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Stop following advice from boomers and finance bros and learn how to create a personalized investment plan that works for YOU. 

You need a strategy that aligns with your lifestyle and future goals, not generic advice or a list of "shoulds."

Listen to learn how to assess your time horizon, understand your actual tolerance for risk, and learn the ins and outs of liquidity. 

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Transcript:

Hey, I'm Katherine. Thanks for joining me at Heir Necessities, the podcast that turns complex financial concepts into real talk for GenX, Millennial, and Gen Z inheritors.

I'm a CERTIFIED FINANCIAL PLANNER®, an investment advisor, and an inheritor, just like you.

Each week on the podcast, I'm breaking down a different topic related to generational wealth and inheritance.

Listen in and finally learn how to manage your money and stop making decisions by asking Google what to do.

Understanding how to Invest an Inheritance

On today's episode of the podcast, I'm going to be talking about how you can build a sustainable investing strategy as an inheritor in your 20s, 30s, and 40s.

This is a huge topic that actually has a lot of different parts.

So I'm going to be covering what I mean when I say a sustainable investing strategy.

And right now, I'm not talking about sustainable investing. So this video isn't actually going to be diving into impact investing or ESG investing. I do have a lot of other content out there on this topic and I'm going to be doing more videos on impact and ESG investing later on in this investing series. So if you're interested in that, definitely follow and stay posted.

When I talk today about a sustainable strategy, I'm talking about a strategy that works for you, not a strategy that all these tech bros or these finance bros are saying is what you need to do. I'm talking about a sustainable strategy that fits you, that fits your lifestyle and fits your changing needs as you move throughout your life.

Current vs. Future Inheritors: Tailoring Your Investment Approach

The other piece that I'm going to be talking about is how this changes when you're a current versus future inheritor. Because the sustainable investing strategy as you're looking towards a future inheritance is very different than what it might look like after you get a five, 10, 20 million dollar inheritance.

Risk Tolerance Assessment for Young Inheritors

Let's kick it off by talking about the basics of building a sustainable investment strategy no matter where you are in your inheritance journey. The first thing that you need to understand when you start to think about building an investment strategy is what your risk tolerance actually is. And risk is a tricky thing to try and calculate because risk is very, very personal. I can't impose my risk tolerance onto you. It's not ethical for me to say, "Okay, well, this is what I would be comfortable with. So I think this is what you should be comfortable with too." It's a very personal decision to figure out what your risk tolerance is. And it matters a lot when you're talking about investing.

Your risk tolerance is going to determine the kinds of investments that you're in. It's going to determine the mix of more growth-focused investments, so like stocks, mutual funds, ETFs, versus more conservative or stable or income-focused investments, which are like your bond, your bond fund investments in your portfolio. And the mix of stocks and bonds or growth and conservative-focused investments in your portfolio is going to be determined by your risk tolerance.

When you're thinking about your risk tolerance, there are a couple of factors that are important to consider. The first one is your time horizon. For a lot of current or future inheritors in their 20s, 30s, and 40s, the time horizon is going to be very long. You're not actually going to be pulling money out of these accounts for 20, 30, 40, 50 years. But if you've gotten a large inheritance and you're going to be taking significant portfolio withdrawals because you're scaling back at work or you decided not to work anymore because you don't have to, then your time horizon is going to change. So the first part of thinking about this risk calculation is understanding when do I actually need the money from my portfolio? And if the answer to that question is decades out, then you're probably going to have a much higher risk tolerance than someone who needs to start taking money from their portfolio in the next five or 10 years.

The second piece that's really important when you're thinking about your personal risk tolerance is how you emotionally respond to changes in market conditions. And if you're not someone who's spent a lot of time investing in the stock market, if investing in the stock market is pretty new to you, then you're going to have to make some educated guesses here because you might not have lived through a major market downturn and you might not have a clear and true understanding of how you would react in that situation. The reason that it's so important to know this is because the worst thing that you can do if you want to be a successful long-term investor is to sell assets when the market is down.

But this is the instinctive emotional reaction that a lot of people have to market downturns. They see that the market's taking a 50% drop and they think, "I don't want it to go down any further, like I'm gonna sell out at the bottom, I'm gonna protect what I already have." The problem with this is that if you look back in history, some of the best days that markets have ever had come immediately after downturns, and you can't predict exactly when those days are going to hit. So if you sell out at the bottom, oftentimes what you're doing is you're missing all of that upside potential. Whereas if you had just been able to, even if it was uncomfortable, not look at your accounts, bite the bullet and stay invested, then history has shown us you will see your investments grow and continue to gain value over time, even if they're not back where they started in the next week or two, or maybe even the next year or two. But if you are in a portfolio that feels too risky for you, so when you see that drop, it feels like there's too much risk, it feels like you have to get out of the market, then that is not going to be a sustainable investing strategy for you over time.

The next and last piece that you need to consider about risk is liquidity risk. And this is going to come into play for a lot of people who have larger inheritances. If you have a five, 10, 20 million dollar plus inheritance, you might start to think about adding some alternative investments into your portfolio. These investments might be private equity, venture capital. There are a lot of different types of alternative investments, which again is going to be the subject of a future podcast episode. So if you're interested in that, let me know, I can make that episode sooner rather than later. But all of these alternative investments, and to some degree this also includes real estate, have liquidity risk associated with them. And that means that you're not going to be able to immediately access funds that are invested in these different investments.

So if you own a portfolio of mutual funds, say you need to take out $500,000 for a down payment on a house, you can sell $500,000 worth of mutual funds and in two days you have $500,000 in cash. But if you're in a lot of these illiquid investments, then you don't have that same option to get liquidity. And so as your inheritance gets larger and you consider adding in alternative investments, the third type of risk that you need to consider is liquidity risk.

Building an Investment Plan After an Inheritance

Understanding your risk tolerance is something that doesn't really change whether you're a current or a future inheritor. If you're a future inheritor and you don't have a significant amount of assets now, then you don't need to worry as much about liquidity risk because you may not have alternative investments in your portfolio. But the questions about time horizon and the questions about your ability emotionally to withstand market downturns are still really important.

Future Inheritors: Financial Planning Without Guaranteed Inheritance

But it looks different thinking about a sustainable investment strategy as a future inheritor than it does if you're a current inheritor. The primary reason that a sustainable investment strategy looks different for you as a future inheritor is you don't have a guarantee, 100% guarantee that your inheritance is coming. Yes, it's likely, it's probably the most likely option that that inheritance is going to come. But you cannot live your life and plan your life around a future inheritance. Because if something happens, if your parents change their will, if they spend all their money, a million different things can happen that means that that inheritance doesn't come to you. And yes, while that might not be super likely, it is the situation that you need to plan around because otherwise, you've been waiting all your life for this thing to happen, it doesn't happen, well now you're in a really bad spot.

So you need to plan for a financial future that assumes your inheritance isn't coming. And this means that building a sustainable investment strategy in your 20s, 30s, and 40s as a future inheritor is all about taking care of yourself and especially taking care of your future self. It's also about saving money. It's about saving money into your retirement accounts. It's about building a financial plan so that you know that you are financially prepared for your future if you don't get any inheritance. And you're probably going to be living a different life.

If you're saving for your own financial future and you're assuming you're not gonna get any inheritance, it's likely that your life would look very different than probably what it actually will be, again, when you get the inheritance that you expect. But you still need to know that you can take care of yourself if something happens and something changes. So your priority should be about making sure that your own finances are rock solid, that you're living within your means, that you're saving for retirement, and you're living a lifestyle that's aligned with the wealth that you already have, not about the wealth that could be coming to you in the future.

This is a really hard thing to do, and I don't want to discount that because you're living in this weird situation where your family is very wealthy, and you know objectively that that wealth is coming to you, but you are not necessarily very wealthy. And you might even feel like you're financially behind relative to a lot of your peers because you haven't had to build up that same safety net because you have this source of wealth that you're relying on. I want to be really clear, there is nothing wrong with you for being in that situation. It is incredibly common and it's a place where a lot of people find themselves in this age range. But you can take steps to change that and to start building your own wealth. And I cannot tell you how good it is going to feel to know that you are building your own wealth independent from any family wealth that you have. That's the most important thing that I want to encourage you to do if you are a future inheritor and thinking, how can I grow my own wealth in a sustainable way as I still keep in mind the potential for this large future inheritance?

Simplifying Complex Inherited Portfolios

If you're in your 20s, 30s, and 40s and you've already inherited a significant amount of money, then building a sustainable investment plan is going to look different than someone who hasn't inherited yet. And that's because your real focus is on trying to figure out how to manage the assets that you've inherited and integrate them into your financial life. This could look really different if you've inherited assets outright versus, for example, if you're a trust beneficiary who just has an annual income coming to them to the trust.

The first thing that you want to do as an inheritor looking to build a long-term plan to manage your investments is to take stock of what you actually have. What money do you have available to you? How is that money available to you, is it in a trust, do you own it outright? What assets do you have that are investable? What assets do you have, real estate or other illiquid assets where you can't actually access those things right now? Take stock of where things are at this moment and then spend some time thinking about where you want things to go. This is more true for people who have inherited assets outright, not through a trust. But if you have a lot of illiquid assets or if you've inherited assets from your parents that aren't what you want long term, then a big part of building a sustainable investment strategy is creating a plan to unwind those investments over time. And over time to move your portfolio from what your parents had and what your parents liked to something that makes sense for you.

And a big part of this for a lot of inheritors is going to be moving towards simplicity. When I talk about a sustainable investment strategy, again, going back to the beginning of this episode, I'm talking about something that works for you, that is manageable and that fits into your life. And I know a ton of inheritors whose parents, and I'm stereotyping, but it's usually the dads, loved these complex investments. They loved meeting a guy and giving him, you know, 100,000 or 500,000 or a million dollars to do this thing he's doing. And it was the way that they had fun and the way that they kind of played with money. It was a hobby for them. But then their kids inherit and they're like, "What is this mess that I've gotten? Like, I don't want all these investments. I want something that I don't have to spend my whole life thinking about." Cause yeah, this was my dad's or my parents' hobby, but it's not my hobby. I want to live my life and I'm happy and grateful to have this money. And I know I want it to be invested safely, but I don't want it to be in something where I'm going to have to spend 40 hours a week managing my inherited wealth over the long term.

So it's thinking about how you can move these investments towards things that are more in line with your vision for the future, while again, keeping in mind your time horizon, your risk tolerance, and your tolerance for any illiquidity in your portfolio.

Practical Tips for Managing Inherited Wealth in Your 20s, 30s, and 40s

This was a super brief overview of building a sustainable investment strategy. If you're trying to navigate this and don't know what to do, please reach out to me. You can send me a DM on Instagram at Sunny Branch Wealth. You can email me, I'm kathryn@sunnybranchwealth.com. You can go onto my website, grab the contact form, schedule a meeting. All those links are in my show notes. I want to hear what questions and what problems you're dealing with.

The whole point of this podcast is for me to create a space to answer the questions that you as a current or a future inheritor have. So any questions that come up after you watch this episode or any other topics that you want me to cover, please let me know. I'm excited to hear from you and you can tune in in two weeks for the next episode of Heir Necessities.

Let’s take the next step together

Understanding how to manage and invest a current or future inheritance is not easy. Inheritors can encounter a wide variety of different situations requiring knowledge and finesse to manage. If you need more help, you can reach out to Katherine Fox, CFP® and CAP®, a financial planner for inheritors to learn how Sunnybranch can help you understand and plan for your future inheritance, whatever goals you’re trying to meet.