Abruptly acquiring wealth: Managing inherited funds.
When acquiring an inheritance and obtaining a sudden surge of funds that were previously unavailable, many individuals grapple with the decision of what to do with their newfound wealth. Professionals often recommend various forms of investment.
Germany observes a significant amount of inheritances annually, with the German Institute for Economic Research (DIW) estimating up to 400 billion euros being transferred, although it's worth noting that not all inheritances are recorded for statistical purposes. This substantial sum comes with the responsibility of managing, reallocating, or investing the funds.
The first order of business is paying off any debts, which include both tax liability, varying according to the size of the inheritance and the degree of kinship, and other forms of debt. Jan Bittler from DVEV explains, "Spouses and life partners pay inheritance tax from 500,000 euros, children from 400,000 euros." Taxation scales with the size of the inheritance and degree of kinship, starting at 7% and reaching up to 50%, but only if there is no degree of kinship and the inheritance exceeds six million euros.
Once any debts have been tended to, it's crucial to consider personal circumstances, risk tolerance, financial status, investment horizon, and financial goals. Yann Stoffel of "Finanztest" emphasizes, "Not every investment is suitable for everyone." As a result, there are guidelines to help individuals find suitable investments. Ralf Scherfling, a financial expert at the consumer advice center in North Rhine-Westphalia, states, "Assets should be diversified across different product classes." It's also essential to avoid products that one doesn't understand, avoid superfluous risks, or excessive costs.
Furthermore, Bittler suggests, "If you have an investment horizon of 10 to 15 years, you've never ended up with losses." The longer the investment horizon, the easier it is to invest in the stock market. However, diversity reigns supreme when considering stock investments. Yann Stoffel advocates for investing in funds as the easiest way to diversify funds without understanding the market.
There are several kinds of funds available, categorized by various criteria. These consist of equity funds, bond funds, and mixed funds, among others. Some funds offer global investments, while others are limited to specific regions. Consequently, these distinctions offer investors greater diversification options.
Despite the advantages of diversification and the sheer number of funds available, many traditional actively managed funds come at a major disadvantage: costs. Not only is there a front end fee when purchasing a fund, but there's also an annual fee, which, at several per cent a year, may be burdensome. These fees cover the expenses of fund managers who examine, evaluate, and potentially reallocate a fund's shares. Unfortunately, their results are often disappointing.
Yann Stoffel points out, "Scientific research and our numerous analyses show that managers provide no added value and don't recoup their costs through effective management." Stoffel advocates for broadly diversified ETFs (Exchange-Traded Funds), especially for investors who are comfortable managing their own finances.
ETFs replicate specific indices, including worldwide market caps like the US Dow Jones, the German Dax, the European EuroStoxx, or even the global MSCI World. This "passive management" model saves the fund any expenses from an active fund manager.
ETFs feature substantial breadth across stocks, often including thousands of shares and representing a significant portion of the economic world. In essence, ETFs unite two determinants for a successful investment: broad diversity and minimal expenses.
However, ETFs fall short in tailored customization. For instance, if one prioritizes sustainability, it may be challenging to avoid actively managed funds, in which a fund manager handles sustainability.
In conclusion, managing an inheritance demands diligent financial decisions, informed by one's individual risk tolerance, financial circumstances, investment horizon, and savings goal while following guidelines to ensure suitable investments. Additionally, while ETFs provide diversity and low costs, active fund management can supply additional fine-tuning for investors who require more tailored investment options.
Alongside stock investments, exploring other investment types can contribute towards well-rounded diversification. "If you plan on using your inherited wealth at some specific instance and can't afford any setbacks, it's crucial to safeguard it. The simplest method for this would involve secure options like Saving Account or Fixed Deposits.", states Yann Stoffel. Essentially, a Saving Account can act as an extension to your regular account, easily accessible on a daily basis, and the interest rate changes based on current market conditions.
"Saving Account serves as a liquidity reserve," mentions Ralf Scherfling. A typical recommendation is to have three times your net monthly earnings set aside. "For short or mid-sized timeframes, Fixed Deposits or Savings Bonds could be useful alternatives." Moolah is placed in these schemes for a predetermined term, earning fixed interest rates.
Another popular choice for expanding your portfolio is precious metals. Including gold, specifically, can help fortify it. Nevertheless, this isn't mandatory. "In history, profits generally saw a minor decrease when gold was introduced.", says Yann Stoffel. If you're still keen, ensure that your investiment in said metals doesn't go beyond 20% of your equity allocation.
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- To manage inherited funds effectively, one should consider investing in various forms, such as ETFs or equity funds, to diversify assets and mitigate risks.
- Legal issues related to inheritance law may arise, especially with regard to tax liability and kinship, which can significantly impact the amount of assets available for investment.
- Inheritance tax can vary depending on the size of the inheritance and the degree of kinship, with spouses and life partners paying from 500,000 euros and children starting from 400,000 euros.
- Consumers who have received an inheritance should seek advice from financial experts or advisors to understand their options, risk tolerance, and financial goals, as not every investment is suitable for everyone.
- After paying off debts and taxes, investors can consider investing in ETFs, which offer broad diversification and low costs by replicating specific indices, such as the US Dow Jones or the German Dax.
- An adversary of ETFs is that they lack the potential for tailored customization, such as focusing on sustainable investments or actively managing funds to fit specific investor needs.
- For individuals who favor liquidity and safety, traditional savings options, like saving accounts or fixed-term deposits, can be suitable, providing a guaranteed interest rate and minimum risk.
- When making investment decisions, it's essential to be cognizant of securities like gold and other precious metals, while also keeping in mind that they should represent no more than 20% of an investor's equity allocation due to their relatively limited return compared to other investment types.
Source: www.ntv.de
