Saving/ Investing a lump sum

Question

I have recently come to a settlement agreement with my employer, to terminate my contract. As part of the agreement, I am expecting to receive a pay off in one lump sum.

I do not have any immediate needs for this amount, and have saved enough myself while I've been working to tie me over for a couple of months until I find new employment, as my rent and other regular expenditure are all relatively cheap.

So what I'm looking for is to find out how I can best invest this money in the mean time. I can afford to lock it away for a while, but would like to buy a house in maybe about 5 years time- so would need it available for a deposit then.

Ideally, I am looking for as low risk a way of saving/ investing as possible, but obviously want to get as good a rate as I can.

What would people suggest?

Edit

As requested in the comments/ answers- I am living in the UK.

My situation is- I graduated from University in 2013, and am currently in my second job since graduating (first was a 6 month contract that was extended by a couple of months, and I've been in the second one just over 18 months), I also had an industrial placement year during my third year of university, so have just over 3 years of professional experience.

I say that I'd like to buy a house in about 5 years time- this is just a rough guess... I actually have no idea when I will be looking to buy a house. My thoughts at the moment are that I will probably go travelling for a year or so, now that I've had a couple of years working since graduating.

When I'm done travelling, I will be looking for a permanent job- that's when I'll be looking to buy a house (rent is dead money...). I am willing to put this lump sum into something for longer than the time I will be travelling (i.e. the 5 years I mentioned), as I already have enough saved for a reasonable deposit on a house- so when I find permanent employment, the regular income will cover the mortgage repayments. However, unless there are rates out there that really make it worth investing for longer than 5 years, I would be happy to put it into something for just a year or two, until I have finished travelling- and re-assess then.

I already have a reasonable amount saved (before the settlement is paid)- and that's currently spread around a few different current accounts that are all earning roughly 3% or more (i.e. higher than the current rate of inflation). I am earning interest on the maximum balance for each of these current accounts- but since I am now expecting to receive a reasonably sized lump sum, I want to put it somewhere where I can make it work for me while I am not earning a wage.

I have recently started looking into opening a stocks & shares ISA as a potential way of investing, but don't know if this would be a good idea...?

Answer 1

In my mind, when looking at a five year period you have a number of options. You didn't specify where you are based, which admittedly makes it harder, to give you good advice.

Equity investments

If you are looking for an investment that can achieve large gains, equities are impossible to ignore. By investing in an index fund or other diverse asset forms (such as mutual funds), your risk is relatively minimal. However there has historically been five year periods where you would lose/flatline your money. If this was to be the case you would likely be better off waiting more than five years to buy a house, which would be frustrating. When markets rebound, they often do it hard.

If you are in a major economy, taking something like the top 100 of your stock market is a safe bet, although admittedly you would have made terrible returns if you invested in the Polish markets.

Bonds Gov & Corp

While they often achieve lower returns than equity investments, they are generally considered safer - especially government issued bonds. If you were willing to sacrifice returns for safety, you must always consider them.

Crowd-Funding loans

This is an interesting new addition, and I can't comment on the state of it in the United States, however in Europe we have a number of platforms which do this.

In the UK, for example you can achieve ~7.3% returns YoY using sites like Funding Circle. If you invest in a diverse range of businesses, you have minimal risk from and individual company not paying.

Elsewhere in Europe (although not appropriate for me as everything I do is denominated in Sterling), you can secure 12% in places like Georgia, Poland, and Estonia. This is a very good rate and the platforms seem reputable, and 'guarantee' their loans. However unlike funding circle, they are for consumer loans.

The risk profile in my mind is similar to that of equities, but it is hard to say.

Whatever you do, you need to do your homework, and ensure that you can handle the level of risk offered by the investments you make. I haven't included things like Savings accounts in here, as the rates aren't worth bothering with.

Answer 2

5 years is very short term, and since you are sure you'll need the money, investing it into the markets should probably not be done. You can toss it in Ally bank for 1% or consider a 5 yr raise your rate CD

A decent write-up on time horizons: http://www.investopedia.com/articles/investing/110813/using-time-horizons-investing.asp

If you want to go the stock/bond route you can assess the benefits of using something like a vanguard target date fund, or a roboadvisor such as wealthfront or betterment.

You need to assess whether you think you may move up your time horizon, say you want to buy a house in 4 years, or, if it is 5 years, are you ok with it being 6.5-7 if there is a market downturn.