Inheritance

by Chris
(Melbourne)

Hi,

Where would you put an inheritance of $500K to generate and stable consistent income ?

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Dec 27, 2018
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Investing an inheritance
by: Mike

Hello Chris,

Thank you for your question. Receiving an inheritance is often quite pleasing until you realise the responsibility that comes with it!

Firstly I'll answer what I would do. I would buy a broad (diverse) basket of high quality stocks. When I say high quality stocks, I'd look for businesses that I understand and have a long history (at least 5 years) of delivering profits and dividends to shareholders. I'd also look for stocks with solid balance sheets that are reasonably priced as this lowers the risk.

I see you are messaging from Australia. I actually have a few investments in Australia and frequently visit Australia (I have family there). Every year I buy a book called "Top Stocks" by Martin Roth which gives me some good ideas in the Australian share market. That said, I would be happy to look in many geographies but I'm sure you are aware there are a good number of excellent companies in Australia if you wanted to stay local. With $500k, I'd probably look at investing in 10-20 companies.

That is what I would do but may not be what you should do and you need to understand your own situation. Remember that I have quite a lot of experience in the share market (having invested before, during, and after the GFC) and I know how volatile stocks can be. If I invested $500k, I'm fully aware that $500k could turn into say $300k quite quickly.

It is impossible for me to give you advice without knowing your full situation. You really should seek independent financial advice but these might be points to at least think about:

1) If you need the cash in the next few years (at least the next 5) then I wouldn't go anywhere near the stock market. I would stick to cash like products (mainly savings accounts with banks). In Australia, up to $250k of savings is protected in an Authorised Deposit taking Institution (ADI), so I'd probably find three ADIs to park your savings into.

2) If you don't need the cash in the short run and want to generate potentially decent returns then I'd consider rental property or the stock market. My understanding of property (especially in Australia) is limited so I won't discuss that here.

If you are thinking of the share market and have no interest in picking individual shares (which is not a problem) then I'd consider investing in index trackers (probably through an ETF provider like Vanguard). I'd consider the major world indices and buy these over time to smooth out the short term volatility in the market.

Another option could be to get a professional manager to make investments for you. Obviously there are some big names that can do this but there are some decent smaller names in Australia such as Montgomery, Hyperion, or Platinum who can do this. I'd try to find a manager that looks for investments in high quality companies.

If you have interest and some experience in the stock market (and enjoy the process) then I'd go down the route of picking individual stocks along the lines I pointed out that I would do it. You must be fully aware of the risks though. That said, I think with $500k, you could be in a decent position to build a sustainable dividend income of around $20k per year and you can hope to grow that (especially if you reinvest the dividends) over time.

Remember, the only certain thing I can tell you, though, is that the market will be go up and down (sometimes quite a lot) in the coming years. Just try to focus on the underlying businesses that you invest in and your fortune will probably be closely tied to their results in the long run.

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