If I won the lottery, I wouldn’t tell anyone but there would be signs

STATISTICALLY speaking, some of us will make bank simply by receiving some unexpected wealth. 

Perhaps it is through winning the lottery, or through finding a gold coin on the ground as part of a marketing startup’s treasure hunt. More likely, it could be inheritance from a loved one who has died. 

In Monopoly, a bank error in your favour will grant you $200, which could net you any property up to New York Avenue. You would be wise to pick something up immediately to quickly make rent. 

However, real life is not as straightforward. 

Young adults with time and energy on our hands could be enticed by the allure of overseas holidays, for example.

But for those looking to get married or start a family, they will have to consider whether the windfall could be better spent paying down mortgages or car loans. They may even top up the Central Provident Fund (CPF) special account, which has been paying out interest of 4.14 per cent per annum since Oct 1 this year. 

Wealth advisory firm Providend’s chief executive Christopher Tan said that for individuals who have just entered the workforce and started a family, they should first take the time to consider their financial health. 

One quick way to do that is to see if they are carrying debt that amounts to more than 50 per cent of the assets that they have. Another way could be to see if the amount of loan instalments they pay each month is more than 40 per cent of their gross monthly income, including CPF contributions. 

If these conditions are met, Tan said that individuals should consider paying down their loans to get to these levels so that they are financially healthier.

They should also take into consideration whether they have sufficient emergency funds of about six months of living expenses. 

Next, they could then use the balance, if there is any, to decide how much risk they would like to take from an investment perspective. 

Tan said that depending on the size of the windfall, individuals could consider topping up their CPF special account up to the full retirement sum. This is because there are very few products in the market that guarantee capital while providing 4 per cent per annum in interest. 

For those who turn 55 in 2024, their full retirement sum would come up to S$205,800, and they will receive CPF Life payouts of S$1,560 to S$1,670 per month for as long as they live. 

“The risk you have to take is liquidity risk…as well as policy risk but based on what we can see right now, that should still be okay,” he said. 

For those who are savvy, he said that investors can also invest the funds in the equities market.

“Assuming that you have a very long time horizon, you have no need for this cash, you would deploy this whole lump sum into 100 per cent equities,” he said. 

He added that rather than picking stocks, they could invest in low-cost instruments, such as globally-diversified exchange-traded funds. 

Paragon Capital Management chief executive Paul Lee said that investors should be careful that they are not simply trading in stocks, rather than investing. 

While it can be daunting to invest all their money at once, he suggested that they could split their funds into two tranches to invest in at two different times. 

“What matters more is your holding period, your time horizon, your ability to set this money aside to let it work. 

“You are an investor, you are not a speculator. Don’t be too caught up in the day-to-day gyrations, it’s not helpful,” he said. 

He added that it is important for people to be able to identify the right level of risk.

For instance, someone may insist on paying off all their loans with their windfall before investing any funds, which would suggest that they are highly conservative. 

If an individual does not identify that right amount of risk, they could experience remorse, he said. 

“On one end, you put your investable funds into a riskier investment and it doesn’t work out, there’s remorse there because you have losses. 

“Remorse can also happen at the other end of the spectrum when they…use their available cash to pay down the loan and therefore miss out on opportunities elsewhere,” Lee said, adding that there is no right answer when it comes to a person’s risk appetite. 

There also appears to be a difference in the thought process of those who are seeking to invest their inheritance.

Lee noted that in cases where clients receive unforeseen inheritance, people tend to be more willing to take on more risk as the windfall is extra capital on top of what they have already planned for.

“They tend to be open to take on a little bit more risk for the longer term just to see if it can grow healthily,” he said. 

On the other hand, Providend’s Tan said that inheritances may be invested more conservatively than other types of windfalls because of how they are derived. 

Because the funds remind people of the giver, individuals tend to feel some sense of responsibility to use it in certain ways. 

“(Individuals) would tend to think about what the wishes of the giver are, certain instructions, and then they manage it accordingly. 

“Based on my experience so far, most of the time inheritances are invested a lot more conservatively than other types of windfalls,” he said. 

With their advice, there may be signs that I did receive a windfall but more importantly, I would get some additional quiet assurance in knowing that my path to financial freedom is more secure.