Investment 101 – How should I invest my lump sum?

7 principles that will keep you on the straight and narrow

How should I invest my lump sum? Stick it on deposit in the bank? Invest it with the post office? Open an account with a stock broker and buy some shares? Find some interesting start ups to invest in? Perhaps you should try and identify the latest thing, maybe wind energy or solar farms on the continent? Buy gold? Buy an investment property? Or perhaps stick it all on number 7 at the 1.30 in Leopardstown? Whether you saved the money, inherited it, s

old a property is of less relevance now then how you proceed.

So what should you do? We think you should start with a few basic principles:

Diversify – Don’t put all your eggs in one basket! Diversification simply means spreading your risk across many different investment assets. That way if one individual asset fails it will have a limited impact.

Employ a professional manager(s) – Contrary to much lauded street lore there is a reason why people who manage money professionally have a job. Maybe think about it like this, a piece of string, a bottle of whiskey and a heavy door will probably do an adequate job of pulling a tooth for you, but would you not be better off using a dentist?

Keep it simple – Avoid unnecessary complication. Why chose an investment with excessive structuring or complication if you have an alternative of using one without. By avoiding complication you will limit possible unwanted outcomes and perhaps avoid the obtuse where you may find you are the one providing the funding but not participating appropriately in the return.

Stay away from the exotic – If you don’t understand an investment, you should not be involved in it. There are many exotic and convoluted investments available in this world, some good, some bad and some ugly. If you are determined to have an exposure to something complicated or exotic, do it through someone who truly understands it.

Invest in scale – If you have a proven record of spotting the next Facebook when it’s two men and a lap top in a college dorm, stop reading now and go enjoy the fruits of your wisdom. If not, stick with mainstream investments.

Don’t punt, invest – Investment is a long term discipline. Make a plan and stick the course. American research shows that investors typically cost themselves between 1/3 and 2/3 of the return they might have enjoyed simply through their own behaviour. This generally comes from buying high and selling low.

Take advice – There is a considerable body of research that shows that those who take advice outperform those who do not. A recent Canadian study showed advised consumers ending up with 173% of the eventual wealth of the unadvised. {Link to blog post on advice}

So back to the question, what should I do with my lump sum? The first part of the answer is simple; you should invest in a broadly diversified portfolio of professionally managed assets. What is in the portfolio should be based on your own circumstances and a good dollop of investment expertise. For example do you need your investment to produce an income? What is your tolerance for investment risk? Have you a particular ethical or political beliefs which will influence your investment choices. How is your health? Can you foresee a life event that is going to mean you will need to access your money or are you looking a long way into the future? The best place to start is by talking things through with a competent advisor and developing a plan then sticking to it.

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