How should I invest a £50k lump sum?
Moneywise believes in helping you save money so you can focus on taking your first steps on the investment ladder. Over the long term, investing money will produce far greater returns than you'll get from high street savings accounts.
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 £50,000 as a lump sum.
"How and where to invest £50,000 is very dependent on a number of factors – time horizon, attitude to risk and objective – whether that's income, growth or a bit of both," says Sheridan Admans, investment research manager at The Share Centre. "These variables will help determine what strategy an investor might follow to achieve their goal," he adds.
Patrick Connolly, a chartered financial planner at Chase de Vere, adds it is very important not to make any hasty decisions and to be mindful of spreading risk, too.
"If you don't have many, or any, other investments, then you shouldn't take too much risk. If you take big risks and your investment falls by 20%, which is entirely possible, then your £50,000 investment will be worth only £40,000," he warns.
Connolly believes the best way to spread risks, and so help to protect your money, is to invest in different investment types. "So perhaps put some money in shares, some in fixed interest and some in property.Then also spread risks within each of these assets by picking different types of investment in different geographical regions. So, for example, with shares you can invest in large and small companies, in different types of businesses and in different parts of the world," he says.
You also need to be mindful of your timescale when deciding how and where to invest, Darius McDermott, managing director of IFA Chelsea Financial Services, points out. "Assuming the investor has a time horizon of a minimum of five years, they could get some nice diversification by investing the money across five to 10 different funds."
You should also look to hold your investment as tax efficiently as possible. Admans says: "If the investor has not made use of their Isa allowance, I would suggest this as a priority."
However, Connolly adds that for many people, a combination of pensions and Isas can be suitable. Pensions give initial tax relief, and stocks and shares Isas can be tax efficient and provide far greater flexibility as you can get hold of your money when you want.
McDermott urges those looking for a home for a significant lump sum to avoid cash. "Cash rates are very poor across the board, with only a small percentage of accounts beating inflation, so I wouldn't assign any portion of this investment to that asset class."
Finally, if you're not sure what you should do, then you should take independent financial advice.
Connolly suggests those looking to spread risk by diversifying could consider investing through one multi-asset fund such as Cazenove Multi Manager Diversity, Fidelity Multi Asset Strategic or M&G Episode Balanced.
Alternatively, McDermott recommends they consider Chelsea’s balanced growth Easy Isa portfolio, which includes AXA Framlington American Growth, JO Hambro UK Opportunities, M&G Recovery, Rathbone Global Opportunities, Threadneedle European Select and L&G Dynamic Bond. He suggests Newton Absolute Return could also be added to the mix.
However, for those looking for income, he suggests a diversified income stream from a mix of property, strategic bond and equity income funds that use covered call options to enhance the income provided.“I like the Henderson UK Property fund, which has one of the highest yields in the sector; Invesco Perpetual Monthly Income Plus, which again has one of the highest yields in its sector; Fidelity Enhanced Income; RWC Enhanced Income (both of which use covered call options) and Newton Asian Income.
Admans suggests investors seeking income and who are prepared for a bit more risk in the hope of generating growth could consider the M&G Global Convertibles, Newton Global Higher Income and Legg Mason ClearBridge US Aggressive Growth funds.
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.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
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.