How to invest inheritance?

In My Humble Opinion
1

I’ll be inheriting a sum of money from my deceased grandparents in a few years (mid-five figures) with two identical amounts to arrive in five year increments. I am fortunate to live a fairly comfortable mid-upper middle class life and while it’s certainly not extravagant, the needs of myself, my wife, and our young children are met by my income.

I’d like to improve my family’s financial security, as well as honor my grandparents’ hard working, small-business owning legacy by investing this money in some sort of vehicle that will one day provide me with (mostly) passive income. I’m looking for suggestions. While I’m certainly anticipating putting work into this endeavor, I’m also not planning to leave my current job to begin a new full-time pursuit using the inheritance (Though I would consider doing so for the right opportunity).

My wife and I do own a small business that operates out of our home and employs a few part time contractors. We’ve had it for just a few years and we’re in the black, but not by much. The business is service based and revenue is solely driven by the number of customers. While growing this business would be great, I’m not sure what the inheritance money could even do other than possibly pay for advertising.

One thought I had was to buy a rental property, with additional properties purchased as the second and third payments arrive. I have some friends that have done this for quite a while and I’m sure I could draw on their experience as I learn how to be a landlord.

Any advice?

2

You don’t want a realtor, you want a brokerage account. Invest that money in a good spread of stock, bonds, and mutual funds with a DRIP (Dividend Re-Investment Plan) where possible. Right now you are fine so the trick is to make sure that you don’t touch it
(or as little of it as possible). Also, make sure that you are depositing the limit into your IRAs (5500? 6500 if you are over 50?).

I have never been a landlord, but there have been many threads here about being one in the past. From what people have told me and from what I have read, being a landlord is the single hardest job you can imagine. You have to do all the work yourself or you’ll go broke, you have to be a hard-ass on collecting the rent, you have to have all the docs prepped and updated monthly to immediately start eviction proceedings should a renter stop paying, you are in and out of court so often you may want to rent a parking space near the courthouse, and you’ll probably need another job on top of that just to eat.

Some people I’ve spoken to have said that its a total nightmare, but YMMV.

slight hijack

PS- What about buying a parking lot in a city & renting daily parking spaces? That always looked like a cash cow to me. Cars have to be out each night or you have them towed the next day.

3

Or college accounts for the kids - or pay off any debt you have.

Renting is a pain in the butt. We did it for two years to a family member - we knew we were going to take a loss on the deal when we got in - I didn’t plan for thousands in plumbing work. Two years in - $20k loss (we sold the house for a little less than we bought it for - we paid realtor commissions, we rented it cheap because it was my dying brother in law living there - so he paid most of the cost, but we paid taxes and subsidized the mortgage, we had to have plumbing and electrical work done while he lived there, and to sell it we put in another few thousand. When he died we considered hanging on to it and renting it out, but it wouldn’t rent for mortgage+taxes - and mid five figures would have bought half that house).

Mid five figures is not that much money when you have kids - Once I had kids I put everything in terms of “a year of college at a state school” - you are getting two years. Kids - you need at least eight.

4

I second the suggestion for a Financial Planner. He will help guide you as to the best place to put (and grow) your money. Congratulations on the windfall even though it came at a loss. Honoring that person with sound choices instead of blowing it on an extravagance is a wise choice.

5

Thanks for the suggestions so far. To clarify, the amount is three installments of mid-five figures each. I’m in my early 30s.

6

Its still not that much money - I say this as someone who has inherited six figures twice - and watched friends and relatives who inherited the same blow through it quickly under the whole “you can’t possibly spend that much money” thought. Be careful. $150-$300k CAN change your life. You can also be exactly where you were in a few years with nothing to show for it. In my experience, that is far more likely and has to do with mindset. (My brother in law, who we helped support for the last two years of his life - blew through his).

(We paid off our house, paid for an adoption, set up an emergency fund, funded the kids college, and invested - then when my brother in law got ill, were well able to become non-profit landlords).

7

I inherited money from my parents when they passed. The first thing I did was pay off my house. Then I put the house in trust for my kids. I’m a little older so I did the rest differently. I didn’t want the risk of the stock market. With interest rates in the area of .5 to 1% range, investing in CDs was out of the question. They offered some annuity options that returned 4.75% and fit my needs. You can do better than that if you search a little.

So the bottom line is how old you are and how soon (if) you’ll need the money. Talk to a professional and explore all the options. And reserve a little for those things you wanted but would never otherwise buy. I splurged on a Blackberry Z10 and love it.

8

PBS TV Business Week show with the beautiful
Susie Garab has stock analyst’s picks that look ok,

and sometimes a nice view…

9

Virtually everyone, even professionals suck at picking stocks as well as timing markets. These are proven facts. This is even more true for individual investors, regardless of what people might tell you. You’ll always hear about the victories but never the losses.

What really matters in the long run are fees and asset allocation. In the first instance what matters there is the lower the better. So you want to find the lowest fee vehicles you can that give you the best diversification within an asset class. More on that anon.

In the second instance, you’re also talking about diversification but of a different sort. Diversification really just means not putting all of your eggs in one basket. If you’re talking about stocks for example, the more stocks you spread your investment over, the closer your returns will mirror that of the over all market.

The bet here is that over time, the upward trend of stocks will be up. Of course if you happen to get into the stock market at its peak, it may take you a while to see any real returns, but historically, if you take a least squrares regression of the Dow, S&P etc, the trend is an upward sloping line. The only question is whether you happen to get in at a point above or below that line.

There are also a lot of people who think that growth in the US for the foreseeable future may be in the low to mid single digits rather than what we have seen say 10 or 20 years ago. But then who really knows?

But stocks are just one asset class. You also have bonds and other fixed income investments, real estate (which you can invest in via thinks like real estate investment trust - REIT ETFs), commodities and so on. Also with in asset classes you will have sectors. So with stocks you will have energy, transportation, telecomm, etc.

So it’s important not just to diversify within an asset class but between them as well. Fortunately, with the proliferation of mutual funds and ETFs, that’s easier now than ever. Just remember to always look at the fee structure. Also decide if you will reinvest and how what the tax treatment of reinvested dividends will be (i.e., before or after taxes - an accountant can help you with that depending on how much money you’re talking about).

The only other thing you might want to think about is whether or not you want to worry about periodically rebalancing your portfolio. For example prior to the current run up in interest rates, it was pretty clear that investors were going to lead the fed in bidding up rates, the only question was going to be the exact timing. So a prudent person, anticipating this probably would have gotten out of bonds as early as a year ago or more. Personally I don’t think that’s something the average person should be doing though unless they both follow markets very closely and have a very good understanding of both the mechanics and psychology. People always overestimate their own intelligence when it comes to financial matters and only seem to learn through bitter experience for some reason.

10

Moved to our advice forum, IMHO (from MPSIMS).

11

I’m definitely NOT any kind of investment expert, but I happened to see an article by someone who says all the normal good investment possibilities (the stock market, real estate) are going to be in trouble because the U.S. dollar and ALL the major currencies are all now fiat currencies (none backed by precious metals).

He went on to say (in what seemed like a thorough presentation) that ALL fiat currencies have failed – 100 % of them – within 30 to 40 years, and the U.S dollar is fast approaching that time.

The only difference I can see between the past fiat currency failings and the current situation is, in the past there was at least ONE currency that was precious metals (gold/silver) guaranteeed, but now there are none. So, there’s a kind of unique status with the various currencies now that has never occurred before.

Maybe someone else can elaborate on this.

I thnk I saw this on goldsilver.com, btw

12

That site (goldsilver.com) wouldn’t happen to be selling gold and silver, would it?

13

Mid 5 figures doesn’t sound like the kind of money you’d need to be buying a rental place. I suggest you pay off as much debt as you can and stick the rest in an emergency fund.

14

Really - get a fee only Financial Planner (not a commissioned Financial Planner - they are just salespeople - selling you investments).

You describe yourself as “comfortable mid-upper middle class” and “in my early 30s” and you don’t already have a rudimentary investment plan going? Sorry to sound harsh, but you’re doing it wrong.

Your Financial Planner will, after working out your budget, tell you that you need an emergency fund of some size (3 to 6 months living expenses). This is usually kept in some kind of safe, money market type account. That might take up the first 5 figure payment.

After that, you’ll look at your debt, so again - not yet investing…

Once you get rolling with all that, then you can consider investing. The Financial Planner can help you get into a balanced portfolio.

15

IMHO the real advantage of an inheritance of that size is that it allows you to avoid paying all costs of “not having money”. Use it to pay off mortgages, car loans, and credit card balances if you have them. Pay for all insurance, and any services that offer a discount up front in full for the entire year or longer. Buy all new cars and houses in cash (but don’t buy a new house now, or more house than you need/could afford before the inheritance). Raise your insurance deductibles on Auto, home, health insurance to much higher values. Then use the money you save each year to max out your 401-k and/or IRA accounts for both yourself and your wife. If you have money left over after all that, invest it in a taxable account as specified above.

16

Find fee-only financial planners at NAPFA.

I vote for much of what deltasigma said. Also, find the book (or books?) by John Bogle, the founder of Vanguard. They are the low-cost leader for index funds. That’s where you want to put most of your money. And you should not, under any circumstances, follow the day-to-day fluctuations of the market. That is what made many people exit the stock market in droves right after the market dropped in 2008.

Here is my philosophy, FWIW: If the economy (and its proxy, the stock market as a whole) does not grow over long intervals, it’s because every possible investment except for canned food and guns is bad. For long-term investing, a mix of equities and bonds, but mostly equities, is your best bet.

Also, I have just started the 7 year process of sending 2 kids to college (1 year of overlap). Run, don’t walk, to the FAFSA website and start thinking about how you want to allocate your assets for the purposes of paying for college. Wish we’d done just a little more planning for that.

17

A second on the Bogle recommendation and a strong “You don’t need to pay an advisor” comment. At your age, time and the magic of compound interest / growth are powerful friends who work for free. (Over 20 years I had a similar sized portfolio grow by a factor of 10 - just by letting it sit and avoiding panic sales)

Read the first entry in this forum thread - several times. Trust me, Taylor Lattimore’s advice is worth more than most advisors - he has been investing for over 50 years.

18

I’d 3rd the suggestion, along with **Icarus **and **RickG **to find a fee only investment adviser.

I think it’s worth the money, but I don’t disagree with **jasg **either. You could do fine on your own. You’ll almost certainly be better off on your own than going to your local bank and letting someone there give you a thoughtless plan for “free”. The only effort the put into it is their commissions and they’re not knowledgeable enough to help you.

If you do pay a for-fee planner, you should still educate yourself on investing. I think most educated, reasonable people can immediately tell that Phil_CostaMesa is a crackpot even without much specific knowledge about investing or the economy or money and banking systems. But can you spot why jacobsta811’s advice isn’t very good? If you can’t you should get a better understanding of risk and interest rates and the time value of money.

19

Head over the Bogleheads forum read through thisthread. After that fill out the templatethey request you use and start a thread asking about your personal portfolio.

20

It’s far from the hardest job imaginable. Having run real companies, been a landlord, and invested in regular old securitized investments, it’s a bit of a hybrid between simple investing and running a business.

The biggest prerequisites that come to mind for me are having experience running a business or the genuine desire to play that role, and the ability to do at least some of the labor required yourself, and the desire to learn more.

For someone like Whiteknight, who presumably understands first hand that running a business is hard and takes talent and hard work and a little luck, it could well be a fine way to earn money.