Be it a bonus, inheritance or a particularly successful day at the races, an additional amount of cash on top of your usual income stream is always helpful. However Heyman (pictured), who is a chartered financial planner, says investors who find themselves in this position should address a number of key issues before even thinking about putting their money to work in the stock market.
"The main thing to do when you receive a lump sum is reduce debt," Heyman advised.
"The next step is to ensure that you have sufficient cash for those unforeseen circumstances, such as a broken boiler, a new car or a damaged roof."
"It is also important to have emergency cash just in case you find yourself out of a job and you need two or three months to find employment."
"Once those have been sorted, then it is a question of whether you use that capital to clear your mortgage or look to add to or start a portfolio of investments."
"You need to look at the rate of interest you are paying on your mortgage and how much you expect your outgoings to be."
"At the moment, interest rates are fairly low, but investors need to ask themselves, if interest rates were to increase, would they have the funds available to pay?"
"If the answer is 'no', I would pay off – if not all – a large part of the mortgage before looking to invest that money."
If you decide that you have the maneuverability to invest part or all of the lump sum into the market, Laith Khalaf, pensions investment manager at Hargreaves Lansdown, says you need to address what your objectives are for that cash.
"The first thing you need to think about when getting a lump sum is what length of time horizon you are looking at," he said.
"You need to ask yourself, what is this lump sum for? Is it for a specific purpose: retirement or for a rainy day? Once you have assessed that, the decision will determine what kind of wrapper you want to put that money into."
"For retirement, using a pension for tax advantages makes sense."
"If you want more money to be more readily available and accessible, but you are still thinking long-term for such things as children’s school fees, then you are probably best off using a stocks and shares ISA."
"However, if the money is needed more immediately because of unemployment or any sort of unforeseen circumstance, I would put it into a cash ISA. If your horizon is six months, one or two years, I think it is too short a timeframe to be investing." Khalaf (pictured) says investors should always use the most tax-efficient products available to them.
"Obviously you can invest that money outside of an ISA or a pension – but for tax breaks it makes sense to use your full allowance."
"Once you have sorted out what wrapper you want to use then you can start to think how much risk you are willing to take."
"Within a pension there is the common misconception that you have to keep a very safe portfolio – it’s simply not true."
"Normally, investors with pensions will have a long-term horizon so you can afford to be holding, if not all, then predominantly equities."
Khalaf says that investors should always use equities if they have a long-term horizon.
He adds that although the past should not be used as a guide to future performance, it is useful to learn lessons from history.
On 19 October 1987 – "Black Monday" – global equity markets crashed. The FTSE 100 index lost 11 per cent in a day, with the press hailing the event as "the death of equities".
Performance of index since Oct 1987
Source: FE Analytics
Despite the pessimism surrounding the markets at the time, the FTSE 100 has returned 697.82 per cent since then.
Khalaf says investors should not fall into the trap of feeling too safe, however.
"You could go with 100 per cent cash in your pension, but you are going to have to put a lot more in than you think as the value of that money over time is either just going to go sideways or lose value."
"In an ISA, you might move slightly lower down the risk scale if you are looking at the short-term."
"However, if you are looking over 10 years and won’t be calling that money for anything specific, then you can still allow for a higher degree of equity risk."
"Once you have decided on the asset class you want to use, it is a case of deciding what fund you want to use. Firstly, do you want to use an actively or passively managed one?"
"If you want to go down the active route, there is a huge amount of information available on the internet to help you make your decision."
Later this weekend, FE Trustnet will look at the best way to judge the performance of an actively managed fund.
Khalaf continued: "For passive funds, you need to look at which markets you want access to and which are suitable, then look at the most cost-effective funds available."