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Money Times - Febuary 7, 2017

Posted by Jill Kerby on February 07 2017 @ 09:00

NO ONE-SIZE-FITS-ALL SOLUTION TO A CASH WINDFALL

“I didn’t win the €88 million in the EuroMillions jackpot,” a reader from the Midlands wrote last week. “But I have recently inherited just over €120,000 from my late father, a former teacher. We were all a little surprised – I have three other siblings – since he and my late mother had lived quite well and we thought they only had their pensions and house which we sold for just over €250,000.

“My husband and I are in our early 50s, our youngest is nearly finished college. The other two live in the UK and Australia and have good jobs. I work part-time and my husband has a good job and pension. (He is also a teacher.)  Our house is paid off and we only have a few small loans, so we’re in no huge need for this money.  Any suggestions on where to invest it? (We have some savings which are paying only a tiny bit of interest.)”

I received quite a few emails and letters like this – and about sums as small as €5,000 - after the lottery win column. Most people only ever benefit from modest windfalls - an inheritance, a redundancy payment, a retirement lump sum or a capital gain after selling an asset like a property or a business they’ve spent a lifetime building.

Most people, in my experience, tend to be pretty conservative when they find themselves with an unexpected sum of money, even a large sum.  It’s size, relative to the person’s existing income and financial position will impact on investment decisions, say investment advisers. As will their immediate and longer term expectations for the money, their capacity to live with market risk and price volatility. Age play a big part too; a free-spending, ‘easy come, easy go’ approach is usually reserved for younger lottery winners or inheritance beneficiaries with few financial responsibilities and liabilities – like a mortgage and other bills, a family to support or chronic indebtedness.

In other words, there are simply no ‘one size fits all’ solutions whether the sum is €10,000, €100,000 or €1,000,000.

My correspondent from last week is also typical of the person who has no immediate money pressures who seeks some help in what to do with their good fortune. In such cases, financial advisers often report that after rewarding themselves and their loved ones with modest purchases, such clients often take a longer term view of the money, say, to pay for a wedding, or for retirement or to pass on to the next generation(s).

This is why the first step has to be a proper wealth review in order to confirm the status of this money, relative to their expectations and desires.  Has the person factored in the importance of clearing existing high cost credit card and personal loan debt, overdrafts, perhaps even higher variable rate mortgages or the real cost of long term liabilities, like medical and nursing costs in their advanced age?

No matter how large or small the amount at stake, a good adviser will ask you what your expectations are for your inheritance, retirement lump sum, capital gain, etc and plan around your answers.

No one can accurately predict investment growth consistently.  Which is why expecting positive results from a small collection of stocks or funds is also unrealistic.

The high tech stock you heard about – or even a single property fund producing high gross yields today, could still tank tomorrow, at great capital loss or be impacted, yet again by arbitrary government tax policies. The higher return, the higher the arrangement and management fund charges which will also eat into any return.

Only an independent, impartial financial adviser can advise our reader with the €120,000 inheritance where to invest her money, and only after a comprehensive, personal financial review.  It could be in the end that she and her husband simply won’t sleep if this money, which perhaps they ultimately want to leave to their grandchildren, was tied up in the bond or stock markets.

In that case, paying off the last of their debts and finding the safest deposit account might ultimately be where the cash remains. Or they might decide to disperse it as a contribution to higher education, or even seed capital for a grandchild’s business. 

What every beneficiary of an unexpected or earned windfall needs to accept is that genuinely suitable investment solutions are always going to be more bespoke that any popular, advertised ones.

And probably a lot safer too.

 

 

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