Investing my windfall

Everyone’s journey in life is different. We take different paths to achieving our goals and some paths may be more difficult than others. However, planning and preparation can help us to achieve our goals. A common goal shared among most, if not all people, is that of financial freedom. We all want to be able to live comfortably and afford the things that are important to us.

The starting point along the journey to financial freedom is different for each of us. Some persons work, save and invest to get to that place of freedom and comfort. Others may receive a lumpsum which could be in the form of an inheritance, the sale of a property or even won the lottery. For the investor who has now received a one-time lumpsum, they may ask themselves, “What should be my next move?” The natural inclination may be to pay off debts or make purchases which you previously wanted to but couldn’t afford to until now. We also tend to look to trusted family or friends for advice. Before taking any of these actions, it is best to speak with a licensed financial advisor who can provide guidance and advise on how to allocate the funds to preserve and grow your wealth.

A wise decision is to invest the newly acquired wealth across different asset classes to reduce risk and maximize earnings. Different asset classes play different roles in helping to achieve your goals. Look at some fixed income investments, equities & real estate. All the asset classes may not be suitable for your portfolio so it is important to understand the characteristics of each asset class and then determine which can be used in building your portfolio.

Keep some cash: It is always important to have some money available in the event of an unforeseen emergency. This emergency fund should be easily liquidated to meet your cash needs. However, the emergency fund does not have to be held in a bank account. A short-term investment such as a repurchase agreement can earn more interest than a bank account. It can also be easily liquidated should the need arise. If there is no emergency, then you benefit from the higher interest rate. This cash portion of your portfolio can generally be 10-15% of your investment portfolio to allow the greater portion of your portfolio to earn more.

Invest in bonds: The global bond market is enormous and offers a wide variety of investment options. The spectrum of options in the global market includes bonds with risk levels from low to medium and high. It also provides bonds with a variety of interest rates. There is always a bond available to meet one’s risk appetite. Having bonds in your portfolio can provide periodic income and has potential for capital gains. Most bonds pay a semi-annual or a quarterly interest payment and buying multiple bonds with different interest payment dates can provide income which may mimic a monthly salary. Speak with your advisor to select bonds within your risk appetite and structure the portfolio to meet your cash flow needs.

Benefits of investing in equities: Stocks can be a risky investment as the price movement can be very volatile. However, volatility can create opportunities for earning higher rates of return. An investor can benefit greatly from buying low and selling high. They may also benefit from stocks which pay dividends to their owners. Having a combination of growth and dividend paying stocks can greatly boost the earning potential of your portfolio. But always seek professional guidance.

Real Estate investing: This asset class tends to require a greater amount of money for the initial investment. Unlike stocks and bonds which can be purchased in smaller quantities, real estate requires a larger capital outlay at the inception. By adding this asset class to your portfolio, you can benefit from capital appreciation as prices increase, or you may be able to benefit from rental income once the property is purchased.

Whichever asset classes you decide should be part of your portfolio, ensure that you understand and know the risks involved with each. Know how you will earn from them and ensure that you are maximizing your earning while minimizing risk. It is important to find the balance of these to dynamics to ensure that you are earning adequate returns for the risks being taken. Remember too that inflation and devaluation affect your newly acquired wealth. Consider these when choosing investments and look to minimize the effect they will have. 

Dwayne Neil, MBA, is the AVP, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm.