"Where should I invest £5,000?"

The Investment Doctor helps a reader with £5,000 to invest.

I have £5,000 that I would like to invest but don’t know how to start. Can you advise?

Initial diagnosis

It’s fantastic that you’re investing for your long-term future. I can reassure you that you’re not alone in being confused as to where to start. The investment industry – with its jargon – doesn’t make it easy for anyone.

If you’re really confused, then you should take independent financial advice. However, many investors manage their money very well by investing in the stock market on a DIY basis. Most beginners start with investment funds rather than direct company shares.

• Moneywise's First 50 Funds for beginners

Make sure that you can afford to put aside this money for at least five years, preferably 10, because if you’ll need to access it earlier, you are more likely to lose your money to a stock market downturn. The good news is that if you can afford to invest in the stock market for the very long term, you’re likely to have a positive result, even if there are ups and downs.

While the Financial Conduct Authority, says that past performance is no guarantee to future performance, looking at past returns is the only thing that investors really have to draw conclusions from. And new research shows that investing for at least 10 years generated a positive total return 98% of the time.

Architas, a multi-asset fund manager, has analysed the total return of the FTSE 100 index of the biggest companies listed on the London Stock Exchange over 10 years. It assessed the 10-year performance on a rolling monthly basis since February 1987. Over this period, there were six out of 253 occasions when investors would have lost money over a 10-year period.

Only if you had bought during the dotcom boom (31 January to 30 June 1999), and subsequently sold in the corresponding month 10 years later when markets were reeling from the financial crisis (31 January to 30 June 2009), would you have lost money over 10 years, excluding any charges.

Treatment plan

Adrian Lowcock, investment director at Architas, says: “Investing can appear complex because of the wide range of choices available and unfamiliar terminology. However, a lot of this can be made easier by taking a bit of time before you make your first investment to know what you want to achieve from it and understand the costs associated with investing.”

1. Have a planBefore you invest, write down your investment aims and timeframe.

2. Be tax-efficientPut any investments inside an individual savings account (Isa), where they can grow tax free. Even better, if you can put your money aside until you’re 55, then consider a pension, where you get upfront tax relief on your contributions.

3. Choose the right platformTo get started, you’ll need to choose a DIY investment platform – these are like online supermarkets for funds. They act as a place to buy, sell and hold all your investments, while putting a tax-efficient wrapper around them if you invest in an Isa.Platform fees vary enormously, so you should pick one that is low cost for your circumstances.

4. Diversify your investmentMr Lowcock says: “Often first-time investors are attracted to individual shares, having seen or heard stories where investors have had huge successes. However, investing in individual shares can be risky; for every success, there will be plenty of disappointments you don’t hear about. Instead, first-time investors (and experienced investors for that matter) can benefit from using expert fund managers who have significant investment experience and will provide diversification by investing in a number of companies through their funds.”

Fund medicine

Most beginners should start by picking the lowest-cost funds with the highest amount of diversification. This generally means tracker funds that aim to ‘track’ or replicate performance of stock market indices.

Fidelity Index World Fund is a good fund to start with. It tracks performance of the MSCI World Net Return Index of large- and medium-sized companies from more than 12 developed countries and its ongoing charge is very low at 0.15% a year. What you combine this with depends on your attitude to risk. If you have a high-risk appetite, you could add some smaller companies via Vanguard Global Small Cap Index Fund. This might make your portfolio more volatile, but over the very long term it could help you grow your money faster.

If you have a medium-risk appetite, add some UK government bonds, in the form of Vanguard UK Gov Bond Index Fund. This should help your portfolio have a smoother ride, but might hold back performance a little.

To avoid picking the wrong time to invest, stagger your investments by drip-feeding the money into your funds. You could try investing, say, £500 a month and see how it goes. 

For more starter investment ideas, see Moneywise’s Easy tracker fund portfolios. 

Do you have a question for the Investment Doctor? email editor@moneywise.co.uk.