If I had a lump sum of £100,000, I think the best way to invest this money today would be to use what I like to call a bucket approach.
The best way to invest
The idea behind this is simple. Rather than putting all of the money into a selection of stocks and shares or funds, I’d allocate a percentage of the funds to different buckets.
For example, I could invest 30% in individual stocks and shares. Another 30% in low-cost index tracker funds. 30% in actively managed funds, and the final 10% in alternative investments.
I think this approach is sensible because it combines the best of both worlds. I can buy the individual stocks and shares that I know and understand well and effectively outsource some of this management to active fund managers. This may be more suitable for small and mid-cap companies. These shares tend to be riskier than their blue-chip peers.
As such, I think it could be better to leave it to the professionals. The additional diversification provided by actively managed funds also reduces overall risk. Actively managed investment funds also offer a good route for me to own overseas investments.
Indeed, while most stockbrokers offer access to equities in other developed markets such as Europe and the United States, accessing stocks in emerging and frontier markets, such as China in Vietnam is not always possible. That’s where actively managed funds can come in handy.
However, research shows that many actively managed funds underperform the market in the long run. That’s why I think the best way to invest could be to split my money between active funds and passive funds. If active funds underperform, passive investments can pick up the slack.
Finally, with regards to the alternative investment bucket, I think this provides additional diversification. Some alternative investments include Greencoat UK Wind, which owns a portfolio of wind farms around the country and provides a steady income stream for its investors.
Another option is investment trust RIT Capital Partners. This firm owns a portfolio of hedge funds and private companies. Its goal is to protect and grow its investors’ wealth over the long term.
The best way to invest in individual stocks, in my view, is to buy a basket of high-quality blue-chips. Companies that own household names tend to have strong competitive advantages. This can help them outperform competitors in the long run. Reckitt Benkiser, the owner of the Dettol and Air Wick brands, is a perfect example. I’d buy these stocks for my £100k portfolio with the view to holding them forever.
I think the approach outlined above is the best way to invest a large lump sum. I’m already using a similar strategy to manage my existing portfolio. In my opinion, in the long run, the combination of all four buckets should lead to large total returns.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Greencoat UK Wind. 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.