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Three Ways to Protect a Windfall3 min read

Feb 7, 2018 - Max Osbon ( 4 mins to read)

Max Osbon

The sudden arrival of a large sum of money can be exciting and disorienting at the same time. The big dollar amount may short-circuit some of your normal financial decision rules and patterns. With that in mind, we offer you three solid ways to protect a windfall and prevent future regrets about how you spend and invest it.

Watch for the Windfall Mentality

Windfall mentality is a slippery slope. The sliding can easily happen after the sale of a business or inheritance. Those caught up in the windfall mentality spend liberally on short-term discretionary consumption rather than thinking about long-term investment goals. This behavior is understandable seeing as newfound abundance can feel endless. But it can easily get out of hand. Sure, buying a large and beautiful home in Vail for all of your children, nieces and nephews will be a thrill for the family, but that doesn’t make it a sound financial idea in the long run.

Ask yourself, are you feeling the windfall mentality? Self-awareness can be a powerful antidote and it may save you from some very expensive decisions. We recommend carving out a portion specifically for luxury and enjoyment — the new designer vacation home, boat, car or plane — with the rest invested according to reasoned guidelines and goals.

Wait on Big Purchases

There is no urgency to invest or spend funds immediately. When it comes to big purchases, take a pause. Like a teenager about to get a tattoo — see if it’s still something you want six months down the road.

Luxury has a notoriously poor bid/ask spread, meaning the sale of a boat will be a fraction of the price you paid. The same goes for real estate if you go for too many high-end customizations. Before you sign on the dotted line, consider financial consequences like ongoing maintenance costs or the way tastes change over time.

One lesson learned from market turbulence in 2008/09 is that your entry point to the market — whether it be stocks, gold, art, real estate or other assets — is extremely important. Spreading out your buying decisions reduces the chances of facing unintentional and unlucky market timing.

The cost of an ill-informed decision is usually much greater than the cost of delayed benefits when putting decisions on hold. A delay may even help you buy at a more favorable price.

Write Down your Investment Plans

Or have your advisor write them down for you. Like a business plan or contract, written investment plans can guide your decisions over years or decades. Think of these plans as the rulebook you want to utilize for investing. When the plans are written down there’s no chance of forgetting what you’re trying to achieve or how to pursue it.

For instance, create rules for when and how to invest your multi-million dollar payout. You may decide to put $250K per month to work for the foreseeable future, buying through the ups and downs and smoothing out your costs and returns over time. A written strategy can help guide your decisions, especially when distractions, investment opportunities du jour and market volatility try to throw you off track. Consistency is a powerful force in investing; let it work for you.

If you would like a sounding board for your own windfall decisions, we’d be happy to share more insights.

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