It Could Be You: The Psychology Of Investing An Unexpected Windfall

The TV ads for the National Lottery paint a picture of a new life of unbridled joy for the potential winners. The reality of receiving an unexpected lump-sum can be quite different.  

There are various ways in which people might receive a windfall, the National Lottery being the most obvious. Inheriting money is the most common type of windfall and although it is not completely unexpected, the timing and scale is often very unpredictable. A current topic of public conversation is the major transfer of funds from the courts back to the individuals, known as ‘Wards of Court’.   

All these situations have in common the need to take sudden responsibility for a large sum of money and to decide how it should be invested. This can be very daunting because the consequences can be life changing for good or for ill. It is very important to approach these decisions with the right mindset and as advisors, we spend almost as much time discussing the psychology of the decisions, as the intricacies of the investment strategy. The taxation and cashflow technicalities are also important factors to take into consideration.  

Inheriting money is often fraught with psychological challenges. Coming hand-in-hand with a bereavement, many of us can experience feelings of guilt which can sway our decision-making. The desire to do what the deceased may have wanted must be weighed against our own needs. If there are siblings, they may not all have the same financial circumstances, so the sibling who wishes to buy a villa in a sunny climate must exercise discretion with the sibling who will now breathe a sigh of relief when contemplating their children’s college education. Depending on the age of the beneficiary, the mundane but crucial option of repaying a mortgage rather than investing the funds in a more adventurous and exciting way may arise. What if there is a property that was in the family – should it be kept or sold? Perhaps there is a longstanding portfolio of Irish shares – should they be liquidated or held for sentimental reasons? The most difficult financial choice of all may revolve around a family business or farm. Should the beneficiary change their own life to maintain the family tradition, or make a clean break and sell it for the highest price and use the funds to pursue their own dreams and aspirations? 

Sometimes, the painfully slow process of probate can work to our advantage. The passage of time allows emotion to subside, thoughts to settle, and logic to prevail after careful discussions with your financial advisor, solicitor, tax advisor and family members. Again, the practical and taxation necessities often help to concentrate the mind and simplify the decisions. One principle I use is to ask: would I buy this property or these shares I’m inheriting if I was investing my own savings from scratch? If the answer is no, then you should probably sell them, because the power of inertia generally doesn’t produce good investment outcomes.    

Wards of Court face a unique challenge. Many of them were awarded funds because of serious accidents at birth or in childhood that changed the course of their lives. Through no fault of their own, they were rendered unable to manage the financial settlement, so they were placed in the hands of the courts. The courts managed the money and distributed income as required to their wards. New legislation is dismantling this system which has been in place for decades and each person is gradually being assessed and the funds returned.  

Depending on the capacity of the individual, the courts are deciding if they are to take responsibility for the funds themselves or with the assistance of an approved representative known as a Decision-Making Assistant. Receiving funds in these circumstances is particularly daunting. The person is often not in employment, not used to large sums of money and may require an income from the funds for the rest of their life from a young age. The principles of the legislation were a well-meaning attempt to give more agency to the individuals, but the world of finance and investments can be intimidating for some people, and risks of making the wrong decisions are high.  

So, the first step is to normalise the decisions. It is easy to over-complicate finance, but there are plenty of solutions to suit everyone depending on their appetite for complexity. The next step is to establish the practical requirements such as the term, the income, the need to buy a home or to pay a carer. There may also be state disability benefits that can be protected by placing the funds in trust. In some cases, the investment returns can be tax exempt subject to an application to Revenue. All these factors narrow down the variables and make the consideration of the most suitable investment strategy and investment vehicle part of a clear logical process aimed at achieving the person’s special objectives. We also focus on having a down-to-earth approach and the human touch in liaising with the client, the family, the solicitor and a tax advisor, if necessary.  

Finally, the Lottery winner who often had a job, a house, a plan and wasn’t expecting the wheel of fortune to land on their number except in their wildest dreams. A million euro is a lot of money in anyone’s language so the excitement of winning an amount like that is immense. Should I give up my job, buy the house of my dreams, that sports car or the holiday home I’ve seen in the brochures?  

Pity the poor financial advisor who must break the news that a million euro when invested in a balanced portfolio and adjusted for inflation may produce €30,000-€40,000 per annum for your retirement. Suddenly, it doesn’t sound so exciting. Perhaps there is a balance to be struck by paying off the mortgage, setting something aside for retirement and then a bit of sensible splurging, if that’s not an oxymoron.  

In all these situations, the key is to delve deep and identify the personal circumstances of the individual, their objectives and obligations but also their hopes and fears. Very few financial decisions are purely logical and free of emotion but especially ones made in unexpected circumstances. We lay out the options, consider the practical and tax requirements, the investment likes and dislikes and bring our client to a satisfactory decision in their own time.  

It could be you or one of your loved ones.  

This is an opinion piece. Investments may fall as well as rise in value and income may fluctuate in accordance with market conditions and taxation arrangements.  

Concurrent with the publication of the above piece, the Business Post covered the State’s changing approach to transfers of funds to Wards of Court, including commentary from Tom Clinch. Read it here [paywall].