How should I invest my £10k inheritance?

Keeping your windfall in cash is the safest option, but investing in shares is a far better long-term bet 

I am a woman in my mid-30s. I have just received a £10,000 inheritance and would like to invest my windfall in a way that generates the best possible returns. What would you recommend and what should I consider?

Initial diagnosis:

You need to decide what you want to achieve, how long you want to invest for and the risk level you’re prepared to accept, according to Patrick Connolly, a chartered financial planner at Chase de Vere.

He says: “Before investing, make sure you have paid off any expensive debts and have enough money in cash to cover short-term emergencies or other requirements. If you are investing for less than five years, stick with cash, as you have too little time to claw back stockmarket losses.”

If you won’t need your windfall for more than five years, you can consider other options.

Adrian Lowcock, head of personal investing at Willis Owen, says it’s important to accept that no single theme will consistently perform. However, he adds: “Shares have historically delivered the best long-term performance, although they can be volatile over the short term.”

Volatility will cause the value of your investments to rise or fall over time. He says: “If you’re investing in anything overseas, currency will be a factor to consider. This can increase volatility and be a reason why investing more in the home market makes sense.”

Treatment plan:

The starting point would normally be a Stocks and Shares Isa invested in a portfolio compatible with your attitude to risk, suggests Scott Gallacher, a director at Rowley Turton. Based on a £10,000 investment, he suggests that you will be better off with a passive investment strategy. Passive funds that seek to replicate the performance of a specific index such as the FTSE All Share index cost less than active funds.

“Most investors are best served by a well-diversified investment portfolio,” he says. “This avoids the risk of significant losses if just one share or area does badly. The downside is that it does reduce your potential returns.”

There are other risks to ponder, such as liquidity. “Consider whether you’ll be able to sell your investments and access your money when you want,” he says. “As recent events with the Woodford funds show, even mainstream funds are not always completely immune from [liquidity] risk.”

Within sectors, he suggests smaller companies funds, which tend to do well, although he emphasises that past success is no guarantee of decent future returns. “They have historically delivered the best investment returns, but there’s no such thing as a free lunch, and these investments are naturally higher risk,” he says.

Alternative suggestions:

Mr Lowcock suggests having exposure to three different funds: “a global equity fund offering growth, as well as some more domestically focused investments – perhaps a UK growth and an equity income fund – initially”.

Meanwhile, Mr Connolly advises splitting your money evenly between the Baillie Gifford Managed and Investec Cautious Managed funds for their lower-risk growth potential.

His higher-risk suggestion would be putting £3,000 into both the HSBC FTSE All-Share Index fund and the Rathbone Global Opportunities funds, along with £2,000 into both Liontrust UK Smaller Companies and JPM Emerging Markets.

Either way, Mr Connolly insists it is important to revisit your decisions every six months to make sure they are meeting your needs. “If your investments aren’t performing as expected, try to understand why before making any changes,” he says.

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