I inherited a lump sum and paid off my debts. How can I preserve the value of remaining capital?
I managed to benefit from an inheritance lump sum payment overseas. After paying off my debts, I will still have majority of that inheritance lump sum. My goal for that money is to preserve its value. Investing them in GIC, bonds, or other cash-like liquid investments would get that fund eaten away fairly quickly through inflation. I was influenced heavily to purchase real estate, but I'm hesitant to do that due to its volatility. I'm leaning towards purchasing lifecycle funds, but I don't know how the risks would calculate out comparing to ROI. What are your thoughts, backed up with resources or calculations?
This is for a person who is close to retirement age located in Canada (the lumpsum is located in Hong Kong).
Thanks in advance!
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I'd just apply the principal toward my general savings goals. If I didn't have anything saved yet, I'd either start with a lifecycle / target-date fund for my retirement, or with a portfolio of broad mutual funds and index funds with an asset allocation similar to one you'd get in a lifecycle fund: some stocks and some bonds. There's still a risk to my capital, but I'd also actually earn money off of it.
My secondary consideration would be to buy a house, or at least save up for a down payment on the house (in a less aggressive portfolio) but it's not so much as an investment goal: it's more to just have a house. (There's risk of losing capital, but my housing situation is stable. Also, if I'm in a city with consistently good prospects this is good; if the city turns into Detroit this stability is worthless).
If I felt I'd saved enough and just wanted to start spending it but didn't want it to ever run out, I'd buy a managed-payout fund like these from Vanguard.
If you simply want to preserve the value of your capital, take a look at buying Treasury Inflation-Protected Securities (TIPS) from the US Treasury:
When a TIPS matures, the investor is paid the inflation-adjusted principal or original principal, whichever is greater. Since a TIPS investor won't receive less than the original principal, the investor's original principal amount is protected against deflation as well.
TIPS pay interest semiannually at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.
So you'll earn (a small amount of) interest, and the principal will be adjusted for inflation.
Edit: As Michael Pryor points out in a comment below, there is liquidity risk -- if you need the money before the bond matures, you could lose principal. In my answer above I'm assuming you want to "lock up" the money for a period of time. If you're anticipating needing cash from the principal, you could set up a bond ladder to provide you with some extra liquidity.
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