If I had a lump sum of £100,000 to invest right now, I’d start investing with a low-cost FTSE All-Share index tracker fund. This might seem like a bit of a shortcut, and it is, to a certain extent. Owning a low-cost index tracker fund is a very straightforward way to build a well-diversified portfolio at the click of a button. But it’s not the only investment I’d buy. In fact, I’d only devote around 10% of my portfolio to this asset.
Start investing with funds
Alongside the tracker, to start investing I’d also buy a handful of investment trusts. Two of my favourites are the Law Debenture Trust and the Personal Assets Trust.
Law Debenture has a professional services business attached to the company, which provides cash flow to support the trust’s dividend. The investment side of the enterprise invests in a portfolio of blue-chip UK stocks.
Meanwhile, Personal Assets has a broader brief. Its managers can invest in any assets they believe will accomplish the goal of protecting and growing investors’ capital. To that end, it currently owns stocks, inflation-linked bonds and gold.
These two trusts provide exposure to UK equities, international stocks, bonds and precious metals. However, they’ve limited exposure to mid- and small-cap UK equities. To that end, I’d also buy the Henderson Smaller Companies Investment Trust. This trust aims to maximise shareholders’ total returns by investing in smaller companies.
I’d deploy around 60% of my capital in these trusts and the FTSE All-Share tracker to start investing. I think this would provide me with a broad spread of funds targeting different areas of the market.
The one downside of this approach is I won’t have any further insight into the funds’ investment decisions. This could become a problem if they start to drift into other assets. Returns may fall, and the trusts might lag the market. Fees could also hurt returns. These are the two risks I’ll be watching out for.
With 50% of my portfolio invested in funds, I’d invest 20% of the remainder in blue-chip stocks. Companies such as Unilever, BT and BAE Systems. I think these businesses have the potential to provide a steady income and capital growth for my portfolio.
And the final 10% I’d invest in small- and mid-cap stocks I’ve been following. I’d be happy to take more risk with these stocks and look for companies that might have huge growth potential, but a chance of loss. I’d buy growth stocks such as Team17.
This approach might not be suitable for all investors, because picking stocks can be a risky proposition. Even professionals get it wrong regularly. Therefore, some investors, when they start investing, might prefer a more significant allocation towards funds.
Nevertheless, I’m comfortable with the risks involved in picking stocks myself. That’s why I’d use the approach outlined above when investing a lump sum of £100,000.
Rupert Hargreaves owns shares of Henderson Smaller Companies Inv Trust, Law Debenture Corp., Personal Assets Trust, and Unilever. The Motley Fool UK has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.