Investing your windfall

Paying off a mortgage and/or any debt should be a priority for anyone inheriting money during the current recession, a panel of experts selected by the Otago Daily Times recommends.

ABN Amro Craigs sharebroker Chris Timms, wealth management adviser Craig Myles, Forsyth Barr sharebroker Peter Young and financial planner Peter Smith were asked by the newspaper to provide some guidance to two selected groups - a family with three children, parents 35 years old, and with a $100,000 mortgage; and a couple aged 55, with children who had left home, and who had three grandchildren.

Each family was assumed to have inherited $350,000.

Younger couple

Paying off the mortgage, and any debt - either partially or in full, depending on circumstances - should be a priority for the young family who had inherited money, according to our panel of experts.

"This releases at least $750 a month, assuming a 20-year mortgage payment. To keep the mortgage requires $1.27 to be earned for every dollar paid into the mortgage," Mr Smith, the principal of Smith Financial Planning, said.

The couple should repay student loans and should join KiwiSaver, if they had not already done so.

If one parent stayed at home, he or she should still join, paying the minimum of $1040 a year into the scheme to get tax advantages.

With up to $250,000 left to invest, depending on things like repaying student loans, the couple could form a family trust.

Mr Smith recommended them spending up to $20,000 on an educational holiday, going to places such as Japan, Egypt, Turkey, Northern France and the United Kingdom, but also visiting fun parks in Australia on the way.

"It is good to see the world at a young age and understand some of our heritage, such as war zones."

The family could consider one major home renovation of up to $30,000.

Mr Smith recommended setting up an education fund for the children's university fees.

A balanced fund from any of the major providers, such as AMP, ASB, AXA, ING or Tower, would be suitable; but the fund probably needed to be $50,000.

Investing what was left:

• Cash fund for emergencies - $15,000.

• New Zealand fixed-interest PIE - $40,000.

• Listed property companies - $15,000 and reinvest distributions.

• New Zealand share-managed funds - $20,000.

• Managed funds in Australia and Asia - $60,000.

Mr Myles, a director of Myles Wealth Management, put $20,000 aside for emergency funds and assumed the spending needs of the younger couple would be met from income for the next five years.

He would put $67,500 in a defensive blend of high quality, highly rated and tax-efficient funds, invest in some property assets and use growth assets that would be currency-protected if they were international.

He would put $162,500 in growth assets, predominantly shares that were activity-managed and well diversified across countries, sectors, industries and companies.

Currency hedging would be put in place and Mr Myles had a preference for some protective strategies against prolonged falls in markets.

Mr Young suggested the couple seek recommendations for a growth portfolio investment, with the knowledge that as a growth investor they would prefer predominantly sharemarket investments with a small fixed-interest component.

As a growth investor, they would have to accept the portfolio might lose value for extended periods in the course of seeking capital appreciation over the recommended minimum period of, for example, five years.

A growth portfolio would have:

• Cash - a portfolio should have some available cash for emergency funds or any investment opportunity that arose.

• Fixed interest - a small weighting of fixed interest would provide some quarterly income to top up cash reserves.

• Property - a small exposure to the listed property sector would provide diversity and a good income from dividends of about 8% to 14%. Listed property stocks were also PIEs where the maximum tax paid on the dividend was 30%.

• Australian and New Zealand equities - Mr Young would have the largest weighting of the portfolio split between New Zealand and Australian shares.

New Zealand tended to be the market where shares paid higher dividends, but Australia offered more scope for selection because it was a larger market and more diversified.

• International equities - brokers could access research information on all listed companies in the world from New Zealand.

Therefore the asset class of international equities was an easy one in which to invest.

Mr Young recommended some large cap stocks that had shown growth characteristics with worldwide operations, such as Microsoft and McDonalds.

Mr Timms recommended paying off the mortgage, paying off any personal debt and for both parents to join KiwiSaver in a balanced portfolio.

"Given the advantages that KiwiSaver offers through government and employer contributions, this should be the first investment choice and provides the foundation for their investments."

Assuming there was $250,000 left to invest, Mr Timms would put 5% in cash, 20% in New Zealand fixed-interest, 19% in New Zealand shares, 22% in Australian shares, 24% in global equities and 10% in property.

The portfolio must be monitored on a regular basis, at least annually.

This was to ensure that the asset allocation was still appropriate in the circumstances and still met the couple's investment objectives.

As the couple grew older, it was expected the portfolio would progressively become more conservative in nature.

Older couple

A conservative and balanced approach should be taken by older investors receiving an inheritance, the Otago Daily Times expert panel recommends.

ABN Amro Craigs broker Chris Timms recommends that if they had not already, the 55-year-old couple should join KiwiSaver in a conservative portfolio.

If the couple owned their own home, the $350,000 inheritance would be invested into a balanced income portfolio which had an income growth split of 55% to 45% and was designed to predominantly provide a regular income with a high level of capital security.

He would put 10% in cash, 45% in New Zealand fixed interest, 11% in New Zealand shares, 12% in Australian shares, 12% in global equities and 10% in property.

Forsyth Barr broker Peter Young advised the couple to repay all of their debt and set up a conservative portfolio of investments.

"At the age of 55, you don't want to place any undue stress on your hard-earned assets or in this case, inheritance.

Therefore, a conservative portfolio is the best option, as it is predominantly made up of fixed interest investments with a small weighting of equities to provide some growth."

The majority of a conservative portfolio should be in fixed interest investments that had A credit ratings, or at least an "investment grade" rating of BBB-, Mr Young said.

Myles Wealth Management director Craig Myles assumed the couple had no spending requirements other than what they covered from their working income during the next five years.

Income was assumed to be sufficient to meet their expenses.

He placed $20,000 in emergency funds and had $172,500 in a defensive blend of cash and income assets, property and growth assets.

An additional $157,500 was placed in growth assets, predominantly shares that were actively managed and well diversified.

Peter Smith Financial Services principal Peter Smith advised the couple their first decision should be whether they would stay in their present house after retirement or move within the next year or two.

They should form a family trust and if they decided to move, then the new house and investments would be owned by the trust.

All assets should be transferred to the trust.

The couple should open KiwiSaver accounts for all grandchildren with at least $1000 and have a "really good holiday" of at least a month.

They should review all existing savings and assets.

"With 10 years to full retirement and another 20 years after that, the couple still has a long-term investment horizon."

Mr Smith would put 5% of the windfall in cash, 40% in fixed interest PIE, 10% in listed property, 15% in New Zealand shares and 40% in overseas investments.



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