How To Invest A Settlement

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1) Investing Settlement Proceeds

-You received those investment proceeds. If it's a larger chunk, you're obviously going to want to focus on optimizing your TFSAs, your RRSPs, your RESPs if you have kids and maybe an RDSP, if you have a disabled child.

-First, you're going to optimize all of that and afterwards, will be left with non-registered dollars. If you're retiring today because of the settlement, well then you need to focus on building a portfolio that generates tax efficient income. If this money is going to form part of a longer-term plan or you're only retiring in the future, that's fine. We’ll approach the construction of the portfolio in another way.

-You might want to have some growth stocks in there, some dividend payers as well. We’d be less concerned about the actual income that's being generated in the portfolio. You've received the inheritance and all of it is in cash, 2 million dollars just sitting there in cash, in a settlement.


2) Well, do you just go and buy a whole bunch of stocks today?

-I would strongly advise you not to do that. The first step would be to figure out the asset allocation that you should have. Now, whether that's a 60/40, an 80/20 or another percentage allocation, you should own alternatives.


3) Alternative Asset Class

-You should definitely own a portion of your portfolio in either alternatives, real estate, private debt or principal protected notes. Something that is a nontraditional investment. It's not a stock or a bond. They have a clear purpose to either create income, reduce volatility and/or stabilize the portfolio with uncorrelated asset classes.

-What I would suggest for you, given that you have this cash now, it'd be to look at investing the alternatives, the debt and the fixed income right away. In a short timeline, you should put that money to work because for that money, basically the earlier you're in, the earlier you start collecting the dividend.

-You want to start earning income on that money. In regards to stocks, you want to be a little bit more prudent. You want to make sure that you're trying to time the market. You want to reduce your market timing risks. So how do you do that? We like to use what's called the legging in strategy. You leg in chunks of cash over time into the stock market.

-Perhaps, initially you'll buy maybe a third or a quarter of your equities right off the bat. You would buy the stocks in the first week or two that you receive your cash. You would try to find a down day in the markets, buy sectors that are either oversold if you could.

-What you DON’T want is to have your settlement sit in a bank account or an investment account and sit there for two, three, four years while you wait for a correction. You want to have some of your money that's participating in the market and then depending on the amount and depending on your asset allocation, we would suggest a timeline to have all the money legged in. It could possibly be three months, a year or two years, but a period of time where all the money gets legged in.

-The way we do it is we pre-establish rules. The rules are pre-set. If the following were to happen: a 5% correction or a 10% correction, we start buying more equities. With a 20%-30% correction, we buy more, and we may invest all of your portfolio.


4) Market Correction and Recession

-If you end up buying in a market correction, you end up buying all the way down and your average cost based on your securities is going to be significantly lower and in a much better position to participate in the rally that always follows corrections.


5) The reason we do that:

1) We want to remove emotion with pre-established rules. We don't want to be emotional when it comes to money. It's very difficult for people to not be emotional with their own money, so we pre-establish rules, make sure that the money's put in over time. Also, it reduces your market timing risk.

2) We want to own equities because equities have performed so well in the last 100 to 150 years. It's a really good asset class. There are some really good companies that exist out there and you get to participate in the profit. If a company can generate 10 to 15% return on their investment for their shareholders, that's something we want to get.


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