Enjoy windfall gains in investments

Recently, at a session, a participant mentioned he had made a 500% return on Bitcoin and wanted my advice on making additional investments into bitcoins. He was surprised with my advice of booking profit and exiting his existing investment. And why not, after all, it is not often that one makes a windfall. Better to protect the windfall than get greedy for more! And with the likelihood of cryptocurrencies being banned in India, makes sense to exit.

Sometimes, sudden big money can make people take hasty and bad financial decisions and hence end up with very little. Planning and careful consideration can help build a much more stable passive income from the windfall.

Irrespective of whether the windfall is through investments or employee stock options (ESOPs) or any other source (hopefully not dowry!), put it away in a liquid/ultra-short term debt fund while you decide further course of action.

First, build financial security. Pay off debts, even if there are tax benefits on it. Better to be debt-free as early as possible. If you do not have an emergency fund, set up one with six months of expenses. Contingencies can happen anytime and be prepared with an emergency fund would be useful.

Increase life and health covers based on your requirements. Sometimes, people think a windfall will take care of everything, but investments may be tied up or used up. Hence taking care of basics is essential.

Use some funds from the windfall for essential, long pending expenses or financial responsibilities. The tendency is to bump up against one’s lifestyle by buying a high-end luxury car or taking exotic vacations. You can actually keep aside some funds for this too but plan for financial goals before that. Having a budget is still critical. With sudden, large wealth, people believe they can spend away and still have enough.

Investing these funds for your financial goals will kickstart the financial plan and will help to reach some goals earlier than before. Of course, you may need to reset your asset allocation and risk tolerance.

This will depend upon your financial situation. You may decide to take higher risks for some investments and play safe for others. In cases of very large windfalls, wealth preservation is focused upon. Investors could consider taking a moderate risk for core financial goals and higher risk for investments like a stake in a start-up. Betting everything on high-risk investments may be detrimental. The basics of portfolio planning like diversification are still essential to follow. All this can be quite confusing and hence working with a financial planner would be advisable.

Investors with a windfall feel good choosing complicated exotic products believing that they now have the wealth and expertise, and these products are for a select few like them. Stay away from such complex products. Sometimes, family members/ friends/ colleagues too may talk about can’t miss products, which are too good to be true. Stay away from such investments. Be clear about how you will deal with loan requests from people around you.

Certainly, keep aside an amount for splurging. You may the gain, you certainly deserve to enjoy it! Finally, use windfall gains for what’s really important to you. This could be a life goal like exploring something new or a charitable cause. With some patience and planning, even a small windfall can be used to build the comfortable life of your dreams.