Don’t be shy, ask ii…should I invest a large lump sum in the stock market?

No question is a stupid one, so whether you want to find out what you need to do to start investing or how the stock market works, don’t be shy, ask ii. Email yours to: ask@ii.co.uk

Fiona asks: having sold my small business in January 2021, I proceeded to invest in the Vanguard 100% Equity Acc fund. I am very nervous about the current global economic situation in light of the distribution of these funds and believe I should re-evaluate. I’m 62 in July and what seemed a very good longer-term investment last year now seems more risky.

Alice Guy (pictured above), personal finance editor, interactive investor, says: For investors, 2022 has been a punishing year. Stock market volatility is still big news and looks set to continue for the foreseeable future. Like many similar equity funds, the Vanguard LifeStrategy 100% Equity fund has suffered and as of 20 May 2002 it’s down about 8% since the beginning of the year. It’s a painful reminder that it’s possible to lose money with equity investing, especially in the short term.

The Vanguard 100% Equity Fund invests everything in shares, mostly index tracker funds giving exposure to the FTSE UK All-Share index and US equities, with smaller allocations to emerging markets, Europe, Japan and elsewhere. That makes it relatively high risk. Typically, if stock markets are in a positive trend, having all your eggs in that basket can be very profitable, but it can work against you if markets are falling, like they are now. You can ride out the bumps if you’re invested for the long term, but losses can take time to recoup.

But what about the future? With a large sum to invest, it’s often worth getting some tailored financial advice. An independent financial adviser will be able to gather all the facts and advise on how to invest. An investor’s individual circumstances will have a big impact on their investing decisions. For example, if they intend to carry on working this will affect when they need to access their investments.

In the meantime, here are some more general things to consider.

Think about investing goals

If investors have a large amount to invest, it’s tempting to dive in and start picking funds or stocks. But first, it’s a good idea to step back, look at the big picture and think about your investing goals. This will help you decide where and how to invest.

Here are some things investors should think about when setting their goals:

• When do they need to access their investments? If investors are planning to draw an income soon then they might decide to go for a more cautious investing approach and reduce their exposure to equity.
• Are they planning to buy an annuity or access their pension through income drawdown? If they want to buy an annuity soon then they may decide to reduce their investment risk.
• Do they have any other income? This might mean they don’t need to use their investments immediately and can afford to take a more relaxed approach to investing risk.

Some assets are more risky than others

Investment goals decided? Investors can now move on to planning the best asset allocation for their needs.

Asset allocation can make a big difference to investment risk. Owning different types of assets (a mixture of equities, commodities, bonds, gilts and cash) means a portfolio should fluctuate less over time and suffer less if there’s a stock market crash.

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The best asset allocation will be different for each investor and depends on many factors including their attitude to risk and how long they plan to hold their investments.

Investors who are approaching retirement often decide to reduce their exposure to equities and invest in a higher proportion of other assets. If investors aren’t keen on picking their own stocks, then they could opt for a ready-made multi asset fund that invests 20%, 40% or 60% in equities.

Pensions and ISAs can help save tax

Investors who own funds or stocks through a pension or stocks and shares ISA can save a huge amount on their tax bill. And pension investors also benefit from generous tax relief to boost their investment wealth. Here are the details:

• Pension investors get 20% or 40% tax relief on their contributions, immediately boosting a £100 contribution to £125 or £167.
• Pension and stocks and shares ISA investors don’t pay National Insurance on dividend income, and they won’t owe Capital Gains Tax on stocks or funds they sell.
• Wealth held in a pension pot won’t be charged inheritance tax when it’s passed on to the next generation.

Other fiddly rules

There are also a few other fiddly tax and pension rules to watch out for that may affect peoples’ decisions on how to invest.

Wealthy investors need be careful if they have a big pension pot as pensions over the current lifetime annual allowance of £1,073,100 are taxed at a whopping 55%.

Investors should also be aware that withdrawing a pension tax-free lump sum may trigger different rules for their pension. If their pension has entered the drawdown phase, they can only contribute £4,000 per tax year, rather than the normal £40,000, reducing the amount of available tax relief.