Options for Investing a Lump Sum
Savings of over €12bn were built up by Irish households in 2020 during Covid-19 lockdowns. As the impact of the pandemic wanes this should support consumption growth but for those who are looking at longer term investment, what are the options in a low interest rate environment? We have looked at some options for investing a lump sum taking three hypothetical investors at three different life stages.
Determining Your Risk Profile and Investment Objective
Firstly, it is important not to look at any investment in isolation, but rather to consider it in the context of an investor’s overall financial position. Your attitude to risk, liquidity needs, and the importance of capital security should all be explored before any investment takes place. Rather than a focus on asset classes or fund options; your investment needs and objectives should drive the final recommendation.
Your understanding of investment risk and reward is critical. While a number of factors should be taken into account in setting the appropriate level of investment risk, the overriding influence from a purely objective standpoint is your investment time horizon. For example, a 30 year old investor can often afford exposure to considerably more risk than a pensioner seeking advice for investment of their life savings.
Diversifying your investment among the major asset classes will also help to achieve an degree of balance – the allocation to each asset class within your portfolio will have a significant impact on the eventual investment return that you might hope to receive.
So lets look at three investor profiles
Singleton in their 30’s with a long term investment horizon – Equity Exposure and ESG Investments
An investor with a long term time horizon can afford to take on more investment risk and exposure within their portfolio to more volatile assets such as equities, once this is in line with their objectives. We also find that younger investors are becoming more aware of the impact of their investments on society; although this is not limited to this particular group. A focus on making your money matter is understandable when your investments (from investing in fossil fuels to tobacco companies) might sometimes contradict your own values.
ESG Investing (the ESG acronym stands for Environmental, Social and Governance) has now become mainstream – around 40% of assets managed by European investment managers involve some kind of approach to sustainable investing, and legislative developments will continue to make ESG investment prevalent.
For long term investing a multi asset investment portfolio will facilitate investment across a broad range of asset classes in line with your risk profile and for a younger client with a long term investment horizon their investment portfolio may look like an Adventurous Investment Portfolio.
Young Couple with a medium term investment horizon – Balanced Investment, Regular Payments
Couples will generally have a specific investment goal in mind, whether that is saving for future education costs or planning for their eventual retirement. A balanced portfolio with a moderate allocation to higher risk assets such as Shares and Property might be appropriate depending on the couple’s objectives. You can also spread your investment over a period of time by investing in a structure that allows you to make regular payments rather than one lump sum – this reduces the overall risk of investing, and helps stress levels when watching the market and trying to decide when to invest!
Person in their 60s, a couple of years off retirement (short time horizon) – Cautious Portfolio & Investing for Income
Older clients often have more of a focus on Income when considering their investment options. In this age bracket you may be looking to invest in a portfolio that will provide you with a source of regular income distributions to supplement any private or State pension income you’re expecting to receive once you retire. Income is a real measure of value – we find that clients close to or in retirement can take a degree of comfort from their accumulating investment income, particularly when markets are somewhat volatile.
It’s worth bearing in mind that as a 60 year old your investment time horizon might still be long-term – is possible to invest in portfolios that are designed to produce returns as a combination of income distributions and long-term capital growth, assuming you have the ability to take on the investment risk required.
Whatever stage in life you are at, it is important to determine your investment objectives, risk tolerance and capacity for loss before you make any investment decisions. Whether you’re new to the investing or a sophisticated investor our Advisors are ready to speak to you about an investment portfolio that suits your needs. Talk to us at justask@harvestfinancial.ie or call our team on 01 2375500.