If you’ve a lump sum to invest, either because you’ve recently sold an asset, received an inheritance, or you’ve been holding cash to avoid the recent volatility in the stock markets, then you’ll be keen to get your money working harder for you.
With current interest rates in the UK at an historic low, returns on cash are not even keeping pace with inflation, meaning your money is losing value in real terms. So it is time to look at alternatives. When you are making a one-off investment it is particularly important to think clearly about your options. So what are the common mistakes that investors make? How can you avoid them?
Not having a clear goal in mind
When you are looking to maximise returns on your money, it is essential to define your strategy. Are you looking for capital growth, income payments, or a mixture of both? What is your time frame – are you planning to hold for three to five years, or are you in for the long-term, maybe ten years? Will you need your money in a hurry?
Exposing your lump sum to potential capital loss
No investment comes without risk, but you can take steps to ensure that your investment is not going to crash and burn because you have taken excessive risk in the hope of chasing an unrealistic return. What is the potential downside of the investment? How and when will you be able to sell?
How much protection is built into the design of the investment product? Is the return achievable and can you understand where growth or income is likely to come from? If the product or investment is complicated or you don’t understand how the business works, then you should avoid it.
Many private investors are uncomfortable with the ups and downs of stock markets, and dislike seeing their money disappear if a share or company suddenly issues a profit warning. Volatility is often the reason people sell at the bottom of stock market cycles. Volatility can also mean that you become disillusioned with your investment. For this reason, it is best to choose a home for your money which provides steady growth or income rather than large up and down swings in value.
Putting your money into untested markets
It’s easy to fall for the lure of new fads or fashions in investment, or to be tempted by the promise of a brand new product. But often the real strength of an investment is that it has a proven track record and a management team that has experience and expertise in the markets they are dealing in.
Failing to choose an investment that is diversified
The advantage of diversification is that it spreads risk so that the investor is not exposed to shocks or falls in a single market or product. Opting for a pooled investment relieves you of much of the administrative headache and risk of monitoring individual holdings.
Options for lump sum investors
An option for investors who are looking for an income-producing investment with limited risk and the opportunity for capital growth over a three to
five year period could be US property. One company which is making US property investment accessible to UK investors is CityR, whose management team has a proven track record and 15 years’ experience of investing in the USA. CityR specialises in researching and purchasing multi- family residential American properties on behalf of investors from around the world. The team has strict criteria in order to spread risk, reduce volatility and protect capital:
- The properties selected must offer opportunities for improved rental income – providing an immediate income uplift
- There should be potential for capital gain when the property is sold
- The location chosen should offer a range of employment opportunities for tenants thus reducing the risk of tenancies being affected by a single employer
- The investment should have the potential to generate an income stream of 10% plus per annum
- It should meet the needs of investors who can commit to a three to five year investment time frame
CityR offers the opportunity for those with a lump sum of £26,000 or more to invest in an asset which will provide both income and capital growth.
“Investment in commercial and residential property is in many cases an asset class which can produce high yield with relatively low risk,” says Ron Szekely, partner at CityR.