Investing a large lump sum can seem like a daunting prospect at first. But it doesn’t have to be. Today there are plenty of tools and funds investors can use to get the most out of the market and make the investing process as simple as possible.
For most of us, the best way to invest a large lump sum would be to choose a selection of low-cost passive tracker funds, with the goal of branching out over time.
Tracker funds
The great thing about tracker funds is that they give you instant exposure to hundreds, or possibly even thousands, of companies at the click of a button.
What’s more, you don’t have to worry about managing them or about what the managers own in these funds. Because tracker funds are only designed to replicate an underlying index, there’s no chance you will get a rogue manager who goes off and invests in a lot of illiquid start-up companies, like Neil Woodford.
Diversification is also easy to achieve using tracker funds. Investment professionals usually recommend including at least 30 stocks in any portfolio to be well-diversified. However, buying just one passive tracker fund could achieve this aim instantly.
A FTSE 250 tracker fund, for example, would give you a portfolio of 250 different companies across a range of different sectors, industries and countries.
Risk-tolerance
Choosing investment funds for your portfolio will depend on your own personal risk-tolerance. The FTSE 250 is a mid-cap fund and has produced a much better performance than its larger peer, the FTSE 100, over the past few decades.
That being said, the FTSE 100’s average dividend yield is around 50% higher, and the index is much less volatile. So, if you are looking for a steady income stream, the FTSE 100 might be a better addition to your portfolio than the FTSE 250.
It is also relatively straightforward to build an international portfolio using tracker funds. For instance, you can find a range of low-cost funds on the market that offer exposure to, say, US stocks or European companies, as well as other developing stock markets.
If you are really adventurous, you could venture into the emerging market segment. However, emerging markets can be very risky and volatile, and the additional returns available don’t necessarily make up for the increased risk.
There are also low-cost passive tracker funds available for investors who want to own fixed income products such as bonds. Some of these funds offer a prospective income yield of around 3% from a relatively safe portfolio of global bonds, which is more than you would be able to get from any high street bank.
There are also passive tracker funds that are devoted to owning property stocks, which gives investors an easy way to invest in the property sector with minimal investment.
A combination of all of the above would make an excellent starter portfolio for an investor looking to invest £100,000. Using a Stocks and Shares ISA would also significantly reduce your tax bill and enhance returns over the long term.