What To Do With A Sudden Windfall?

Almost everyone dreams of landing a surprise windfall after years of saving bit by bit to get by. However, there is a likelihood that the initial euphoria of getting a windfall could spark a wild spending spree for many of us, leading us to splurge it all – lavish meals, a down payment on that dream car, travel or the home renovation you have been wanting to do for years.

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It would certainly be enticing but it pays to pause and consider if there is a financially smarter way to use that extra cash, whether from an inheritance, a lottery win, or some other stroke of luck.

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Therefore, for today’s 225th week of our #SundayTimesRecap learning series, based on this article published in yesterday’s Sunday Times Invest section, “What to do with $100,000 windfall or spare cash?”, let us learn to be wiser with putting a huge cash pile to work. While it may not bring us instant gratification, using an unexpected windfall strategically might set us on the path to fulfilling a long-held financial goal.

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1. Clear off outstanding debts. Consider both your short- and long-term financial goals, what you intend to use your monies for and when you will need them. For instance, if you have a wedding coming up or renovation works, you may need to set aside more money.

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If you have outstanding personal loans or credit cards with high interest charges – for example, rates of more than 7% – you should aim to pay them off first before the outstanding payments snowball due to missing a monthly payment on a credit card, resulting in high fees on existing and new balances, and hurt your credit score. At the same time, paying only the minimum sum can incur late payment charges.

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2. Learn from mistakes of others. It is important to avoid the common mistakes people who come into a sudden windfall tend to make. These include making extravagant purchases, quitting your job prematurely and even being overly generous. In other words, do not make hasty decisions; you are better off being prudent and responsible.?

3. Set aside emergency funds. Before investing, ensure that you have set aside sufficient cash for rainy days, by having at least three to six months’ of living expenses tucked away for emergencies.?In addition, gig economy workers or freelancers should have an emergency fund of at least 12 months for monthly expenses. This will tide you through unforeseen circumstances such as a job loss and you will need to be disciplined in building up your emergency fund. Building sufficient savings is especially important for young adults who have just entered the working world.

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4. Build your defences. Once the emergency cash has been set aside, you can consider addressing your protection and insurance needs, which should be done before investing any excess savings.?If something unforeseen happens and you are not able to provide for your dependents, savings and payouts from your life insurance and mortgage insurance policies will help to sustain them until they become independent.

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Getting health insurance coverage that protects against critical illness and hospitalisation is your first step to building up your financial defences.?You can also address any protection and insurance gaps through term, personal accident and long-term disability insurance.

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5. Plan your investment decisions. Once all the above is done, start planning for your investment decisions that suit your risk profile, time horizon and investment goals.? As investment considerations depend on your age and circumstances, the options can vary greatly. Whether you are in your first job, an experienced professional, a parent with school-going children or about to retire, investing is an effective way to put your savings to work so that you can build and preserve your wealth.

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6. Understand your investment profile. There is no one-size-fits-all approach with investing. What is most important is to take a disciplined and long-term approach and choose investments that meet your specific risk-return objectives. Your investment profile is influenced by your financial situation, investment goals and objectives,?risk tolerance and time horizon. Ask yourself what your investment objectives are; when you need the money; what is your risk tolerance; and how active do you want to be in managing your investments???

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Understanding your investment profile and financial situation enables you to arrive at an optimal asset allocation for each financial instrument, such as stocks, bonds and alternatives, that is aligned with the four key considerations for investing.? You can build portfolios that provide strong and rapid growth, with a focus on capital appreciation.?Investors who subscribe to this strategy tend to have most of their portfolio in equities, especially growth stocks, over fixed-income instruments like bonds. Such a strategy is more likely to be taken by younger investors who have a longer time horizon and can stomach more risk.

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However, investors can focus on generating dividend income and preserving wealth. By employing such a strategy, investment portfolios are likely to have more bonds and dividend stocks from blue-chip companies over growth stocks like technology plays. This strategy is often considered lower risk and tends to be favoured by older investors who are closer to retirement.

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7. Staying calm. Given your windfall, you might be tempted to jump in and invest all the funds immediately, but this might not be a good idea. Instead, consider taking a slow and steady approach to portfolio growth, bearing in mind that history is on the side of those who can wait.? The global economy historically has longer periods of growth than recession, and stock markets see longer “bull” phases than “bear” ones.

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You can consider investing fixed amounts at fixed intervals – known as dollar-cost averaging – to avoid timing the market, remove emotions from investing and to ride out market volatility.?This reduces the risk of having extreme outcomes, be they positive or negative ones. And when the opportunity arises due to market volatility, you can consider lump-sum investing by topping up your existing investments in tranches.

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8. Best ways to invest $100,000. The first step is to establish a time horizon for your investments, one distant enough to skirt the short-term “irrationality” or a situation in which markets deviate markedly from economic fundamentals.?The odds of creating sustained wealth via timing the market or trading in and out on a frequent basis are extremely low. Investors should aim for time in the market – be it 5, 10, or 15 years in their investment time horizon.

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Investors should also consider multiple asset classes, recognising that each contributes to the construction of a well-balanced portfolio. For example, equities produce capital gains while bonds generate cash flow and introduce stability.?

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On deciding on the allocation to income and growth asset, it will depend on your age. As you approach retirement with a five-year investing horizon, a portfolio should shift towards being income heavy as the runway for risk shortens.

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Investors should keep an eye out for global investment opportunities and not narrow their bias towards domestic or regional markets. Don’t be afraid to look beyond Asia to find best-in-class companies across the best growth sectors.??

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Consider building resilient investment portfolios by adopting a “barbell” strategy, which aims to capture superior returns from long-term irreversible growth trends, while also generating stable income to mitigate any short-term market volatility.

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This is done by taking an outsized position in two areas of focus.?One would be income-generating investment-grade bonds, which now yield about 5% a year. The other is “growth boosters”, such as specific plays identified as pillars of the new digital economy. It is crucial to think long term, multi-asset and global, and buy into best-in-class companies.

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9. Diversify. Remember - do not put all your eggs in one basket. A sound investor should build a portfolio that has exposure to different asset classes such as equities, bonds, gold, foreign currencies; regions (United States, Europe and Asia); and sectors ranging from technology and industrial to financial and consumer staples.?

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Do not try to time the market. This can be time-consuming and does not necessarily guarantee a better entry point than dollar-cost averaging.

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Review your portfolio’s performance and risk at least once a year, or preferably once every six months. This will help you assess whether you are on track with your goals and if you need to adjust your approach.?

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Your goals may change as you age: What you desire as a fresh graduate or young adult will look very different from what pre-retirees in their 50s want. For instance, if you’re aiming to get married and to buy a home in five years, it may be prudent to adopt a more conservative strategy, given the relatively short timeframe.

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You could invest 65% of your portfolio in bonds and the remaining 35% in equities. But keep in mind that you might need to make a larger initial outlay, as bonds tend to deliver lower returns than equities over the long term.

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If you have two young children who are entering university in 10 years, this timeframe offers a relatively long runway for planning. You may want to create a long-term, diversified investment portfolio, allocating a portion of your $100,000 specifically towards their university expenses. A balanced approach could involve investing 50% in bonds and 50% in equities, with a focus on dividend-paying stocks to generate income. This strategy can provide periodic income that you can use to reinvest or to cover other expenses such as your child’s pocket money.

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10. Build up your knowledge. Make continuous efforts to increase your understanding of financial planning topics and concepts. There is a host of free quality content online.?

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MoneySense, Singapore’s main national financial literacy initiative, contains a wealth of information and resources to help you better understand various financial instruments and concepts.

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If you are looking to invest in stocks on the Singapore Exchange (SGX), it makes sense to follow the SGX My Gateway page. This is run by the SGX and provides daily updates, write-ups and commentary pieces by the exchange’s market strategists and writers.

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You can also get useful tips and resources to build the financial confidence to reach your life goals on the Central Provident Fund Board’s website. It has articles to help you budget for various events, from buying a home to managing your healthcare expenses, growing your savings and building your retirement income.???

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Singapore banks, including OCBC and DBS, have of free how-to guides, financial wellness articles and a wide range of financial literacy webinars.?

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To grow your knowledge on investing matters, join my teammates and I at our next webinar, “The Lifetime Income Streams”, on Tue 26th Nov 2024 at 8pm.

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We will share simple investing tips to help you create monthly income that can last you for the rest of your life without constantly having to worry about money. You will feel more confident in managing your money matters as most of our attendees can testify.

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Register for the zoom link – select “Invited by Victor” - here: https://www.thelifetimeincomestreams.com/tlisvip

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To reach me over my personal Telegram chat, click here: t.me/victorfong

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