PAUL – You and your practice have dealt more than once with big lottery winners. You told me in the break a $5 million winner and a $1 million winner, what do you do with, with the people who have scored big windfalls all of a sudden like that?
ROB – It depends on where we’re at in the market cycle, but the first part there is the emotional advice because that becomes tough. You have friends coming out of the woodwork, you have cousins you haven’t spoken to in forever that need cash.
You want to probably pay down your debt, you want to buy some new cars, you want to just take a moment and pump the brakes a little bit. That’s one thing we advise folks to do and then the most important thing is cash flow projection because sometimes they want to retire and they just want to stop working and retire.
If you’re younger still and you’re retired, you’re obviously spending significantly more than if you’re working.
We do a couple of things for folks in this situation but it’s not just lottery winners. It could be inheritance, it could be a business sale, it would be a court settlement.
PAUL – Right. You told me you had a very large one that came from a tragic story. That’s the residential school settlement. One of your clients received a large sum from that process.
ROB -Yes. Depending on how much experience there is in the market for that individual, you have to pump the brakes again. We used to just do them one off. Now we have a process in place. First of all, the classic risk tolerance process is: once you’ve figured out the asset allocation, call it a 60/40 or something similar, you can then buy the fixed income almost right away.
You could also buy the alternatives almost right away. If you’re buying alternatives such as real estate, infrastructure or any alternative asset class, you could buy that right away. The equities are obviously the portion you want to be legging in.
We leg in, we look at some historical data and we will leg in anywhere over a 6 month to 12 month period. We have a bunch of rules that we have in place as well.
PAUL – So you identify a portfolio of stocks and legging in means that you occasionally buy periodically rather than plunging it all at once?
ROB – Yes! There’s two factors we consider. One is time and the other is market movement. If the market is moving in a negative way, we add to the position and we set pre-established rules.
We’re all in a 25% correction and then on a time basis, generally we’ll do kind of two, four, six or eight month leg in. Perhaps it’s three, six, nine months, depending on the risk tolerance. The plan is in place ahead of time.
We want to remove emotion, because it’s tough to sit there with a large windfall when market’s down 25% and say, I want to buy today. However, if you pre-establish those rules and if the market keeps correcting, historical data will tell you that it will work out in the client’s favor.
We’ve done the numbers and we really liked the strategy we’ve developed and there is way less market timing risk for the client. At the end of the day, you want to protect that capital and you want to reduce the risk for the client. What kind of frame of mind are they in?
PAUL – Let’s talk about lottery. They must be elated and are they spend happy? Do they have automobiles and cars they want buy tomorrow?
ROB – Everyone’s different obviously. If you and I won the lottery, we’d be out there probably buying something for sure. The key is the expenditures I like to look at. It needs to be a portion of the money and we talk about this with the client. There’s definitely money that can be spent on yourself and that’s healthy. You have to do that and you’ve got this windfall emotionally, you want to do that.
However, going out and buying assets that are not great for your wealth picture longterm is certainly something we want to avoid. If you could buy a home, a cottage or real estate, that’s okay.
It will appreciate in value. You can probably sell it if you need to down the line and the ongoing cashflow is also great.
If you’ve got five properties, you want to look at what your monthly burn is on your cash. You have to look at the details when it comes to that.
What’s the portfolio generating? Are you still working? If you’re not, how much are we sending you and what’s your burn on those new assets?
PAUL – In your experience, have they taken your advice and stuck with it over time?
ROB -Yes absolutely, we’ve had some success with our lottery winners. It’s just a process of taking them through lottery windfall and to go through the details. For some folks, it’s the first time they ever sit down with a portfolio manager. Right? If first time you’re sitting down with a portfolio, you’re being explained what a stock is, what a bond is, what a preferred share is. It can be overwhelming. We take our time, a lot of education, and we get there.