Wouldn't we all love to have a lump sum investment? Sadly, very few people find themselves with a lump sum investment as a result of a lottery win. Most lump sum investments are the product of unpleasant and stressful life events - the death of a loved one, a redundancy, or accident compensation. At such times, we are not in our best state for making investment decisions.

Even at the best of times, many people are uncertain about making investment decisions. A lump sum investment raises the stakes considerably, because you have a lot more capital at risk, riding on the outcome of your choices. It is very important to keep a clear head, and focus on your goals.

What rate of return do you hope to achieve?

Is this lump sum going to provide your day-to-day income, or are you trying to grow it over time to spend later? Are you just looking for a regular steady income to be generated from your investment or will you be investing with a view to taking no regular income and instead retire off the invested lump sum at some point in the future or perhaps use it to pay off your mortgage at retirement?

Your intentions about income and/or capital gains will have a large influence on your lump sum investment strategy.

How much risk are you willing to take?

When making any investment decision it is important to know how much risk you are willing to take (financial advisors often refer to this as your risk tolerance). Investment returns are in proportion to risks in the investment world. The higher your risk tolerance, then generally the higher returns - of higher losses - you could make. Once you are approaching retirement age, you need to adjust to a lower-risk lump sum investment strategy, because you don't have time to recover if you do take a big loss. If you are relatively young, you can take more risks with your lump sum investment.

How much time and energy can you invest in managing your lump sum investment?

Some investments require more active involvement than others. Make sure you have the required knowledge if you choose an active investment - and make sure you have the time required to monitor your lump sum investment. Entering into active investments without the required time and knowledge is a dangerous path. If you are in a position to be actively involved, you may enjoy a lump sum investment in commodities or options. Otherwise, you may prefer the peace of mind of a managed fund - you will have to pay fees, but you gain the services of a professional fund manager.

A lump sum investment can change your life, but not always for the better. We have all heard the stories of lottery winners who ended up broke just a few years down the track. A lump sum investment can give you great security if you make the right investment decisions, so it is very important that you excercise proper diligence in making your lump sum investment.

This article is an extract from Mark Bennett's comprehensive guide on lump sum investing, which is available from AllFinanceAdvice.com.

Mark Bennett is a staff writer for AllFinanceAdvice.com, and publishes regularly to other reputable financial websites and publications.