Money matters: how would you invest a cash lump sum?

by , Money Editor Money 13 May 2013
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We’re asking you, the Which? Conversation community, to help answer people’s financial queries. This month, we’re asking what you’d to with a lump of cash if you were lucky enough to have one.

Hands holding small plant

It’s been a sorry few years for savers. The Bank of England base rate has been frozen at a record low of 0.5% for more than four years, and the best savings rates continue to creep down all the time.

Let’s put things in context. Five years ago, the best instant access savings account paid 6.5% in interest.

Now, savers are lucky to find the same accounts paying just 1.7% – a 73% fall drop in interest. So what do you do if you want to get an inflation-beating return on your savings? Well, you could start investing on the stock market.

Share markets have been enjoying phenomenal growth since the beginning of this year, despite the bad news coming out of the UK and Europe. The FTSE 100, for example, has just broken the 6,600 barrier for the first time since 2007.

And there are plenty of ways to tap into growth, from buying individual shares to investing in mutual funds. Whatever option you take, you’ll be taking some form of risk. But perhaps those are the lengths you need to go to to get near the returns you enjoyed just five years back?

What advice would you give?

A Which? member wrote to us recently asking for investment advice:

‘My wife and I have just sold a buy-to-let property and are sitting on £150,000. We have decided to invest £75,000 in another buy-to-let property but in a cheaper area. I’m thinking of investing the rest in Sainsbury’s, Tesco or Marks & Spencer shares. Would they be a risk? If we don’t do that, how else should we best invest the remaining amount?’

So, how would you advise our reader? Should he invest shares in well-known companies, or is it too risky to rely on them continuing to grow? How have you invested your money in the past?

We’ll be posting our own view on this investment quandary soon, but in the meantime, we’d love to hear your views and experiences.

14 comments

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Figgerty

I would buy a classic car, wrap it in cotton wool, put it in the garage and wait for the price to increase. In the meantime, I would join the relevant classic car club, find out all about preserving the car for the future (I may have to remove the cotton wool) and just have a good time.

Investing in stocks and shares is just a form of gambling without the enjoyment of real gambling.

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Malcolm R

If you can do without the cash for a few years, a spread of stocks and shares is sensible, and reinvest the dividends. Put them in an ISA up to your annual limit if you can. If you don’t have enough capital to get a reasonable spread, then go for unit trusts.
I’d put some in Premium bonds as well – with interest rates low, nothing to lose. Gamble a small amount each week on the National Lottery – it could be you.
This is just passive investment – not likely to make a decent return without putting effort in. So why not try trading on ebay – pick a type of product and buy and resell. Furniture seems to offer good possibilities particularly if you can refurbish or paint. Best if buyer collects.

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claire anderson

i had redunancy money off last job leeds building society had a great deal had to put 10k a bond down for 6yrs but guaranteed at least 1375 back in return its a risk leaving your money for long period but worth while if you can afford it

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Malcolm R

Claire, according to my calculation this is an interest rate of about 2.2%. 1.8% if taxed. Less than inflation, and we’d hope interest rates would rise a bit in the next 6 years.A stocks & shares ISA would have been an alternative.

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mark

If you have a mortgage it often makes sense to pay that off (or a proportion of it) instead of investing the money.

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Malcolm R

and, if you want to have possible future access to your money, arrange an offset mortgage where mortgage interest is not payable on the amount you have as savings (no interest on your savings of course).

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Geoff Gill

I received a lump sum when my company pension matured on retirement. I went to my Bank HSBC and said I wanted an investment that would guarantee that in three years time I would get back at least the total amount I was paying in plus a bit more.I’m in I think a stocks and shares ISA which in the space of a year has earned around £1,800.

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lucy

I think you have to split it more…
I have shares, property and cash…if anyone of these failed I would be ok (not happy but still ok).
I about to invest in solar panels and having a woodburner installed in house I am going to live in (have access to lots of free wood) – also have got maximum level of insulation (including stuff you can’t get grants for) and the most efficient boiler – should save on energy bills at least ! (planning on paying any FIT etc into an ISA -or even into savings for my children) and reduce my living costs as I get to retirement age…
You also need to think about inheritance tax …make sure you aren’t above the levels and if you are think about moving money/assets (protected if you can from future divorces/remarriages etc by making sure they have a will) to who you plan to inherit asap ( as long as it is 7 years before you die this is fine) …better to make sure you never get into that bracket – as executor I have just written the cheque to HMRC for unmarried uncle – one of the most soul destroying things I have ever had to do – money he had worked hard for, paid tax on, lived frugally – only for it to be taxed again at 40%…made me feel like I’d failed him…he obviously wasn’t expecting to die just now and the same thing had happened to him and my father when my grandmother died.
I also think gold/silver – won’t necessarily raise income but relatively safe (think about what happened in Cyprus a month or so back ) tempted to keep that under the floor boards as my insurance policy!

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Lynne A

I’d recommend peer-to-peer lending. I use Ratesetter and I’m currently getting about 6% after fees etc. Also premium bonds are still worth a punt – calculated as an interest rate the return is meagre, but there’s always the chance of the big win!

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Malcolm R

That’s a good return by today’s standards (but was the norm not many years ago) – still only 6 pence in the pound though. It’s all about the risk you are prepared to take – peer to peer has a default risk attached to it through unprotected organisations.
Perhaps you should buy shares in Wonga.
It’s a pity the limit isn’t raised on Premium Bonds – you’d think the government would want the money. No one else seems to which is why interest rates are so abysmal.

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2jatha

It’s interesting to see peers giving financial advice, so I guess that’s one consequence of the RDR regulation (where we now have to pay upfront for financial advice from IFA’s).
If you want to have fun in investing go for alternative investments like wine and art, and as someone already mentioned classic cars or boats. Another thought is in start up companies – higher risk but you could be helping the next google….

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PeterD

Judging by the quality of some of the suggestions so far, my advise would be never to pay too much attention to strangers on the internet (or to journos). And no, putting half of your assets in a single equity is not a good idea even if you like their cream buns.

Reading a few books such as the ‘FT Guide to Investing’ by Prof Glen Arnold might be a better place to start.

Thanks to you all for the comments.

The companies the member suggested may seem reliable, and have a history of paying good
dividends (a distribution of the profits a company makes), but investing all your money in just three supermarkets exposes you to an awful lot of sector risk. If the supermarket sector fell in value, you could lose a significant amount.

In Which?’s view, the key to successful investment is to diversify. You should have a mix of assets (such as shares, bonds and property), and within this, in a mix of companies, sectors
and regions. That way when one area falls in value, the others prop up your losses, as they’re unlikely to all fall at the same time. How much you have in each asset will depend on how much risk you’re willing to take and how much you’re comfortable potentially losing in the search for a higher return.

We’ve build a set of diversified investment portfolio, which can help you see what a portfolio of mixed assets looks like. Visit http://www.which.co.uk/portfolios.

Investing in mutual funds is a good way to diversify, as they invest in a range of companies and sectors. Before going ahead, seek independent financial advice – an adviser can help you assess your attitude to risk and recommend funds. Going down this route also gives you the power to complain if things go wrong.

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Harry Evans

You took the woprds out of my mouth. Definitely spread your cash about – I put a load into the technology boom in the early 2000s and lost a fortuner of the back of it.

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