Windfalls – an unexpected sum of cash coming your way – may not happen as frequently as an unexpected expense, and certainly never as often as we might like, but they do happen.
A bequest from an all but forgotten relative, a spot of luck selling an heirloom that you could not stand the sight of anyway, perhaps even a premium bond win. But wherever it comes from, the big question is what should you do with it?
A Savings account?
Savings accounts are safe homes for your money. Your capital is safe, and thanks to the Financial Services Compensation Scheme (FSCS) your savings are protected up to £85,000 even if the financial institution fails. However, since the economic crisis back in 2008, interest rates have been low, and the return on savings small. Since Covid struck, the Bank of England Base Rate has fallen even more, and the yields on accounts already paying historically low interest have fallen even further.
These low interest rates may be vital for post-Covid recovery. But they mean the little interest your cash on deposit earns is likely to be eaten up by inflation. Using a savings account as a home for your windfall will actually cost you money in real terms.
If you want to make the most of your windfall, you will need to consider investing it.
What investment is right for you?
The best way to invest it could depend on how long you have to grow your money, which can depend on your age.
You can see our infographic on how your priorities for investment may depend on your age here.
Obviously, if your windfall comes when you are close to retirement, or have already retired, you will probably want to secure an income from the windfall you have, rather than try to grow it any further. This can be easy to achieve with bond based investment, using a mix of different maturities and yields to balance income – or simply by selecting a suitable fund.
Investing for short term growth
Investing for under 5 years is considered “short term” in the investment world. Investments go down as well as up, and you don’t have enough time to make good any losses – so you need low risk investments where loss is less likely. Low risk investment funds exist, and you might consider short-dated bonds, which may provide positive returns.
Investing for medium term growth
Between five and 10 years may be considered medium term. The market can be volatile over short periods but over a few years, the ups and down should be ironed out. Over 10 years, the stock market may produce a positive return.
You can afford a little risk, because it will mean the potential for better returns – but one simple approach may be to consider a tracker fund, which should deliver steady growth that reflects the whole market, or market sector.
Investing for long term growth
If you have more than ten years to grow your windfall, you might want to have a spread of investments. You can have some ‘safe’ choices for part of your portfolio, but you can afford to be speculative with at least some of it.
Investing in some targeted high growth stocks might be one tactic to consider for the riskier end of your investment spread. If you would prefer a managed investment, “multi-asset” funds mix stocks with bonds, and commodities. The fund manager can balance exposure to riskier stock markets with more defensive assets to deliver stable returns.
Getting some help
If you have a windfall, or even if you don’t, it can be wise to get some expert help to find the investments you need and feel most comfortable with. At Continuum, we have the expertise you need to plan an investment strategy for you – and ample knowledge of the market and the various funds to put those plans to work.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable Protection products or investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
Equity investments do not afford the same capital security as deposit accounts.