Investing a Lump Sum- 6 things to considerBy CCTrader - April 14, 2016 |
Whether you are a seasoned investor, or simply a stock market novice, below are a few basic things to consider before deciding on how to best invest your new found wealth.
- What to do with the money as soon as you receive it?
One solution could be to leave the funds in your bank’s current account until you decide what to do with the monies. However, the interest rate offered in such an account is very low indeed. Therefore, you may be better off transferring it to an instant access savings account that pays a higher rate of interest. You can still access the money quickly once you have made some long-term investment decisions.
- Emergency Fund
It is sensible to keep some funds easily accessible for emergency use. For instance, if your car requires some costly mechanical work to be carried out, it would be preferable not to disturb a long-term investment.
Having inherited some monies, you need to consider whether you should pay off some or all of your liabilities. This will depend upon a number of factors such as; the amount you have inherited the type, the amounts outstanding and the interest rates you are paying on any liabilities.
For instance, if you have an outstanding balance on a credit card that you do not clear each month, it is likely that you will be paying a high interest rate. Therefore, you should consider liquidating that liability. On the other hand if you have a loan with a lower interest rate it might be wise to invest in an investment grade bond for example which will return a higher income that your loan liability and leave you with surplus cash in hand.
- Capital Growth or Income?
Something else you need to decide on is whether you wish to invest the funds for capital growth, if you need to earn an income from the monies to supplement your existing income or, indeed, a combination of both.
- Term of Investment?
If you are only prepared to invest for the short term for example, fixed term investments such as Bonds or Treasury Bills are available.
Treasury Bills and Bonds offer the advantage of not having to tie down your money for a period of time and can be sold at any time. Short, medium and long term bonds are available to choose from. This is an advantage over fixed deposits and structured guaranteed products where the investor cannot sell for a stipulated period of time without incurring heavy penalties. (E.g. 5 years)
- Attitude to Risk?
This is also a major factor in determining where your monies should be invested with a view to maximising your return. There are four basic levels of investment risk as far as your capital is concerned:
No Risk – Cash, bank savings accounts
Low Risk – Government backed securities (Government bonds)
Low to Medium Risk – Investment Grade Bonds (Corporate bonds)
Medium Risk – Shares in major companies. (Also known as blue chips)
High Risk – Shares in companies/instruments where there is large volatility in the share price such as shares in smaller companies. E.g. Examples of such companies could be smaller companies involved in oil exploration or pharmaceutical research that are dependent on making a discovery to succeed.
Different Types of Portfolio strategies
A medium risk investor could invest all their funds in the shares of major companies (medium risk) or, instead, invest some funds in Government backed securities (low risk) and some funds in the shares of smaller companies (high risk) which, when mixed together produce a medium risk portfolio. Another example would be to invest in bonds (low risk) and blue chip shares (medium) which would result in a low to medium risk portfolio.
You could also invest in the various companies from different sectors such as industry and banking. Another method is investing in different stock markets around the world to further spread the risk. This is referred to as diversification.
Remember, with low, medium and high risk investments there is an element of risk. Although the general theory is, the greater the risk the greater the potential gain, it could prove to be the opposite without professional advice from the experts.
For more information about investing a lump sum for the first time you may contact one of our investment advisors.