Dealing with Lump Sums

Are you sitting with a large cash position and wondering what to do? Are you feeling anxious over the market conditions based on the U.S. election, and not sure about making the next move? You’re not alone, and this article can help.

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Whether the cash came from the sale of a business or real estate, a pension roll-out or stock option exercise, an inheritance or simply seeking shelter from the next anticipated market downturn…having a large amount in cash is both comforting AND anxiety provoking.

The older you are and the bigger the lump sum, the more challenging this becomes. It’s easy to over-think the situation and end up feeling like the proverbial “deer in the headlights” especially if you’re concerned about market valuations and event risk.

A wise mentor once told me that “when your principles are sound, they can never fight you,” so in our firm we’ve designed principle-based processes to deal with almost every major situation that clients experience over a lifetime…we live the mantra “process provides protection.” Maybe that’s why intelligent and analytical people are drawn to us? What I know for certain is that this methodical process dramatically reduces stress and improves the longer-term outcomes. Here it is:

  • Assess how this lump sum needs to complement the other investments you currently have, including these questions:
    1. How confident are we in how the rest of our portfolio is being managed, especially regarding risk management?
    2. Does our current financial advisor have all the tools necessary to deal with future challenges and opportunities?
    3. If you’re self-managing, do you still want to have the primary responsibility for day to day investment decisions?
    4. If you have your portfolio divided between multiple advisors, have you considered the potential cost savings, portfolio coordination benefits and additional tax deductions that you could be missing out on?
  • Once you’ve carefully answered the questions above, and are comfortable with the asset mix and investment vehicles you’ll be buying into, we get to the most stressful part. Just like eating an elephant, we recommend doing it one bite at a time. Here’s how we implement:
    1. Decide on how many tranches you want to divide your lump sum into. It could be 3 or 4 equal portions, or another number you’re comfortable with.
    2. Decide on the frequency of getting the subsequent tranches of capital invested, perhaps monthly or every six weeks.
    3. Add tactically to each asset class as it experiences its own natural dip
    4. Be ready to pounce. Crisis contains danger for the unprepared, and opportunity for the well-prepared and patient types. If a major buying opportunity materializes during the systematic implementation process described so far, that’s the best thing that could possibly happen. You get to buy under-valued assets while others are selling them in a panic, thus taking advantage of “Mass Psychology” instead of being the victim of it.
  • Once fully implemented, monitor and adjust as necessary, using the risk management parameters and systems that you’re comfortable with. If someone else is managing the portfolio, get clarity on exactly how they manage downside risk.

This process works like a charm, but you need to follow it systematically.

Patience and discipline are accretive to your wealth, health and happiness, so focus on these.

Cheers,

Andrew H. Ruhland, CFP, CIM

Founder and President

Integrated Wealth Management Inc. in Calgary