.
Fixed-rate savings, easy-access cash savings and Premium Bonds are all highly defensive assets too, so can help balance out the more volatile equity portion of your portfolio.
As long as you choose a provider that is covered by the Financial Services Compensation Scheme, cash savings are protected up to the value of £85,000. This means you will be compensated in the event your provider goes bust.
Meanwhile, NS&I Premium Bonds are backed by the UK government. Again, this means they are about as safe as you can get.
Invest in the market but also in yourself, says Damien Jordan
“There are three things that will dictate the amount of money you end up with in the end: the time you have, the amount you can pay in, and the return you achieve,” says Damien Jordan, one of the biggest financial YouTubers in the UK.
He adds: “Unless you’re Warren Buffett, getting market-beating returns consistently will be tough; unless you’re Marty McFly, getting more time will be even harder.
“So, as investors, we should focus on the thing we can control, and that’s what we pay in. Increase that number as much as you can, and the best way to do that is to earn more money.”
Unless you’re Buffett, getting market-beating returns consistently will be tough.
Damien Jordan
Jordan has over 200,000 subscribers on his channel, Damien Talks Money, where he shares tips on how to improve your finances. He also shares regular insights through his newsletter, Financial Interest. One of the top tips he shares with MoneyWeek is the importance of investing in yourself.
“It sounds cliché, doesn’t it?”, he says, but adds that upskilling can help boost your regular income, thereby giving you more money to invest in the first place. As such, Jordan says he would invest 10% of the £50,000 pot in improving his earning ability.
“I started my YouTube channel with an iPhone and a £200 roll of filming paper, which I hung up in my loft to hide the exposed beams,” he says. “That simple investment changed my life and the amount of money I invest monthly.”
Global vs US equities – which route is best?
After investing 10% of the pot in yourself, working towards a promotion, a qualification or a side hustle, Jordan says you could look to equity markets. He agrees with Craig’s concept of “owning the world”, and prefers global trackers to US trackers because of the broader diversification on offer.
He says: “I buy a global index because, while I agree that America is an exceptional economy that has delivered wonderful returns, I am British. As such, I live in a nation that once claimed the top spot in terms of global influence, only now to make up around 4% of the global stock market.”
Jordan isn’t saying this will necessarily happen to the US, but he points out that a global index already gives him a decent amount of US exposure (around 65p in every pound).
“For me, the long-term returns global markets have achieved are enough to meet my financial goals,” he says. “If the States goes through a period of sustained underperformance, such as in the 1930s, 1970s, or from 2000-2009, I won’t be losing sleep at night wondering if I should be investing elsewhere because I own a bit of it all anyway.”
Three global ETFs Jordan highlights include: the Vanguard FTSE All World, the FTSE Global All Cap, and the HSBC FTSE All World Index.
Invest in a tax-efficient way
When it comes to where to place the money, Jordan says the answer is simple – a tax-efficient account like an ISA or pension is best.
“For most people, the pension structure tends to be the best overall due to the tax relief you get on the way in and the ability to decide when you take the money on the way out,” he says.
“Yes, it is taxed on the way out and the ISA is not, but most people drop down a tax band in retirement, so you might get higher-rate relief but only pay basic-rate tax at the end,” he adds.
On the other hand, the main benefit of an ISA is that it offers more flexibility, allowing you to access the funds at any time rather than having to wait until retirement age. With this in mind, Jordan says he would split the funds between the two to help meet a range of different goals.
