I’m 53 years old and will soon come into a multi-million dollar sum that I need to manage properly for my retirement and for my children’s future. I’m not willing to just hand the reins over to anyone, but I also realize I’m not an experienced investor. I’d like to invest this money so it will continue to grow for all of us, but I don’t know where to begin. Any suggestions?—Lori
Managing a large windfall to ensure long-term financial security is a complex task, even for seasoned investors. The current economic environment, characterized by rising interest rates and significant market volatility, presents additional challenges. However, with a disciplined, structured approach, it’s possible to invest this sum effectively for your retirement and your children’s future.
Here are four strategies to consider:
1. Assess Your Risk Tolerance
A critical step in disciplined investing is understanding your risk tolerance. Your objective is to achieve returns that align with your financial goals without exposing yourself to unmanageable losses. Attempting to time the market is unreliable; instead, focus on creating a balanced portfolio of stocks, bonds, and cash. This approach allows you to benefit from market gains while withstanding downturns.
Begin by establishing an emergency fund from your windfall, ensuring you have sufficient liquidity to cover unforeseen expenses without disrupting your investment strategy. Allocate this reserve to secure, low-yield investments such as FDIC-insured accounts or short-term CDs, prioritizing capital preservation over returns.
For the remainder of your investment, determine an appropriate asset mix using a risk tolerance and asset allocation tool. While the tool provides a baseline, you can adjust the allocation based on your preferences. Maintain your chosen asset mix, with occasional rebalancing, to avoid reactionary shifts based on market predictions.
2. Diversify Strategically
Once your asset allocation is set, focus on diversification to mitigate risk. Simplicity is key: consider broad index funds that offer exposure to the entire U.S. stock and bond markets, and add international index funds for further diversification. Alternatively, lifecycle or target-date funds provide a pre-set mix based on age and risk tolerance, simplifying allocation decisions.
While diversification is essential, avoid overcomplicating your portfolio with niche investments like commodities or cryptocurrencies, which can increase management complexity and risk of di-worse-ification. A well-diversified portfolio, combined with a cash reserve, should suffice for most investors.
3. Minimize Fees and Expenses
Lowering investment costs is an effective way to enhance portfolio returns over time. Research by Morningstar indicates that funds with lower annual expenses tend to outperform higher-cost counterparts. By prioritizing low-fee investments, you retain more capital for compound growth, benefiting your retirement and potential inheritance for your children.
Seek out index funds with annual fees around 0.25% or less, significantly lower than the 1% typical of many funds. If you explore actively managed funds, use tools like Morningstar’s Fund Screener to identify those with competitive expense ratios.
4. Seek Professional Guidance
While direct management by an advisor may not be your preference, professional guidance can be invaluable, particularly for complex planning issues beyond investments. Consider consulting a financial planner for advice on retirement planning, withdrawal strategies, and estate planning.
Opt for fee-based advisory services where you pay for specific guidance rather than ongoing management. Ensure the advisor’s fees are reasonable and verify their competence and trustworthiness.
By adhering to these structured strategies, you can position your windfall for sustained growth, ensuring financial security for you and your family.
