KEY POINTS:
Bill finally sold the business when he was 67. He had discussed selling up for years it had never been easy making money from the business but it was all he knew and he wasn't sure that he could invest well enough to give him the income he wanted.
However, at 67, he decided his time was up and sold out to a competitor, banking more than $600,000 from the sale.
Investment scared him it worked in a different language than the business and he had no idea how to get a steady income from his capital.
So he did the right thing and visited an investment adviser.
The investment adviser did a good job allocating capital into various asset classes and diversifying across a variety of funds and investments.
The investment adviser wrote up his recommendations and sought Bill's approval.
After Bill gave his approval, the investment adviser placed the investments, all on the same day.
A year later, share and property markets had fallen and the exchange rate had gone against him so Bill's $600,000 was now worth about $450,000.
Bill yearned for the hassles of the business it was a fraction of the stress and good deal easier than this investment caper.
This true story is similar to many cases I have seen over the years. The problem is in the timing of investments.
The planner might have done a good job in terms of asset allocation, but by placing all the investments on one day he did Bill a great disservice.
The investment became a lottery of whether or not the particular day happened to be the right time to invest.
Most of us do not get much practice at lump sum investment. Instead, we usually drip feed money into the investment markets over time.
Whether it is KiwiSaver or another form of superannuation, we only become fully invested over a long period.
Property and share investors usually take time to become fully invested, adding to their portfolios over time.
For most of us, lump sums come only occasionally when we sell a business or farm, cash up our super, receive an inheritance or perhaps following a marriage break-up or property sale. Generally, people look to invest it immediately.
However, financial planners do often see clients who have lump sums and they should know better than to invest it all on one day. They know about dollar cost averaging drip feeding money into investment markets over long periods to get an average price and they know they should be using it.
The problem is many financial advisers, incentivised by the commission system, place all of a client's money into funds and investments immediately.
A financial adviser paid by commission knows he or she will get a bigger commission by investing the client's lump sum on day one. To invest gradually over some years means they must wait for the full amount to be invested before receiving all their commission payments.
Bill, and many others like him, would be much better advised to build up the suggested portfolio over time. I would have advised Bill on his asset allocation and then suggested he move towards it over a four-year time frame. This would mean Bill keeping most of his money in the bank and each quarter drip feeding about $35,000 into the suggested investment areas.
All investment markets are volatile to at least some degree.
When you have a lump sum, take your time a rush to become fully invested is like deciding investment timing by playing spin the bottle.
Each week best-selling financial author Martin Hawes will share his strategies to help you grow your wealth. You can email finance questions to info@wealthcoaches.net or andrea.milner@heraldonsunday.co.nz On the web: www.wealthcoaches.net
