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Your wealthy relative–the one who kept trying to figure out how he could take it with him–has finally expired, leaving you as one of the beneficiaries of his hard work and financial acumen. What now? How best to invest your windfall? Essentially, you have four choices:
1. Pay off debt;
2. Park it in a bank account, T-Bill or other conservative investment;
3. Open an on-line brokerage account and manage it yourself; or
4. Find a professional to help you manage your money
This first option is often overlooked, but is the number one recommendation of financial professionals. Why? Take a good look at the annual interest you're paying on that credit card. Is it 16, 18, 20 per cent? Unless you're sure of that kind of return–after taxes–on your investments (and, if you are, call me) you're best advised to get out of debt before you invest.
The next option may seem safe and could be appropriate for part of your windfall…but it isn't your complete answer. An investment that doesn't at least keep pace with inflation–and outperform it after taxes–is a lousy investment in the long run. You need some growth, because you are likely to live longer than your parents. How much growth is right for you? Here's a rule of thumb used by financial planners: Subtract your age from 100 and that's the percentage of your assets that should be in stocks. The older you are, the lower that percentage gets…but you should always hold some stocks, right up to the time Willard Scott puts your mug shot on that Smucker's jar.
On-line brokerage accounts make it very easy to do it yourself. First, though, look in the mirror: Do you have the experience and temperment for the job? Buying and selling online is so easy that it can become a trap for the impulsive, who winds up churning his or her own account with little gain-or overall loss-to show for it. If you conclude there is some wisdom in finding a professional to guide you, here's my advice, after 14 years experience as a stockbroker:
1. First, determine your risk tolerance. One way to do this is to ask yourself how long it would bother you if you lost $1,000 in an investment: an hour? a day? a week? the rest of your life? The answer will guide you to an appropriate percentage of growth stocks in your portfolio.
2. Then, identify your goal before you approach anyone. Investors generally fall into one of three broad categories: income, growth or total return, the latter being a hybrid of growth and income. If you have received a large inheritance, your goal may be capital preservation and living off the income it generates; if you need to grow your capital further, that will require a greater percentage of growth stocks and, thus, more risk.
Once you have determined your own investor identity and goal, then it's time to seek out a professional. If you have a friend with whom you share investment philosophy, ask him or her to recommend their investment advisor. If that doesn't work, here is one common pitfall to avoid:
Do not–please–respond to a broker's ad you have seen in the paper or received in the mail. Two types of brokers advertise: the very new and the very focused. Do you want to turn your nest egg over to someone who just entered the business? As for focus, these brokers zero in on one product–often annuities–and make a good living giving the same seminar on them over and over and over. That's good for them, maybe not so good for you, because you deserve someone who will listen and respond to your unique needs, not just shoehorn you into his or her specialty.
Plan on talking to at least two or three brokers before making a decision. If you try a local brokerage office, insist on seeing the manager and make it clear you do not want to settle for whoever happens to be the “floor broker” (the one who gets walk-ins) on that particular day. Since you have already identified the kind of investor you are and your goal, share that with the office manager and ask him or her for a broker with whom you would be compatible.
When interviewing a broker, I strongly recommend avoiding those who make the majority of their living referring their clients to fee-based asset managers. These brokers receive a small portion of these fees. If they can get enough of these accounts, they can spend more time on the golf course than in the office and don't have to stay current on market trends. If the performance of one of their managers lags, they will simply shift you to another manager before heading back to the links. The truth is that you can just as easily find yourself an asset manager who fits your investment profile.
Instead, seek out a broker who closely follows the markets. An excellent way to do that is through the technique of the essential question. Those who have ever contacted a referral for a job applicant know the essential question there is, “Would you rehire this person?” The response-or pause before the response-can speak volumes. In this case, here's what you ask: “What's your single best idea right now?” If you get an enthusiastic, coherent response to this question, you have found someone who makes it a practice to regularly sift through the mountain of new information that constantly pours into every brokerage office and then make his or her best investment judgment. If, instead, you are shown a list of stocks and told, “These are what we like right now,” you are talking to a person who doesn't care to make his or her own choices. Avoid that person.
When you have found a broker with whom you are comfortable, be clear on your expectations, then give your broker half of what you intend to totally invest. Make it clear that you expect a quarterly update of progress and that more funds will be forthcoming if the future unfolds as the two of you have planned. You will then have done your best to start down the road to what could become a beautiful and profitable partnership.
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