Imagine you’ve been handed a huge cheque with an eye-watering sum on it. Regardless of where it’s from (inheritance, property sale, even a lottery win…), you can do whatever you want with it. Spending it would be the easy option; however, the less glamorous but more rewarding route is to invest it. Whilst you might put some aside so you can fly along the French Riviera on a jet ski, a sensible investment plan is probably (and annoyingly) a better option for most people in the long run.
Where do you start?
With its acronyms and jargon, investing can be daunting. So, it’s important to go back to basics and first decide how much of the windfall could solve immediate financial concerns (debts, mortgages etc) and what amount could be used in a long-term investment plan. You then need to be clear about what you’re investing for. Do you want to grow your wealth for retirement? Or perhaps launch a business venture you’ve always dreamed of?
Take a long-term view
Whatever your goal, note there is no such thing as a ‘get rich quick’ investment. Investing is a game of patience and sticking with (sometimes) dull but reliable assets, as pursuing higher gains usually means a higher risk of losses. Take some time and decide how much you could afford to lose to help identify the right investment to suit you. This is where having an investment professional to talk through the correct risk threshold and investment strategy for you, is so important.
Now, if there is one piece of investment jargon you should understand, it’s ‘investment cycle’. Essentially, markets rise and fall, repeatedly and in a cyclical fashion (what goes up must come down). Many things influence the short term direction of markets but, despite events such as the COVID-19 pandemic which was completely unanticipated by markets, overall markets have been steadily trending upwards since the 2008 financial crisis.
Be prudent in your decisions
Trying to time the markets in order to invest your windfall is always going to be a risky business. In many ways, trying to invest a windfall could be like turning up to a lively party with bags of drinks unaware it might be ending within the hour. One more conservative approach is to opt for less risky assets, such as cash and government bonds, but these won’t offer the highest returns in the meantime.
Therefore, diversification and investing across a spectrum of assets classes is vital. Some are more resilient than others and may retain their value in a market fall. For instance, government bonds are likely to hold up unless the government issuing the debt goes into default (in which case, you have much bigger problems to contend with). This is one of the benefits of investing a windfall, as you have more capital to spread around. Some people may invest to gain exposure to high-quality compounding assets that will generate sustainable returns for the future. Again, for an individual to manage this process on their own is a huge ask, and where an investment professional can add value by ensuring that any investment strategy you pursue is fully diversified and protected against market risks.
Position yourself for the cycle
So, if you think the economy will enter a downturn, consider exposure to ‘defensive’ assets. Defensive assets, as opposed to cyclical assets, are less impacted by economic vulnerability. For example, investing in an energy provider is a defensive play as people will need to heat their homes whatever the economy is doing. At the same time, a retailer of jewellery could be described as a cyclical investment as people are more likely to buy such goods if the economy is doing well and they have money to spend. There are obvious upsides and downsides to each.
Nobody is psychic but using professional investor’s invaluable market experience will ensure you utilise your windfall in the most effective way to reach your financial goals.
If you’d like to know more about how London & Capital invests for its clients, get in touch with the team today.