Sometimes we may have the chance, whether known (e.g., endowment payouts, inheritances, etc.) or by luck (e.g., lotteries), of obtaining a windfall, which is the sudden drop of cash or capital onto one’s lap. It is a pleasant surprise to get one, but the main challenge comes immediately after, which is what to do with it. On a personal level and being materialistic as most humans are, the urge to splurge on things that were both wanted and needed is there, such as the fancy car one desired, a meal at a high-end restaurant, and/or giving money away for altruistic or ego reasons, or both. The examples cited are not far-fetched as I had witnessed them personally, and in some instances the windfall dried up as fast as it came, and the recipients just went back to their normal lives.
One of the etiquettes that I had learnt about personal finance is that finances are personal. Unless being requested, I would not advise in what they wanted to do with the monies and/or capital, and even if they did, it is just an advice and up to them whether to take it or not. Admittedly deep inside me, I may be lamenting on the way how the windfall recipient is spending on some deemed frivolous stuff, but I also remember that those are their monies, not mine.
Windfall Planning
Though sounded a bit absurd, I do have a “windfall planning” spreadsheet in place to guide me on what to do should it fall onto my lap. I had initiated this after seeing the aforementioned examples about people not knowing what to do windfalls and then just spend it off, mostly without thinking. Though the numbers vary, but the splitting percentages are about the same across; portions to charity, contributing to family, partial/full settling of long-term loans, etc., and of course, investment. For this post I will focus on the investment part, because gaining a windfall is one thing, holding it sensibly is another.
Deploying The Windfall For Investment
The deployment would very much depend on the stage of investment one is at. If the recipient is a total newbie, then the windfall would be better off being in a safe institution such as the government (via Singapore Savings Bonds and treasury bills) or in a bank (as a savings or fixed deposit) for the time being as he/she is learning more about investing.
If there is sufficient investing knowledge obtained, then it could be used to start a portfolio consisting of one’s preferred asset class allocation. This can be done immediately to capture the current characteristics of the asset classes as at a particular economic situation, or done gradually over a year’s time if immediate is not comfortable.
If an investment portfolio is already in place with the set asset allocation, a windfall would bring in cash injection that would enlarge the cash portion of the portfolio (in terms of The Bedokian Portfolio). Theoretically, it would be preferred to deploy the capital immediately to rebalance back to the desired allocation levels, especially for passive investors like Bob, and to avoid cash drag. However, for an active, active-passive, or passive-active investor with some individual counters and exchange traded funds (like me), he/she could deploy quickly in the latter and keep some for the former, as the counters may not be in the “price is right” range.
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