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 Module 1, 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. So, before you get started, you need to know how comfortable you are with the risks. And so, understanding Anna’s risk tolerance was an important starting point for us.
Questions to think about
The inheritance of a large sum of money can change your circumstances significantly, and 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?
-What is your risk appetite? That is, 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
When we spoke to Anna, the first consideration was her investment time horizon for the lump sum or more simply, the length of time she was willing to invest. Her financial situation is an important gauge of this: would Anna need these funds in the next 12-24 months?? If so, it should be kept liquid and in cash and not form part of an investment portfolio.
The second consideration was Anna’s risk tolerance – ie, how much stock market volatility she’s willing to accept in exchange for potential longer-term growth. Ultimately, Anna’s investment mix should reflect her willingness and ability to tolerate risk in the context of her investment time horizon.
Often, people feel like they are risk takers but when this is quantified by illustrating examples of stock market corrections, they can become uncomfortable. 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% 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% liquid, invest 80% with a medium risk and time horizon (five years) and invest 10% in a high-risk, long-term (six-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.