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Lump Sum Investment

While we all dream of suddenly having a lump sum to invest, it can be a stressful situation whena lump sum descends upon you for some reason. Lump sum investments may be the result of a redundancy, insurance payout, inheritance, or accident compensation.

In most cases, the situation which cause the lump sum investment is, itself, stressful.

Lump sum investment decisions can be daunting, no matter how familiar you are with making investment decisions. It is a good idea to carefully think through your life goals and investment strategy before making your lump sum investment.

What kind of returns are you looking for?

Is this lump sum going to provide your day-to-day income, or are you trying to grow it over time to spend later? Are you just looking for a regular steady income to be generated from your investment or will you be investing with a view to taking no regular income and instead retire off the invested lump sum at some point in the future or perhaps use it to pay off your mortgage at retirement?

The priority of investment income vs capital gains will make a big difference to how you invest your lump sum.

How much risk are you willing to take?

With any investment decision it is crucial to define how much risk you are willing to take (often referred to as your risk tolerance). Returns are the reward for taking risks in the investment world. The more risk you are willing to take, then generally the more potential profits you could make. If you are planning to use the lump sum to fund your retirement in a few years time then you should take a low risk investment. If you have plenty of income from other sources and view the lump sum as a bonus then maybe you can afford to take on more risk in the hope of getting higher returns.

How much time or expertise do you have to put in?

Some investments require your time and attention. Choosing these investments without having the proper knowledge and the time to apply it is a dangerous strategy. If you have the time and interest to invest then maybe you can learn to invest in a rising sector such as commodities. Alternatively, if you are short of time or knowledge then perhaps you should opt instead for a managed fund. In that case, you will pay to have a professional fund manager who does have the time and knowledge look after your money, and make investment decisions on your behalf.

A lump sum investment can change your life, but not always for the better. We have all heard the stories of lottery winners who ended up broke just a few years down the track. A lump sum investment can give you great security if you make the right investment decisions, so it is very important that you excercise proper diligence in making your lump sum investment.

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