What is the best way to invest 100k for income?
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Investing a large sum of money can be very rewarding, but also highly complex. Which assets do you choose and what should be the balance between them? Another key question is whether you want to invest for growth or to provide an extra income. With the cost of living rising in 2022, increasing numbers of people are interested in the latter. In this article, our Grantham financial planners explore ways that a lump sum (in this case £100,000) could be invested to generate an income. We hope you find this content helpful. If you want to discuss your financial plan, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
Establish your goal
Perhaps you recently sold a business or received a sudden windfall from an inheritance. Whilst keeping it in cash may feel safe, a £100,000 lump sum will lose value over time due to inflation. Investing it into a portfolio (e.g. income-generating assets), however, could help you retain much of the value – even increase it – whilst possibly receiving regular dividends or interest payments along the way. However, achieving maximum growth and income simultaneously is very difficult. Instead, you typically need to prioritise one over the other.
Your chosen goal will, in turn, affect your asset choices for the portfolio. For instance, a young person looking to build a retirement fund will likely benefit most from focusing on growth (e.g. company shares where profits are mainly reinvested, rather than distributed to shareholders). A person nearing/in retirement, however, may want to protect the wealth they have built up and start drawing an income from it. In which case, dividend-paying shares and bonds may be more suitable to look at for the portfolio.
Determine your risk appetite
First of all, are you comfortable with investing your money (e.g. £100,000) all at once or would you prefer to “drip feed” it into a portfolio (“pound-cost-averaging”)? With a growth-focused investment strategy, evidence suggests that investing a lump sum can outperform a “drip-fed” portfolio over the long-term. However, if the market crashes shortly after you invest the money, you may be tempted to pull it out (thus crystallising your losses). If you do not, it may be a while before your portfolio recovers and surpasses its initial value. We suggest speaking with your financial adviser to determine which approach may be best for you based on your risk tolerance and investment goals.
Secondly, investing a £100,000 lump sum means choosing assets that you are comfortable with. As a general rule, the lower the perceived risk of an investment, the lower the potential returns. Large companies with a consistent dividend-paying history, for instance, may be lower-risk than investing in buy to let (to get a regular income from tenants). Determining your risk tolerance is best done with a financial planner, who can ask you the right questions to ascertain how much risk you can tolerate in practice (e.g. “If your portfolio fell 25% tomorrow, what would you do?”). Factors such as your age, relationship status and dependents can also bear upon the level of risk you should take with your investments.
Agree upon a strategy and stick to it
With your goal(s) and risk tolerance identified, which investments should you commit £100,000 to? Here, a wide range of strategies is available to investors. Broadly speaking, however, there are three that can help narrow down suitable investments for your portfolio. Value investing finds investments (e.g. shares) that are trading below “fair value” and buying them at a “discount” in the hope that the market will eventually recognise their value (leading to a rise in price). Growth investing looks for companies which have above-average growth potential – perhaps due to a unique product or advantage they have in the market – and care less about finding a bargain. A third option is momentum investing, where investors look for investments which are gathering popularity in the market and invest in them – looking to “ride the trend” upwards.
For someone looking to generate an income from a £100,000 lump sum, options two and three may be less suitable. “Growth” stocks, for instance, typically pay little/no dividends because their priority is growing the business (and its stock price). Momentum investing tends to be short term in nature – e.g. looking for investment trends over a 3-12 month period. This requires you to be very active with your portfolio, which you may not have the time, inclination or skills for. Instead, income investors may want to consider a value investing approach and/or find holdings that produce the highest annual passive income possible (within an acceptable level of risk). There are other options, too. Speak with a financial planner to explore your full range of options.
Invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
