Case study: investing an inherited lump sum

Written by Conor Crowley, Wealth Management Executive

12 April 2022

Every year, we conduct hundreds of financial reviews for our clients and prospective clients – and the most common issues we come across focus on savings plans, protection, inheritance, and pensions. In a three-part series, we explore these themes through real-life case studies and present the recommendations we would commonly make in each scenario. In our first case study, we looked at ways to secure your family’s financial future. Today, we consider the importance of diversification when investing a lump sum, such as inheritance.

The inheritance of a large sum of money can change your circumstances significantly, and you may need financial planning to allow you to make the most of this.

Our client Christine1 came to us after receiving an inheritance from her late mother’s estate. Having already taken the decision to use some of the money received to pay down her mortgage and with a balance of €500,000 remaining, Christine wanted to discuss what options were available to her.

With inflation and negative interest rates dominating news flow, Christine appreciated that allowing excess cash to sit on deposit was not a long-term solution.

It’s not always the case that people have sufficient funds to pay off debt and invest, as one of the most commonly asked questions following the receipt of a lump sum is: should I pay my mortgage or invest excess funds? We believe that with interest rates at historically low levels, meaning relatively cheap debt, we generally find clients are better continuing with their mortgage payments as usually they will never save as much as they are making in re-payments.

How to make the most of your inheritance

When we spoke to Christine, the first consideration was her investment time horizon for the lump sum or more simply, the length of time she was willing to invest. Her financial situation is an important gauge of this: would Christine need these funds in the next 12-24 months?  If so, it should be kept liquid and in cash and not form part of an investment portfolio.

The second consideration was Christine’s risk tolerance – i.e., how much stock market volatility she’s willing to accept in exchange for potential longer-term growth. Ultimately, Christine’s investment mix should reflect her willingness and ability to tolerate risk in the context of her investment time horizon.

Often, people feel like they are risk takers but when this is quantified by illustrating examples of stock market corrections, they can become uncomfortable. A diversified investment in global equity markets can offer high single digit returns on average over the long term, but we can also expect them to correct by between 30-50% every six to eight years. As we have experienced since the beginning of the year, markets can be volatile. That’s why thinking about your lump sum in different baskets of time and risk can be useful.

A rainy-day fund is essential for everyone, so together with Christine, we decided to keep 10% liquid, invest 80% with a medium risk and time horizon (five years) and invest 10% in a high-risk, long-term (six-10 years) aspirational bucket. The majority of the portfolio was invested across multiple asset classes (equities / commodities / bonds) with an actively managed approach taken to the allocation of these assets across the portfolio which is reviewed regularly.

For the aspirational bucket, we explored the Goodbody Smaller Companies Fund which is an actively managed, concentrated global equity fund that offers investment in a diversified portfolio of 35 - 45 small/mid-sized growth companies.

By allocating Christine’s lump-sum across multiple risk buckets, we were able to help Christine achieve her key objective of avoiding the erosion of value of her lump sum from inflation over time by delivering long-term growth in a diversified investment portfolio.

1 Names have been changed to protect client anonymity.
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