Lump sums: Gift or a Curse?

Have you recently lost a loved one and come into an inheritance? Or have you come of age in your community and been gifted with a lump sum? Or do you have savings which have reached a significant amount which you would like to work harder than interest is allowing? This is my guide followed by further reading at the end specific to various topics of interest.

Trying to figure out what to do with a lump sum can be difficult, especially in the fast paced world that is also prone to scamming people. Here is my list on what to do to positively change your life with a lump sum:

Set your objective. Assess your current position and determine if you need access to the money on a regular basis; at a moments notice; or if you would like to have the money pay you a salary.

Understanding your risk profile is key in all the instances that are going to be discussed as it assess you and your financial circumstances specifically to find something that is the right fit for you. Once you have decided look into a product that will meet your needs or speak to a financial advisor to lay out the options for you.

Tax burdens and the implication on the lump sum is another important thing to take into consideration. Some people coming into a lump sum in a specific way means that they will have to give the tax man just under 50% of the amount and as such will heavily impact what they can do with the remainder, while others are inheriting an asset which they choose to dispose of for tax and maintenance reasons as the up-keep long term is more expensive than they see as worthwhile, which leads to a lump sum cash pay out.

To get an investment which you can access on a regular basis you should look at discretionary investments, such as a tax-free savings account or an endowment. This allows you access within a short period of time while also allowing you to invest the money in an investment with a range of different risk appetites or profiles that align with your own.

This alignment will ultimately be for the sake of your comfort, however some investors may look at their rate of return, risk premium or return on investment and decide that the rate is too low and they would like to reach for something slightly further up. This leaves them with the opportunity to move to a moderate approach from a conservative one; a moderately conservative one to a moderately aggressive one; or a moderate one to an aggressive one. All of these shifts be they by degrees within the same approach (moderately aggressive or moderately conservative) or be they in entire stances (conservative to moderate, moderate to aggressive) are going to be accompanied by increased risk and increased reward and as such due diligence is an important aspect of the process as we aim to invest amounts which we can stand to lose with the aim of gaining more than we put in – once all the fees, costs and taxes have been dealt with.

Another investment that one may look into is property or some other sort of asset (Kruger rands, commodities, futures, bonds) – cars do not count except in very, very, very specialised cases and even in those cases a large amount of due diligence is required, so the new AMG is not where you want your money – which is either interest bearing, profit-earning or adds value in some other way which in the long term will add to your bottom line – this is where art work is typically lives, as the value cannot always be quantified immediately based on the cost of production, but also needs to take into account the reputation of the artist and other assessments that make up the due diligence in that regard. If property is where you would like to go, have a look at https://ca3zar10.wixsite.com/wealth/post/housing-market-to-rent-or-to-buy.

Another place that is great for investment is business, however if it is not your business the first thing that you have to keep in mind is that 80% of business in South Africa fail in the first five years. So rather than getting into a start up, it may be better to start with doing due diligence on a more experienced business person, getting an outline on the equity which aligns with what you are putting in and what you can expect as a return on your investment. If you like what you are seeing and you can see that the financial information which has been put in front of you adheres to the SMART principles, IFRS and that the books balance you can push the button and watch it grow – or fall, as past performance is not an indicator of future performance, COVID 19 is a reminder of that– and if that all goes according to plan, then in the meantime you can start doing your research on how you can diversify your portfolio. The access to this money can be fixed – which will be dependent on your agreement with the company – so you may find yourself in a crisis and unable to get access to the money invested.

Guaranteed Income investment vehicles are also a great way to cement your handle on your lump sum. They deliver a fixed payment on a monthly basis, holding the initial sum fixed and so you are earning directly off of your investment on a monthly basis without being as affected by the price movements.

Penultimately, you can also pay a lump sum into an existing retirement annuity that you hold. You may find that you exceed the threshold for a single year so that will mean that you have tax that is carried over to the following year or many, many years thereafter, however it can be an effective solution.

Finally, a combination of these could be the optimal combination of flexibility, monthly income and long-term effect as your own needs dictate. A make-your-own-pizza (investment split) solution to cravings (needs) that no one else has.

While these are all great possibilities depending on your unique set of circumstances it is a great idea to really get an in depth understanding of what it is that you need (needs analysis), what it is that you would like to happen (objective) and in what time period you would like to see it happen in (time horizon). As time horizon shifts the way you view or spread risk; objectives influence the return on investment that you are looking for; and your risk profile dictates where you are comfortable, in terms of volatility, however not necessarily where you should be.

If property is where you would like to go, have a look at https://ca3zar10.wixsite.com/wealth/post/housing-market-to-rent-or-to-buy.

If you would like to read about assessing art and even more recently digital art in the form of NFTs go to https://ca3zar10.wixsite.com/wealth/post/non-fungible-tokens.

If you are looking into share portfolios then https://ca3zar10.wixsite.com/wealth/post/getting-started-with-easy-equities.