Today, I’d like to START A NEW video series on How To Manage A Financial Windfall.
In the financial world, few things offer more comfort than receiving a large sum of cash. The challenge is how to handle a windfall responsibly based on the markets, economic environment, and personal circumstances. In this video series, I’ll offer a framework that may be helpful to ensure your large inflow of capital, irrespective of whether it’s from the sale of business, large gift, life insurance settlement, bonus, or inheritance, is being handled responsibly:
The first step is to Pay Off Debt: An important first step after receiving a large windfall is to assess your overall finances. If you borrowed any money, you should consider paying that off first. It’s very difficult to grow your wealth while you have an onerous level of debt weighing you down. Credit card debt, student loans, and auto loans are all bad and should be paid off as soon as possible. Conversely, a low-rate fixed mortgage on your primary residence and some forms of business debt can be paid off more slowly. Once you relieve yourself of your burdensome debt, you can explore the best way to invest this capital.
Next consideration worth mentioning is Do NOT Time the Market: Since the market is around all-time highs as of this recording, some investors may consider the idea of waiting for the bottom of the next bear market to invest their money. On the surface, waiting for stocks to drop by 20% in order to buy things on the cheap seems like a great idea. In practice, this strategy is impossible. There is no way to perfectly time the market. Even if the market did fortuitously freefall just before you had a large pool of capital to invest, most people would still hesitate to start investing. Their psyche would tell them that the market can always fall further. Furthermore, markets tend to rise three out of every four years. Even though the market is currently at a high, it has a probability of continuing to rise going forward, so there is no need to be concerned about investing at a market high.
Another point is the fact that Diversification Is a Must: Choosing to have exposure to a variety of investments is always imperative. While the U.S. market has been setting record highs, it also has experienced large periods of underperformance. Additionally, while most global markets have not had such a good run over the past decade, they have outperformed the U.S. this year. The same is true for various asset classes and sectors, whose performance moves in cycles. Maintaining a diversified strategy when deploying capital can minimize volatility, risk, and offer a higher probability of achieving your financial goals. Investors should always pursue a strategy of diversification across geographies and asset classes.
In my next video, I will offer 3 more considerations to manage a windfall.