How to invest a large inheritance or sum of money

In this article I will answer some questions that I get asked time and again by clients, readers and listeners including:

  • How to invest a large inheritance, or for that matter, a smaller one?
  • How to invest a large sum of money?
  • If you get a large sum of money, from whatever source, can you retire from it straight away?
  • Is investing in one go best, or should you invest monthly to reduce the risk?
  • What sort of safe income can you get from investing a sum of money from inheritance or another source?
  • What mistakes should people avoid when investing an inheritance.
  • How about for expats moving from country to country, or locals who plan to live overseas in the future? I specialise in this area. Should people who receive inheritances as expats invest back home, in their current country of residence or another country? Of course, much might depend on your country of nationality and how taxes are treated locally, but this article looks at this question in general terms.
  • There is an old Chinese proverb that wealth seldom last three generations. How can people avoid this and create generational wealth?

I will use my answers from Quora.com, where I am the most viewed writers on financial matters with over 222.2 million answer views in the last few years.

If you are looking to invest an inheritance or other sum of money, and want more specific guidance, then please contact me, email (advice@adamfayed.com) or use the WhatsApp function below.

If I Inherited $3,250,000 what will be the best way to invest that money so I can live off it yearly?

Source: Quora

It will depend on several factors.

The main factors are:

  • How much risk do you want to take
  • Where do you live
  • What’s your cost of living. That is related to the previous point, but can also be related to whether you have kids and dependents.
  • Is there something specific about your situation. For example, if you are an expat who will move from country to country.

The first thing to remember is cash in the bank will inflate away.

Even with 2%-3% inflation, it will soon eat away at your capital, now that interest rates are 0% in most countries.

In many of the countries where interest rates are higher, the currency risks are bigger due to devaluations and so on.

In general, the safest way to invest a large pot of money is

  • Invest in a liquid portfolio of ETFs and other investments. By liquid I mean something which you can sell easily. Investing all into something like a business or real estate is riskier because if you invest into the wrong thing, you can’t sell it.
  • Only withdraw 4% per year of your portfolio. On $3.2m that is about $128,000 a year. Increase that by 2%-3% to keep in line with inflation. The founder of the 4% rule of retirement said 5% or even 6% could be safe, but it is best to be conservative:
  • Invest 60% in stocks and 40% in bonds. Your chances of being down are low for that asset allocation as per below:
  • Rebalance your portfolio from the good performing parts to the bad ones. For example, if you are 60% in stocks and 40% in bonds, and then stocks beat bonds in 2021, you will need to sell some stocks to retain the 60%-40% balance.

Things to avoid are

  • Failing to take advice. Many people who receive huge inheritances are new to investing and personal finance, and then trade on emotion.
  • Dipping your toes in. Many people try to invest it gradually (dollar cost averaging) rather than in one go because it feels more emotionally easier. Yet numerous academic studies have shown that investing a lump sum straight away is more likely to beat dollar cost averaging or monthly investments.
  • Trying to time the markets. I know somebody who received an inheritance in September. He was worried about markets because of, quote, “the virus and the election”. 4 months later and markets are up about 20%! Nobody can time markets. Being well balanced is good enough.
  • Being too risk adverse or too cavalier with risk. You need a balance. Too little risk, keeping money in the bank, often leads to big indirect losses to inflation over time. Likewise, trying to dig your toes in with dollar cost averaging will hurt you (more than likely) long-term. But putting 100% in stocks or 100% in one real estate property also doesn’t make sense. A diversified strategy is needed.
  • Not staying the course. Even somebody who invested one day after the 2000, 2008 or 2020 crashes have done fine if……..they didn’t panic sell during the crash. There is no need to fear market crashes unless you can’t trust yourself not to click the sell button!
  • For expats specifically, it is a mistake to not consider some unique aspects of your case. For example, in some tax systems, you pay an arm and a leg to send money home. Take the UK as an example. If you are a British person living overseas, you don’t usually need to pay taxes to the UK government . There are complex rules, like the ties test, but in general you don’t need to pay. The exceptions are…….if you spend a lot of time in the UK and you own assets in the UK like rental property. Then you are taxed too death, especially in the case of property!
  • Not thinking carefully enough about spending. It is easy to go on spending spree but then it affects your overall pot.
  • Not paying off any debts which are charged at high interest rates, such as credit cards. 16%-24% is excessive and should be paid off asap.

An alternative is to invest it for 5–10 years, grow the pot, and then you can live off more than 128k if you want.

I have just inherited an amount of money that is too large for a 23 years old, how can I stop my self from wasting and spoiling this money?

Source: Quora

I would focus on taking these steps:

  1. Relax!
  • Do nothing for weeks
  • Procrastination is seldom good, however taking a holiday and taking your mind off it for 2 weeks+ is great
  • You will avoid making silly hash decisions this way

2. Seek professional advice

  • From lawyers and anybody else that can help you. Spending 0.01% of your new found wealth on this would be money well spent

3. Do your own reading

  • About investing and portfolio management for a few weeks after work

4. Implement

  • Now 2–4 weeks should have passed and you have more information.
  • So after you are relaxed and have read the information, focus on implementing the information

5. Don’t spend too much early on

  • This is a key mistake. If you get $1M+ and you spend 200k on yourself and give 300k to others, or any other combination, you are only left with 500k.
  • In comparison if you invest the money properly, you will have more before you withdraw

6. Keep working for now

  • Let the money grow

7. Focus on the 4% rule

  • Once you are ready to withdraw
  • However, the 4% only works if you watch your asset allocation properly

8. Don’t try to impress others

  • With your spending habits or behavior

Above all else don’t be complacent. There is no sum which is big enough for a 23 year old to never worry again.

It makes me laugh when people say “he is made” – speaking about the inherited rich.

If that was true, why do most “rich kids” lose the money……..so regardless of whether you have inherited $100,000, $1m or 1 billion, don’t assume you can’t lose it.

What do people who inherit wealth lack that those who earned the same amount of money have?

Source: Quora

Well, it depends on how much you inherit and at what age. If you inherit money after a certain age, you are more likely to be sensible compared to somebody who has inherited it at 20.

In general, however, studies have shown those that inherit money are more likely to be complacent.

A large study looked at accountants and lawyers. All had:

  • Similar ages
  • Similar incomes
  • The same or similar job roles
  • Similar cost of living as they lived in the same country

Only one group had been given inheritance, and one hadn’t. The result?

Those without inheritance had more money, than those with, at least in the long-term.

I guess those with inheritance are less likely to have self-control, and more likely to factor in inheritance in wealth planning.

In other words, `I don’t need to invest as much, as I have 500k coming in the next 10 years`.

People who have came from poorer families, and reached decent heights, are often tough and resourceful.

These are just broad generalizations though. I have seen many people from wealthy families stay wealthy.

The overall trend, though, is that inherited wealth doesn’t last beyond 2–3 generations.

Remember this quote;

Does inheritance make people rich? 

Source: Quora

It can do. Especially on day 1. This is going to become more and more relevant.

As the Baby Boomers pass away, bigger inheritances are going to become the norm.

However, it is just a start. The key is maintaining and compounding the inheritance.

$500,000 is a lot of money if you get it at 25 or 30, and compound t for decades.

$500,000 isn’t a lot of money if you just spend it, or try to live off it on day 1.

So it all depends on how you manage the money. It is easier said than done.

Historically, and even today, most inherited wealthy don’t stay wealthy.

The old Chinese proverb of wealth not lasting more than 3 generations still holds true.

Think about something here. Think about all the wealthy people you personally know.

And also think about all the wealthy people you `know` from the media.

CEO’s, celebrities and so on. Now ask yourself a question. How many of those, apart from royalty maybe, have been wealthy for 3–4 generations?

Not many is almost for sure the answer.

What should I do with a $140,000 inheritance to make it grow?

Source: Quora

It depends on many things including:

  • Where you live to decrease currency risks
  • How old you are
  • What you want to do with it. You seemed to have answered this question with the word grow. Some people, in comparison, want to take an income from it

I would keep to model portfolios like this. Stay diversified and long-term:

Model portfolios for American citizens and expats under 40

60% US Stock Markets,

20% International stock markets,

10% Emerging stock markets

10% US short-term government bonds

Model portfolios for American citizens and expats over 40 –

50% US Stock Markets,

20% International stock markets,

5% Emerging stock markets

25% US government bonds

Model portfolios for American citizens and expats over 55 or close to retirement –

50% US Stock Markets,

20% International stock markets,

30% US government bonds

Model portfolios for British citizens and expats under 40 –

40% UK FTSE All Shares

40% International stock markets,

10% Emerging stock markets

10% Global government bonds index

Model portfolios for British citizens and expats over 40 –

35% UK FTSE All Shares

35% International stock markets,

5% Emerging stock markets

25% Global government bonds index

Model portfolios for British citizens and expats over 55 or close to retirement –

35% UK FTSE All Shares

35% International stock markets,

30% Global government bonds index

Model portfolios for European citizens and expats under 40

40% Euro Shares

40% International stock markets,

10% Emerging stock markets

10% Global government bonds index

Model portfolios for European citizens and expats over 40 –

35% European All Shares

35% International stock markets,

5% Emerging stock markets

25% Global government bonds index

Model portfolios for European citizens and expats over 55 or close to retirement –

35% European All Shares

35% International stock markets,

30% Global government bonds index

You can follow a similar pattern depending on where you are living, your age and investment time horizons.

I have inherited $5,000,000 and I already have $3,000,000 in the bank. What advice do you have?

Source: Quora

I presume you mean `what advise do I have for you to protect and grow your wealth`. Well the following things:

  1. Read the academic evidence before doing anything and not marketing and other people trying to get you to do things which aren’t in your best interest. If you don’t have time to read it, employ somebody at 1% per annum to look after your portfolio
  2. Upon reading the evidence, the following things will become clear: i). You won’t be wealthy for long if you have bad spending habits. Mike Tyson made 500 million, much more than you have, so don’t waste the money. ii). Don’t speculate on any individual stocks, bitcoin or anything. iii). Watch your asset allocation.
  3. In addition to point 2, if you have the right asset allocation, you can `only` take out 4% of your portfolio every year to avoid running out of money. So that is $320,000 in your case
  4. Don’t just put the money in the bank or try to time markets and be cute with timing. It doesn’t work. The Dow was at 66 in 1900 and it at 25,000+ time. Long-term you will be fine, especially if you have bonds too.

Is most wealth a product of generational wealth?

Source: Quora

It depends on which part of the world. In some `old wealth hotspots` like Europe, it is more common than in `new wealth areas` like China and emerging markets.

However, in general, most wealth isn’t inherited;

There are various reasons for this including;

  1. Many wealthy people give money to charity. Look at Buffett and Gates, their kids won’t be super rich from their parents
  2. Many `playboys` ruin the wealth
  3. Many people get complacent
  4. Apart from royal families, other wealthy people can’t survive huge mistakes. They don’t have a state to back them up.

Is it better to keep gold you inherited or sell it and invest the money?

Source: Quora

Invest the money. Gold isn’t an investment. It merely holds its value.

It has been stagnant in real terms since the times of Christ. Here is a long-term chart:

Don’t get me wrong, gold has its periods in the sun. 2000–2011 as an example, before the fall:

However, nobody knows when those good times will come. If they did, everybody would be able to time the gold and stock markets.

Further Reading

In the article below I answered the following questions:

  • What advice would I give to a high flyer who seems destined for success and wealth? Would my advice be different to anybody else?
  • Can you lose more money than you put in investing in ETFs or does it depend on which ETFs we are speaking about?
  • Is it a good idea to invest in index funds when some track “overvalued” as well as undervalued stocks?

Here is a preview of one of the answers

If somebody was truly destined to become a multi-millionaire, meaning it seems highly likely that they would achieve that number, I would first speak about the importance of a lack of complexity.

I know, personally, countless people who fit into the following categories:

  1. They peaked too soon in their teens, 20s or 30s.
  2. They became millionaires and multi-millionaires but then lost it due to divorce, complacency or any number of events. 2020 was a great example. Plenty of new millionaires were created due to the rise and rise of the internet and rising stock markets yet…….there were also plenty of ex-millionaires that were created too. Typically, they were either old-fashioned companies that didn’t adapt, or business owners who didn’t see the need to diversify until it was too late. Bar and restaurant owners who were doing well before the crisis, and never planned for the worst case and black swan events.

So, I partly agree with this quote below. I think the key is a healthy degree of paranoia – one that avoids a high degree but keeps you on your toes:

In addition to that, I would get them to focus on the process of planning money and managing money.

Most highly talented people, be they business people, sports and entertainment stars or whoever else, know how to make money.

Sometimes they know how to make a lot of money. What is much less frequently found is somebody who knows how to manage money long-term.

Studies have shown that between 20% and 60% of lottery winners go bust and up to 78% of former NBA and NFL stars are broke within five years of retirement.

The reason is simple. Salaries go down after retirement. If you can’t adjust your spending habits and live within your new means, you will soon be eating into your wealth.

For somebody who is used to living off tens of millions, this can be a hard pill to shallow, which is why the likes of Mike Tyson and Michael Jackson went into financial difficulties despite earning $500m+.

So, my biggest tips would be to focus on expenditure and investing the surplus well as much as income.

It is pointless to earn $1m, if you spend $1.1m! It is far better, for wealth, to earn 90k and invest 20k a year over many decades.

People make the same mistakes in business. Saying “I have a business which has a turnover of $10m, and I employ 100 people across five continents” sounds sexy, but it is pointless and an ego measure if the costs are also $10m.

Having ran businesses myself, I can say that it gets harder to stay as profitable once you add infrastructure like staffing and rental costs.

In some cases having a business with $30,000 a month after tax revenues and only $5,000 costs because it is a one-man business ran from your home, is a far better model, as it is net $25,000 a month vs net $0.

Too many people are focused on the top line and not the bottom line. Now sure, running a business is different to personal finances.

In some cases if you manage the top line, the bottom line will eventually follow, and you can sometimes sell out a non-profitable business which has big revenues.

But I am more alluding to the obsession some people have with status and something sounding good.

That is one reason why online, stay-at-home, businesses didn’t take off as quickly as they could have done from 2000 until 2015 or 2018.

Too many business owners thought it doesn’t sound as sexy as some alternatives.

What’s more, highly talented and intelligent people, are more likely to get bored and think something is working too well.

To continue reading click on the article below:

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