How to Invest a Million Dollars

how to invest one million dollarsThey say you have a 1 in 10,000,000 chance of winning the lottery.

Well, today is my lucky day because I just won – yeah baby!!

Okay….maybe I didn’t actually win.

We’re just going to pretend I did for the sake of this article.  :)

I once had a client ask me,

“Jeff, if you had a million dollars, how would you invest it?”

I’m not one who is usually in to playing these games of pretend.

Sure as a kid, I loved to pretend that I was He-Man and that the big cardboard box in our basement was Castle Grayskull.  “I have the power!”  <<<He-man quote.  Fellas, don’t pretend like you don’t remember that! Haha….

But those days of “pretend” are long gone. That is….until today.

Today’s post is merely for the fun of it.

I’m pretending that I hit the jackpot and walked away with a cool mil.

For this pretend exercise, we’ll say that I’m netting a million dollars and I have all of it to invest.

Just so we’re clear, this is not investment advice, so don’t take it as such.  And just in case that isn’t clear enough, read here.  You have been warned.

How would I invest a million bucks?

In going through this pretend exercise I’ll also try to walk you through it as if you won the money, too.  At least in the beginning.   After the first couple steps, then it’s all me.    Let’s begin….

Hello Mr. Check!

The big day arrives and you finally receive your check, a big, fat $1,000,000.  You drool over the zeros and the commas.  You’ve never seen a bigger check in your entire life.

You take a second to breathe it in.  You want to whisper nice things to the check like, “Oh, check, you’re so amazing”.  Don’t worry, no one’s watching.  I’d probably do it too. :)

So what’s the first step?

Step 1: Nothing

how to invest one million dollars step oneOkay, so here’s the first thing you do if you were to obtain $1,000,000 (or any large amount of money for that matter).  Nothing.

What do you mean nothing?  

I mean nothing.  

You sit on it.

You sit on it for at least three, preferably six months.

People tend to make rash decisions when they’re hit with a windfall of unexpected money.  Most people’s tax refunds are spent before they’ve even got it.  We don’t want this to happen with the $1,000,000.

Need a place to park all that cash so you won’t do anything to it? The first place I would look is to a group of Certificates of Deposit or an online savings account. Going with CD’s helps put an additional barrier between you and making a poor decision because you are penalized for any withdrawals from the CD before it matures. An online savings account gives you more flexibility at the risk that you will withdraw the money to go on a spending spree.

You can get the highest interest rates for Certificates of Deposit and Online Savings Accounts at online banks like our favorites Capital One 360 and EverBank. (And since they are online you should be able to bank with them no matter what state you live in. Or decide to buy your mansion in. Whichever.)

I was once referred to a couple that received a $1.5 million dollar settlement.  I told them the exact advice above.   Did they listen?  No!

Within the first 3 months of getting the money, they bought a brand new home, 2 new cars, gave their church $50k (I’m cool with this one and you’ll soon see below), several different relatives $10k a piece AND they quit their jobs.   I was floored.   We are NOT going to do what this couple did.

Step 2.  Let’s Talk Debt

You have debt; we’re going to pay it off.  Are we going to pay off all the debt?  Not necessarily.

You’ve been lucky to lock in a 30-year mortgage at less than 4% in the last couple of years, there’s no sense paying that off.  That’s cheap money.

We could talk about making double payments at a later time but for the mere sake of paying off your principal, I don’t think it’s necessary.

Credit card debt gone.  Department store card gone.  Student loan debt…..  That’s a tough one, too.  I’m leaning more towards paying it off.  I’ll let you decide.  Any other debt that has double-digit interest rates, gone.  Pay it off, be done with it.

Just because you paid off the debt this does not give you the right or permission to go out and charge more debt.  You just won a million dollars for petes sake, why would you need more credit cards!

Need help with developing a debt payoff plan? Check out our post on the top 11 personal finance software. One free product to look at from that list: Ready for Zero. You really shouldn’t need a piece of software to help you pay off your debt when you’ve just been handed a check for $1,000,000… but just in case, it doesn’t hurt to take a look.

Step 3:  Boost up your emergency fund.

As you have a large influx of cash, why not keep at least 18 to 24 months of monthly expenses in a high-yield Money Market account. Think of it as the Ultimate Emergency Fund. Best places to hold that huge sum? Online banks like Capital One 360and EverBank. Or you might throw it into a Certificate of Deposit with Discover Bank.

It’s probably more cash than you’ve had in your entire life sitting there doing nothing, but that’s okay.  You’ve now turned a new leaf.  It’s a new you, enjoy it.

Step 4: Give it Away

You’ll notice that I didn’t refer to myself in any of the above.  That’s because other than a mortgage and a car note, we have no debt.  If I had $1,000,000 to invest, I would not have any debt to worry about being paid off, plus our mortgage is a 15-year 3.375% and we’re making extra payments.  I’m not in a hurry to pay that off.

Our emergency fund currently is between 12 and 18 months for household expenses.  Once again, I’m okay there.  So, what do you do?  Now, this is more for me and my background, so don’t feel like you have to oblige, but the first million, I give 10% straight to our church, otherwise known as a tithe.

Yes, I would write a check for $100,000 to our church straight off the top.  You might call “BS” on this.  You might think I’m just saying that to be sound like a good Christian.  If I was writing this post a year ago, it would be hard for me to try to argue that.  You can even watch this video where a couple years ago I thought a client of mine was nuts for wanting to keep tithing while trying to pay off debt.

In the past year, my wife an I have finally, and I mean finally, started tithing where we give 10% of our gross income to our church.  It took us a while to finally grasp the concept, but we finally got it.

Would it be a hard check to write?  Uhhhh, YES!!! But I believe that our church and God’s will can do much more with it than I could.

Step 5: Peer to peer lending.

This might come as a shock to many readers, especially because I’m a “financial planner”.  Maybe you think I would buy stocks, maybe you think I would buy mutual funds.  I would, but I would actually start with peer to peer lending.

How much?  A very good chunk.  I would put $250,000 into both Lending Club and Prosper splitting them in half, so $125,000 a pop.  I initially started a lending club account back in 2008 and to this day I’m averaging about 9%.  Not too shabby.  I have not personally tried Prosper out yet (planning to open an account soon), but the platform seems very similar. (Read both my review of Lending Club and review of Prosper.)

Just for the sake of diversification, I would try both.  Sitting on 8% to 9% yield with very little volatility, or as some planners refer to it as standard deviation, is pretty hard to beat.

Step 6: Bonds, bonds, and more bonds.

To say that this interest rate environment has been an interesting one over the last couple of years is an understatement.  Trying to get a high yield on a bond these days is about as realistic as trying to get an In-and-Out Burger in the mid-west.  It ain’t going to happen!

Instead of assuming that interest rates are something to brag about, I thought I would tackle this area of investing, as if interest rates were somewhat normal.  If you’re curious, I define normal as you can go out and get a one-year CD paying you north of 3%.

In that case, I definitely would have a larger percentage of municipal bonds, the tax-free kind, in my portfolio.  In addition, I would also add some short to intermediate corporate bonds, some mortgage-backed securities, and perhaps some bank loans and convertible bonds as well, but allocate about $250,000 to this piece of the pie.

What type of bonds would I buy?  Frankly I’m lazy, so I wouldn’t do the time or research to choose individual bonds.  It’d be too much of a headache.  I lean more towards the mutual fund side of things.  There are a lot of good mutual fund bond funds that have done really well over the last several years.  Just to diversify, I would also consider buying some bond ETF’s.

This  piece of my portfolio is meant to be the boring part that makes me want to yawn when I think about it.  Plus, this makes the wifey happy and not have to worry about me making any stupid stock picks.  Been there, done that, too many times.

Step 7:  Actively Managed Mutual Funds.

Let it be known that I’m not a passive investor.  Indexing is personally something I’m not a big fan of.  Disagree?  That’s cool.  We can have a debate another time, so with $100k I would allocate it to 10 to 12 different mutual funds.  I anticipate that the allocation will be somewhere in the 60% to 70% stock range with the rest being in bonds.  Notice how heavy I am in my bonds?  How ironic for a mid-30-year-old to be so conservative?

Seeing previous younger clients receive big inheritances and how they are more interested in protecting vs. growing is a contributor to me feeling this way.   I’m almost positive I would be just the same with most of the funds.

Another option I would consider is Betterment.  Even though they use passively managed ETF’s, they do make active changes to their portfolio.

Step 8.  Stocks

I would buy some individual stocks with part of the money, but I wouldn’t allow myself to be too crazy.  This would be considered my “slush fund” where I wouldn’t be affected if I lost my butt on some horrible stock trades.  Trust me.  It would happen.

If you need a place to trade stocks I would look at E*TRADE or TD Ameritrade. Both are solid, reputable firms that have good trading platforms.

Step 9:  My Business

Other than peer to peer lending, I don’t really entertain any non-traditional investments like private real estate partnerships or any of that type of private equity stuff.  Living in the mid-west, I’m not as exposed to this as someone living in the big city, so that’s why you see a lot of more traditional investments in the portfolio.

The other non-traditional asset I would invest to is my business.  Whether that be new technologies to help me streamline my financial planning practice or investing into ways to grow my online business.   If my stock picks end up being dogs, I would definitely shift some of that money over here.

That’s How I Would Invest, What About You?

As of right now, this is how I would invest $1,000,000.  Chances are if you talk to me in three weeks, it would be somewhat changed.  That’s wise, right?  Here’s a bigger question:

“If you had $1,000,000 to invest, how would you do it?”

Love to hear your thoughts.

 

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Comments | 12 Responses

  1. says

    Great post, Jeff. The reality is that most of us are going to win a million or two in the lottery: it’s our career earnings paid out over the next 20 years. And while it’s not as much fun as one check with a lot of zeroes, the same techniques you advise here will work for one paycheck at a time over 20 years.

    I have a question about P2P lending that might be a separate blog post: How do you scale it up to $250K? It seems like a huge analysis workload– even if you just push the “I believe” button on their spreadsheets. Splitting between LC & Prosper is smart, but that forces you into twice as many loans. Even so you still end up buying a big chunk of the loans you choose– $125-$250 per loan instead of “$25″. And then they’re relatively short-term loans, so every quarter you end up having to reinvest 8-10% of that $250K in new loans. More work. Lots of risk that’s not readily apparent to the retail investor.

    It’s difficult to assess whether the P2P work & risk are worth the extra yield. Hard choice. 9.6% for extra work and sector risk, or 5-7% in a small-cap stock index ETF… or in a large-cap dividend stock ETF. I don’t have a pat answer.

    • says

      @ Nords That would be pretty difficult to scale up with P2P with that amount. I do know that Lending Club does offer separate portfolios starting off at $100,000 to get in, so I imagine that’s where I would start.

      I wasn’t completely sold on P2P lending 3 + years ago when I first opened my Lending Club account. I’ve been amazed on how my return as been over the last couple years and it’s really super easy to manage. It’s obviously not right for everyone, but I do suggest it to clients even now for those that are comfortable with an online investment.

  2. Matt Oaks says

    Hey Jeff,

    My one question for you is about the debt. Why wouldn’t you pay ALL of your debt off. What are the benefits of still paying your mortgage payment and your student loan payment? Thanks.

    • says

      @ Matt I could see student loans, but I don’t the point in paying off a mortgage when you have a rate in the low 3′s. Especially if I could invest into something and net more even after taxes. But that’s just me…..

  3. says

    For Step 8 (invest in stocks): sure, you’ll have some bad trades, but it’s important to remember that is factored into a diversified portfolio of excellent stocks. If you hold 30 positions of value stocks showing strong fundamentals you’re likely to beat the market overall. If you want long-term growth with part of your million dollars, it’s hard to beat the stock market.

    “In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.” – Peter Lynch

  4. says

    I like your step #1. Wait. I’d also add pray and seek council for tax advice. Not sure if I’d personally go deep with P2P lending as I can’t stomach the idea of charging such high interest rates to others. Overall good advice.

  5. says

    Great advice here. I have had a few financial windfalls, and though I blew through $100,000 before I even turned 21, I did end up doing some more productive things with my next income. I have written 10% checks to church on those windfalls as well, and it was one of the best things I have ever done. So I think it’s great that you have made the decision to give in that manner.

  6. says

    Ah, the dreams about what I would do with $1 million. All of your advice is good, but the best is to just wait before spending any money. I would guess the majority of people who receive a windfall don’t do this and then regret it later.

  7. Terry Willett says

    Good advice, especially the ‘parking’ part. If there was a way to keep that windfall out of the papers, I’d do it. Otherwise, every Tom, Dick, and Harry would be at your doorstep.

    Personally, we would continue to tithe to our church and other ministries, although with that amount, we’d need to be selective where to give. We would up our six month reserve to a year-reserve.

    Then, we have two rental houses, so I would pay those off and probably purchase four more – giving us six, with passive income which is taxed at a lower rate.

    Other than our rental houses, we have no debt. I hear what you’re saying about not wanting to pay off a house with that low of interest rate. But, we prefer no debt. Having the rental houses with passive income makese sense to us.

    I’d probably invest some in storage units or in some other income-producing business.

    The rest of the initial cash we’d probably put in a trust to be used to fund Christian ministries.

  8. Sadie says

    Just wondering what you might do if you were single and subject to only the $100,000 FDIC insurance limit – perhaps use CDARs or have 10 accounts at 10 different banks?

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