It happens in the best of families! We receive a large and often one-time sum of money.
Our good fortune may come from a substantial inheritance (expected or unexpected). Other times it may result from a successful insurance claim (usually not associated with good news). Still other times, that large receipt of dollars may be due to a major monetization event such as the sale of a business, family farm, or other type of real estate.
Whatever the source, such an event has the power to dramatically alter our lives financially and otherwise…for better or worse. It may be a one-time event! That is why it is so important to invest correctly and carefully. Unlike in golf, there are no mulligans when we make a mistake.
So…how do we invest a large, one-time sum of money? Here are five things to remember.
Proceed slowly and carefully! Emotions typically run high when we inherit a large sum or sell our business for more than we ever dreamed possible. All kinds of thoughts run through our minds, not to mention the minds of family members and friends. Give yourself time to get grounded and achieve clarity of mind. Decisions driven by emotion and/or made in haste are rarely optimal but often regretted.
Emphasize safety and liquidity in the short-term. It’s OK, actually wise, to temporarily invest in high-quality short-term assets such as U. S. Treasuries and FDIC-insured certificates of deposit. Think of them as a temporary parking place until you are ready to invest for the longer-term. What if there is a strong and prolonged rally in the stock market? This strategy may under-perform, but given the horrific volatility of recent years, there may also be comfort in knowing that one’s assets are not fully invested.
Involve your family in the “conversation.” In addition to your own expectations, it’s important to understand and manage those of your spouse, children, and other family members. Talk to the people who matter the most to you.
Involve trusted advisors. Start with a thorough analysis of your current financial situation and then proceed to a second analysis that considers the new funds. What are the income tax and cash flow implications? How will your lifestyle change? What impact will your new wealth have on your estate plan – during your life and upon your death? Who will handle all of this in the event of your disability or death? Going forward, will you live off of these assets or continue to work? Will you start another business? The answers to all of these questions are important and must be answered before designing and implementing your longer-term investment plan. Make sure that your attorney, CPA, trustee, and investment manager have the necessary experience and skillset to serve you and your family.
View the investment process as a marathon rather than a sprint! As mentioned above, high-quality short-term assets are the right starting point. Once you’ve identified your return expectations, tolerance for risk, time horizon, cash-flow needs, and tax considerations, it’s time to begin designing and implementing your investment plan. It may make sense to take a year, longer for especially large sums, to fully implement your long-term plan.
Cleary, investing a large sum can be approached in many different ways, but why rush and chase performance? Give yourself time to work through the emotional and financial elements of your new good fortune.
Invest slowly and wisely. There are no mulligans!