Lump Sum Investment

While we all dream of suddenly having a lump sum to invest, it can be a stressful situation when a lump sum descends upon you for some reason. Lump sum investments may be the result of a redundancy, insurance payout, inheritance, or accident compensation. In most cases, the situation which cause the lump sum investment is, itself, stressful.

Lump sum investment decisions can be daunting, no matter how familiar you are with making investment decisions. It is a good idea to carefully think through your life goals and investment strategy before making your lump sum investment.

What level of returns are you expecting?

We all think we'd "have it made" if we suddenly had a lump sum investment drop from the sky. Sadly, many people who receive compensation payouts or lottery wins end up broke again within a few years. The way you handle your lump sum investment will determine the course of your life for decades to come. Make sure that you exercise caution and due diligence, and make the right choices for your lump sum investment.

Your intentions about income and/or capital gains will have a large influence on your lump sum investment strategy.

What level of risk can you tolerate?

With any investment decision it is crucial to define how much risk you are willing to take (often referred to as your risk tolerance). Returns are the reward for taking risks in the investment world. The more risk you are willing to take, then generally the more potential profits you could make. If you are planning to use the lump sum to fund your retirement in a few years time then you should take a low risk investment. If you have plenty of income from other sources and view the lump sum as a bonus then maybe you can afford to take on more risk in the hope of getting higher returns.

How active can you be in managing your lump sum investment?

Some investments are more passive than others. If you choose investments which require your active participation, you had better have the knowledge you need and the time to apply it - otherwise you are walking a dangerous path. If you have some knowledge, and some time, you may enjoy a lump sum investment in commodities or options. If, like most people, you a short on time and haven't studied up on investments, then you may get better results from a managed fund - you pay fees, but a professional find manager makes the investment decisions on your behalf.

A lump sum can be a great, life-changing event, but there are pitfalls. Many people who win large sums in the lottery or in court cases find themselves in a worse financial situation than ever, just a few years down the track. The decisions you make about your lump sum investment can either set you up for financial security, or cast you into the group who wonder where it all went. Make sure you take due care in choosing how to place your lump sum investment.

This article is an extract from Mark Bennett's comprehensive guide on lump sum investmenting, which is available from AllFinanceAdvice.com.

Mark Bennett is a staff writer for AllFinanceAdvice.com, and publishes regularly to other reputable financial websites and publications.