“My dad was good with money, so when I inherited his PG&E stock back in the 1980s, I figured it was probably a good investment, and I kept it,” Joe said.
Joe didn’t normally invest in individual stocks, but he thought PG&E was different. It is a utility stock, which didn’t seem particularly risky to him, and it paid steady dividends. He loved receiving the checks in the mail. It made him think of his dad.
Joe thought he would eventually pass along the PG&E stock to his kids, but then the problems started. PG&E stopped paying dividends to shareholders after California’s devastating wildfires in 2018 and 2019. Its stock price tanked, and the company filed for bankruptcy.
Joe now wishes he’d thought more about whether or not PG&E fit into his investment plans when he was still making money from it, and he worries about whether there will be anything left of his inherited stock to pass down to his kids.
Why it can be hard to invest an inheritance
FundX investment advisors have heard these kinds of stories many times. In many families, one person is trusted to make investment decisions, when that person passes away, his or her heirs may find it difficult to step into the investor’s shoes.
Even if you’ve been investing on your own for decades, you may find it challenging to manage an inheritance and incorporate inherited money into your own financial plan.
Inheriting money is emotional. You may be grieving the loss of a loved one. Perhaps you feel guilt about the money you’ve been given or anxiety around managing an important legacy.
Many people feel more emotionally invested in the money that they inherit than the money they’ve earned themselves. An inheritance often has a history: it may represents the years that your parents worked, the sacrifices your family made to get by, and the choices your loved ones made with their money, and so you want to manage it with the same care and skill that they did. And yet, you also need to manage an inheritance in a way that meets your financial goals and needs—and your goals may be quite different from your folks’.
4 inheritance investing tips
So what should you keep in mind when managing inherited assets? Here are four tips from FundX advisors.
1. Be open to making changes
If you are inheriting investments from people who were good investors, you may feel nervous about making changes to these investments, but as Joe’s story shows, this can lead to problems. Try to think about how your inheritance fits into your investment plans.
2. Learn to invest for multiple goals
You may be comfortable investing for your retirement, but you may have different goals for inherited assets. For instance, we worked with an investor who inherited her mother’s investment portfolio. The investor needed to use some of these assets for her retirement, and she hoped to preserve the rest of the money for her children and grandchildren. But she wasn’t sure how to allocate the assets to meet these different goals or how to invest it to meet different time horizons.
3. Adapt to managing a larger portfolio
Larger portfolios usually require some changes to your investing approach. You may be able to own share classes with lower expenses; you aren’t limited to the retail share classes.
You’ll also need to trade carefully if you’re taking substantial positions in a fund; if a fund company believes your trades are harmful to other shareholders, it can ban you from any future purchases.
Tax-smart decisions are also more important with larger taxable accounts. It’s critical to consider short- versus long-term gains on positions and avoid taxable distributions when practical.
4. Consider how to handle inherited cash versus inherited shares
If your inheritance is in cash, you’ll want to determine how and when you’ll invest it. If you’ve inherited stocks or funds in taxable accounts, this usually comes with a large step up in cost basis, so there may be an opportunity to diversify that wasn’t available before.
In the client accounts we manage, we consider the size of the current holdings and whether all of the inheritance is sitting in one or two stocks or multiple stocks or funds. Then, we seek out optimal ways to trade these positions and design the selling and buying strategies for these funds.
When to work with an advisor
Many investors turn to an advisor to help them manage an inheritance. In fact, some FundX clients hired us to manage their assets, so when the time comes, their heirs won’t have to worry about it.
An advisor doesn’t have the same emotional connection to inherited assets, and so he or she may be able to provide more objective guidance to help you use your inheritance in a way that works for you and your heirs.
Advisors and financial planners are also experienced in allocating and investing money to meet different goals, and they’re used to managing larger accounts and investing in lower-cost share classes.
Learn more about how FundX advisors and financial planners could help you manage your inheritance in a way that works for you and your family.