Investing a large lump sum, such as £50,000, can seem like a daunting prospect at first. But there’s no reason why you should approach it any differently to investing a small sum.
That being said, today there are thousands of stocks, funds and bonds on the market investors can choose to own. Deciding which ones should make it into your portfolio can be challenging.
Invest in what you know
The best way to start whittling down the selection is to eliminate any funds you don’t understand. If it is difficult to understand what the fund owns, or its investment objectives, it’s best to stay away.
The next filter is cost. There’s no need to pay more than around 1% per annum in fees every year to a fund manager in this day and age. Costs for investors have fallen substantially over the past decade or so, but that hasn’t stopped some fund managers trying to get away with charging investors exorbitant fees.
The impact high fees can have on your wealth cannot be understated.
An investor saving £100 a month into a fund that returns 5% a year and charges just 0.1% per annum for 40 years, would pay around £3,666 in fees overall.
If the same fund charged 1%, fees paid would be £32k. An annual charge of 2% would cost £56k over the lifetime of the fund. The 0.1% fee fund investor would have a pot of £145k after four decades. While the investor paying 2% per annum would be left with just £92k.
One of the best funds on the market for investors looking for income and growth at the moment is Vanguard’s UK Equity Income offering.
This fund charges just 0.14% per annum to replicate the UK Equity Income index. It owns around 125 stocks with an average dividend yield of 5.4%. Since its inception, the fund has returned approximately 10% per annum through a combination of income and capital growth.
What’s more, as this is only a tracker fund, there’s no need to worry about active fund manager risk either. In other words, there’s no risk of a Neil Woodford style stock-picking disaster.
Another possible investment for a £50k lump sum is the FTSE 250. The cheapest FTSE 250 trackers on the market charge less than 0.1% per annum in fees. Also, as this is a tracker, there’s no risk of overpaying for bad performance.
The FTSE 250 is a bit more geared to growth than the UK Equity Income index. Since inception, the index has returned around 12% per annum. It currently offers a dividend yield of under 3%.
Still, if it’s growth you’re after, this could be the index for you. As a market capitalisation weighted index, the FTSE 250s fastest-growing stocks tend to float to the top and have a more considerable impact on performance than struggling businesses. This means the index is, in some respects, a growth fund.
Buying both of the above funds could be a great way to invest a £50k lump sum. This would give you a diversified portfolio of 375 stocks across a range of sectors, industries and countries.
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Rupert Hargreaves owns no share 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.