What to do with a wonder windfall

Fantasies aside, it does happen: small businesses get sold, large sums get inherited, bonuses get paid. So we asked a few experts for their thoughts on where a 40-year-old should invest a modest windfall of $10,000, a more generous one of $100,000, and a bonanza in the form of $1 million. Somebody of that vintage will have a savings time horizon of at least a couple of decades, Graham Harman, director of capital markets research at Russell Investments, points out. There are opportunities "in a world where asset prices are still somewhat depressed," he says.

So let's have a look at some of those opportunities for each hypothetical payday.

KA-CHING! $10,000

OK, it's not life-changing, but it's not peanuts, either. Before we go further, let's shake the last vestiges of that tropical holiday daydream: "Many 40-year-olds will have a mortgage and maybe also school fees to deal with," George Mileski, from Mercer Financial Advice, says. Thanks, George. That means your first thoughts should be putting the cash in an offset account attached to the home loan. That reduces your loan balance but gives you flexibility to access the cash should you need to.

If you earn $80,000 a year and have a mortgage charging 6.5 per cent interest, Mileski calculates you would need to earn at least 10.6 per cent on an alternative investment to make it worth it.

Even so, it could be worth investing the money in a diversified portfolio of shares, or in a managed shares fund, if it means you become more engaged in your financial wellbeing earlier in life, Mileski says.

Russell's Harman says with that amount of money it's too risky to buy individual stocks. Instead, "a diversified, high-yielding Australian shares fund is a great idea," he says. "You could access this in a managed fund, or via an exchange-traded fund."

For the more adventurous among you, Jonathan Ramsay, head of asset consulting at van Eyk research, suggests you invest in the shares of some quality, high-growth small companies, ones which are already generating good cash flows and which have reasonably strong balance sheets.

"We would shy away from 'traditional' speculative stocks such as small-cap miners, explorers and bio-techs and the like," Ramsay says.

KA-CHING! KA-CHING! $100,000

Now we're talking with this amount of dough you can make a lot of pizza.

Paying off your mortgage via an offset account is still a smart move, but your other options expand.

"With $100,000, I would be buying a broader range of assets, and in particular looking at unhedged international equities," Harman says. "Both developed- and emerging-market equities make sense right now." It's a way to move your portfolio from being dependent on what happens in Australia.

He reckons Chinese equity markets look particularly cheap and offer "a great opportunity on a 10- to 20-year horizon." With the Australian dollar at "dizzy heights", any significant drop would turbo-charge your return as your offshore earnings rise in value once translated back to the local currency.

Mileski says he is a fan of a strategy called "instalment gearing" as a way to build a portfolio of high-quality shares.

It works like this: each month, you borrow a small amount via a margin loan, match this with some of your own money, and invest the combined amount into your portfolio. This is a tactic that follows the investment principle of "dollar-cost averaging".

"By buying more of an investment when prices are relatively low and less when prices are relatively high, the average cost of the investment is reduced," Mileski says.

"This strategy capitalises on market weaknesses and avoids the need to make market-timing decisions the key to its success is sticking to the strategy in all market conditions."

Ramsay agrees that the local sharemarket looks a good option for your money, but this time in high-yielding Aussie shares. If market conditions remain pear-shaped over the longer term, he nominates an investment in global infrastructure (there are a variety of local managed funds that do this) as a lower-risk alternative. And if you think things are likely to remain dysfunctional, then gold is likely to do the best, Ramsay says, and it would provide "valuable diversification".

JACKPOT! $1 MILLION

The more you have, the more you have to lose, but this amount of moolah might be your ticket to early retirement. That's the assumption Ramsay works with and it means you want to protect your capital.

Tempted to put the money in safe-as-houses government bonds?

"At most other times in history that might be the obvious choice," Ramsay says, before adding: "but these are not normal times."

The biggest threat is inflation.

"An investment in government bonds would see that $1 million melt away, although it might still be largely intact in 10 years if inflation remains at current levels," he says.

But that is a big "if": "Rising inflation, which many see as inevitable at some stage, could see [government bonds'] purchasing power halve, or worse," he says.

"A deflationary environment might see some strong gains but deflation is already priced in and making that sort of a bet starts to look like a speculative decision."

If your objective is to have that money intact in 20 years, then inflation-linked bonds might be a better option, Ramsay says.

Harman recommends an investment in corporate credit as a better way to provide "stability and ballast" to your portfolio.

"Some exposure to commodity funds as a hedge against inflation would also be prudent," he adds. "Both of these asset classes can be accessed via ETFs."

We'll leave the last word to Mercer's Mileski. He reckons you should be able to pay off a fair chunk, if not all, of your mortgage with that amount, and with more left over. Investing in your superannuation is an option - the tax breaks are great - but he also sees the value of having money outside the system in terms of flexibility.