“Jeff, we have $500,000 and have no idea how to invest it”.
I admit, having $500,000 sitting in a checking account earning little to no interest is one of those “good proble
ms to have”.
But if you find yourself in this situation, and have a level head on your shoulders, it can be a very overwhelming,
This was the exact case for a recent client of mine.
An aunt who had no children left her only nephew and his wife a $500,000 inheritance.
The couple, never really having invested before, were terrified about how much to invest whether it be invest 20000, invest 100000 or the entire 500000, and that they would invest the money poorly and loose it all.
Here were the basic principles I explained to them and how I would talk to anyone else that was seeking the best way to invest $500,000.
1. Don’t Tell Anyone You Have It – And Don’t Brag About It!
It’s unfortunate that anytime anyone falls into money, they suddenly have a all kinds of new friends that they never had before. You may even find that some long-lost family members come poking around looking to “rekindle” a relationship that never even existed in the first place..
Money can bring out the worst in people, that’s why the fewer people you inform about your windfall, the better your life will be. Everyone will be looking for a handout, and that will leave you with one of two lousy outcomes:
- Either you will meet every request – until your windfall is gone, or
- You will alienate a lot of people who think that your windfall is something that needs to be shared.
You can avoid that whole mess by keeping your mouth shut about your new-found wealth.
2. Payoff Any “Bad Debt” You Have
Most debt falls under varying degrees of bad debt, so a case can be made for paying off all of your debt once and for all. But that’s far too general, and it ignores the benefits that some debts provide.
That said, I recommend this debt-payoff pecking order:
- Loans from family and friends. This is more about personal responsibility than it is about financial sense, if only because people often forget they even have these loans. But if you do, now is your chance to pay them off, and secure/protect your relationships. Some things are more important than money, and this is certainly one of them.
- Credit cards and other unsecured debts. Pay them off. That includes a home equity line of credit (HELOC) on your house. HELOCs aren’t virtuous – they’re just gigantic credit cards secured by your home. No further discussion is necessary.
- Student loans. The only way to make these go away is to pay them off, so get to it. Even if you have a low interest rate, these are just big, fat unsecured debts, and for that reason you need to make them history in your life. This is even more true if you had a parent cosign because you couldn’t get a a student loan without cosigner. You’ll feel worse than awful if you somehow blow your half-million dollar stash before paying these off.
- Car Loans – Maybe. If you use your vehicle for business and it’s a tax write off, or if you’re within two years of paying it off anyway, a case could be made for keeping it open. Otherwise, pay it off.
- Your Mortgage – An even bigger Maybe. Since a house is a very LONG term asset, a mortgage actually makes sense, particularly if you’re getting a generous tax deduction in the process. However, if your mortgage is of the exotic variety – interest only, an ARM, a balloon, or a sub-prime – ditch it. You don’t need any of that uncertainty in your life.
3. Make a One-Time, Big-Time Charitable Contribution
To fully appreciate having big money, you first have to prove to yourself that it doesn’t own you. That means giving some of it away, and doing it as early as possible.
I’m a Christian, so for me that means making a tithe. That involves donating 10% of my increase to furthering the Gospel of Jesus Christ. If you’re a Christian, I recommend doing the same.
It’s easy to pretend that this biblical directive doesn’t apply to windfalls, but it actually does. It’s all about “walking the walk” of your faith walk. As it says in the Good Book,
“From everyone who has been given much, much will be required…” – Luke 12:48 (NASB).
You’re rich now, so the giving bar has just been raised in your life.
If you’re not a Christian there are all kinds of needs all around. Pick your favorite charity, or group of charities, and be generous. This is your chance to make a difference. It’s about helping others when you’ve been richly blessed, and also about exercising your mastery over your money.
And I can tell you from experience that it’ll feel pretty darned good too…
4. Decide What Kind of Life You Want to Create
In previous posts on this topic, I recommended doing nothing as the first, best way to handle a large windfall. That will give you time to come to grips with your newfound fortune, and hopefully to make better decisions on what to do about with it. But I’ve refined that recommendation a bit, and think that it will be better if you spend that doing-nothing time thinking deeply about what kind of life you want to create for yourself and for your family.
Here’s the thing…a windfall of $50,000 can do a lot to improve your finances. Unfortunately, that kind of money probably won’t be a game-changer in your life. But $500,000 – I’m sure you get where I’m going with this, imagine the feeling of what to do with one million dollars! Wow!
This kind of windfall creates all kinds of new options. And let’s face it, that kind of money probably won’t come more than once in your life. For that reason, you should think seriously about how the money can best be used to create the kind of life that you may have only dreamed of up until this point.
Exactly how that will play out will be different for everyone, but here are some directions that are well worth pondering:
- Do you want to retire, as in right now?
- Do you have other assets or passive income sources that will make that possible? Or can you make it happen on $500,000 alone?
- Do you want to change careers, and do work that you totally enjoy, even if it doesn’t pay the kind of money you have been getting up to this point?
- Do you want to live in a radically different place, like on a farm, or even in a foreign country?
- Do you want to start a business?
- Is there a dream that you’ve always wanted to pursue, but couldn’t because of financial limitations?
Coming into $500,000 means that you can dare to dream. And you should, because that kind of money can make dreams come true. The choice you make will affect everything else you do with the money, which why this hurdle has to be crossed early.
5. Do Some Deep Soul-Searching About Your Risk Tolerance
This step is important because you will likely invest most of the windfall, and you have to decide in advance how much risk you are willing to live with in the process.
More than anything else, risk tolerance is about how you will feel and react to the loss of a significant portion of your wealth. It might be best to start with the assumption that you will invest 100% of your $500,000 in the stock market. Then ask yourself how you will feel if your portfolio falls by 10%, 20%, 50% or even more.
Given the performance of the stock market over the past 15 years, it’s not unreasonable to assume a loss of 50%. If that kind of loss really troubles you, then you will have to keep only a minority of your money in the stock market.
For example, if you would be okay with a 10% loss, you probably don’t want to invest any more than 20% of your money in stocks. This is because a 50% loss on a 20% stock position will translate into a 10% loss on your entire portfolio.
You need to address this issue before investing any of your windfall in risky investments.
6. Emphasize Safety of Principal
In #4 above I said that a $500,000 windfall is a game changer when it comes to creating a life for yourself. But it’s also a game changer when it comes to investing your money. If you are a new investor with say, $10,000 to invest, you might want to invest the money aggressively so that you can grow it. But when you have $500,000, you have a lot to lose.
That idea needs to dominate your investment strategy. That’s why safety of principal becomes more important as your wealth grows. For that reason, you should emphasize fixed income type assets.
Here are some that I really like:
- Set up a generous emergency fund. I’m talking about up to 24 months of living expenses here, so that no matter what happens you’ll be covered in the short-run. You can earn some decent rates of return with either high-yield money market funds or certificates of deposit with online banks such as Capital One, Synchrony, or Discover Bank. you
- Peer-to-Peer (P2) Lending. These are online lending platforms where you act as a direct lender to individual borrowers. As a direct lender, you earn interest rates on your money that far exceed anything you can get with a bank investment. This is an investment activity that I myself have been involved in since 2008. I’ve been averaging something on the order of 9% per year. Not only is that much better than what you can get at a bank, but it competes with long-term rates of return on stocks. Only P2P investments are a lot less volatile than stocks.
You certainly don’t want to put your entire fixed income allocation into P2P lending, but having a large share of in these alternative investments can really improve your overall rate of return.
- Bonds. With interest rates being as low as they are, you have to get a bit creative here. I would favor tax-free municipal bonds, since the tax savings provides a higher net yield. I would also hold short- to intermediate-corporate bonds, and maybe even some mortgage-backed securities and convertible bonds. Bonds should make up at least half of your fixed income portfolio allocation. Yes, they’re incredibly boring, but are also fairly safe, and safety of principal has to become one of your new investment guidelines.
Buying individual bonds is not only time-consuming, but can also be expensive. For that reason, your bond holdings should be held through either mutual funds or exchange traded funds that specialize in each bond category.
What percentage of your portfolio should be invested in fixed income type assets? To my thinking, as much as possible!
But even if you think of yourself as an aggressive investor, you should still have at least 50% invested in fixed income assets. People invest aggressively to get $500,000; now that you have it, your strategy needs to change completely.
7. Invest in Yourself
Somewhere in the middle of all that investment allocating, you should be prepared to invest some money in yourself. That should happen sometime after you set up your fixed income allocation, but definitely before you start investing in risk assets, like stocks.
Investing in yourself is an opportunity to both improve the quality of your life and to increase your income and net worth in very tangible ways. You need to take this step very seriously.
What exactly do I mean by “invest in yourself”? On the financial/career side, it could mean any of the following:
- Investing in a new business venture
- Investing in your current business (new equipment, marketing campaigns, product lines, etc.)
- Creating passive income streams, like rental real estate or silent partner business arrangements
- Acquiring or improving critical business or job skills
- Improving/increasing your education
- Taking investment courses, or attending investment seminars
Any of these can improve your income in the future, which is exactly what a good investment is supposed to do.
On the personal side, you may want to invest in opportunities for better health, such as exercise or weight loss programs. You may also want to spend some in areas that will help to improve the quality of your life.
For example, maybe you have always wanted to learn how to play a musical instrument or master a foreign language, but because you were so busy earning a living, you just didn’t have the time or the money. Now you do, so have at it.
8. Add Risk Investments in Measured Steps
I just want to re-emphasize that this is an investment area where you don’t need to get crazy. If you already have at least $500,000, you’re no longer a small investor, and you shouldn’t be thinking like one.
Still, you will have to build growth into your portfolio, if only to make sure that it keeps pace with inflation. That’s what stocks can do, at least in the long run. But don’t overdo it! Keep your stock allocation to something well below 50% of your total portfolio. That will provide you with the growth that you need, but without exposing you to a ridiculous level of risk.
That said, here are some of the possibilities:
- Mutual Funds and Exchange Traded Funds (ETFs). Unless you’re a successful and seasoned investor, you’ll probably prefer funds over individual stocks. That will eliminate the need to worry about security analysis, buying and selling, and re-balancing. I like actively traded mutual funds, because they offer an opportunity to beat the market rather than just keeping up with it.
But if you are content just to keep up, then you might want to favor index based ETFs. You’ll probably want to spread your mutual fund allocations across at least 10 different funds, particularly the ones that are actively managed. That will keep you moving forward in case one or two of the fund managers starts to lose their investment touch.
- Robo Advisors. If you prefer a totally hands-off approach to investing in stocks (or even bonds) you can always punt and go with a robo advisor. These are online investment platforms that provide professional investment management at extremely low fees.
For example, Betterment charges only 0.15% of your portfolio to manage an account of at least $100,000. They determine your risk tolerance, allocate your money between about a dozen stock and bond ETFs, rebalance your account regularly, and even perform tax loss harvesting to minimize your capital gains tax liability. That’s a whole lot of value at very low cost.
- Individual Stocks. Even if you know little about investing in stocks, you may want to try your hand at it anyway. After all, you may find that you have a hidden investment talent. Just understand that investing in individual stocks is much more risky than the alternatives. For that reason, you should keep only a very small percentage of your portfolio in individual stocks, thoroughly research any stocks you buy, and maintain a trading account with a low-cost brokerage firm.
AssetLock. This isn’t a stock investment, but rather an asset protection software package. AssetLock lowers your investment risk by creating what they call the AssetLock Value. They use proprietary software to alert your financial advisor to contact you in the event of adverse market conditions. This will enable you to get out of certain investments before losses reached the point of no return.
I’m actually an AssetLock approved advisor, not so much because I make money on the program, but because I love the product. People are usually much better at buying into investment positions than they are at selling them. AssetLock helps with this surprisingly difficult process, and keeps you from losing money at the worst possible times.
The Financial Success Blueprint. This is my own comprehensive retirement plan review, that will help you stay on top of your retirement investing. With this program, I can offer you the following:
- A specific strategy for retiring when you want and how you want – even if you don’t think it’s possible.
- The special technique I use to help clients visualize what their ideal retirement actually looks like.
- An easy way to organize all of your investments into a logical framework so you can really see what’s going on.
There’s a lot more that we can do with the Blueprint. If you like what you’re reading in this article, check out The Financial Success Blueprint and see all that it has to offer you.
9. Spend a Little on a Few Things that You REALLY Want
This is where we come to the fun part of getting a windfall. But take this step seriously – coming into a windfall should be fun!
If you have been driving an old clunker for the past couple of years, now would be a good time to break the bank and upgrade your ride. If there is a dream vacation that you have been wanting to take, you have the money so make it happen. Spending a small amount of money on a few luxuries can help you to avoid going into a full-blown consumption frenzy later on.
Naturally, you don’t want to get carried away with this step. I’ve had clients who come into very large inheritances, only to blow most of the money on new houses, new cars, boats, and high living. That’s not a mistake that you want to make! It could very well set you up for a lifestyle that you will not be able to afford in just a few years.
So there you have it – a nine step strategy to preserve and grow your capital, improve your life, and even have a little bit of fun!
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