- When you receive a financial windfall, sometimes the best course of action is to do nothing.
- It's best to define the "problem" before coming up with "the solution".
- It pays to take the time to develop a plan of attack and then stick with that plan.
Have you ever experienced a financial windfall in your life? Perhaps you have been named as a beneficiary of an insurance policy at the death of a loved one. Maybe you've received an inheritance from a distant relative. You've participated in lottery events and actually won a substantial amount of money after years of playing.
There are a number of life situations that could provide a financial windfall to us, without our having been aware of the forces in place that were going to give us that financial windfall, but one day, "your ship came in."
In a recent article at Seeking Alpha, "Rich and Retired? Don't Buy Dividend Stocks" the author presented us with a very interesting scenario. The author says:
A few weeks ago a friend of mine, who has sold out of a joint venture and is now retired, asked me how to invest his money.
He is married, his children don't need any support anymore, he owns a nice house, where the couple usually lives, has a quite expensive lifestyle and now wants to travel a lot. In figures: Besides the house, his now liquid net worth amounts to about $15 million and he wants to be sure that he can spend at least $200,000 each and every year for the rest of his life. He is now 53 years old. He doesn't want to rely on his pension, which anyway would be too little (compared to his requirements) and he still has to wait for it to become available. So basically he has to squeeze $200,000 (after taxes) out of $15 million every year and protect the purchasing power of this amount. That's the goal.
Now, I have to tell you, on first glance, this would be an enviable position to find yourself in. How would you like to have a windfall like this? Like I said in the beginning of the article, "it could happen". I have no doubt that many readers of this article will share with us a financial windfall that came into their lives.
Some Random Thoughts:
I have to admit that when I read the article, I thought to myself, why wouldn't this guy with the $15 million financial windfall invest in dividend growth stocks?
There were many other comments made that suggested the same thing, some comments that suggested other strategies, and some comments that were made from the perspective of "what's the problem here, the guy has $15 million!"
I think, however, after having time to digest the original article, the situation and a follow-up article by Adam Aloisi, "Rich and Retired? Please Buy Dividend Stocks", I've managed to have an epiphany moment of sorts.
I've taken the theoretical construct of the original article, thought about it, rolled it around in my brain for a while, and I think now I have a much better perspective on what kind of advice I would offer to our new found millionaire.
I have often said; sometimes the best thing we could do is to do nothing. In my haste to share my opinion (many of us fall into the same hastiness) I completely overlooked one of my most important dogmas. My kids have often paraphrased my dogma by suggesting it should be "shut up for a minute and let's think about this for a while". Either way, it's the same thing.
This fortunate man who just received $15 million from a closed out venture capital deal does not need to be investing in dividend growth stocks. He does not need to be investing in growth stocks. He does not need to be doing anything with that money at all, right now.
Instead maybe what he needs to be doing is this:
Shut Up Already:
The last thing you want to do is to tell everyone that you have just come into a financial windfall. Keep things close to the chest and do not tell anyone who does not need to know about your windfall anything about it. You will be surprised at how many relatives you never knew existed suddenly show up asking for money.
You will also find that there are a lot of people who want to give you a lot of worthless advice as to how you can best spend that money. You know, like Uncle Ernie who wants to start his "worm farm" where he is going to farm "red wigglers, the Cadillac of worms".
The woodwork is full of these kind of people.
Hire A Team of Professionals:
I know. As individual investors, we like to think that we are so smart about everything. But, I remember one time when my mother wanted to make a change to her Living Trust and told me about it. I asked her a simple question: "Mom, when did you pass the bar exam and become a lawyer?" She had an Estate Lawyer and a CPA on her side. I suggested that she might want to call them both, discuss what she wanted to do and then proceed if her plan made sense.
Any windfall might just be subject to taxes. A CPA with tax experience will be able to walk you through all of the tax implications, both Federal and State. Perhaps that $15 million will not be quite as large after taxes are paid. You don't need the tax man on your back.
An Estate Lawyer is a great guy or gal to have on your team. What do you want to do with the money after you're gone? How can you best protect yourself against inheritance taxes and estate taxes, again, both Federal and State? How can you use that money to benefit your family, civic organizations, church groups etc? What is the best way to structure the different future goals that you have for the maximum effect to those you wish to gift?
Don't Be In a Hurry To Invest Your Money:
What's the rush here? You've got 15 million bucks, before taxes. Nice problem to have. Take stock of your own risk tolerance, your short- and long-term goals, your comfort level with investing. You might feel that a Financial Planner or Registered Investment Advisor is a better choice for you than managing your own investments.
Interview a number of advisors and find someone who is compatible with your own personality, goals, and risk tolerance. Take the time to learn what you can about investing in self-directed accounts and perhaps enjoy some leisure time devouring books written about investing and sound financial decision making.
Take Some Time Off and Kick Back:
You are in a situation where you don't need to rush into anything. If you want to fulfill a particular life goal, then go ahead and do it. Perhaps you want to learn to sail a boat, fly a plane, visit Tahiti. Enjoy. Reward yourself. As Nike used to say; "Just Do It".
Make A Plan and Stick To It:
Six months into this thing, you have managed to address the tax issues and the estate issues. You've got a team around you that you can go to and say, "I want to buy a Buggatti, what do you think about that?" Hopefully they will ask you how that "fits into the plan that we've constructed".
How You Choose To Invest, Eventually, Is Really Up To You:
Whether this windfall gets reinvested in DG stocks or growth stocks is almost irrelevant. It all depends on what the investor is comfortable with and what his goals are. That's where the financial planning comes into play.
Is one style "better than the other?" We could argue this all day long. However, there have been many investors who simply don't own any stock at all. Why does it have to be an "either/or" proposition at all?
My next door neighbor owns no stocks at all. He owns 7 Papa John's Pizza Franchises and he owns a lot of rental real estate. He lives very well and has a game plan in place for after he passes.
It doesn't get much better than that.