The doorstep test
Don’t keep an asset – convert to cash first.
The first rule of inheritance is the ‘‘doorstep-test’’. Don’t lay claim to Dad’s Toyota Yaris under the premise it would be handy for your teenagers to drive.
Imagine the inherited asset as a pile of cash. If you woke up one morning and found $10,000 on your doorstep, would you have an overwhelming urge to buy a Yaris? Probably not. Most cars fail the doorstep-test.
When you invest $10,000 it’s possible to double it every 10 years due to the power of compound returns (7.2 per cent return). That Yaris money could be worth $20,000 in 10 years, then $40,000 in 20 years and $80,000 in 30 years. Alternatively it’ll become coffee money after the teens have thrashed it. Cash up the bach and bonds
Use the same doorstep test with the family bach. It feels nostalgic to keep it for everyone to use, but is it fair to talk other siblings into it? If you woke up to $100,000 on the doorstep would you immediately ring each other and want to buy a holiday home together? A 40-year old could turn that money into an $800,000 investment portfolio at age 70 if they’re wise today.
Even shares and bonds tend to fail the doorstep test. Those assets were bought by a different generation with different risk appetites. Just because Nana bought A2 Milk shares at $1 (now $12) doesn’t make them right for a family who have no other diversification. Most people finding cash on their doorstep wouldn’t experience an overwhelming urge to ring a broker and buy A2 Milk.
Low-risk cash assets cloud the brain too. If the inheritance is in a term deposit, your automatic bias is to do the same. That’s not a good long-term choice for your own retirement.
Many people fear they’ll be made to look a fool by not staying invested in the assets chosen by their parents. Respect for their choices and how hard they worked often means you don’t see the cash for the trees.
We all need to be independent and not live someone else’s financial past.