Our client Anna* came to us after receiving an inheritance from her late mother’s estate. Having already taken the decision to use some of the money received to pay down her mortgage, she had a balance of €500,000 remaining. How should Anna invest the remainder of her inherited lump sum?
In our beginning your investment journey video series, we learned about the importance of diversification when investing and understanding your risk appetite. Investing comes with its own set of challenges – and you could potentially lose some or all of the money you put in.
The inheritance of a large sum of money can change your circumstances significantly, so there’s a lot to think about. We encourage our clients to consider the following:
– What are your investment goals?
– How long are you willing to invest the funds?
– What is your current financial situation?
– How much stock market volatility are you willing to accept in exchange for potential longer-term growth?
How to make the most of your inheritance
Anna’s financial situation is an important gauge: does she need these funds in the next 12-24 months? If so, it should be kept liquid and in cash, so it should not form part of an investment portfolio.
Ultimately, Anna’s investment mix should reflect her willingness and ability to tolerate risk in the context of her time. A diversified investment in global equity markets can offer high single digit returns on average over the long-term, but we can also expect them to correct by between 30-50 per cent every six to eight years. As we have experienced since the beginning of the year, markets can be volatile. That’s why thinking about your lump sum in different baskets of time and risk can be useful.
A rainy-day fund is essential for everyone, so together with Anna we decided to keep 10 per cent liquid, invest 80 per cent with a medium risk and time horizon (five years), then invest 10 per cent in a high-risk, long-term (six to ten years) aspirational bucket. The majority of the portfolio was invested across multiple asset classes (equities / commodities / bonds) with an actively managed approach taken to the allocation of these assets across the portfolio which is reviewed regularly.
For the aspirational bucket, we explored an actively managed, concentrated global equity fund that offers investment in a diversified portfolio of 35 – 45 small / mid-sized growth companies.
By allocating Anna’s lump-sum across multiple risk buckets, she now has a diversified investment portfolio that aims to deliver long-term growth for her future.
*Names have been changed.
SEE MORE: A Guide To Inheritance Tax And Planning For The Future