For many wealthy individuals, the sale of a business is a key turning point in their lives, for a number of reasons. One of the challenges entrepreneurs face is how to manage their lump sum payment. They want to secure their long-term financial security and enjoy the lifestyle they have worked hard to create. If you're fortunate enough to be in this position, UBS' recent report covers all the essentials you need to know to manage your lump sum payment.
As with any other major decisions you take in life, making some time to plan will help you explore your options, properly consider each and select the right route for you and your family.
UBS advisors help their clients to do this using their 'Liquidity. Longevity. Legacy. approach':
Liquidity - Ensure your family has enough cash assets to maintain your lifestyle. Avoid needing to sell any assets or cash in any investments at the wrong time.
Longevity - Invest in assets that will give you a long-term return, in line with your personal risk appetite.
Legacy - Consider how you would like to improve the lives of people and causes you care about beyond your lifetime.
To go from receiving your cash lump sum to an optimal investment portfolio, consider the following strategies with your investment advisor:
Going straight into the investment market
This can feel uncomfortable for many investors, given the risk of investing near a market peak. But this strategy is worth exploring together with your advisor because it can give you better long-term returns versus phasing in the money or waiting for the market to correct because you lose potential asset appreciation while you wait.
Phasing into riskier assets
For large deposits where the potential cost of bad market timing is greater, you may consider mitigating the risk by investing directly in government bonds, which are less volatile, and phasing into riskier assets. You could agree with your fund manager to accelerate each phase-in tranche if there is a market dip of at least 5%.
Options and structured investments
Where markets are volatile, but you want to mitigate against the 'opportunity cost' of prolonged phasing in, your advisor may suggest you consider a put option, call option or structured investment. These allow you to 'hedge your bets' a little but are not without their drawbacks, so should be considered carefully.
So recipients of a large lump sum should consider a range of options before putting their money to work, and avoid just sitting on the sidelines in expectation of a market correction. For more detail on this subject, see UBS' recent report: "How should investors deal with lump sums?"
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