This Is How To Invest A Lump Sum In 2018

December 24, 2017

This Is How To Invest A Lump Sum In 2018

If you’ve been investing over the last 15 years, you’ve probably got a well-diversified portfolio, your cost base is extremely low, and your yield high. This makes you feel good and protected from whatever could happen in financial markets in 2018.

But there are a lot of people out there who don’t have that much investing experience, but now find themselves, in the late part of the economic cycle, getting a nice lump sum given that the economy is doing great and they’ve saved up something. After seeing that many investors have seen nice gains from the market or from other investments, they feel ready to invest.



I get the question a lot from 90% of the people I meet who aren’t in the financial field of how to invest a lump sum, so in today’s article I want to share my opinion on how someone should go about investing a lump sum in 2018.

I’ve divided this up in three groups: the easy option, the stupid option, and the option where you’ll have to take responsibility for your own financial life.

The Easy Option

I always think that a non-professional investor should stick to simple investments.

If the lump sum is large enough to buy a little piece of real estate that can be rented out, one should do that. Further, buying bonds that have a nice yield and no probability for default is also a good option.

The current 10-year Treasury offers a 2.4% yield. $100,000 invested in 10-year Treasuries where the yield is reinvested will amount to $126,765 in 10-years if they yield remains the same, which isn’t a bad return.

A piece of real estate will require a bit more effort, but will likely give a 4% rent yield after costs and will offer the potential for capital appreciation.

Such safe options are usually boring to many and usually lead them toward the stupid option.



The Stupid Option

The stupid option is usually very well sold by your local banker. He flashes 5-year charts of a few funds that the bank offers and says how they are well-diversified and have done extremely well in the last 5-years.

The package usually includes index funds, bonds funds, and some exotic products like emerging market funds or high yield funds just to spice up the story and help the banker get a higher commission.

Figure 1: The iShares iBoxx $ High Yield Corporate Bond ETF lost 30% in 2009. Source: iShares.

The problem with this option is that while it has worked very well in the past few years, but it will perform extremely poorly in the case of a bear market even if it’s well-diversified. The inexperienced investor usually rushes to sell to protect whatever he or she had, suffers a loss and swears to stay away from financial markets forever, which is usually until the next late part of the economic cycle when the same fear of missing out again roles in and the pattern repeats itself.

The Taking Responsibility Option

The third option is usually one that I recommend to all my dear friends, but it’s also the option that makes me lose their attention very quickly. I’ve thus come to the conclusion that non-professional investors prefer a coffee with their local banker, a few nice charts that go up, and that’s it. Nevertheless, if you are part of the 5% that are really willing to take responsibility for your financial life, keep reading.

Taking responsibility for your financial life means writing down your goals and doing whatever is necessary to reach them with certainty. If you want to retire at 50 with $2 million, retiring at 60 with $1 million shouldn’t be on option on the table for you because you’ll lose 10 years of your life and will have a million less to live on in retirement.

What will get you to your financial goals is the cash yield and an eventual tailwind from capital appreciation where you will rebalance for less risk. Investing properly is all about risk reward.

So what is the strategy that will lead you to certainly reach your investment goals? Well, that would be an all-weather portfolio with a margin of safety. This strategy will do well no matter what happens in the economy or with inflation, and will give you a yield that is satisfying in the long term in addition to taking advantage of short term volatility by rebalancing around the portfolio.



An example of what it means to have an all-weather portfolio is the comparison between owning gold and stocks. If we see a recession soon where central banks increase their balance sheets, the dollar will depreciate in relation to gold and therefore gold offers a hedge. When that happens, the all-weather investor would sell a part of their gold portfolio to buy more stocks which creates additional returns that take advantage of volatility. In addition, by owning gold mining stocks, one can enjoy a small yield right now that will add to long term returns.

I’ve written on how to structure an all-weather portfolio here.

I hope I’ve gotten your attention with this article. Keep reading Investiv Daily as I’ll be digging deeper into how to properly structure a portfolio for the future. But as awlays, only if you are ready to take responsibility for your financial life.

© 2017 Investiv

By Kristina Keene Investing Strategy Investiv Daily Share:
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