Dangers of Sudden Wealth?

In harsh economic times, the lure of a life-changing windfall has even more sparkle. Little wonder that Colin and Chris Weir from Largs are reportedly “tickled pink” with their £161m Euromillions jackpot. But what dangers await them?

People who receive sudden wealth often suffer great frustration over how to deal with such a large amount of money. For some this results in a painful inability to identify real needs and longings, or to connect with meaningful work or occupation.

For many people whose experiences were not positive, much of the damage has its roots in non-financial matters. Many simply did not know how to handle the attention and emotions involved, and they were not prepared to make the decisions and set the boundaries that were necessary. Many people have stories of scams, bankruptcies, and unexpected losses. Lottery winners have told me about spending binges and how they hid money from their spouses.

So what is best advice for a newly minted millionaire? It goes from the very practical, to changing the telephone number and organising a PO box number, in case people are trying to contact them remotely or track them down, to giving them the first advice – do nothing for 12 months. This is about providing time and space where they are free from the burden of making unnecessary decisions.

Next comes a gradual initiation into financial jargon, the meaning of risk, and building a life plan. Investment would typically be “low-risk for the first couple of years, until winners become more knowledgeable. A typical spread at the outset would be 70% in gilts, high-quality corporate bonds and cash spread among different banking institutions, and 30% in stockmarket-backed funds. This diversified asset class approach has been proven academically to be the smartest way to invest over the long-term, reducing volatility and creating consistent returns.

Diversification is the only antidote for uncertainty. Although diversification neither assures a profit nor guarantees against loss in a declining market, a properly constructed and well-diversified portfolio is a key component of a successful investment experience.

Investment should not be confused with speculation. There is no free lunch. Risk and return are related. Higher expected returns only come from bearing more risk.

With the help of professional advisers investors should concentrate on what can be controlled: managing the transactional costs of investing, reducing the impact of taxes, and taking a long-term view. Establishing investment portfolios that are cost effective, tax efficient, and above all, disciplined.

Duncan R Glassey
Senior Partner – Wealthflow LLP

duncan.glassey@wealthflow.com

This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated. Errors and omissions excepted.