US Edition
Emma Wall is head of investment analysis & research at Hargreaves Lansdown
Got a lump sum? Lucky you. First thing to ask yourself is: what is it for?
If you’re looking to fund a holiday, an engagement ring, any kind of bill – take a step back from the stock market.
Any fixed price or high stakes purchase needs to be in the lowest possible risk asset, ie cash. Though rates have come down over the past six months, you can still get a decent yield on a cash savings product – extra bonus if you pop it in an Isa so you don’t have to pay any tax on those gains.
However, if you want to use it for the long term – buying a house in a few years, funding your retirement, or just to start off an investment fund, then the stock market could be for you. Regardless of whether you’ve got £1,000 or £100,000 to invest, you’ll want to consider your options carefully.
How to match your investment to your risk appetite
Next thing to consider is how much risk you want to take. Most of us like to think of ourselves as risk takers – but when it comes to investing, safety is cool (a mantra I repeat to my toddler as we pop our cycle helmets on in the morning).
You really don’t want to be in a position where your risk appetite and your investment volatility are mis-matched. In cases where investments drop, it can lead to panic selling – crystallising losses you didn’t have to bank.
It could be that this £1,000 is just play money, or this could be the first lump sum deposit of your long and illustrious investment journey. Its significance might well affect your risk appetite.
You can gauge it by asking yourself: what is your capacity for loss? How would you feel if your investments dropped significantly in value? Devastated or apathetic?
Of course, all investments have the potential to lose money, and in a crash even “good” (ie. less risky) investments take a hit. But you should consider the averages – for example, the major US stock market, the S&P 500, lost more than 20pc in one day in the 1987 crash, but the average daily move of the S&P 500 is between -1pc and 1pc.
You should expect a few daily moves of between 5-10pc a year, but on the whole an index should offer a smoother ride than single equities.
This is because – as the name suggests – there are 500 companies in the index, offering diversification across different sectors and therefore market forces.
Individual stocks, on the other hand, can move about far more. Meta, Facebook’s parent company, may be riding high at the moment, but the company holds the undesirable crown of the biggest single day losses of all time for the S&P 500.
After a bad earnings report in February 2022, Meta dropped 26pc in just one day – wiping $232bn off the value of the company. While that is the most acute drop, it was nearly matched by another plunge just eight months later when it fell 24pc in a day after another missed earnings target.
I don’t mean to pick on Mark Zuckerberg, but this illustrates how even the largest, most established and successful companies carry more risk than investing in than a large index. Hence my preferences for collectives for most retail investors – exchange-traded funds, investment trusts and funds. And cycle helmets.
Of course, daily moves are manageable if it’s a case of a single trough being followed by a single peak – but what about longer time frames?
Our house view suggests that a global equity portfolio – one invested in companies listed around the world – would have a typical investment return to turn £1,000 into £2,036.40 over five years. But this portfolio can also typically fall as much as 24pc before recovering over time. Do you have the risk appetite to stay the course when you’ve lost a quarter of your money?
Adding some fixed income exposure to those equities – a 20pc bonds, 80pc stocks mix – reduces the volatility.
A portfolio with this mix typically falls less, reduced to 19pc before recovering over time. Return expectations are also dampened with volatility however, and an average return on £1,000 over five years is £1,892.
Still too much of a drop? A portfolio with a mix of 40pc equities and 60pc bonds only falls 8pc on average before recovering and a typical five-year return turns £1,000 into £1,605.20.
Fit your investments to your goals
Your risk appetite is informed not just by your personality type (I’m a “Commander”, according to Myers Briggs – make of that what you will), but what are you trying to achieve with your £1,000.
Is it the first investment – a core to what will become a larger portfolio with several different investments? Or is this an addition to an already well-diversified portfolio?
Scenario one: this is your first investment
In this case, you’ll want to achieve maximum diversification with this first hit to provide a good basis for any other cash you’re able to invest in future.
For those who have the stomach for maximum risk-to-return, it’s a 100pc global equities fund all the way. You could opt for a cheap passive index tracker, or look to one of the few fund managers who have generated positive performance over a global benchmark through the market cycle.
Past performance is no guarantee of future returns, but if they’ve managed to weather the global financial crisis, the pandemic, an interest rate cycle and Trump’s tweets they’ll likely have some stock-picking skill.
For a global tracker, we like Fidelity Index World, a tracker fund that offers exposure to the whole of the developed world – a simple way to form the equity foundation of a portfolio.
Alternatively, the Vanguard FTSE All-World ETF tracks an index of large and mid-sized companies from developed and emerging markets, covering around 90pc of the global investable universe.
If you want to go active, you’ll invariably introduce some style bias, meaning potentially more periods of underperformance and volatility than a passive option but, with a good fund manager, better returns too.
We like Rathbone Global Opportunities, run by James Thomson who, our analysis shows, has outperformed the global stock market since he took over the fund in November 2003.
His growth style can be out of favour for prolonged periods, however, so you may wish to blend – £500 a piece – with a value-tilted fund such as Fidelity Global Dividend. Manager Dan Roberts has one of the strongest stock-picking records in the global equity income sector.
If you want some downside protection – jargon for fewer bumps in the road – opt for a multi-asset fund, a one-stop-shop that gives you exposure to stocks, bonds, alternatives and cash in just a single investment. We like Schroder Managed Balanced and BNY Mellon Multi-Asset Balanced.
Scenario two: you’re adding to an existing portfolio
If you already have a well-diversified portfolio with a good mix of geographies and sectors, blended to achieve your goals in line with your risk appetite (top marks!), this £1,000 is all about expressing your values in your portfolio, or taking a punt on a more esoteric theme.
Impact funds invest in companies that have a clear positive impact on the environment and society. Fund managers using this approach will measure and report on the positive impact that their funds achieve.
We like WHEB Sustainability, which invests based on nine sustainable investment themes. These range from resource efficiency and sustainable transport to education and wellbeing.
Or, for an established way to tap into the technology sector, Polar Capital Technology Trust invests in technology companies around the world, including in both developed and emerging markets. The trust is backed by a well-resourced team with plenty of experience in the technology sector, including lead manager Ben Rogoff.
These so-called satellite holdings should only make up a small part of your total investments. The tilts add not only interest but diversification and the potential for uplift with the right tailwind – think of them as added spice on your balanced meal. Hot sauce in your bag.