educating you on ways to handle your lump sum and steer clear of typical pitfalls
Receiving a lump sum is a significant life turning point for a lot of people. It can be challenging to determine when to use the ensuing cash windfall when markets are uncertain, as they are right now. We want you to know the best ways to handle the lump sum, regardless of whether you won the lottery, sold your company, received your pension, or inherited a windfall.
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Let’s look at one scenario of what a 50-year-old entrepreneur did when she received a lump sum after selling her business:
Thus, how can you ensure that you meet your immediate and long-term needs while safeguarding your finances?
Putting bonds to work in a lump sum, phasing stocks
Naturally, the possible cost of poor market timing increases with larger deposits. An equity-only portfolio needs, on average, just over two years (26 months) to recover from a trough and reach a previous market high since World War II. For an investor who has mistimed a sizable windfall investment, this would be a painful wait.
Investing directly in government bonds, which are less volatile, and gradually phasing into riskier assets, a strategy known as “dollar cost averaging,” would reduce the likelihood of such an event. According to us, the best course of action is to create a schedule, speed up each stage of the process, and intervene if there is a market decline of at least 5%.
Therefore, investing bonds all at once can lessen the possible opportunity cost of a phase-in plan. Furthermore, if there is an opportunity to purchase stocks at a discount, the investor’s bond holdings might increase as a result of a flight to quality, giving them extra money to invest when they “rebalance” their stock allocation.
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