Dealing With Lump Sums

November 10, 2016

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

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:

  1. Step back, breathe deeply and re-assess this decision in the context of your complete Wealth Management Plan. If you don’t have a real plan, learn about our planning process. Some questions to ponder include:
    • What does this lump sum need to do for us?
    • When do we need to start drawing income from this lump sum, if ever?
    • How much volatility are we willing to tolerate in a worst case scenario?
    • How do we overcome the problem of low interest rates?
      • What’s the most tax-efficient way to deploy this capital?
      • If you still have debt, how much of this cash should be used to reduce or eliminate liabilities?
  2. What, if anything, do we need to do to update our Investment Policy Statement?
  3. Assess how this lump sum needs to complement the other investments you currently have, including these questions:
    • How confident are we in how the rest of our portfolio is being managed, especially regarding risk management?
    • Does our current financial advisor have all the tools necessary to deal with future challenges and opportunities?
    • If you’re self-managing, do you still want to have the primary responsibility for day to day investment decisions?
    • 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 the frequency of getting the subsequent tranches of capital invested, perhaps monthly or every six weeks.
  2. Add tactically to each asset class as it experiences its own natural dip
  3. 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.
  4. 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.

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