Managing a Windfall
The high-reward part of high-risk/high-reward does not necessarily happen. Perhaps seldom happens. They call it risk taking because there is some probability you will lose most of your money. If you could not lose, it would be called sure-thing taking.
What if you get the high reward?
People who have a lot of money suddenly dropped into their life frequently mishandle it. Experience is a worthy assistant and if you have none, odd things happen. Look at lottery winners, heirs, professional athlete and entertainers. The skills that avoid ruin are straightforward.
- Build a team to fill in your blank spaces. Seek advice from objective people who have experience. Create a team of accountant, lawyer and investment advisor before going far. When someone approaches you with a chance to invest in their can’t miss project, tell them you have people to do the due diligence and you rely on them for their opinion.
- Ask yourself many questions. What do I want the money to do. Help family. Maybe a charity. Provide lifestyle spending. Provide an estate. Build something worthwhile. There are few limits. Who shall be involved? How long does the money need to last? What about inflation?
- Ask advisors to fill in some blanks. Mostly tactical things. What structure? Corporations, trusts and the like. What portfolio mix? Growth and security are tradeoffs. If you win $40 million in a lottery, is it enough to say, I could probably earn 2% after taxes and inflation so could spend $800,000 per year forever without harming the capital. Not too exciting, but nonetheless nice. Know how much you need to live your lifestyle and make the trade-offs necessary to make it near certain.
- Recognize the totality of the thing. You cannot both have the money and spend it or give it away. Businesses look easy until you try to run one. If you know what you are doing, the expectation of losing money on a private equity deal (help someone set up a business) is about 97%. The expectation of losing when you do not know what you are doing is close to 100%.
- Keep records. People who lose their capital almost always cannot tell you how they did it. Records can be your conscience.
- Not everyone does badly, but it is the way to bet. Some athletes have done well. Wayne Gretzky for example, has a rule that says he will never invest more than 10% of his family’s worth in any single project. Diligence, risk aversion and diversity all play a part.
- Most wealthy people do not try to avoid loss, but rather manage on the idea of win big or lose small. Amateurs do it the other way round.
- Build in a time to reflect. A lottery winner especially needs six months to a year to understand what it means. Let the advisors handle the phone calls. Every charlatan in creation will be looking for you so just disappear for a while.
The techniques to build wealth are not very different. Learn what money means to you, does for you, and does to you. Then go about building it.
Think it through.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
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