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With much sadness I have seen more than a few clients pass away over the last
few months. As such, I have spent a lot of time with children who have recently
received an inheritance. Whenever one receives a sudden windfall, it’s important
to stay level-headed and plan accordingly. I often see investors make the same
mistakes over and over again.
Without question, the most
common of mistakes people make when they receive an inheritance, especially a
stock and bond portfolio, is that they become emotionally attached to what they
receive. They refuse to sell anything in the portfolio, even if they are good
reasons to do so, because they say, “This is how I received it, and this is how
it should stay.”
There are reasons the deceased was holding certain
positions, most probably for tax planning considerations, and these reasons
don’t apply to you, so it can be detrimental to continue without doing
Last week, I met with a young lady who inherited a portfolio
worth $400,000 that was solely invested in tax-free municipal bonds. She kept
saying her father was a very successful investor, and if that was the portfolio
he had, then it was good enough for her. I explained that her very successful
and wealthy father was using these bonds for tax-planning purposes.
addition, I tried pointing out that a 33-year-old mother of three, whose husband
makes a nice living, doesn’t need municipal bonds, and she could use a
more-diversified portfolio that has some exposure to growth as well. She
wouldn’t hear of it.
I routinely see clients coming in with stocks that
have been held by the deceased for decades, and the future prospects of the
company are dim. When evaluating if an investment is worth holding, or if there
is a better alternative, look forward.
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Which stock has the better
potential? If the stock you’re holding has a lousy outlook, why hold it? Take a
step back and judge each position on its own merits to determine whether it
should be kept or sold, not because it’s “been in the family” for
Along the same lines of what has already been
mentioned, due to sentimental reasons, people refuse to make any changes to the
portfolio they have inherited. The problem with this is that your needs and
goals are far different than those of the deceased. If you are younger and you
need more growth-oriented investments, and the inherited portfolio is full of
income-producing instruments, then changes should be made to make the inherited
portfolio compatible with what you need. Conversely, the portfolio may be very
aggressive, and you may have a much more conservative nature and find yourself
starting to toss and turn at night worrying whether you lost money that
Take a break
We all dream about what we would do if we came in to a
sudden windfall of money. We would give charity, buy a new apartment, a new car,
furniture, whatever it may be.
With all our daydreaming we are still
unprepared. Numerous studies have been conducted on lottery winners: how not
only does their financial situation deteriorate but how they manage to
self-destruct. One study noted how the average lottery winner blows through the
winnings in five years.
Money isn’t the answer to all your problems; in
many cases it can exacerbate problems you already have. It’s important, when
coming into a large amount of money, to take a step back and catch your breath.
Make a financial plan. Figure out what it is that you want to do both long and
short term with the money.
It may be a good idea to sit with a financial
Financial advisers will: 1) help you look at things objectively;
and 2) remain level-headed as this is what he does for a living, and chances are
he will routinely deal with similar situations and have professional training on
how to deal with these issues. He will be able to tell you if your goals are
realistic based on the amount of money that you received.
recommend to those who suddenly come into to a large amount of money to wait a
month or two before making any decisions. I find that this helps the client
settle down and become a little more focused and much less impulsive about what
to do with the money, and it ultimately allows the client to accomplish the
goals that the money was intended for.
Aaron Katsman is a licensed financial adviser in Israel and the United States
who helps people with US investment accounts. email@example.com
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