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BIG QUESTIONS FOR MONEY MOMENTS

A large sum of cash is coming my way, should I invest it all at once?

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Your diversification moment has arrived. Do you helicopter drop your cash into a risk-oriented, diversified investment portfolio, or do you take your time? On one hand, the stock market goes up more often than it goes down. Stock returns are also usually higher than bond returns. Thus, on average, a helicopter drop into a risk/stock-oriented, diversified investment portfolio will outperform a phased implementation into that same portfolio over time. On the other hand, forecasting short-term returns for stocks is a loser’s game and a big loss via a stock market correction can be psychologically devastating, especially for investors with newfound wealth and little experience managing it. A bad experience on the front end can therefore jeopardize long-term success. When it comes to managing wealth, the long game is the game that matters. While not always, we typically recommend taking a breath and easing new cash into the market over a period of one to two years. This process entails implementing a portfolio at a stock allocation (including residual company stock, if any) that is below the long-term target, and purchasing more stocks over scheduled tranches until the long-term allocation is reached. Again, on average, this is a losing strategy! Probabilistically, you can’t buy stocks soon enough. On balance, however, a phased implementation is often a very sensible approach for several reasons:

  • Investing is a marathon, not a sprint; and protecting yourself against a poor experience on the front end may be a prudent path forward.
  • The U.S. stock market, in particular, is rather expensive from a valuation perspective.
  • A phased implementation provides flexibility to accelerate stock purchases in a declining market or slow stock purchases in a rising market.

Another area of focus on the front end is bucketing assets into categories and aligning investment strategies with each bucket. For example, many clients who come into a large sum of liquid wealth want to acquire or upgrade a home. If the timing of that significant expenditure is short-term, a more conservative investment allocation for that bucket (as compared to, say, a “nest egg” bucket) is likely warranted to reduce loss exposure. In other words, it makes sense to accept lower expected returns for these assets because downside protection is more important than growth potential. Bucketing assets in accordance with defined objectives, coupled with forming investment strategies tailored to your time horizon, are key building blocks to successfully managing wealth through time.

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Have your own money moment question? Ask B|O|S Principal Aaron Waxman, CPA, CFP®:

MORE QUESTIONS TO CONSIDER:

What’s your Money Moment?

Have your own money moment question? Ask B|O|S Principal Aaron Waxman, CPA, CFP®:

Aaron Waxman, CPA, CFP®
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