Receive an inheritance: Don’t listen to the crowd

Make sure your goals are realistic based on the amount of money that you received.

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
The only way you will ever permanently take control of your financial life is to dig deep and fix the root problem. – Suze Orman
A few weeks ago my third-grader asked me if she could get her ears pierced. If it was solely up to me the answer to that question would be easy. “Sure you can pierce your ears. When you turn 18!” Understanding that would be my initial response, she decided to wait to ask me until she had the rest of her arguments lined up. She first got her mother’s thumbs up, then her sister’s “coincidentally” reminded me that they were in third grade when they had their ears pierced and then she emphasized that almost her entire class have pierced their ears. That basically left me no choice but to realize that there are battles to fight and this wasn’t one of them.
In certain respects unknowingly she used the “crowd” to work on her behalf. Using the wisdom of the crowd, has become a very popular decision making tool. What does the wisdom of the crowd mean? According to Investopedia, “Wisdom of crowds is the idea that large groups of people are collectively smarter than individual experts when it comes to problem-solving, decision-making, innovating and predicting.”
Not always so wise
Twice in the last week I have received phone calls from recent inheritance recipients. In both cases they asked their friends what they should do with the money and in both instances the unanimous answer was to buy an apartment. I’m all for real estate, if you can afford it. In one of the cases a single mother of three received about NIS 800,000 in an inheritance. She had only called to check if there was anything short term to do with her money while she looks to buy an apartment. She told me her friends all told her that was the best thing to do with her newfound funds. I started asking pointed questions about her financial situation and it turns out that she is unemployed, doesn’t think she is able to work emotionally and in overdraft. She gets some alimony and has a few other small sources of income, including charity, and is about NIS 3-4,000 short each month. I told her to work with a budgeting organization, and that at this point buying an apartment would be a big financial mistake. I explained that based on what she was telling me, she would need to use up almost all of her money for the purchase. She would have no money left, add to her minus every month and not be able to make the mortgage payments let alone feed and educate her three children.
When I asked if any of her friends understood her financial picture she said no. None of them asked.
Almost 15 years ago Cass R. Sunstein penned an article in the Harvard Business Review titled, “When Crowds Aren’t Wise.” She was very balanced in her analysis and presented situations when the following the crowd makes sense and when it doesn’t. She wrote, “Not surprisingly, many companies, including Microsoft, Google, and Eli Lilly, have been asking their employees to participate in prediction markets, ‘betting’ on whether products will sell, when new offices will open and whether profits will be high in the next quarter. (The markets are structured to comply with bans on gambling.) The early predictions have been exceedingly accurate. At Google, for example, events that are forecast as 80% likely to occur tend to happen 80% of the time; those forecast as 60% likely tend to happen 60% of the time; and so on.”
But then she discussed when the crowd misses the mark, “But for those who embrace crowd wisdom and prediction markets, there’s an important qualification. As French philosopher and mathematician Nicolas de Condorcet himself warned, his theorem reveals the downside of group decisions. Suppose that each individual in a group is more likely to be wrong than right because relatively few people in the group have access to accurate information. In that case, the likelihood that the group’s majority will decide correctly falls toward zero as the size of the group increases.”
Expert advice
Well-meaning friends and comment posters on Facebook groups, are usually lacking critical information needed to make an intelligent decision that pertains to the specific case at hand. As I have written many times, I often recommend to those who suddenly come into to a large amount of money, to wait a two to three months 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.
Make sure your goals are realistic based on the amount of money that you received. It may be beneficial to speak with a professional financial adviser as they can draw on their experience to make sure you are headed in the right direction.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
The writer is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.;