Second Opinion: The Financial Windfall

Over the past few weeks, I’ve received a few emails from friends and readers of the blog about how to handle a financial windfall. A few were simply curious. A couple were actually facing the situation and needed grounded and impartial advice.

In The Old Money Book, I proposed, after an initial consultation wth a Certified Public Accountant to address any tax issues and potential liabilities, a waiting period of six months or so. During this time, it’s possible to let ideas about how to use the money come and go; the emotional rollercoaster can run its course; and hopefully a little balance and perspective can take hold before any financial decisions are made.

One friend offered a different perspective that, she confided, had helped her tremendously. She received what I’ll call a mid-range inheritance: mid-six figures. Not enough to quit her job and live however she chose off dividend income (seven figures, these days), but enough to possibly change her life considerably as a single, working professional with no children.

Having had a history with credit card debt due to a close, personal relationship with Jimmy Choo, she took a different approach. She followed my advice and immediately sought the counsel of a Certified Public Accountant in her area who was referred by an Old Money Gal she trusted. She received advice about her potential tax liability and planned for that.

william-hamilton-in-new-yorker

She then sought out advice from another friend who had sold his company a few years ago and was now committing his energies and talents to various community projects, pro bono. In her estimation, he’s managed to handle his windfall and now lived very comfortably from the proceeds of his investments.

He spoke with her at length, shared some sage wisdom, and then referred her to his money manager. The money manager listened to her at length, discussing her concerns (that she would spend all the money if it was on hand for any period of time) and aspirations (travel, early retirement).

They then jointly decided that she would set aside a small amount for a vacation, to be taken the next summer. A percentage of the inheritance would be immediately invested in very dull, safe, and predictable financial products (annuities, or the like, I’m guessing) which would, at staggered intervals in the future, begin to trickle dividends into her checking account on a monthly basis. Some of her portfolio would be invested in precious metals. All of it would be available, but difficult, to liquidate. Preservation, diversification, and growth were the by-words. A stack of cash on hand was to be avoided.

Two years later, this has worked very well for her. Why? Because, she says, she gets to pretend the money never  existed. In another year, she’ll begin to receive monthly dividend payments from one product in the portfolio. She feels comfortable enough, now, to be able to handle the extra, disposable income. She can choose to reinvest it, or to use it wisely. (She mentioned that she was considering buying some real estate.)

It’s not what I had recommended in the book, but it worked for her. So…I’d love to hear your comments, thoughts, and experiences. Stack of cash to hold for a minute? Or immediate investment? Which option seems best? And why?

Thanks.

  • BGT

30 thoughts on “Second Opinion: The Financial Windfall

  1. Hello Byron,

    Not sure if I can post comments any longer as I have a new wireless. Tried once and not successful with the J. Press picture piece. Can still receive, as one can see, your postings.

    Cheers, Michael

    Like

  2. Good post, Byron, but you mentioned something that has come up before in this blog, and this time I feel compelled to comment. You said she was going to invest some of the money in precious metals. You do not “invest” in precious metals, you speculate in them. This does not mean you can’t make money by buying gold, but it’s a speculation, not an investment. The reason is that gold has no internal rate of return.

    Stocks, for example, are supported by dividends and earnings growth. Bonds are supported by interest coupons. But gold is supported only by your hope that someone will buy it from you for more than you paid for it. If everybody suddenly decided they didn’t want bonds, the bonds you own would still pay interest and you would still recoup the principal at maturity. But if everybody suddenly decided they didn’t want gold, it would become virtually worthless over night.

    This is not merely a technical distinction. Your chances of making money in gold over the long run are not very good, and if you do make money it’s almost entirely attributable to luck. You can make money by going to a casino and betting on a craps game too, but that’s not an investment.

    As far as investment advice for the young lady you write about, it would be helpful to know how old she is, but in general I have a strong bias toward saving for much later in life. Old age and retirement is when most people really need to rely on their savings. If she’s young enough she can let the power of compound interest work for her. Compound interest can do amazing things but it takes time.

    For many people, low cost index funds are a great long term investment. In a “total market” stock fund you have to be able to weather the short term fluctuations, but if you don’t withdraw any money until retirement, it’s a very good long term investment. People think of bonds and annuities as safe, but they carry an extremely high risk that you will receive a substantially lower rate of return over the long haul, by which I mean decades, in exchange for being protected from short term fluctuations and slightly higher long term risk in the equities markets.

    I would tell her to pay off any debts, especially credit card debt, and invest the rest and don’t touch it until retirement. It can be difficult to get young people to resist the urge to spend now and to save for the future, but as bad as it is to be young and poor, it is much, much worse to be old and poor. Old and rich however, is very nice. Take my word for it.

    Liked by 1 person

    1. Thank you, Amy. I’m happy to get a 360 degree view on this situation. You always make great points, and I know all of our readers benefit from them. Hope the new year is going well. – BGT

      Like

    2. Couldn’t agree more about gold and your distinction between an investment and a speculation, Amy. And using that, it can easily be extended to things such as antique cars, rare stamps and coins, paintings and artwork, jewelry and collectors timepieces. None of these things pay dividends, yet we keep reading headlines in popular media how ‘the rich’ invest in them to ‘crash-proof their portfolio’. What non-sense! I heavily doubt it except for play money. A simple test: How many in the Fortune 500 made their money by speculating in precious metals, coins, stamps or classic cars? No one I am aware of. And how many made their money in good old fashioned investments in stocks/private companies or real estate? Investments as you correctly pointed out feature rising profit/rental income growth over time, matching or even outpacing inflation.

      Like

      1. Hi David, truly rich do not report. You have to understand David, that private wealth is used privately. No obligation to report. No obligation to show. It is private.

        Can any of you share ……… owners present at least one share with your name on it?
        Can you present any evidence that the shares ……. are registered on your name?
        Aren’t they registered on brokers’ name?
        Is not the SEC the only owner of “your” shares, stocks ……..?

        David, can you name at least ten paintings that gone bankrupt?

        Have you ever heard of Odiot silverware gone bankrupt?

        Or have you ever heard of E type 61, XK 150 or 1938 BENTLEY 4 1/4 gone bankrupt?

        Like

  3. Amy, unless an investment carries a guaranteed rate of return, couldn’t every investment be considered a speculation? I’m assuming you were just making a point that precious metals can be more volatile than other investments, and indeed that is true! However, in today’s uncertain political and economic environment, I believe stocks (index funds, especially growth funds) are a very risky place to be. Stocks and index funds do have a good track record over the long haul, but perhaps this isn’t a good time for someone with inheritance to enter the market, as I think it is at a very high level right now. Can it go higher? Sure, but I think the upside potential is limited, and that a meaningful downturn could be forthcoming. What of it if you put a lump sum in stocks paying dividends if your principle gets cut in half? As happened to many people when the last recession hit. The market seems very frothy at the moment, like it was in 2007. I think better to be patient, hold cash and wait till a recession when the market drops, then scoop up those dividend paying stocks at a discount with the benefit of capital gains as the economy improves! Perhaps some rental properties for too at that time if prices are depressed. As for precious metals I think it’s good to hold some just as insurance against such downturns, as the metals seem to perform well during such times. They give peace of mind especially when the markets are so high. Not something to get rich from per say, just to diversify and hedge loses if traditional assets take a downturn. To anyone reading this, please don’t consider this investment advice, it’s just my thoughts and opinions.

    Like

    1. I see what you’re saying, Alex. My basic point is that gold is not an investment because it does not have an internal rate of return. As for risk/reward, there is a sweet spot between possibly very high return but very risky and very “safe” but very low return. You’re right, the stock market is at record highs right now, and it does fluctuate, but you can take advantage of that by using dollar cost averaging.

      The long term trend of the stock market has always been up, and probably will remain so. That’s why index funds are so good for people who aren’t going to need the money for a long time. You can ride out the down markets secure in the knowledge that they always recover.

      And forget about trying to time the market; it can’t be done. No one knows what the stock market will do in the future, especially in the short to medium term. Which brings me back again to dollar cost averaging. It’s a prudent way to invest in the stock market even if, as you suggest, stocks are overpriced and about to drop.

      Like

  4. I agree with Amy. Warren Buffett, in his 2014 shareholder letter to Berkshire Hathaway shareholders, wrote something along the lines that he would recommend that his wife put 10% in government bonds, and 90% in a Vanguard index fund.

    How is your friend’s money manager paid? Is he a fiduciary?

    On the other hand, given your friend’s admitted spending issues, perhaps it made sense in her case to make it “difficult” to liquidate the principal.

    Like

    1. Hi George! I’m not sure about the relationship my friend has with her money manager, so I can’t comment on that. But you make a good point: she’s probably making a good choice simply not having the cash on hand. Louis Vuitton is not really an investment. – BGT

      Like

  5. How to handle a windfall:
    1) Pay Cash
    2) Eliminate all debt
    3) No mortgage
    4) Save as much as you can(conservatively invest your first million or two, then go stocks)

    Like

  6. Amy, I agree with most of what you said in your post. I too like dollar cost averaging, but I like to accumulate a given asset most when I perceive it to be undervalued. It is impossible to time a bottom or top in the markets, there are however historical trends and other signs that can paint a broad picture suggesting whether a market is overbought or oversold. Like anything else I might buy, I prefer to buy when it’s on sale. I like to use dollar cost averaging to help smooth out any inevitable timing issues and massage my way into accumulating in certain markets. To reiterate my point on gold from a different angle, whether one views it as an investment or not I myself would feel very vulnerable especially during such times without a little bit of exposure to the metals as financial insurance, just as I would feel vulnerable if I didn’t have health insurance. I would not forego health insurance so that I could use the money instead to purchase dividend paying stocks. My point being only that for me, having some gold has this hedging appeal that outshines (mind the pun lol) the opportunity cost it carries with it. Once again these are only my perceptions.

    But to comment on the topic of the person that inherited the mid-range amount, I think they made a very wise move by making it somewhat ill-liquid to protect against spending temptations. I know of someone that inherited a small to mid-range amount that instead of saving and investing the money, spent it all and then some, going into debt with not a single asset to show for it. Looks like she won’t be having this problem, I wish her continued success!

    Like

    1. Alex, I think you’re on the right track and I’m not necessarily against buying gold, I just think people should understand that it’s not an investment. To your point about buying assets when they’re “on sale”, if we’re talking about equities, the efficient market theory says it’s almost impossible to do that. An experienced professional investor who specializes in a particular segment of the market can probably do it, but for the rest of us it’s difficult, time consuming and risky.

      Regarding the person you know who squandered their fortune, those stories are all too common. I haven’t seen any statistics, but it seems to me that happens at least half the time. That’s why I think Byron’s basic message is a good one. Most people could benefit from the Old Money way of thinking and living.

      Like

  7. Amy, when I say on sale I’m not talking about trying to buy the asset cheaper than its current market value, I’m talking about buying cheaper relative to a longer term outlook, as in when the market price is low because nobody is currently interested in the particular asset. Currently being the key word.
    I’m not quite grasping why you say gold is not an investment. Just because it doesn’t generate a return through dividends or other forms of regular cash flow? Capital gains are where returns are made in precious metals, same as in fine art, et cetera.
    Yes Byron’s message is great, read his book too and thoroughly enjoyed it! Unfortunately many people (young and old) are too wrapped up in popular culture to grasp and appreciate his philosophies.

    Like

  8. Hi Alex! I’m not sure I see the distinction between investing in an asset that is cheap relative to current market value as opposed to cheap relative to the longer term outlook. Isn’t the long term outlook reflected in the current market value?

    You ask a good question about gold. You invest in an asset that produces profits which either increase the value of the asset or produce income for you. If a company has a good product and is well run it will likely be profitable and if you are one of the owners of that company, you share in those profits.

    Gold doesn’t do that. People see gold as an alternative to cash, so when the dollar is weak people buy gold and the price of gold goes up. When the dollar is strong, the price of gold goes down. The price of gold has nothing to do with anything inherent in the gold itself, it’s mostly just a response to the strength of the dollar. So you can make money in gold if you guess right, but it’s really just a guess. That’s the difference between an investment and a bet.

    Like

  9. Hi Amy, it’s a pleasure debating this with you!
    When I say cheap relative to a long term perspective, it would be the same as saying cheap in dollar cost when looked at historically. For a real life example, it would have been better to begin buying stocks some time after the last crash (at the beginnings of this most recent several year bull market) when nobody wanted them and they where cheaper in dollar cost, historically speaking. This as opposed to someone piling into them just prior to the crash, say in 06 or 07. The person would be much better off today because they would have many more shares per dollar spent and much more capital gains as the stocks rose in value since they started at lower point of value when entering the market. That’s all I mean by that.
    Yes gold is an alternative to cash. And that’s exactly right it is a bet, but it’s an educated and purposeful allocation of capital to hedge against the possibility that growth and prosperity may be peaking at this moment in time, during which times governments have been known to devalue their currencies through inflation to help prop up markets or re-inflate deflating bubbles.
    Purchasing stocks at any given time can be said to be a bet as well, a bid that growth and prosperity will continue for a company or the economy as a whole. Stocks are not purchased for dividend yield alone, potential capital gains/losses also play a role in the appeal or lack of appeal of stocks, just as they do with the metals. I don’t agree that just because gold is valued intrinsicly and not does not pay a dividend that it cannot be classified as an investment. An investment is any asset that you can earn monetary gains from, regardless of how such gains are derived.
    Don’t get me wrong, I do not like the idea of being to heavily exposed to the metals. Once again, I like it for the additional diversification it provides. I like stocks, I like dividends as much as you do! But I’m not buying any stocks right now, I’m putting some cash on the sidelines and waiting for them “to go on sale”.

    Like

  10. Thank you Byron for yet another great blog post! I would like to recommend the following youtube video, wherein investor Warren Buffets explains the point that I believe Amy is trying to make:

    Like

    1. Thank you, Lucas. I really appreciate your contribution to the discussion, especially with the video link. With everybody explaining their perspective articulately, it leaves our readers in a great position to make up their own minds. – BGT

      Like

    2. Maestro him self:

      “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.”

      “The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.”

      “This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth.”

      “Why would central banks put money ……..?”

      W. Buffett is only a local boy, very local.

      Like

  11. Thank you, Amy and Alex for this enlightening debate. It is educational, and I am grateful for the insights. When it comes to gold, in my family, we implement the strategy of a small amount of gold, just “saved for a rainy day”.
    It is interesting to examine diverse investment opportunities and strategies. I wholeheartedly concur that I probably do not need that extra pair of “Choos”. (Pun intended.)
    I am glad for the heiress above, and hope her strategy works well for her.

    Like

  12. Buffet is making the common and very elementary “you can’t eat it” argument. In other words, he’s saying holding gold doesn’t have utility value beyond “looking at it and fondling it”. What Buffet is missing is that, as a financial asset, gold isn’t valued solely for its utility value, but for its role as a monetary metal. Like Amy and I descried, gold is an alternative currency. At the core it’s valued for the purchasing power it represents and will always be attractive and desired as such because it’s in limited supply and governments cannot inflate its quantity at will, thus reducing its value, as they can with dollars. As omgm touched on, through printing and inflating a currency supply, purchasing power is transferred from savers to the government – a hidden tax. Holding gold, especially during times of high inflation, is protection against this…theft. In addition to its track record of preserving purchasing power for savers (if bought at the right time and over the long term), when meaningful declines in traditional markets occur and more people start looking for alternatives to diversify (gold), the value can spike as demand soars and new supply cannot keep pace. At this point when gold looks overbought, I hope I’m wise enough to sell most of of it and transfer those funds to an oversold asset – dividend paying stocks perhaps 😉
    If we’re bringing the opinions of big wigs to the table… I’m not saying I necessarily agree with such proportions, but I’ll point out that in their heyday the Rothschild family apparently held one third of their wealth in so called treasure assets. This included gold and fine art, among other things. The other thirds they held in real estate and securities (stock, bonds, et cetera). There are many billionaires that are invested in gold today, perhaps Buffet is the exception and not the rule.

    Like

  13. I generally agree with Amy but with a slightly different perspective. The distinction whether gold is an investment or speculation is irrelevant to the advice given to Byron’s friend. If she wants some gold to hang onto, fine, as long as it is not a large percentage of her portfolio. Larger questions loom. Paying off credit card debt is pointless without a corresponding change in behavior that caused the debt in the first place. A paid off credit card would just give a compulsive shopper permission to go on a spending spree. For this reason having the money where it is hard to access is a good idea and it sounds like she is on track. She should not even think about touching the money until she has learned to live within her means. Maybe she has reached that goal, but it is not clear from the information given. Then there is the question of her age which Amy brought up. If she has not reached a position that she can retire comfortably, I have a lot of concern with spending any of the dividends and interest that the investment might produce. “Mid six figures” is not a lot of money. It would make for a comfortable retirement provided there are other sources of income. Consider the 4% rule. Trinity study, for those not familiar. So her goal at this point is to invest well and not touch the money until she is retired (or financially independent).

    Like

    1. Well said, Charles. I absolutely agree with you. If she wants to play around with gold, that’s fine although I don’t think it should be more than 5% of her portfolio. And to tie this in with a concern that Alex raised, I always say you can invest in the stock market or you can bet on the stock market. Investing is like owning a plow horse; slow and boring but strong and dependable and it will get you where you want to go eventually. Betting is like betting on a race horse; fun and exciting and you can make make a lot or (slightly more likely) lose a lot very fast. I recommend investing.

      Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s