Investing a lump
sum intelligently

Investing lump sums of money spurs people to reassess their finances and explores how intelligent investing helps you achieve explains Wendy Spires.

There are many instances in which individuals might receive a lump sum of money and, while a windfall of any size is always welcome, these often represent very significant sums indeed. The circumstances around receiving a large lump sum may not be positive, such as when it is through inheritance or a legal settlement, but carefully investing those monies could provide a massive boost to your finances over the long term. The prospect of a spending spree may appeal, but a lump sum can provide the foundation for a far wealthier future if approached intelligently.

One of the major misconceptions about wealth management is that it is only for the super-rich, but this couldn’t be further from the truth. There are institutions suitable for every possible profile of individual who might need private banking, investment management or financial planning services (which today is arguably most of us). So, while there are some firms which restrict themselves to ultra high net worth individuals, many institutions are happy to work with those with just £50,000 to invest.

Record numbers of our users today are complete newcomers to wealth management. Some of this influx seems to be due to the new pension freedoms which have just come into force, yet we’re also increasingly hearing from DIY investors who want to explore what the professionals might be able to add. Often these investors have been investing on a DIY basis for some time and – while they may have found success – have arrived at a point where they haven’t got the time to properly manage a portfolio any more. In other instances, however, it is because the individual is looking at a sum of a size which makes them think, “OK, things just got serious”.

Tipping points

To look briefly at another area, we often find it the case that our users were perfectly happy managing their own SIPP when their pension pot was quite modest and they had decades to recoup any losses on their investments; “taking a punt” with modest amounts can, as we all know, be quite fun. Conversely, once they are nearer retirement age and have amassed a pot running into the several hundreds of thousands of pounds, investors often then want to hand over the reins to a wealth manager. We see the same trends when it comes to windfalls. When individuals perceive that an amount of money could make a real difference to achieving their financial objectives, they tend to want to bring in the professionals to make sure that it does.

When it comes to putting a lump sum to the best possible use, a lot will depend on the amount concerned, what it represents relative to your current financial circumstances and therefore what it might mean in the grand scheme of things. You may wish to bolster your family income slightly over many years or you may have a far-off dream to put your lump sum towards; you may want a mixture of income and growth from your funds. There are instances where individuals are lucky enough to receive a life-changing haul of cash, such through a lottery win, but in the majority of cases lump sums are very much more modest. Those monies may well have a life-changing effect in the end, but a little more work is required first.

The first thing to remember if you receive a lump sum is not to do anything hasty and to thoroughly explore your options (including around your tax liabilities). Even if you are already investing on a DIY basis, don’t simply pour more money into an existing portfolio and buy more investments in a scaled up (or even worse, scattergun) approach.

Your new-found wealth may have a significant impact on your overall financial circumstances and this in itself warrants a rethink on the risk/return characteristics of your investments.

Unique requirements

On that note, nor should those in receipt of a lump sum blindly follow the crowd and pile into buy-to-let property. Prices don’t always go up and since a significant proportion of your existing wealth is likely to be tied up in your home already you could end up horribly over-exposed to a downturn in the property market (and at risk of being stuck with a highly-illiquid investment). In fact, unless it is a very small amount, you should be wary of investing a lump sum into any one asset class at all. A professional can help you diversify your investments across a range of both traditional and alternative assets which could drive down risk and drive up returns.

While a certain amount of caution is always called for, you don’t have to stay completely safe either, by sticking to low-yielding or index-tracking investments. Passive investment vehicles like Exchange-Traded Funds can form a useful part of a portfolio and are a mainstay of DIY investing, but there may be very much more interesting opportunities you may be able to explore which are well within your risk tolerance. People typically don’t realise that they can access professional wealth management services with quite modest amounts to invest; they are also often surprised to learn that they can have a bespoke investment portfolio built for them that includes a variety of investments too.

Whatever your personal circumstances, one of the best routes to making the most of a lump sum is to have an open-minded conversation with a professional adviser (or perhaps several).

Whether you are in receipt of a very large amount or a smaller one, there are likely to be options they can talk you through which you may never have even considered – and a range of investment strategies to help you get to where you ultimately want to be financially.

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