If you’ve been fortunate enough to amass or come into a large sum of money it might be surprisingly hard to work out how best to use it. Whether you’re looking to move existing savings or you’ve got a windall to invest – perhaps from an inheritance, bonus, property sale or a lottery win – it’s a great opportunity to grow your wealth and secure your financial future.
However, with so many investment options available, it can be overwhelming to decide where to put your money. So, taking £100,000 as the amount available to us, let’s go through the steps to consider as you seek to make the most of it.
Strengthen your rainy-day fund
The first step might be to create or bolster an emergency fund that gives you a buffer against harder times. The rule of thumb among financial advisers tends to be enough savings to cover three to six months’ of your expenses. Some experts suggest a whole year is advisable – which is an option if you have £100,000 or more to invest. The cash would ideally be held in an easy access savings account that allows you to withdraw money at any time without penalty.
You could put the bulk of your £100,000 into cash savings, of course. However, the value of your money would be eroded over time by the effects of inflation. And keep in mind that the Financial Services Compensation Scheme only protects deposits up to £85,000 per banking brand.
Add to your pension
If you’re already paying into a workplace and/or private pension, it’s a good chance to increase your contributions and boost your retirement savings. The big advantage of putting a bit more of your money into pensions is that the government adds to your contributions in the form of tax relief. This means that for every £100 contributed, basic rate taxpayers only have to pay in £80, higher rate taxpayers £60 and additional rate payers £55 (if you’re in Scotland it’s the Scottish income tax levels that apply).
Clarify your objectives
It’s useful to be clear about why you’re investing and what your objectives are. Your objectives with £100,000 to invest might be different to those that previously shaped your portfolio. For instance, it gives you the option of breaking down your investments into short-, medium- and long-term buckets and potentially taking a bit more risk. By setting clear investment goals, you can tailor your investment strategy accordingly.
Use your ISA allowance
You can pay up to £20,000 a year into an Individual Savings Account (ISA), which shelters your interest or investment gains from income tax and capital gains tax (CGT). A stocks and shares ISA is the logical option for a large sum of money. It’s worth noting that married couples and civil partners can effectively double their ISA allowance and shelter up to £40,000 from tax each year.
Choose your funds
Investment funds broadly come in two forms: active and passive, and many portfolios include both types. With active funds fund managers select investments aiming to beat the benchmark against which the fund’s performance is measured. Passive funds such as index funds and Exchange Traded Funds (ETFs) work by tracking and thereby performing in alignment with markets. We have more on the differences between active and passive investing. Selecting funds isn’t as hard as it sounds, as investment platforms provide recommendations based on risk profiles, as well as tools such as portfolio builders, risk questionnaires and various calculators. Use our free comparison tools to compare platforms.
Don’t overlook the charges
When looking at your fund options it’s important to check costs, because higher fees and charges can eat significantly into your investment returns over time. Costs are typically lower on passive funds (such as index trackers and exchange traded funds (ETFs)), as they don’t have the same level of research or activity. When you buy funds through a platform you’ll also pay its annual fee, while some also levy charges for buying and selling investments. Check out more on why fund fees are important.
Diversify your portfolio
One of the key principles of investing is diversification. This involves spreading your money across different assets (i.e. equities, bonds and property), sectors and fund types to ensure you’re not overexposed to one company or sector. Many investment platforms offer risk assessment tools that help investors get an idea of their risk profile.
Stay patient
It can be tempting to chop and change your investments or attempt to time the market by buying and selling at apparently opportune moments. But no one can consistently predict where the financial markets are heading, so don’t waste your time trying. The most successful investors keep their nerve when markets are turbulent and learn to block out the unhelpful noise that can lead to poor emotion-driven investment choices.
Explore alternative investments
Having £100,000 to invest means that should your risk profile allow for some adventure and you can tolerate the prospect of losses, certain alternative investments can be considered. These include assets such as private equity, hedge funds, and commodities, which offer potential for high returns while providing extra diversification. But these investments also come with higher risks and may not be suitable for all investors – speak to a financial adviser before investing in alternative assets.
Seek professional advice
Investing £100,000 isn’t child’s play. Unless you are a confident investor, it makes sense to use a financial adviser to guide you through the maze of sectors, assets and products available so you can make the right choices. A professional adviser will help build and monitor your portfolio and ensure your investment decisions fit in with your wider objectives and needs. They’ll also help stop you falling foul of your investment biases. Check with the Financial Conduct Authority that your adviser is regulated.
But if you want to manage your investments independently and feel sufficiently confident to do so, it’s never been easier. Investment platforms provide a range of tools to help you make investment decisions, with some offering their own ready-made portfolios for those needing more of a helping hand. You can also easily compare different platforms and access a wide range of free guides and articles.
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