How to invest a 50,000 euro lump sum
Receiving a substantial lump sum, whether it’s 10 thousand, 50 thousand, or even 100 thousand euros, can evoke a mix of excitement and trepidation, particularly if you’re unaccustomed to handling such a sizable amount of cash.
In this article, I’ll delve into the critical considerations when managing a significant lump sum for investment. We’ll cover essential steps prior to making any financial commitments, explore diversification and risk management, and address the significance of considering your investment timeline.
Prioritise Financial Housekeeping
Before you make any decisions on investments or purchases, one must do a full self-assessment on their financial situation. Now please, don’t make the mistake 90% of people make which is waiting for a significant event to occur in their life before conducting a thorough review of their finances.
Organise and prioritise your debt. This includes credit cards, student loans, mortgage payments and any other liabilities. Once this has been considered also look at your emergency fund (if you have one), It’s advised that individuals have at least 6 months of earnings put away in an easy access account.
Other uses might involve contributing to your pension, certainly if your employer will match your contribution.
Assess your financial time horizon
Now you’ve been able to clear some debt, and contributed to both your emergency fund and your pension, you can begin to consider investing the remaining amount. Assessing your current finances is essential, but when investing we are required to look into the future and plan accordingly.
When first deciding on your strategy, consider future significant expenses, for example weddings, school fees, home purchase, and renovations, these will factor into your investment decisions as you may expect your investments to meet certain future liabilities. This planning factor can be essential.
Also consider your time frame, usually you can separate the time periods you might be looking to invest for, for example short term is generally under 5 years, medium terms is 6-10 and anything over 10 years could be considered long term. If you are investing for under 5 years, then you’d want to avoid historically volatile asset classes such as stocks.
If you’re investing for retirement, and likely wont be withdrawing until you’re retired then the timeframe could be much longer, and there for you could allow yourself further exposure to riskier assets.
If, as mentioned above, you have certain payments to meet in the future, then it’s worth sitting down with a professional and understanding how these expenses can be met.
For example, if you need 15,000 euros for your children’s school fees in 10 years’ time, and know you can get a term account paying 5% interest on an annual basis, then you may invest 9,208.70 of the 50,000 into that term account, with the full knowledge that in 5 years’ time you’ll have earned the required interest for the school fees (gross of tax and other expenses). If we wanted to consider inflation assumed at 3% per year we would invest 12,339.65 euros to insure the level of purchasing power was the same.
This is one example of effectively planning your investments to meet future liabilities, it allows the individual to budget more effectively and ensure other factors such as inflation can be taken into consideration.
Evaluate your risk appetite in investing
You don’t have to be an investment professional to understand the importance of a risk assessment. There are two simple concepts for conducting a risk assessment:
- Risk Appetite – How do you feel about losing money?
- Capacity for Loss – How much can you afford to lose?
Addressing your risk appetite is important, how would you feel if your investment were to fall in the short term, would you sell your investment if it dropped over 5%? These are important things to address, if you had invested in the S&P 500 in January 2022, by the end of December your investment would be down over 20%, requiring a 25% increase just to get you back to where you started. Would you have sold your investment, or would you have left it alone?
Capacity for loss addresses what you can afford to lose, for someone who holds 50% of their entire net worth in investments, it wouldn’t be wise for that individual to be in historically higher risk assets, as a significant chunk of his wealth could be eroded in a short amount of time. On the contrary, if someone is investing a small portion of their wealth and the effect of losing this money would not be significant, then that individual may opt for a more aggressive strategy.
Diversify your investment and access professional management
We have touched upon briefly how an investor may keep part of their 50,000 in cash or highly liquid investment products, however this might only use up 5-10% of the total lump sum. Within the realm of investing, 50,000 is not considered a large amount, by the time you’ve broken this down in different companies, asset classes and so on, the trading costs imposed on each individual trade may have a larger than intended effect on the overall portfolio, particularly if rebalancing is required.
An investor may opt to build their portfolio from scratch, selecting the bonds and each individual stocks etc, but this DIY approach is only really suitable for confident and experienced investors who have the time to research the companies they are investing in.
An alternative route is to buy funds, this way you’ll likely pay a management fee and depending on the fund a performance fee, but you’ll be a part of a much larger portfolio, and therefor investment costs should be lower. You’ll also have a professional making the decisions on your behalf. These collective investment schemes are considered more suitable for the inexperienced investor looking for a cheaper way to diversify their investment and access professional management.
Be careful when considering funds to invest in, fund documents will usually be on the website, and offer key information such as fees, past performance and underlying investments. Also consider whether that fund suits your risk profile and objectives.
Rely on discretionary management
You may choose to have a professional look after your investment on a discretionary basis. Investment management companies will usually have a number of ready made portfolios designed to meet the risk, liquidity, and financial needs of the client. These will usually come with names such as cautious, balanced, and aggressive depending on the strategy that fits your risk profile.
As with any other investment, its important to research the company you’re investing with, their strategies, past performance, customer service and so on. Some companies will have a minimum investment requirement, so keep this in mind.
Does anything change if my lump sum is 100,000 thousand?
Yes and no, the truth is it would be more appropriate to write a completely separate article but considering 100,000 euros plus. The reason for the ‘yes’ is that the same method of responsible thinking should be applied as spoken earlier in the article, however, as the lump sum increases more investment strategies, products, and asset classes might be available, and therefor the strategy would be adapted.
Embracing the Long-Term Vision for Successful Investment
Investing is a personal process, and no matter the size the same principles need to be applied. Consider the factors I have mentioned above as a guideline to help you simplify the decision making process when investing your cash. In most cases for the average investor it’s best to take a long term view on your investments, that way you can benefit from the power of compounding, and also decrease your exposure to volatility over the long term.
If you have a lump sum and would like to learn more about the wider options available to you, you can contact Framont & Partners to discuss with a professional.
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