If you’ve got a large sum to invest like £100,000, then lucky you. However, that kind of money is quite a responsibility. You have to invest it wisely, otherwise you risk frittering it away.
One option may be to simply leave it in the bank. That’s certainly likely to be your first port of call, while you work out what to do with your good fortune.
Your money is safe in cash because the government-backed Financial Services Compensation Scheme (FSCS) protects the first £85,000 of savings in your account (doubled to £170,000 for joint accounts). If it’s a windfall you may have even more protection, through something called FSCS temporary high balance protection.
This lifts FSCS protection to £1m for a six-month period, if you have more in your account due to ‘certain life events’ such as a property sale, insurance payout, personal injury compensation, divorce, redundancy, retirement, or an inheritance.
Cash will shrink your money
Cash is the obvious short-term home for your money but you don’t want to leave it sitting there for years. The best you can get on easy access right now is less than 1.5%, and then only if you shop around.
After five years at that rate, your money will have grown to £107,278. However, if inflation averages 2.7%, the value of your money in real terms will have fallen to just £94,293.
That’s why, if saving for five years or longer, you should consider putting a large chunk of your money into the stock market, using your Stocks and Shares ISA allowance to take all your returns free of tax.
Over the longer run, the average annual return of the FTSE 100 is 7%, but with hefty volatility in between, as the table below shows. In 2016 and 2017, the index grew 19.07% and 11.95%, respectively, whereas last year it fell by 8.73%. Growth in 2015 and 2014 was negligible.
|FTSE 100||Total annual return|
Don’t let that volatility put you off. The longer you are able to keep your money invested, the more stock markets makes sense. Measured over decades, short-term volatility has minimal impact, whereas the higher returns steadily roll up, especially if you reinvest your dividends for growth.
Spread your wealth around
Personally, I wouldn’t invest a large sums like £100,000 all in one go, that will backfire if share prices crash next day. Instead, I would steadily feed it in over a number of months, taking advantage of any stock market dips.
So where do you put your money? You could keep things simple and spread your risk by investing in a FTSE 100 tracker, which gives you exposure to the largest blue-chip companies in the UK.
As you become more confident, you could look to generate a higher return, by investing in individual company stocks and shares. This is riskier, but can be more rewarding. Motley Fool is crammed full of stock tips to guide your choice.
With the right approach, and a bit of patience, you could even turn your £100,000 into a £1m investment portfolio.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.