Investment Strategies For Cash Windfalls

A windfall of cash is a welcome event for anyone but can create problems when it comes to investment (assuming one’s wealth strategy is not based on rampant consumption). Some sources state that any windfall representing less than %20 of a portfolio can safely be invested in existing assets. But when the accession to wealth is greater than %20 some of the following strategies should be considered:

• For younger investors, investing the entire sum into a long term investment that will grow well over time even if there might be volatile growth periods. This strategy should be used with some caution by investors that are retired or near the end of their careers. The volatility becomes riskier when the money might be needed while exposed to a down market.
• Investing a small percentage of the sum over a set period time, known as dollar cost average, can lessen the risk of entering a market that turns sour right after fully committing. This method will allow investments to be safer but at the potential cost of missing a boom. This strategy can also be adapted to larger sums separated by a longer period of time with the uninvested capital being put into safe and short term investments until its time arrives to go into the long term portfolio.
• Value averaging is one of the tougher, and potentially more lucrative, investment strategies available. It calls for waiting to investment in down markets when prices will be low and the chance for recovery high. However, it requires a keen understanding of the market and the ability to keep impulsive investing minimal.

See Don Freeman, How to Manage a Cash Windfall, The Trust Advisor, October 20, 2015.

Special thanks to Jim Hillhouse for bringing this article to my attention.