Making most of lump sum in low-interest climate

So you have a lump sum sitting on deposit, earning a risible rate of return, and all you read about are the remarkable sums made by those investors who have been in the stock market for years. But how do you go about making the move from depositor to investor?

Before building an investment portfolio there are a number of things for would-be investors to consider such as how long they want to invest for and what level of risk they are prepared to assume. The general rule of thumb in the investment community is the higher the risk, the greater the potential reward. To determine your attitude to risk, many investment advisers suggest the unscientific but very simple and surprisingly accurate "sleep" test - if it disturbs your sleep pattern, it's not for you.

"If you're invested in equities but are not going to be able to sleep at night, you'll be dead before you get your money. You should choose something that's suitable for you," says Mr Mark Cunningham, director at Bank of Ireland Asset Management (BIAM).

Age is an issue that would-be investors should also consider. The investment choices that may suit those close to retirement are not the same as those that suit thirtysomethings.

"There is no point telling an 80-year-old to invest long-term in equities," one investment adviser says bluntly.

Potential investors should also take into account other factors such as whether they need an income from their investment.

Last but not least is the kind of return they expect. But here there are a number of unassailable facts. Do not expect to be able to invest for the short term or to fully guarantee your capital and secure top returns and if someone offers you such a product, beware. As one financial adviser warns: "There is no such thing as a free lunch."

While money can be made in everything from art to antiques, the four main types of financial asset investors generally consider are equities, bonds, cash and property.

Equities, better known as stocks and shares, represent ownership of a company and the right to receive a share in the profits of that company. Generally regarded as the best performing asset over the long term, they are also the most volatile as the recent stock market crash vividly illustrates.

However, the historical evidence clearly points to the remarkable returns delivered by blue-chip equities for investors who stayed in for the long haul.

According to BIAM, $10 (£6.74) invested in Coca-Cola shares back in 1919 would now be worth a staggering $1,382,420 if all income had been reinvested.

Bonds, which are also known as fixed-income securities because the bond-holder is repaid his capital sum along with fixed interest payments, come in two main forms - those issued by governments and those by corporations. Government bonds in particular are considered a very safe investment - but not as safe as cash as any recent investor in Russian bonds will tell you.

Cash - for those who want absolute security and immediate access to their money - will always be king though in the current lowinterest rate environment it will not provide much of a return. But while the Russian government may have defaulted on its debt, or failed to meet its payment obligations, Russian bonds were always considered risky. By contrast, the blue-chips of bonds - US Treasuries and German bunds - provide as castiron a guarantee of repayment as you can get.

Bonds provide a good hedge - a means of using one investment to offset another - for equities because bonds typically rise in an environment where equities fall. The recent slump in global share prices, for example, has triggered a move out of equities and into safer assets such as bonds. Finally, there is property. Whether the obsession with land of a previous generation lies behind the current generation's love of "bricks and mortar" is an open question but it has traditionally been the favoured asset of the Irish investor. However, it's harder to value and less liquid than other assets - it is a lot more difficult to sell a house or a shop than to sell shares or bonds. The balance between these four different asset types has to be tailored to suit the needs of each individual investor but financial advisers generally recommend that the would-be investor does not put all his eggs in one basket.

"If the sum is above a certain size, we would always recommend looking at a mix," says Mr Noel Minogue of AIB Investment Managers. Obviously, it is hard to split up a sum of £5,000 but those with anything above £20,000 to invest should consider a number of different products and assets.

Even within asset classes, investors are advised to spread their risk with a geographical mix, for example. If all your investment is in equities, you are better off holding not just Irish shares but selected European or US stocks as well.

As financial products become more sophisticated, it is possible to find products that combine equity investment with the capital guarantees traditionally associated with cash or bonds. To find their way through the maze of products, however, would-be investors will probably need some financial advice.

Independent financial advisers can guide you through the full range of products on the market while investment advice is also readily available from banks, insurance companies or stockbrokers. But just as people shop around before buying a car or a washing machine, the would-be investor is best advised to canvass a number of opinions before making a final decision. Investors should always keep in mind that old motto of the savvy consumer - caveat emptor - buyer beware.