Dan Dobry
Dan Dobry

Becoming Rich Overnight – What to do after receiving a windfall

Large sums of money entering accounts overnight for instance from an IPO, changes lives and turns people’s worlds upside down. How should they behave in such a situation in order to remain sane?

More and more new Israeli tech companies are trading on the Nasdaq.

Along with positive macro effects on the Israeli economy, the dollars that are constantly flowing inflate the shekel and make it difficult for other industries; The IPO market it seems, will remain as hot in the third quarter basing this assumption on future prospects and SPACs deals.

However, the real story is the money that has made its way into the employers’ pockets. The value of these issued companies is very impressive, so are the employees shares who suddenly must decide what to do with their new significant resources.

Economic inequality has probably never been larger. While many businesses in Israel are struggling to survive considering the government’s attempts to curb the spread of the Covid-19 Pandemic, the high-tech industry is booming. The volume of capital raised by Israeli start-ups broke a record in 2020, reaching about $10 billion.

For example, 230 Israeli millionaires were recently created by the floating of  “IronSource” on the Nasdaq, as it entered the stock market with a total value of $11 billion. The floating of “Transmit Security” also created new significant wealth for families after raising $543 million, most of which went to its executives and employees.

Since the beginning of the year, companies have sprung up in Israel whose employees have become rich overnight, most of them young (in their thirties and even twenties).

In total, there are thousands of “new wealthy citizens” if not tens of thousands, depending on how you define a rich person. There will probably be more and more in the coming years, even if a tech crisis bursts.

But the real question is what happens to these newly wealthy who must get used to a completely different reality of living?

Where is the money going?

First of all, it seems that the first thing the newly wealthy does is to acquire real estate in Israel. Luxury apartment prices have skyrocketed in recent months and significant money is flowing in the direction of the purchase of luxury cars, luxury consumer items, and of course gourmet restaurants who are recording full booking for weeks ahead. The money is flowing as if there is no tomorrow as if the large sums of money are going to flow into their accounts forever indefinitely.

Statistics though are not in their favor; we have learnt from academic resarch that more than 90% of these talented professionals will not receive such sums of money again in their lifetimes.

The only conclusion can be, is that managing their money properly and professionally is the wise thing to do.

 My tips for the newly rich

Tip No. 1: Keep quiet and wait a bit.

It is still possible to celebrate in chef’s restaurants, but before you start spending serious money it is important to take a few weeks to digest the new realities and think about what you want to achieve from the new enrichment. The families mor individuals need to set goals and plan how this new money can help them live the life they dreamt of.

Tip No. 2: Do not share the news with others

Immediately upon becoming wealthy, the families will find out that there are many partners in their success such as family members, or friends they have not heard from them for years, they will appear and propose opportunities and tips. I suggest being as quiet as possible, and not to share plans with others. Most of these offers are targeted at making others rich at your expense.

Tip No. 3: Look for loyal financial advisors which do not profit from your investments

It is hard to find such advisors since the market is flooded with biased professionals that promote certain investments out of self-interest and rake in a share for themselves.

You should ask the professional for his certification and try and understand his methodology of providing advice, and make sure he is a member of a body of professionals who supervise the activity of such a professional, and that his practice has adopted an academic work standard.

Tip No. 4: Build an Asset Allocation aligned with your goals and do not look for good single investments

All international academic studies that came out of global reputable universities emphasize the great value of building an overall strategy that matches the life goals you set as opposed for only looking for “opportunities”.

Tip No. 5: Strive to generate passive income

Ultimately the only substitute for a working person is working money, so when accumulating capital, it is wise to invest a good portion of it in income-generating investments.

Tip No. 6: Create a Liquid Emergency Fund

The need for an emergency fund is clear – no one knows what the future holds. We may be fired from work, decide to remodel our home to align the house to new realities, or need medical care. Therefore, everyone must have liquid funds available for emergencies.

Tip No. 7Invest for the long run

When asked “What is your preferred investment range?”, Legendary investor Warren Buffett replied, “Forever.” When asked to refine his remarks on another occasion, Buffett answered “Buy only an asset that you would be completely happy to own, even if the market is illiquid for 10 years.” Warren Buffett is a classic long-term investor, but that is not to say that this is the ideal range in any investment for all investors. What can be learned from this is that the investment range is a significant component at the core of the investment strategy and has a real impact on the chances succeeding in the investment world in general, and in the alternative investing world especially.

Tip No. 8Look for a qualified financial planner who operates on a model of absolute loyalty to the client

Operate only with a qualified financial planner who operates according to an international method when caring for a family:

Knowing the economic reality of the family (income, expenses, assets, liabilities and life goals).

Planning an asset allocation tailored to family life goals, family risk management, and tax Planning

Planning the creation of passive income for the family and the transfer of wealth between generations.

Tip No. 9: Diversification, Diversification, and again Diversification.

People tend to invest and understand only one or two asset classes. For example, only real estate or securities. Only real estate in the US or only local securities.

The investment world is intertwined; When one thing goes down, something else goes up. That is why it is important to invest in a diversified portfolio.

It is important to invest in a wide range of asset classes, sectors, liquidity options, geographies, currencies, and more. Both equity and alternatives, both actively managed and index funds, both alternative (real estate, private debt, infrastructure, and private equity) and traditional investing, both local and global, developed and emerging economies.

Dan Dobry is the Chairman and Founder of “Global Net International”. Dan is dedicated to finding the most creative and efficient solutions to assist the families face the challenges of a changing market.

About the Author
Dan Dobry was the founder of the Union of Financial Planners in Israel (UFPI), served as the first Chairman and President of UFPI. Dan was the Global Council Representative for Israel for the Global Community (FPSB) from 2012 - 2018 and from January 2019 is a member of the Committee for Standards and Qualifications for the European Union (SQC).
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