Investment Doctor: Where’s the best place to invest a lump sum over three years?

Q: I would like some advice on the best place to invest a lump sum, I want a good return and it can be tied up for a minimum of three years and a maximum of five.

Initial diagnosis

The first step is to work out how much you want to invest, what you’re hoping to achieve and the level of risk you’re prepared to take, according to Mark Stone, financial planning director at Whitechurch Financial Consultants.

“You also need a sufficient emergency fund to cover six months’ normal expenditure in an easy-access bank or building society account,” he says. “Then, depending on the size of the investment, it may be wise to spread the money so each account is covered by the Financial Services Compensation Scheme (FSCS).”

The FSCS protects your savings up to £85,000 per person per institution, and investments up to £50,000 per person, in the event of an investment firm or savings institution going bust.

Cautious treatment plan

Ideally, anyone looking to invest should be prepared to commit their money for at least 10 years to cope with ‘short-term volatility’, in other words the ups and downs of the stock market, advises Martin Bamford, managing director of Informed Choice Financial Planning.


“To meet any financial goals with a three- to five-year time We advise an investor looking for the maximum return on his cash over three to five years horizon, I would keep the money in cash and look for the most competitive interest rates available, as well as keeping the money in a tax-efficient wrapper, such as an individual savings account (Isa),” he says.

Mr Stone agrees that cash is the best place for shorter terms. “National Savings and Investments (NS&I) products are worth considering, as they are government backed, although returns are not necessarily as attractive as other options,” he adds.

Higher risk treatment plan

If you are adamant about investing over three years – even though you know it is a risky strategy, then Mr Bamford advises you diversify your risk by investing across a portfolio of corporate bonds, UK equities, global equities, and commercial property funds. Visit Moneywise’s First 50 Funds for our recommendations in these areas at 50-funds

Justin Modray, founder of Candid Financial Advice, suggests combining a mix of funds that provide exposure to a range of investment types that are unlikely to all move in the same direction at the same time, as this helps to reduce risk.


“This would include exposure to stock markets, corporate bonds and commercial property,” he says. “I like to use low-cost, index-tracking funds for mainstream stock market exposure as these tend   to perform better over time than most active fund managers.”

Tracker funds can be complemented with active funds that invest quite differently from the index to provide further diversification. He suggests you use the Vanguard FTSE UK All Share Index fund alongside the actively managed Marlborough Special Situations fund.

With a fi ve-year horizon, Mr Bamford suggests you could consider adding more specialist investments, such as commodities or infrastructure funds. He adds: “You should focus on funds with low costs, consistent performance and good risk-adjusted returns.”

Alternative combined medicine

Mr Stone says: “If there’s a need for a certain sum of money on a set date, then look at a combination of stock market investments and cash options to meet your needs,” he says.


Mr Bamford says you could hedge your bets by investing half of the capital in a well-diversified portfolio and keeping the other half in a competitive fixed-term deposit account.

“There is a decent chance that interest rates will start to rise in the next three to five years,” he adds. “Despite current low interest rates and rising price inflation, cash offers certainty of capital which you don’t get with an investment portfolio.”