How should I invest a £10,000 lump sum?
With that in mind, our "How should I invest..." column aims to help beginner investors of any age and any financial background plan for their family's future by offering hints and tips from the UK's leading independent financial advisers on how and where they should invest their cash.
In this edition, it's how to invest a £10,000 lump sum.
All our experts state that your attitude to risk is one of the most important things to consider before you invest your £10,000. "You must ask yourself: how much risk am I prepared to take? How long am I investing for? What are my investment goals?" says Darius McDermott of Chelsea Financial Services.
Patrick Connolly of Chase de Vere adds: "If you only want to invest for a short period, say five years or less, then you should keep everything in cash. If you can stomach high levels of risk and volatility, then you can invest more in growth assets such as shares. However, if the thought of losing 10% or 20% of your money would give you sleepless nights, then you should invest at least some of your money in safer areas."
Connolly says you should also take account of other investments you have before taking the plunge. "If this is your only investment, then you should look to manage risks carefully as you won't want to lose everything."
Rebecca O'Keefe, head of investment at Interactive Investor, says the key to investment success is "time in the market, rather than timing the market". But investing a single lump sum can be risky, so O'Keefe suggests an alternative is to consider phasing it over a few months. "This has the benefit of averaging the price you invest at and does mean that in very volatile markets, you're at less risk of investing the full amount just before a possible fall," she says.
O'Keefe also suggests that, along with risk attitude and how long you have to invest, you should also analyse how interested you are and how much time you have to spend engaging with your investments. "If you want someone else to do all the heavy lifting and you don't have or don't want to put the time and effort into managing your money, then investing in a global fund or ETF (exchange traded fund) will give you built-in diversification.
"If, however, you have plenty of time and want to develop an ongoing interest in the market and you're also willing to take some additional risks, then you could think about investing in individual stocks. This strategy will mean that you do need to be prepared to spend considerable time researching the market, the sectors you understand and have a high threshold for potential volatility."
McDermott says a medium-risk person looking for capital growth across a minimum 10-year investment horizon could consider weighting their portfolio towards: 40% in the UK, 20% in the US, 15% in Europe, 5% each in Asia, Japan and other emerging markets, as well as 10% in so-called absolute return funds.
All our experts said that investors should look to tax-efficient investments as a first port of call. That means using your ISA allowance, whether you're investing in cash (via a cash ISA) or the stockmarkets (via a stocks and shares ISA).
Rebecca O'Keefe says that for those who do not have time to monitor their investments, a less well-known fund, Consistent Practical Investment, holds a range of investment trusts and has performed very well, investing in a full range of global investments across different asset classes and sectors.
"If you have the time to focus on a specific geographic area, for example emerging markets, then the First State Global Emerging Market Leaders fund is a well-known, attractive option," she adds. However, you will need to be quick, as this fund, which currently has no initial charges, will levy additional fees from September.
Patrick Connolly says a good choice could be Cazenove Multi Manager Diversity, which invests one-third in shares, one-third in fixed interest and one-third in other investments, such as property and commodities.
"If you've already got an investment portfolio in place and are happy to take greater risks then good choices could include Investec UK Special Situations, which invests in UK shares, or AXA Framlington American Growth, which invests in US shares," he says.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
Absolute return funds
Absolute return funds aim to deliver a positive (or ‘absolute’) return every year regardless of what happens in the stockmarket. Unlike traditional funds, they can take bets on shares falling, as well as rising. This is not to say they can’t fall in value; they do. However, over the years, they should have less volatile performance than traditional funds.
An Exchange traded fund is a security that tracks an index or commodity but is traded in the same way as a share on an exchange. ETFs allow investors the convenience of purchasing a broad basket of securities in a single transaction, essentially offering the convenience of a stock with the diversification offered by a pooled fund, such as a unit trust. Investors buying an ETF are basically investing in the performance of an underlying bundle of securities, usually those representing a particular index or sector. They have no front or back-end fees but, because they trade as shares, each ETF purchase will be charged a brokerage commission.