Wednesday Wealth Dilemma: Windfalls and Investing

by Andrew Morris on 10 February 2010  |  0 comments
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This week's Wednesday Wealth Dilemma is what to do with a nice little windfall...other than invest it in individual shares.

A long time ago...

As I wrote in my introductory post on this blog, I was basking in Bermuda for most of the 1980s.

For the last few years, I enjoyed a dream job. I was in charge of all the financial & treasury operations for the offshore captive insurance company of a global publishing business. My colleague and mate Michael managed all the insurance and reinsurance programmes for the business's worldwide risks.

Apart from a crazy secretary, it was just Michael and me in the penthouse office. Reporting to London and New York in the real world, our hours were often, ahem, flexible. Hangover-delayed mornings, long liquid lunches and late afternoon golf games all seemed to slot in comfortably with our executive responsibilities.

Parting pact

But our day jobs with the insurance captive gave us a great insight into the group's global operations. We met senior people every quarter when they jetted in for Board Meetings, helping to keep our fingers on the corporate pulse.

So we had a good understanding of the group's strategy, and the early awareness that traditional publishing was under threat, but that businesses would pay up-front for critical information, delivered digitally. The company's products and services would be needed now and for the long-term. The group had a solid history of stable management, consistent profitability and a progressive dividend policy. And they were disposing of non-core assets.

Michael and I agreed to mark the years of hard labour together by each investing £1,000 in the company's shares.

Patience, patience, patience

For the next 20 years, we carried on our separate lives. Michael moved from Bermuda to head up the company's global insurance operations on the East Coast of the US, while I lurched from job to job back in the UK. The quarterly statements, which showed our shares increasing in value - helped by being in the Dividend Reinvestment Plan - was a welcome reminder of Bermuda and The Dream Job.

By late 2009 I was looking to simplify my finances, and suggested to Michael that we draw a line under our old investment. The net sale proceeds for our shares hit my account. Our £2,000 had become £9,286 - an annualized return over 20 years of roughly 8%, net of all costs.

Not spectacular, but not too shabby either. We'd made the right decision through that fuzzy focus 20 years ago. But maybe we should have invested a little more? If you really know the company you're investing in, patience, time and the miracle of compounding - especially if you're reinvesting any dividends - should deliver good long-term returns.

What now?

Good point, and that's today's dilemma. I've sent Michael his £4,643 and need to decide what to do with my windfall.

I'd like to invest it in lovemoney.com. I know the business well, clearly, and strongly believe that, with your help, we too have a great long-term future. But we're a private company and although all our employees already own shares, we're currently not issuing any further equity for cash.

It was only through working for our good friends at The Motley Fool throughout the Noughties that I understood I wasn't cut out for investing in other individual company's shares. I haven't the time, interest or investing mentality to make the right decisions.

So, I've decided low cost index-trackers are better for me, spreading the risk by tracking certain stock markets rather than investing in individual shares. These consistently outperform a majority of the more expensive so-called managed funds, and are more aligned to my own thinking.       

Help! 

So here's my dilemma - what do I do with this windfall?

• Pay a small chunk off our UK mortgage, currently on a good low tracker rate of 1.19%, but only likely to increase
• Pay a small chunk off our € mortgage, currently on a reasonably low variable rate of 2.35%...but read here for the state of play on our overseas property investment
• Chuck it into an index tracker inside my SIPP, and grab the tax relief on top...but read here why I'm not sure that's no longer necessarily the best idea
• Put it into an index tracker outside the SIPP
• Jump on an aircraft back to Bermuda and blow it all on a nostalgic rum-fest!

As always, I'd appreciate your input on my dilemma by commenting below, as well as what you've done with any windfall that fell into your lap. And don't forget, you can always ask your own question direct to people just like you on our great Q&A forum.

The small print

• Anything I write relating to Growing your Wealth is my personal opinion, and not that of lovemoney.com.
• I am neither qualified nor authorized to give personal financial advice.
• I have quite a busy day job that demands most of my focus. We have a team of very dedicated and insightful writers, who will deliver much better researched and objective content into your inbox.