While £20k can be used for enjoyable short-term purchases like a vacation or a new car, investing can provide long-term benefits. By carefully investing in stocks, bonds, real estate, or mutual funds, you can grow your wealth, diversify your portfolio, and achieve financial stability.
In this guide, you will discover how to invest £20k, along with the positive and the negative sides of each one, what to keep in mind before you start investing, as well as more conservative strategies for saving toward retirement.
What kind of investor are you?
Not all approaches to investing are the same and which one you’ll choose largely depends on three guiding ideas:
- What is my investing goal? First of all, you’ll need to come up with an end goal for your investment. Are you looking for a modest increase in the sum to spend a summer abroad, amassing a deposit to pay out your mortgage, or preparing yourself for an early retirement? Short-term and long-term goals require different strategies and approaches;
- What is my risk tolerance? How big are the stakes that you’re willing to put your £20K on? Investing always comes with a risk. The higher your desired profit, the riskier the whole endeavor. Your risk tolerance is going to be crucial to picking the right strategy;
- How much do I want to be involved? If you are willing to devote yourself to active investing, you will need to spend a significant amount of time and effort. However, if you lack the time, patience, or will to pursue intensive trading, you should consider passive investing. Both approaches are valid if you opt for long-term investing, but novice traders might be better with passive investing methods. After all, beating the market is notoriously risky, even for seasoned trading veterans.
Ultimately, your investing strategy preference boils down to your financial objectives, age, risk acceptance, and the time in which you want to see the results. After all, these factors are prone to change and you will do well to redo your investor profile from time to time according to your goals and conditions.
Before we continue
Best way to invest £20k in the UK
Whether the extra money found its way into your pocket through an inheritance, a business bonanza, or good old money squeezing, the best way to use it is to invest it. The sum is modest in comparison to some fortunes, sure. But if you invest smartly and have patience, it has the potential to reach significant proportions.
There are many paths that your investment can take. There is no single solution: the market does not work that way. However, if you specify your needs and choose the financial strategy that suits them, you might accomplish your goal regardless.
Here is our selection of the five best ways to invest £20k:
- Stock market;
- Index funds and ETFs;
- Real estate — REITs;
- Retirement — fixed-income;
- Retirement — self-invested personal pension (SIPP).
Let us explore each of them.
1. Stock market
In this section: How to invest £20k in the stock market in the UK?
Investment type: Long-term growth
Risk level: Varies
Recommended broker: eToro
The stock market is among the most optimal ways to accumulate a significant sum in the long term. Reaching this outcome depends on a pragmatic and thought-out investing process, patience, and a steady hand that does not easily succumb to emotions. Although the returns vary from year to year, given enough time and reinvestment of profits, the investors may see incremental gains and significant profits.
Let us take the S&P 500 index as a well-known example and a frequent stock market investment choice. In 2021, it yielded a 26.89% return, most likely due to the post-pandemic recovery boom. Just a year later, the market index fell disastrously by -19.44% in 2022. Such swings in price do seem quite significant and volatile, but when taken as a whole, the S&P is averaging more than 10% since its inception almost 70 years ago.
So, if you opt to invest £20K in the stock market, you have to choose what company (or companies) you want to invest in. The choice will also probably depend on the type of industry and industrial sector the company belongs to. Once you make this choice, the next step is to select an exchange platform such as eToro and register an account. You’re now ready to invest in stocks.
Pros and cons of investing in the stock market in the UK
- High returns: The stock market can potentially provide higher returns on average to investors than the more traditional assets like bonds;
- Liquidity: Stocks are an asset that is highly liquid, which means that you can quickly convert them into money at any time if such needs occur;
- Low barrier of entry: Since commission-free investing and no account minimums are the industry standard for the stock market, you can begin investing with even a couple of pounds;
- Build long-term wealth: In the long run, stocks tend to provide a stable return on your initial investment. In a diversified and complementary portfolio of well-performing stocks, investors can expect to stay ahead of inflation at the very least. As of 2023, the yearly return on the S&P 500 since 2010 was 12.65%.
- Returns are not guaranteed: Although stocks generally perform better than many other financial investments in the long run, they remain susceptible to periods of decreased performance. In other words, your investment period can yield a loss;
- No short-term gains: Waiting for significant returns on stock investments takes years or decades rather than days or even months;
- Volatility: Share prices go through their ups and downs all the time, so investors need to keep the long-term picture in their minds to subjugate the emotional roulette;
- Time and effort investment: Individual stocks or custom-made indices require investors to manage them themselves. It implies regularly performing fundamental and technical analysis, as well as checking the companies’ pulse in the financial sense, even constantly observing the state of the global market as a whole. This easily adds up to a straining amount of work.
2. Index funds and ETFs
In this section: How to invest £20k in index funds and ETFs in the UK?
Investment type: Long-term growth
Risk level: Varies
Recommended broker: eToro
Investing in index funds and ETFs is a prime example of passive investing. By passive investing, traders possess a diversified portfolio of financial assets that require little to no active trading in the market.
With the vast majority of investors in index funds pursuing a buy-and-hold strategy, this form of passive investing is typically considered a part of a long-term growth strategy. The purpose of exchange-traded funds (ETFs) or mutual funds is to reflect and benchmark the market conditions, which indicates stability and slower price movements over a longer time.
Ultimately, the goal of this strategy isn’t to beat the market but to match its performance and, if all circumstances are met, grow with it.
In the UK, the most popular and tracked indexes are:
- FTSE 100 – the 100 largest UK companies;
- FTSE 250 – from 101st to 350th largest UK company in the UK (also known as “mid-caps”);
- FTSE 350 – every UK company from the 1st to 350th largest;
- FTSE SmallCap – smaller UK companies not listed in the FTSE 350.
You might also consider investing in the three most broadly tracked indexes in the US, which are:
- The S&P 500;
- Dow Jones Industrial Average;
- Nasdaq Composite.
Pros and cons of investing in index funds and ETFs in the UK
- Diversification: Investing in many companies across various sectors in index funds results in less risk and potential loss mitigation;
- Low fees: Due to a more passive approach, investing in index funds has lower costs than actively managed mutual funds;
- Easy access: Entering the stock market via online brokerages such as eToro is inexpensive and accessible even to beginners;
- Liquidity: ETFs and mutual funds are bought and sold without difficulty, resulting in quick conversion to cash if needs arise;
- Transparency: You, as an investor, have all the necessary information and performance data as companies in index funds are obliged to report on their holdings regularly;
- Convenience: Investing in an index fund is easier than investing in individual companies’ stocks, which takes substantial manual labor;
- Simplicity: With a passive approach to investing, you will bypass the emotional rollercoaster that springs out from constantly watching over market conditions and individual company performance.
- Limited control: ETFs are tied to a certain index or industry sector. In other words, by investing in ETFs and index funds, you have little to no control over which individual companies or financial instruments get included in the fund;
- Volatility: The performance of index funds is directly bound to the state of their benchmark indexes, no matter the state of the markets. In case of a market drop, the index funds will spiral along with the indexes. A savvy portfolio manager can somewhat mitigate this by hedging or liquidating their assets;
- Slow gains: While passive investing and holding can rake in profits in the long run, spreading out the risk also puts a cap on the potential rewards. The lower the risk, the slower the potential gains.
3. Real estate (REITs)
In this section: How to invest £20k in real estate in the UK?
Investment type: Long-term growth, diversification
Risk Level: Medium
Investing in real estate is one of the most recognizable and familiar ways of investing in our society. However, due to property prices being at a historical high as of May 2023, £20k might not be sufficient for a down payment for a reasonable real estate property. This obstacle can be at least partially circumvented by investing in REITs.
REITs (real estate investment trusts) are companies that own, handle, or fund real estate capable of generating income across various property sectors. These are publicly traded and susceptible to buying and selling regularly through a brokerage platform, which means that they are the most liquid investment into real estate available on the market.
Pros and cons of investing in UK real estate through REITs
- High dividend yield: The law requires REITS to distribute no less than 90% of their taxable income as dividends to all shareholders. These are among the highest dividend yields available to investors;
- Diversification: Including REITs in a portfolio makes for an excellent diversification opportunity without requiring advanced expertise or excess time;
- Liquidity: REITs are publicly listed on stock exchanges, allowing them to be bought and sold fast, unlike trading a physical real estate investment;
- Solid returns: REITs have provided larger returns than the S&P 500 and go above the inflation rate;
- Exposure to the real estate market: Traders do not need to own or manage properties directly, yet still get the boons of value appreciation and rental income.
- Slow growth: As 90% of the income generated by REITs is turned into dividends and distributed towards the investors, just 10% is reinvested into expansion, which puts a hard limit on growth;
- Interest rate sensitivity: Raising external debt and equity capital is the primary way REITs grow. A hike in interest rates proportionally affects their cost of debt and makes profitable growth that much harder. It can, in turn, reduce profits and shrink dividends;
- Sector concentration risk: REITs fully located within one property sector, e.g., retail or hospitality, are susceptible to factors that negatively affect that type of sector and can incur disastrous failures. The most recent such event was the global pandemic, with debilitating effects on some REITs;
- Tax-eligibility: REIT dividends are susceptible to taxes as regular income.
Real estate crowdfunding platforms
4. Retirement – fixed-income investments
In this section: How to invest £20k for retirement in the UK?
Investment type: Conservative investing, retirement
Risk level: Low
Fixed-income investments represent debt securities that yield calculated, fixed, or predictable returns during a given period. The most common case is the one where investors lend money to an issuer, e.g. government, municipality, or a trusted corporation, and receive in exchange a steady source of interest payments and, finally, a return of principal at the end of the contract.
Some common types of fixed-income investments in the UK include:
- Gilts (gilt-edged security): Gilts are government liabilities denominated in sterling. They are issued by the HM Treasury and listed on the LSE. Investing in guilts provides a fixed income (coupon) every six months, with the final coupon and return of principal at maturity. Since the HM Treasury has yet to fail to fulfill these securities, investing £20k in the UK gilts is safe;
- Inflation-linked bonds: Bonds that are indexed to inflation, meaning that the investors will never get less real value than their initial investment was worth;
- Certificates of Deposit (CDs): CDs are generally offered by banks or credit unions with maturities ranging from one month to five years. Documentation and administration costs are low, and the advantage for investors is that the deposit will yield a greater interest rate than an equivalent in savings. Under the Financial Services Compensation Scheme, certificates of deposits are guaranteed.
While the yield provided by these types of investments is humble in comparison to the potential of stock or ETFs, the risks are virtually non-existent, and the income is constant and reliable. This makes fixed-income investments highly popular with retirees-to-be and conservative investments.
Pros and cons of fixed-income investments in the UK
- Stability: Compared to equities, fixed-income investments are less volatile and provide a stable option for investors unwilling to risk;
- Predictability: As the outcome is near-guaranteed and the revenue is steadily delivered, fixed income is a perfect option for regular income payments;
- Diversification: Fixed-income investments can be an ideal addition to your portfolio to help diversify your assets and reduce the potential of hazard;
- Safety of initial investment: Unless the investors withdraw from the agreement early or sell the contract on the second-hand market, the fixed-income investment has zero loss chance of the principal.
- Low returns: In comparison to stocks, fixed-income investments yield much fewer returns, sometimes even failing to stay ahead of inflation;
- Hypersensitivity to interest rates: In case of a surging interest rate in the market, the current fixed-rate bonds will produce less than newly-issued bonds.
- Inflation risk: In certain circumstances, inflation can drive down or even negate the value of future income payments;
- Limited growth: Low risk means low returns, so fixed income provides much less growth potential than e.g. the stock market. Including fixed income in your portfolio may reduce your long-term growth.
5. Retirement – self-invested personal pension (SIPP)
In this section: How to invest £20k for retirement in the UK?
Investment type: Long-term growth, retirement
Risk Level: Low
A self-invested personal pension (SIPP) represents low-tax retirement savings account for people in the UK whose careers do not offer retirement plans or who want another investment option.
SIPP allows investing in various assets, such as stocks, bonds, ETFs, and mutual funds.
Taxpayers in the UK can claim tax relief on pension contributions on 100% of their earnings, so long as the sum does not exceed £40,000 annually. This relief comes as a refund that gets contributed toward the pension.
In other words, any individual who pays the 20% rate and contributes £20,000 to their SIPP account is eligible for a £4,000 reclaim from the HM Revenue and Customs, which is then deposited back into their SIPP account. Contributions above the £40,000 threshold are not eligible for tax relief.
Pros and cons of investing in SIPPs in the UK
- Tax benefits: In essence, you pay fewer taxes on the SIPP assets below the £40,000 threshold;
- Retirement savings: SIPPs are invented as a retirement savings option and provide a simple way to save for retirement in the long run;
- Investment flexibility: SIPPs’ investment options are plenty, and include bonds, stocks, mutual funds, ETFs, along with other financial instruments. This allows for a very diverse portfolio.
- Contribution limits: SIPPs have a fixed yearly contribution limit, which is £40,000;
- Penalties for early withdrawals: Early withdrawals from SIPPs before age 55 are either not possible or incur a penalty and taxes on the withdrawn amount;
- Tax withdrawal limitations: You are eligible for tax-free withdrawals only with the first 25% of your funds, whether you withdraw a lump sum or with monthly/annual withdrawals.
How to safely invest £20k — things to consider
In terms of available cash, £20k is not a modest sum. However, no matter how quickly you want to invest your money, you should always clear your head and check the status of your financial position and credibility. To begin, make sure that you pass the following checks:
- You have no high-interest debt: Before you invest a penny, you should make sure that you have cleared all high-interest debt, for example, credit card debts, personal loans, or payday loans. While credit card debts and short-term loans are among the highest interest-debts with a >20% rate, some experts cite all rates above 2-6% as high-interest debt. Even the most productive investment and returns with the most potential pale in comparison to these debt rates, so these should be cleared before you start investing. Low-interest debts or ‘good debt’ such as mortgages, unlike previous examples, do not present a major obstacle to investing.
- You have set aside an emergency fund: Similar to investing, living cannot be fully determined, and events that we haven’t accounted for will happen. It is in your best interest to create an emergency fund before you start investing. This fund would cover potential living expenses like medical bills, home maintenance, or even abrupt career termination. A general rule of thumb is that the emergency fund should account for six months’ worth of living expenses. This fund should be kept somewhere where your principal is not at risk, such as a savings account. Relying on this emergency fund should also prevent dipping into your portfolio with early withdrawals or resorting to high-interest loans or credit cards.
There are also checks that you want to go through after you begin investing and repeat them occasionally for good measure:
- Diversifying: Risk is best when spread out across your portfolio. To prevent losing the majority of, or even all of, your investments, you should distribute your funds across different assets, even industries and categories. In addition to this, a diverse asset portfolio is crucial in helping you achieve your investment goals. By diversifying, for example, you can fine-tune the level of risk to a place where you feel comfortable, as the risk usually correlates with the potential of making money;
- Spreading out your investments: Investing all your money at once can negatively impact the price of the asset that you are investing in. Instead of bulk investing, think about using the dollar-cost averaging (DCA) approach. This way the total amount of your investment is divided over time into sporadic purchases over an extended timeline. Spreading out your investment like this can lower the impact of price volatility and decrease the average cost per share;
- Stay wary of fraud: Investing has neither a guarantee of success nor an immunity card from hazards. Over time, scammers get more creative, and their ploys get more complex and elusive. It can get pretty difficult to spot con men with their credible websites, ‘authentic’ documents, and sweet talk. Always trust your sixth sense when a proposal sounds too good to be true: most of the time, it is. Make sure to deal with parties that you have reason to trust. For example, always search the Financial Conduct Authority (FCA) register for the company you want to invest in. You can never be too safe when you invest.
Investing £20k in the UK has the potential to build your wealth and multiply your initial investment, as long as you handle risk and adhere to the guidelines given in this guide.
Do not go blindly into the market and do not throw cash at the first glittering thing that you stumble upon. Instead, forge a careful strategy for your financial goal and stick to it. Do proper research before you invest in something and carefully consider your prospects in the long run.
Stay focused and stay on track. With a little bit of luck and patience, you might find yourself with a much larger sum than the one you started with. Then, naturally, your questions will grow in scope: how to invest £50k in the UK, or how to invest £200k… In any case, good luck with your investment.
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
FAQs about how to invest £20k in the UK
How to invest £20k?
The most optimal way to invest £20k is to spread it across multiple assets, including stocks, index funds and ETFs, and REITs, in addition to cautious or retirement options such as fixed income and SIPPs.
How to invest £20k in stocks?
The best way to invest £20k in stocks is to diversify your portfolio across multiple stocks with sufficient potential. Always rely on regulated brokerages like eToro.
How to invest £20k in real estate?
The simplest and most efficient method of investing £20k in real estate for regular investors is investing in REITs. These come pre-diversified in wide portfolios, give attractive returns in dividends, and exhibit high liquidity, especially when compared to physical real estate investments.
How to invest £20k in index funds and ETFs?
The best way to invest £20k in index funds and ETFs is through a regulated brokerage like eToro. Index funds are one of the most popular approaches to passive investment that require little to no active management.
What is the best way to invest £20k short term in the UK?
The best way to invest £20k short term in the UK is to pursue some more volatile stocks or even cryptocurrency, something you can also do with eToro. Remember that short-term, high-gain potential bears significant risk compared to long-term options.
Is it safe to invest £20k in the UK?
If you carefully observe the instructions provided in this guide, the risks of investing in the UK should be negligible.