Inheriting money can be emotional and overwhelming. Investing it doesn’t have to be.
In this video, I walk through the exact framework we use with clients to make smart, calm investment decisions after an inheritance — so you can feel confident about where your money goes and why.
Transcript
If you’ve inherited, you may find yourself with a lot more options than before. You might be thinking about taking that trip, paying down your mortgage, helping your kids or grandkids with college or buying their first home, or investing it for the future, perhaps for retirement or another long-term goal.
If you’ve decided that this money is going to be part of your nest egg, this video is for you. Today we’re going to walk through the same thought process we use with many of our clients when they want to invest inherited money.
Because I don’t know your specific situation, there won’t be any specific recommendations in this video. These are simply the foundations that can guide the way toward what kind of portfolio makes the most sense for you.
I’m Rachael Bourke, a financial advisor with Hello Inheritance, where we help women and couples navigate the financial and emotional sides of inheriting wealth.
Step 1: A Rainy Day Fund
The first step we always make sure is covered before picking specific investments is stability and protection. That means making sure you have a rainy day fund.
Why? Because life happens. And when unexpected expenses arise, the last thing you want to do is be forced to sell investments at the wrong time. An emergency fund creates breathing room. It allows the rest of your money to be invested with a longer term perspective instead of reacting to short term needs.
We typically recommend keeping 6 to 12 months of living expenses set aside in cash somewhere it’s easily accessible.
Step 2: What is Your Time Horizon?
Once we have peace of mind and an emergency fund in place, we want to focus on investing the rest. The first thing we look at is time horizon.
Your time horizon is simply how long you expect to have the money invested before you need it. For example, saving for a home purchase next year, a child’s college tuition in five years or retirement 20 years from now. Each requires a very different investment approach.A general rule of thumb is the longer your time horizon, the more aggressively you can invest. Investing in more stocks and equities typically means you will experience more growth over time.
However, it also means more short-term volatility. If you have 30 years before you plan to touch that money, you can ride out many market storms without having to sell at a low.
However, if you only have a few years to invest, we’ll likely encourage you to invest more conservatively. This means relying heavily on investment vehicles like bonds and CDs, because we recognize that the market is unpredictable and we don’t want you to have to draw from your investments while the stock market is at a low.
I want to mention one more nuance.
When it comes to investing for retirement, there’s something many people miss. Many people think, well, now that I’m drawing from my portfolio for income, my time horizon is essentially zero. So all my money should be in cash or CDs. Not quite. If you’re nearing retirement or have recently retired, that doesn’t necessarily mean that your portfolio should be entirely conservative.
Many people’s retirement will last 20, 30, maybe even 40 years or more. That means a portion of the portfolio still needs to grow to help keep up with inflation and rising costs of living. These are some of the nuances that we would make sure to incorporate with any new client.
Step 3: What is Your Risk Tolerance?
Once we understand your time horizon, next we look at risk tolerance.
A helpful way to think about risk tolerance is to imagine a hypothetical scenario. Let’s say the market drops 20% in a year. This doesn’t happen often, but it has happened before and almost certainly will again. In real dollars, that means if you have a $2 million portfolio, a 20% drop is $400,000. How would you respond? Sit with this for a moment.
Have you given it some thought? Let’s take a look at some of the possibilities. Would you stay invested understanding that markets fluctuate?
Would that be a comfortable place for you to be $400,000 later? Or would you feel compelled to sell everything and move to cash? This is an important question because if a portfolio is invested too aggressively for someone’s comfort level, the natural reaction during volatility is often to sell and that locks in losses.
But the opposite risk also exists. If all your money is held in cash because it feels safer, it will struggle to keep up with inflation over time. So the goal is to find a balance that allows you to stay invested comfortably and consistently while also providing the appropriate amount of growth.
Step 4: Do I Need to Supplement My Income with My Portfolio?
Another key factor we need to keep in mind is income needs.
Some people rely on their portfolios to generate income to support their lifestyle. Others may still be working and have no need to withdraw from their investments for many years.
If your portfolio is providing income, the structure of your investments may look very different than someone who is purely focused on long-term growth.
What are the Elements of a Well-Structured Portfolio?
Diversification
For starters, you may have heard the phrase:
“Don’t put all your eggs in one basket.”
This is referring to the principle of diversification. Diversification simply means having your portfolio invested in many different investments rather than just a handful. Spreading investments across different types of assets and different parts of the market means that your wealth isn’t dependent on the success or failure of just one thing.
This smooths out the ride, meaning you won’t experience as much of this (volatility) in your account balance.
The Power of Compound Interest
Another simple but powerful concept is reinvesting dividends. Many investments generate income in the form of interest or dividends. When dividends are not reinvested, they just go to cash and in most cases earn little to nothing.
Missing something as simple as dividend reinvestment can have a surprisingly large impact over the long term.
Reducing Taxes
Finally, like most things in life, investments are subject to taxes. Taxes can weigh down your portfolio if not managed well. But with thoughtful planning, such as understanding your current tax situation, timing certain decisions, and coordinating how money is withdrawn, we can often help more of your money stay in your pocket and help you send less to the IRS. Advisors sometimes refer to this as reducing tax drag.
If you’re like many of the people we work with, you would rather spend your time and energy doing almost anything other than becoming an expert in tax law. So I won’t go into too much detail here, but I’ll have another video in the future that goes into some of the nuances if you are so inclined.
The Gist
The truth is, investing is not a skill set that everyone wants to learn.
In fact, many of our clients tell us the same thing. They don’t want to watch the markets every day. They don’t want to constantly think about their investments. They simply want to know that their money is being managed thoughtfully by professionals so they can focus on living their lives. And that’s one of the reasons people love working with us.
If you’ve inherited and you’re trying to figure out what to do next, having a thoughtful plan can bring a lot of clarity and peace of mind. If you’d like help thinking through your own situation, you can schedule a call with us anytime at HelloInheritance.com.
See you next time!
Disclosures
This content is for educational purposes only and is not specific investment advice. Advisory services for Hello Inheritance are offered through Bourke Wealth Management. Please visit www.bourkewealth.com for important investor information.
Bourke Wealth Management is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Bourke Wealth Management and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Bourke Wealth Management unless a client service agreement is in place.
This commentary reflects the personal opinions, viewpoints and analyses of the Bourke Wealth Management employees providing such comments, and should not be regarded as a description of advisory services provided by Bourke Wealth Management or performance returns of any Bourke Wealth Management client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Bourke Wealth Management manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.