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I'm Rich!


Smart Investing When You
Receive a Windfall
By Cara J. Stevens


Unlike cheese and wine, newly-found money does not age and appreciate gracefully on its own. It must be tended to immediately, as it can quickly trickle out of your grasp while you stand there appreciating its beauty.

"Too many times we see people who receive small amounts treat these funds as play money," says Susan Hirshman, a vice president and planning strategist at JPMorgan Fleming Asset Management.

Where Does It Come From?
If you’re reading this article in hopes of some day receiving a large unexpected sum, you’re probably eager to learn how that money may someday come to fall in your lap. The standard ways people usually receive a large sum of money are through an inheritance, gift, sale of a company or property, life insurance, winning the lottery, a lawsuit, marriage or divorce, and every once in a while they actually earn it through stock options or a bonus.

"We were fortunate to be part of the Internet stock bubble," says Phillip Lawrence* of Los Angeles, Calif. "My wife and I each worked for small startups that went public, so we made almost $100,000 from the stock options. While it wasn’t enough to retire on, it did pay for a down payment on a house in a great community."

Many families benefited from the boom of the late ‘90s, though like the Lawrences, most people did not earn enough to change their lifestyle permanently. Tens or even a few hundred thousands of dollars can increase your comfort level by paying off debt or helping you plan for the future, while an income of millions changes everything.

Take a Moment to Take Stock
Whether your new fortune is small or large, you should assess your current situation before you begin your planning.

"There are five major areas to look at when you’re creating a financial plan: insurance, estate planning, retirement, taxes and investments," says Jay Freeberg, a CPA and certified financial planner in Westbury, N.Y. "The first two – insurance planning and estate planning – must be taken care of first. If your family and future are taken care of, you can then look at allocating the rest of your funds for savings and investment."

Home and Family First
Experts agree that you should take care of the home front first. "The moment you acquire money of any amount, it’s a good time to make sure your wills are up to date, take care of trusts, family planning and wealth transfer," says C. Robton Perelli-Minetti, a Greenwich, Conn., attorney. "Depending on how much you receive, you might also want to consider changing to a different kind of financial planner who deals with multi-million dollar clients on a regular basis."

As with any sizeable addition of money to your portfolio, the way your assets will be managed and allocated will change completely, as will your risk tolerance. Your advisor will help you determine how readily accessible you need the funds to be and in turn will help you diversify your portfolio to serve your current and future needs.

Once you and your family are comfortably taken care of, you should plan for your everyday needs. "Calculate your regular monthly expenses to see how much you have available for savings," says Freeberg. "Then carefully select your investments based on their performance issues including cash flow, long term assets and overall needs." When considering any individual investment, you should always look at it in the context of your overall asset allocation.

Investment Options
Long-term growth options, such as bonds and CDs, offer the security of ensured maturity; however, the growth potential is quite limited. More volatile investments such as stocks have potential to expand your portfolio exponentially over time, but due to innumerable variables they also have the potential to reduce your investment to nothing.

Hedge funds, investment vehicles that pool investors’ money and invest it collectively, are becoming available to individual investors as a non-traditional investment option. The benefit of these funds is that since hedge funds are not as regulated as most other investment options, managers can leverage more sophisticated investment techniques. The downside is that you often need to satisfy a large minimum requirement for investing, and many funds are limited to fewer than 100 investors.

Other non-traditional options include investing in property and new business ventures. The upside is, of course, the high income potential; however, for investments of this sort, you must be extremely well informed about the nature of the business venture itself as well as the market conditions. For any investments, it is vital to get expert advice and learn all the risks and ramifications involved before committing your capital.

Donating Your Dollars
Often, people consider charitable donations simply for tax purposes, but financial advisors strongly caution against donating for the wrong reasons. "The first question you need to ask yourself is if you have charitable intent," says Hirshman.

"You should also make sure it’s an organization you believe in and are planning on giving to anyway, as deductions could be reduced if you have a sizeable income to report," says Freeberg.

If you are planning on giving, consider setting up a charitable trust. "If you plan on giving every year or providing for a charity in your will, a trust can provide a discounted tax deduction," says Freeberg.

The Bottom Line
Whether the amount you receive changes your lifestyle or just your comfort level, the best way to enjoy it is to appreciate the security that the amount provides, no matter how you allocate it.

*Name changed to protect privacy.

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About the Author: Cara Stevens is a Connecticut-based freelance writer.


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