Getting an inheritance is often bitter-sweet. While the money may be an opportunity, it is attached to losing someone who may have been important to you. As a result, it can be hard to think clearly about how to handle the windfall, potentially setting you up for some poor decisions. However, by using the right approach, you can make smart choices. Here’s some investment advice after an inheritance.
Take a Breath
First and foremost, don’t make any financial moves if you are still grieving. Emotionally difficult events often cloud a person’s judgment. If you are still struggling with significant feelings of sadness, anger, confusion, or frustration, you may make a choice that you wouldn’t usually. At times, that may be a decision you would later regret.
If you don’t feel emotionally calm enough to make big financial decisions, wait. Give yourself a chance to breathe and recover. That way, when you do make investment choices, you can be more confident about them.
Define Your Goals
Another step that you need to take before you choose any investments is to define your financial goals. Not only do you need to figure out your general plans for the money, but you also need to determine a timeline for its potential use.
Some types of investments are better for short-term objectives, while others are more suited for long-term ones. For example, while purchasing stocks, ETFs, index funds, or similar investments through a brokerage may work for goals positioned a few years out, while retirement account investments don’t usually align with short-term objectives.
If you want to save for a child’s college, a 529 plan provides you with benefits you won’t get elsewhere. If your goal is to set the money aside for retirement, then putting the money in an IRA, 401(k), or similar account could be your best choice.
By understanding your goals, you can choose investment vehicles that align with the objective and timeframe involved. That way, you get the best approach for your situation.
Understand Your Risk Tolerance
All investments include some level of risk. You are never guaranteed to receive a particular return. In fact, you may not just miss out on gains; you can also experience losses.
The amount of risk varies between investment options, at times dramatically. When risk levels are higher, the potential for significant growth and losses are both elevated. With lower amounts of risk, growth and loss rates are usually both reduced.
Not everyone has the same perspective when it comes to the amount of risk they find acceptable. Some investors are bolder; they are willing to tolerate a substantial amount of risk in exchange for the possibility of significant gains. While they understand that hefty losses are also possible, they feel the risk is worthwhile.
Others aren’t comfortable with high amounts of risk, accepting lower growth potential in exchange for a sense of increased financial safety. They would instead prefer that their investments feel reliable above all else, even if that means achieving less when it comes to gains.
Before you invest, you need to estimate your risk tolerance. That way, you can choose a strategy that meets your needs.
Diversify Your Portfolio
Regardless of your goal, you want to diversify your investment portfolio. With diversification, you reduce overall risk by having a variety of stocks, ETFs, index funds, bonds, or other assets in your portfolio.
That way, if one asset experiences a problem, you aren’t guaranteed to see losses across the board. Instead, the other investments may remain stable or could potentially rise, offsetting the decrease associated with the one asset or, at least, preventing widespread losses.
Get Help from a Professional
While some investing strategies are relatively straightforward, not all types are easy to navigate, especially for beginners. If you are new to investing, working with a financial adviser or similar professional can be a smart move. Sign-up to The Motley Fool for good advice.
When you work with an adviser, they can discuss your goals with you to understand what you want to achieve. Then, they can provide recommendations or outline all of your options, answering questions about the pros and cons of investing using each of those approaches.
As you start to research financial advisers, make sure to vet them carefully. Review their credentials. See if they are commission or fee-only. Read reviews from past clients. Request recommendations from trusted family members, friends, or colleagues.
Choosing the right financial adviser is essential. That way, you can get sound guidance that you can trust, ensuring you’re able to start your investment journey with greater ease.
Do you have any investment advice for after an inheritance? Did you receive an inheritance and think people could benefit from your experience? Share your thoughts in the comments below.
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Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.