What’s the best way to invest a big sum of money is a question that gets asked a lot. It may be that £100,000 is your life savings, with you now wanting to retire. Or it may have been an inheritance payout that you’re looking to put to work.
Whatever the scenario is for yourself, take a look at the my three top tips for how to invest that amount of money.
1. Reduce liabilities
Before you can look to invest the money into assets that will generate you income, you should look to rid yourself of liabilities that are costing you money. For example, if you have outstanding credit card debt, or a loan, pay this off completely.
While this will take a chunk out of your pot before you even get round to investing it, this is one move that’s definitely worthwhile. For example, if you invested £10,000 in a stock that was giving you a dividend yield of 4% a year, but at the same time had a £10,000 loan that was costing you 5% a year in interest repayments, you’re a net 1% worse off. Thus, even though you’re investing, you’re ultimately not going to be making money as a whole.
Once you have reduced your liabilities to a manageable size, you can move on to the next point.
2. Invest over time
You may feel the urge to invest everything at the same time, but this is often not the best way. A far more prudent approach is known as ‘pound cost averaging’. This approach suggests investing a set amount over a set period, like £7,500 a month for the next 12 months. By doing this, you help to smooth out the volatility that could be in the market.
If you bought £100,000 in one stock in one go, you would have bought it at one price. Now, if you bought smaller amounts each month for a year, you would have got 12 different prices. When you add up all these prices and divide by 12, you will have a more blended and smooth average share price given the volatility over that year, rather than taking just one price for the full amount.
3. Diversify your investments
Using my above example, investing in a single stock you believe in is a valid way to invest your money. However, investing the full £100,000 in the one stock is not as valid!
That is because diversifying across assets enables you to reduce overall volatility. This final point is down to personal preference, but make sure you’re diversified in some respect. Some investors prefer to be concentrated within the stock market, but diversify themselves through different sectors like financials, healthcare, or property.
Others are happy to be concentrated on UK-based assets but diversify themselves by investing the £100,000 into a mix of tracker funds, individual stocks, bonds, commodities and alternatives. Commodities and alternatives are phrases often used to describe investing in assets like gold, cryptocurrency, physical property, wine and more.
So when investing £100,000, reducing your liabilities first is key. From there, look to invest over time and over a variety of assets to ensure you smooth out rough markets and are sustainably invested for the long term.
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Jonathan Smith and The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020