Investment Consult

Don't let a windfall get blown away

If you don't know how to handle it, your good fortune could become misfortune.

By Lewis J. Altfest, PhD, CFA, CFP

Financial windfalls come in all sorts of packages. Inheritances are probably the most common, but people also get rich quick from the sale of securities, real estate, or a business. Perhaps the most amazing story I've heard involved a family that befriended a nice old lady during a vacation to Florida's Walt Disney World. The woman and the family spent a couple of pleasant days together before going their separate ways. About two years later, an attorney contacted the family and told them that the woman had died and left them more than $1 million. They were her only heirs.

Most people, of course, don't receive windfalls under such peculiar circumstances. Nevertheless, thanks to a strong run for stocks during the 1980s and 1990s, many folks could come into a lot of money. These same people, I've found, also have a good chance of blowing an excellent opportunity to provide for a comfortable future. Some will go on shopping sprees that leave them with too little for retirement. Others will put the money, long term, into conservative investments whose returns barely keep pace with inflation.

What should you do if you've received a windfall, or expect to soon? First, you or your accountant should ascertain how much of it will remain after Uncle Sam takes his cut. You don't want to get stuck having to cash in investments or sell personal property to pay the IRS. Once you've settled the tax situation, you can decide what to do with the money. Here's my advice.

Take a deep breath and relax. Understandably, you want to see your windfall reap profits quickly, but don't do anything rash. I usually advise my clients to deposit any cash they receive into a money-market fund while they decide where to invest long term. Charles Schwab & Co. (800-435-4000) and Vanguard (800-662-7447) both have attractive rates for large deposits. Schwab currently pays 5.1 percent on a minimum investment of $25,000; Vanguard also offers 5.1 percent and requires a $50,000 deposit. If the windfall is big, you can easily earn several thousand dollars in interest while pondering your next move.

Next, analyze any securities you receive as part of your windfall. You or your financial adviser should examine them for unusual concentrations. For example, a physician client of ours inherited a large sum in early 2000. Because it was spread among a dozen mutual funds, he felt his windfall was well-diversified. Unfortunately, as we pointed out to him, virtually all of the funds had much of their assets in technology companies. Yet he ignored our advice to replace some of the funds with ones that had less exposure to tech. Soon afterward, technology stocks headed south.

Another example involved a family that inherited a small fortune in Coca-Cola stock about four years ago. The stock was richly overvalued at the time, I thought, and I told them this. I also said that just as a meal consisting only of Coca-Cola could cause a stomachache, a portfolio concentrated in a single stock posed great risk. The family members nodded politely but declared that they wanted to hold on to most of their shares. Today, Coca-Cola's price isn't much higher than it was then; clearly, the family missed out on much better opportunities.

That leads to my next point: A windfall can afford you a chance to be more daring and branch into investment territory you might otherwise avoid. Take a client of mine who recently received a large inheritance. She was usually conservative with her money, but because of the added comfort level provided by the inheritance, I was able to convince her to invest in an oil and gas partnership that earned her 15 percent in less than six months.

Inaction and inattention are the enemies of people who find themselves with a windfall. If you're feeling anxious about what to do and you don't want to devote the time to educate yourself about investing, let someone else manage part or all of your money. For a list of noteworthy financial advisers, see "The 150 best financial advisers for doctors," Aug. 7, 2000. You can also contact the National Association of Personal Financial Advisors (888-333-6659; www.napfa.org) or the Financial Planning Association (800-282-7526; www.fpanet.org).

The author, a fee-only financial planner, is president of L.J. Altfest & Co.( www.altfest.com ), a financial and investment advisory firm in New York City. This column appears every other issue. If you have a comment, or a topic you'd like to see covered here, please submit it to Investment Consult, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742. You may also send a fax to 201-722-2688 or e-mail to meinvestment@medec.com.

 

Lewis Altfest. Investment Consult: Don't let a windfall get blown away. Medical Economics 2001;8:42.