Apart from a few exceptions, I suppose the first thing you’ve all thought on reading this statistic is that «that wouldn’t happen to me», because we believe we’re capable of making far fewer mistakes than others. Perhaps that’s true in some cases, but the fact is that those who make the most reckless mistakes, commit the most rookie blunders, and are the most naive and least prepared, end up ruined much sooner. These are the views of the article’s author, and I fear they are shared by many who will probably never read our blog:
– Share a 10% with family and close friends.
– Donate another 10% to charity.
– Pay off my house; that would clear my mortgage.
– Change the car; it’s about time.
– 25%. I would buy some shares – at least five of them, across different sectors – with a high dividend, which would allow me to earn a little more (if possible, quite a bit more) each month than I do in my current job.
– 5% for investments in plots of land, flats or property funds.
– I would invest the remainder in global actively managed equity funds and at least 5% in fixed-income investments, with a focus on short-term instruments.
If you take a closer look at the author’s plans, you’ll realise that, in his case, he might have some money left after 10 years, but it will basically depend on the stock market and whether he has the nerves of steel to hold on when it falls, or whether he’ll be tempted to invest in a business or enjoy life a bit more. But under no circumstances do his plans guarantee his future.
The first major mistake: spending small amounts straight away on family, friends and charity. The second major mistake is paying off any outstanding mortgage(s). The third is buying a car straight away. As for the rest, apart from a 5% in property investment and another 5 % in short-term fixed-income investments, it is to be invested exclusively in the stock market.
But the crux of these mistakes lies not so much in how the money is spent, but in the way the wealth is structured. Let’s take it step by step:
When a lottery winner or heir receives a large sum of money that is set to radically change their life – for better or for worse – the first thing they should do is seek out an independent counsellor or adviser with experience in dealing with such cases. Clearly, it is not possible to find such professionals amongst private banks, law firms or asset managers, or money managers from investment firms. If your wealth is not sufficient to engage the services of a multi-family office, and assuming you cannot find an independent adviser capable of guiding you towards safeguarding and growing your wealth in the medium to long term, we shall attempt to provide some general guidelines that may help to clarify certain concepts for those who find themselves in a similar situation, whether through winning a lottery or as heirs.
Firstly, you need to start by investing your money in liquid fixed-income assets from day one. That way, you’ll have days, weeks or months to find a good financial adviser and make decisions – lots of decisions. Draw up a wish list which allows us to plan how we want to live from that point onwards. We need to work out the income required to maintain our desired standard of living and factor in the long-term mortgage repayments for the properties we wish to buy in the near future. Once this monthly or annual figure has been calculated, we must add in contingencies, health insurance, financial support for others, medium-term care needs for family members, overall wealth growth at CPI x 2, and a long list of other items that we almost always forget when we draw up a wish list without proper advice. Of course, this list will vary considerably from one case to another, as we cannot apply the coffee for everyone when it comes to shaping our future way of life.
From this point onwards, we must restructure our assets to check whether they generate sufficient income to support our lifestyle, including, of course, any mortgages arising from the purchase of the properties we wish to acquire. If this is not the case, we will need to review our wish list downwards. Obviously, sound tax advice will enable us to structure our Global Wealth Plan in such a way as to minimise the tax liability.
There is a huge difference between receiving a prize or inheritance and starting to spend small (or large) amounts whilst investing the remainder in equities; or using the fixed-income returns generated by all those assets to spend, help others, plan for the future or buy property with mortgages. Naturally, we must be able to invest our money in such a way as to achieve returns that exceed mortgage costs whilst minimising risk. And we will achieve this through sound advice, effective tax planning and a minimum investment threshold that allows us to access certain financial products and, of course, to pay for the services of this comprehensive expert advice.
Returning to the example of our friend from SoloBolsa.org, you’ll see that you could do practically the same thing: give money to family and friends, make donations, buy a new car, etc. You could even invest part of your earnings in the stock market. But we should neither pay off mortgages nor leave the future growth of our assets in the hands of the stock market, as that growth must be safeguarded and secured.
These protocols, which are designed for sudden windfalls (such as lottery winnings or inheritances), are essentially also applicable to any type of medium- to high-value wealth, even if it is newly acquired wealth resulting from the sale of property, shares or business profits.
Even in the case of fortunes that are just beginning to take shape, without lotteries or inheritances, as we mentioned in our article Cluster effect back in April:
«Although many may not believe it, doing the right thing and working with diligence and wisdom attracts good fortune. Perhaps the good luck »it is not as random as the fools would have us believe, and I would go so far as to say that, in economic terms, it is not even that unfair.’