How should I invest £250,000?

By THIS IS MONEY
Updated: 06:21 EST, 8 June 2010

I have £250,000 to invest After using my Isa allowance I am thinking of putting half into shares and the other half into a high yield bond fund.

Do you think this is sensible? Graham, Iver, Buckinghamshire

Shaun Godfrey, managing director at IFA Munroe James Ltd replies: My direct answer would be no, it doesn't seem sensible.

If a client came to me with this question, my starting point would be that I needed to know much more, including their age, any other investments, lifestyle objectives, other assets, likely term of investments, whether they need growth or income, and so on.

Without this information I can only make some assumptions. So, I'm assuming you are looking for growth and over a reasonable time frame.

Your interest in buying shares shows some acceptance of risk. After the volatility of the investment markets over the past three years, I would be inclined to recommend a more diverse approach.

I would look to keep a small element in cash, in case you need it. Beyond that, I would use collective funds such as Oeics and investment trusts, to ensure diversification.

Yes, I would include some bond and fixed interest funds, but not to the amount of 50% of the portfolio. If you want to do this to reduce volatility or risk, then there are other ways to achieve this.

I prefer to look at what growth rate I need to achieve for my clients and over what period, then work backwards to build a portfolio that will achieve what they want over 5 – 10 years, rather than investing on a 'hope for growth' principle. For example, if you need to earn 15% pa to achieve your financial goals, you need to take much more risk than if you need only 6% pa.

Then I would use a range of funds to create a targeted yield for most of the money, but not just relying on equities because many fund managers are using what are referred to as alternative or non-correlated assets, such as life settlement, forestry and secured lending funds to balance the portfolio.

I would add a small amount of higher-risk funds that offer exciting potential such as Africa & China. If you want to trade on your own use a small amount such as 10%.

By taking this approach you will have a portfolio of funds that have some defensive qualities, but is also well positioned to take advantage of economic growth as it happens.