Ask HN: Steady 4-5% on $5 million?
I recently inherited a little over $5 million. I don't have exorbitant dreams of penthouses or private planes so I'm not looking to turn this amount into $50 million or anything. Instead, I'm looking for ways to generate a steady 4-5% annual return. I have meetings set up with tax/financial advisors later this month, but I wanted to ask the smart people on HN -
What would you do to generate a steady 4-5% annual return from $5 million?
110 comments
[ 4.7 ms ] story [ 173 ms ] threadIf you want to play it safer with the 4-5% return, there are safer mutual funds to invest with. Less risk and less returns. But for arguments sake, will 4-5% cover the inflation you experience as you grow older?
It's also simple enough that you don't have to pay a tax/financial advisor exorbitant fees to manage your money - you can do it yourself, saving a lot of money in "wealth management services" you don't really need. Remember, you're a financial advisor's dream come true, and they'll try to sell you everything they can.
Here's a review I wrote of "Fail Safe Investing," Browne's book: http://personalmba.com/review/fail-safe-investing/
Here's more solid supporting information: http://crawlingroad.com/blog/2010/02/06/permanent-portfolio-...
Hope this helps!
http://www.scribd.com/doc/26525858/Fail-Safe-Investing
But if you put all your assets in bonds, you risk getting burned by inflation. Over the long term, stocks have higher returns than bonds. But over short periods they can have disastrously lower returns. So experts generally advise you split your assets between stocks and bonds depending on how soon you need the money. The usual advice is to put 100 - your age percent in stocks. E.g. if you're 20, to put 80% of your assets in stocks. But of course you'd have to put more in bonds if you need some of the money to live on.
The one question no one seems to talk about much is what to do when you have to invest a large sum at once, as you do. If your age implies you should put 70% in stocks, does that mean you should put 70% in stocks the next day? What if you're buying at a market peak? So whatever percent you decide to put in stocks, I'd bleed it in over a reasonably long period. Simulations would tell you how long a period; I'd guess years.
In this case, that would mean investing 250k per month. The idea is that if you buy a fixed amount dollars worth of whatever, you get more of it when it's down and less when it's up. The idea is to get at least the average of the market over 20 months and avoid being burned by a crash (of course, you might miss out on a market surge). By doing it in a methodical fashion you avoid the temptation of trying to time the market.
I'll also chip in my usual recommendation: Bernstein's The Four Pillars of Investing, which will tell you everything you just heard, only in a different and slightly more recent voice. ;)
http://www.amazon.com/Investors-Manifesto-Prosperity-Armaged...
Buy on a random day, or a down day. :-)
http://en.wikipedia.org/wiki/Dollar_cost_averaging
Everyone seems to always hail DCA as the best investment advice ever but fail to realize it's flaws as well.
If you've been averaging starting at the top of 2000 and putting the same amount of money in each month you'd be losing money right now 10 years later. You can say well I'm not retiring in 10 yrs and would be saving for 40 yrs. But that's 20% of the time which is a lost time opportunity of a decade.
The market is not rational, not even close. But if you are investing long term, and behave rationally yourself (buying stocks when cheap, buying bonds when stocks are expensive) you can beat the market.
Right now is a really tough time to invest because both stock yields and interest rates are abnormally low. I'd probably maintain a balanced portfolio, but keep the bonds short term in hopes of a rise in interest rates in a few years.
The other major investment issue is fees which can dramatically reduce ROI over your lifetime. Do the math on what 1/2 of 1% will cost you ~13% of your returns over 30 years. 1-((x-.005)^30)/(x^30)) It works out to around 13% for most reasonable ROI.
I heard California bonds had jumped because of debt/credit problems, and recently mentioned the option of buying such bonds to my parents who asked a similar money management question. They both cracked up laughing. I told them their reaction illustrated why our state had such borrowing problems. I would not have seriously advised getting the bonds but apparently they yielded annualized tax-free 4.7%. (http://latimesblogs.latimes.com/money_co/2009/06/californias...)
The largest default in the history of the municipal bond market was the Washington Public Power Supply System's (WPPSS) default on $2.25 billion in bonds. WPPSS launched a risky program to build five nuclear power plants in the 1970s to supply electricity to the Pacific Northwest. Only one of the five planned nuclear plants was ever completed. The WPPSS fiasco gave a lot more credibility to concerns that tax-exempt bonds were not a completely safe bet.
Perhaps it's more common here in Australia, where compulsory superannuation (currently at 9%) means almost all of the workforce are investing in shares in some form.
What makes you think that is true? We simply do not have enough data to judge. Books like Stocks for the Long Run use incredibly poor methodology, because they left companies that failed out of their indexes ( http://gregmankiw.blogspot.com/2009/07/stocks-for-not-so-lon... ). And when we have reliable data, for the past forty years for instance, stocks have not necessarily had better returns. If you include other countries in the analysis, such as Japan, then the long term superiority of stocks looks even more suspect.
And of course, past data is not predictive of future performance because the nature of investing changes (changes in corporate governance, changes in shareholder accountability, too much "dumb money" entering the market due to 401k plans, etc). Dividend payout rates, for instance, have declined dramatically, and dividends are a major component of returns. So maybe stocks did perform better in the past, but will not in the future because of lower payouts.
Stocks may perform better in the next thirty years or they may not. There is no substitute for studying the market, understanding what is driving the returns, and making a judgement based on the current times.
Portfolios should be built upon bonds, with stock market risk layered-in only to a degree.
I think you have a couple of issues you need to bear in mind. The world is fundamentally broken. And most models you will read about were built for a different world.
I suggested you read John Mauldin (a lot) his newsletter is at http://www.johnmauldin.com/outside_the_box.html You need to now learn and understand about finance, what is wrong with the models and how to read the global environment. As an HNer you shd be able to do this. (You, for example, need to think about the liquidity you need)
So rather than looking at a model, build up a picture of the world.
That picture might probably be: * 10-15 yrs of misery in the US with choppy equity markets and an ever weaker dollar. Assume a deflation type scenario * Growth in China & Brazil but the danger of overeating * Climate change play: climate change play is clearly a good 20-30yr trend but there is reason to believe that with the PDO we will see global temperature anomalies drop for then next 10-12 yrs, so over that time frame there may be a contrarian play * Gold may be valuable but only to a point * And will successive US governments try to eviscerate the dollar, there isn;t much choice for other central bankers but to hold the dollar * Sovreign debt in Europe looks risky.
With $5m you should aim for around 20-25 individual positions. Much of this can be done via ETFs with the right degree of portfolio balancing, and there are several services (which I can't vouch for) like alphaclone, which will help you do this.
I would absolutely not follow the traditional route of the bulk of your assets follow US stock indicies--that worked in the post-baby boom years, don't think it would work now.
However, I wouldn't understate the value of being able to get into a really good macro-oriented or special situations hedge fund. John Paulson's funds are a great example of this. They have returned 16-17% pretty consistently with a few bad years for 20 yrs or so. Allocating $500k into something like that is probably not a bad idea.
It is abosolutely worth you find a good financial advisor (Sanford Bernstein or similiar) and put some of your assets with them to get access to their research & network. Your test should be: can they get me into a few reliable hedge funds, etc and do I get extra benefits. Yes: you pay 2% to get into a hedge fund, but if you get into a half decent one, you'll add a lot to your portfolio.
In your position, my book would look like this: $1.5 - $2m into a variety of hedge funds and / or private equity positions (at least 7-8 very reputable ones $2m into a variety of ETFs ensuring you have good coverage of BRIC and non-US markets $1m in liquids (USD, NOK, other strong currencies)
You should plan to spend at least 1.5 days a month reviewing your portfolio, some of which will be daily reading of good business websites (NOT MARKETWATCH! or CRAMER). Plan on rebalancing no more than half-of your positions a quarted, any more than that and the markets are nuts or you have a trigger finger.
Because ETFs are liquid you can get in and out when you like, with some price risk. So if you need to hire a private jet and take your friends to Ibiza, you can.
Above all: trust no-one. Equip yourself to make your own decisions.
I'd also take issue with your advice to put your money into hedge funds or private equity. There is little reason to believe that the average hedge fund manager will outperform the market, because they are the market. By definition, the average fund manager gets average performance (actually slightly less than average, because investing returns are a skew distribution where the best hedge funds get outsize returns and there's a long tail of slightly-below-average funds to compensate). The best fund managers will outperform the market by a large margin, but you have no reason to believe that you'll be able to pick the best funds. You have less information available in choosing a fund manager than you do in choosing individual stocks. Past performance doesn't cut it - you might be looking at the particular fund simply because they have randomly beaten the market over 20 years.
And you'll get eaten alive by the fees, which are the one predictable part of the financial industry.
As to fund managers: i think that is the case with mutual fund managers. But it certainly isn't the case with hedge funds or VC. VC for example guarantees you will lose money uness you chose a handful of funds whose identity you know a priori. As for hedge funds--they cover a broad church--of which two remain specially interesting: Special situations/global macro -- where you need to know and understand a manager (who is essentially a business man) and find someone who has decent risk management in place as well as a really good investment process.I like Paulson for this. The second interesting area is the the high frequency systematic trading if highly liquid instruments (CTAs, if you will) which have a very different risk/return profile especially in chop markets and actually have a distribution benefit.
Eaten alive isn't very precise--you can actually model your fees and work out how much of you will be eaten.
To the OP, listen: The markets, all of them, are damn close to being efficient, and that means that nobody can really predict the future, unless they have the inside on some market defect. Think of financial advisers as psychics, who can be refuted with one question: "So, why aren't you rich from betting on the market?" Why do they work 9-to-5 for other people? Because they really don't know.
Also, people are being a bit too negative about targeting an interest rate. Right here, I think this is the largest bond fund in the world,
http://finance.yahoo.com/q/bc?s=PTTAX&t=2y&l=on&...
...a little over 5 percent (yahoo is out of date), and notice that even during the financial crisis it was in pretty good shape. Keep in mind that such funds already have better advisers than you could ever afford, and they know how to vet. Just divide your money into 10 or so such funds, put a few 100K of physical gold in a swiss vault if you're paranoid. Ta da.
If you want to be more active, research actually buying bonds yourself, as you won't lose that 1 percent to the managers. Most brokerages have this.
Then put aside $50k. Use that $50k to learn to trade the market, and learn to read the market. Accept that you're going to lose it, and be happy that you have enough money to play with to trigger all the fight or flight reactions that you have to learn to overcome. It'll take you three years to wrap your head around it. It's a challenge. Aim to find a mix of the known low-risk trading strategies that can work for $5 million and for which 20%/year is more than reasonable. e.g. trading the ES opening gap.
Everything else is either (a) trusting people and pot luck, or (b) not much better than a high interest back account, or (c) a lot riskier than it used to be given present geopolitics.
If you want something done, you have to do it yourself.
1. First, be aware that most financial advisors make their money by charging you fees. These can come in a variety of ways, some will take a simple 1% off the top, others will try to persuade you to invest in CDs and other products like mutual funds -- the actual returns on these vehicles may be mediocre and the advisor may earn fees for selling you the products.
So just be aware that their incentives may not be aligned with your goals of wealth protection.
2. Decide if you want to be a passive or active investor.
Passive investing means putting your money into index funds. John Bogle of the Vanguard Group has a series of books out on the topic, there is a slim one called The Little Book of Common Sense Investing. -I'd recommend reading some of his work.
Active investing is more difficult. To be honest, most people simply lack the time and effort necessary to invest intelligently in the market. They wont know how to read a balance sheet yet will buy the stocks of companies that they are familiar with. This is sort of like driving blind and it is not something I recommend. -If you want some I'll suggest some books for this area, but like I said, it is something that requires a big commitment from yourself.
Please do. Thank you.
Mastering the Trade - John Carter
How to Make Money in Stocks / How to Make Money Selling Short - William o'Niel
Anything by Brett Steenbarger
http://traderfeed.blogspot.com/
I recommend basically reading books by:
Peter Lynch, Phil Fischer, and then chapters 8 and 20 of the Intelligent Investor. The book, Applied Value Investing, is also a pretty good place to start that actually does a lot of things well, combining both theory with practical case studies. -Reading the Buffett Partnership letters (not the Berkshire letters) is very helpful for someone managing small sums of capital, say below $10M
In addition, you need to read and learn about financial accounting and valuation. John Tracy's How to Read a Financial Report is a good starter... for valuation Aswath Damodaran has a pretty good book that can be combined with McKinsey's book on the subject. Beyond that, some more advanced accounting books, especially forensic stuff is great to know. Financial Shenanigans and Creative Cash Flow Reporting are where I'd start with that.
To be really good you also need to read quite a bit about psychology/mental models. Look for speeches/lectures by Charlie Munger. Books like Stock Market Wizards/anything that contains a ton of interviews with investors are also great. Reminisces of a Stock Operator is pretty good for giving you an account of the ups and downs that come with investing -- the guy the book is based off of blew his brains out. Studying financial history is also a must, especially with learning about prior bubbles.
Finally, you just have to commit to reading a whole lot, every day, and becoming a learning machine.
To add to your insightful comments, I'd also recommend subscribing to The Economist to get excellent worldly news about business, finance, and economics.
Personally, my favorite stuff is where there are clear inefficiencies.
Investing in orphan spinoffs is an example-- a company is spun off from its parent but is too small to be included in the S&P 500 or some key index, where its parent exists. Since it wont be part of the major indices, fund managers are forced to sell, creating the kind of inefficiency that an investor can profit from.
Do you have any idea if there is a 'passive' way to choose between currencies?
Diversify.
Be very careful, don't follow any advice, including any of this without triple checking.
And remember that what 5 million today will buy you is a significant multiple of what it will buy you in 20 years.
Inflation is hard on money that you've got, simply maintaining purchasing power is already an issue.
Saying that you shouldn't hire a professional to create a suitable strategy for you and maintain your wealth doesn't sound right.
It all depends on which professional and there are plenty of shysters in that world. A fool and his money are soon parted, and there are people that have turned that sort of thing in to a career.
Case in point, a friend of mine did pretty good, had a good sized IT business and a sizeable nest egg. Enter the investment advisor. 15 years later, and a lot of bullshit stories he's down to roughly 15% of what it was when he started out.
Finding people you can trust with your dough is very hard, learning how to do so yourself is not easy but if you fall you hopefully won't fall too far.
Coming in to some money without having earned it is harder still, it means that you don't have money managing skills that would have gotten you to that height in the first place.
It's a very tricky position to be in, best described as a goldfish landing in a shark tank.
> Saying that you shouldn't hire a professional to create a suitable strategy for you and maintain your wealth doesn't sound right.
Is a strawman, I didn't say that you shouldn't hire someone to create a suitable strategy, I said 'Definitely don't put it in the hands of third parties', in other words, maintain control of your funds at all times.
Advise is fine, but a third party managing your funds for you in a 'hands off' mode is most likely not. It's your money, when it gets moved you should be the one to make the call, not some broker. Their interests are not aligned with yours.
And brokers are not investment advisors. They are in the business of selling stuff to you. So if you are saying don't give money to brokers to manage then I agree :). When you hire an advisor you agree on a strategy beforehand and the advisor makes trades to keep certain averages in your account. This industry is pretty regulated and advisors know they are liable if they divert from an agreed-upon strategy.
You're isolating yourself from a bad egg. The point is to insure yourself against utter crooks/total screwups.
Instead, I would shift the advice slightly to: inform yourself, find someone who knows this kind of stuff and give them your business, trusting but also verifying them. Far too many people think they can build that one model which guarantees success only to be burned. Granted, using a professional can still get you burned (uncertainty is a fundamental principle of our life and universe) but you at least increase your odds.
With individual stocks, companies are at least required to give a detailed report to the market every quarter. It's a lot of work to keep up on all the information that may be relevant to a company's performance (some would probably say it's impossible), but at least the information is out there. That's not the case when you're looking for information about a financial professional's performance.
If you really don't have time to spend on this yourself, I'd recommend passive investments. Index funds, treasuries, munis. When you buy an index fund, you're basically hiring the services of all financial professionals, everywhere, to do your research for you. And paying a significantly lower fee than if you'd actually hired one.
As many other posters (correctly) pointed out, typical money managers may not have your interests at heart.
I agree. You don't have to be too bright to be a good investor. In the long haul, you'll be ok if you don't do something stupid. So aim for loss MINIMIZATION rather than profit maximation.
Also, the markets are very, very tumultuous now and I believe it will get worse. The federal reserve just pumped a massive amount of US dollars in the system and the long term effects of this will be a staggering amount of inflation. So in my opinion, you should invest in assets that are not denominated in US dollars, such as gold bullion and other commodities.
Beware of commodities that are traded fractionally. Meaning they sell you more of the commodity than they actually have.
Finally, diversify, diversify, diversify. Don't put all your eggs in one basket. Beware of mutual funds that are diversified but charge exorbitant rates. Index funds have the same amount of diversification but at rock bottom prices.
- Stever
PS If you are worried about a major market crash (as am I), you might want to check out the Black Swan fund: http://online.wsj.com/article/SB124380234786770027.html .
i ask because i'm going to spend the next hour or so fantasizing about being in the ops position.
(a) Think of investments like a function with two inputs: risk and return. You've picked a desired level of return but haven't identified a desired level of risk, so by definition nobody can recommend an investment strategy.
(b) There's no such thing as a "steady 4-5% annual return from $5 million" for any meaningful definition of "steady".
(c) Where did 4-5% come from? Without understanding the thought process that went into those figures, it's hard to make any suggestions.
If you want to get the most out of free advice on HN, I think you should rephrase the question along the following lines:
"I recently inherited a little over $5 million. I am Y years old. I plan on working until I am R years old and expect to live until L years old. My current monthly expenses are M1 and I expect those to grow to M2 over the next 10 years. I want to use my inheritance to ______. What would you do with the money?"
Usually, targeting returns is kind of a sucker's game. That's not to say that it is impossible to achieve the kinds of returns you are looking for, but rather that it creates a mindset that ignores risk.
The poster should first try to think of his $5M as money that stands to decline in value as the frictional forces of inflation approach.
The goal here should not be so much targeting 5% returns but at least initially, preserving that $5M. It's not as simple as parking money into gold either, because gold itself fluctuates based on when you buy it. Yes, people have lost money by purchasing gold in the past, at the wrong times.
TIPS aren't great either, because the calculations used by the government often understate inflation.
So to me, when I see questions like this I often advocate scrutinizing the individual's current personal finances and then doing like portman says with projecting goals and expenses. Then, you look at investing and target how to invest with the appropriate time horizon.
I think your question is perfectly stated, and gives an investment advisor all the information they need to choose an asset allocation.
He is saying he wants the appropriate level of risk that would come with 4-5% return. There isn't anything unclear about it.
http://news.ycombinator.com/item?id=1109031
Next, with that much money you will have many people that may want to take it from you. So go out and get an umbrella insurance policy that covers your net worth to protect against ambulance chasers.
Also, you're going to have relatives and long lost friends coming and asking your for money for all sorts of things. I suggest you harden your heart and learn to tell them "NO" right now before you get burned. If you want to give them money, then make it a gift and not a "loan." Those types of loans are never repaid and if you are expecting them to be re-paid and they aren't it will ruin your relationship.
Now for actual investing advice.
First, you don't want to do anything stupid and lose that money. So be VERY conservative in your investment decisions. You do not need to risk 10-15% a year returns because you already are in the top 1% of net worth in the country at this point.
Second, most financial advisors do not have your best interests at heart. They will sell you expensive products that generate fees for them and probably underperform the market. So your best choice if you want exposure to stocks is to just buy a low cost index fund and not get into the stock market trading game.
Third, you will want bonds to work as fixed income and I'd only buy Treasury bonds as they have no credit or call risk. You don't save enough in taxes usually to make the risks of munis worth the price of admission. IMO. During the credit crisis in 2008 Munis went DOWN in value, but Treasury Bonds were up almost 30%. That tax savings people thought they had went out the window when the market panicked.
Fourth, you should have some hard assets for inflation shock insurance in your portfolio. Gold works best. IMO. It doesn't produce interest or dividends, but it can go up like a rocket when stocks and bonds are suffering.
Finally, you should keep a slug of cash sitting around to help you ride out market storms and support yourself so you don't have to sell assets out of desperation when they are down in price.
So I do think the Permanent Portfolio allocation would be a good choice. It gives you growth with an average CAGR of 9-10% the past 40 years. It gives you protection with the worst loss being in 1981 when it lost about -4-6%. It gives you stability because it won't have crazy swings in value. Lastly, it gives you control over your finances so you don't need to use a money manager and pay exorbitant fees.
For now, you may want to park that money in a very safe Treasury Money Market fund while you make your decision. They pay almost no interest, but it's better than jumping into something and losing your shirt. Don't let the financial advisors you're going to meet pressure you into expensive and dumb investment products. And, BTW, that's mostly what they're going to offer you.
If this sounds like too much to handle, then just go to www.vanguard.com and contact their money managers. They charge a small fee each year but will not do anything dumb with your money and their index funds are well run and cheap.
http://crawlingroad.com/blog/2010/02/06/permanent-portfolio-...
Arguably not 100% true anymore. Some people are buying insurance on treasuries these days.
But compared to other bonds, the US Treasuries are probably the safest. Even the Euro bonds are less safe. IMO. They are having big problems that will only get worse.
However if this all goes to hell, then you have an allocation to gold to cover the inflation fallout from the mess.
But in 2008 everyone thought inflation was coming when gas was $4 a gallon and climbing. But by the end of the year we had a deflation situation and Treasury bonds went up 30%. Nobody saw that one coming which is why portfolios should hold a wide variety of assets at all times and not try to use market timing.
Historically unlikely. Democracies favor inflation, at the expense of mostly foreign creditors, over higher taxes, at the expense of the average voter.
Actually, it would be anti-deflationary. The fact that U.S. Govt can print money to pay off creditors is already priced into the price of the bonds ( if it wasn't, U.S. bonds would already be worthless, as there is simply not enough dollars in the world to come close to paying off the debt). T-Bills are inflationary at the time of issuance.
In 1933 they broke the gold standard and confiscated citizen's gold. After the gold was converted to paper money they took the official price from around $20 an ounce to $35 an ounce thereby reducing the purchasing power of the paper (you needed $35 to buy what once cost you $20 just a few months earlier). Since Treasury notes then were essentially gold certificates promising to pay the bearer in the dollar value of gold, the US defaulted because they wouldn't honor the conversion. US Citizens were not allowed to own gold outside of jewelry again until 1974.
In 1971 Nixon closed the gold window for international holders of dollars. Foreign countries with dollars would no longer be allowed to convert their dollars for gold at the agreed to rate of $35 per ounce. So this too is a default as the terms of the agreement were not followed and we left foreign holders with dollars that were declining in value rapidly due to our inflation.
I'm not expecting the US to default any time soon, but there are ways for it to happen that technically aren't a "default" but achieve the same outcome. High inflation is the most likely way they'd do this if it came down to it.
http://mitpress.mit.edu/books/chapters/0262195534chapm1.pdf
Particularly the advice to park it in a Money Market fund until you are confident you know what you want to do.
The only thing investors should be concerned with is how the assets they own correlate to the economy and not each other. Stocks for prosperity. Gold for inflation. Bonds for deflation (and prosperity). Cash to ride out recessions.
Stocks and bonds are not negatively correlated all the time. During the 1970s stocks and bonds both did horribly in real terms because inflation was so bad. The correlation of them to each other didn't matter, only how they correlated to the economy did.
Prior to 2008 investment gurus said that stocks and long term bonds were actually positively correlated and that both would suffer at the same time. I guess that's maybe true in mild recession or inflation, but not true in a deflation. They reached their conclusions because we hadn't seen deflation since the 1930s and they were just looking at the past few decades. Their data and economic analysis was incomplete and they were unpleasantly surprised by the outcome when stocks lost over 30% in value and long term Treasury bonds went up 30% in value. Prior to 2008, many investment gurus poo-poo'd treasuries and encouraged investors to take on credit risk in lower quality bonds for more return. That was also a bad bet. Junk bond funds for instance dove almost as much as stocks. Corporate bonds also did not fare as well as Treasuries. All the correlation data they had proved to be incorrect because they were looking at the wrong things.
Gold is a volatile commodity because there is so little of it in relation to dollars in circulation. If there is no serious inflation expected in the dollar (say 5% or less per year), then gold will not perform well. But if it gets over 5% a year (or it is anticipated to do so) investors will start thinking that gold is looking pretty good compared to holding dollars and will buy it running up the price.
But we should also remember that asset allocation strategy should avoid looking at any one asset in isolation. Only how all the assets perform in the entire package matters.
I can make a case that any asset is horrible to own. Stocks the last 10 years have been real stinkers but I still own them because the next 10 years they could be great. In the 1990s nobody wanted gold but by the time the tech bubble popped gold was poised to go on a tear the next 10 years to today. In the late 1970s nobody wanted bonds because inflation had killed them the prior decade. But once inflation came under control bond prices went through the roof and continued to turn in excellent performance the next 30 years!
So I strongly encourage investors to step away from the mindset of correlations and guessing what assets will do best and just spread your money around. It is counterintuitive, but by owning four major assets of stocks, bonds, cash and gold you are actually far safer risk-wise than concentrating your investments.
This question of which asset class will do best and whether to own Asset X or Asset Y comes up a lot. I wrote a post about it that includes a snippet from Browne explaining his experience in this as well that readers may enjoy:
http://crawlingroad.com/blog/2010/01/12/what-asset-will-do-b...
In general, most common investment advice is bad because it understates risk (e.g. telling people that the stock market will perform well over the long term). The truth is that it's difficult to get reasonable returns with low risk, but that's not what anybody wants to hear because they "need" higher returns.
If you're investing for the long term, you don't care about temporary panics, the price will just come back up again ( which is what happened: https://personal.vanguard.com/us/funds/snapshot?FundId=0043&... ). Coming out of the worst financial crisis in many decades, corporate funds and tax free funds have performed pretty close to Treasuries over the last ten years. ( Compare https://personal.vanguard.com/us/funds/snapshot?FundId=0043&... to https://personal.vanguard.com/us/funds/snapshot?FundId=0083&... to https://personal.vanguard.com/us/funds/snapshot?FundId=0028&... ). If you figure the worst of the defaults is over, then corporates and munis are probably a better buy now. Of course, since interest rates are so abnormally low, buying any kind of long term bond or bond fund may not be a very good idea right now.
As an example, I am a CFA Charterholder, and off the top of my head, I cannot give you advice for the following reasons:
1) I'm not familiar with your investment experience.
2) Your return objectives are unclear. Do you really just want a 4-5% return (and perhaps a 1-2% draw?) or are you looking to withdraw 4-5%?
3) Your risk tolerance and your understanding of various risks is unclear.
4) I have no understanding of any other financial goals you may have, such as intent to protect wealth in case of divorce, or intent to transfer wealth to children, etc.
5) I have no understanding of what your full financial situation is, and what your current portfolio looks like. Is this $5m all you have, or do you already have a variety of assets?
6) I have no understanding of what level of liquidity is required of your investments.
7) I do not know if you have any specific objectives, mandates or constraints. These could range from a desire to move to a particular country, to engage in a particular business, or to weight a particular sector more heavily when possible.
8) I do not have the ability to accurately and clearly communicate investment information via an internet forum comment. Doing so requires presenting you with the information in a manner that is clear, easy to understand, and where you have the opportunity to ask questions and allow both of us to be sure that you understand what is being said as well as what is not being said.
9) Any over-simplified recommendation I made for you would fail a test for diligence and adequate basis.
To be frank, I can see NUMEROUS problems with much of the advice given here (in particular, a lot of people are advocating strategies that carry serious risk, but are NOT disclosing that risk, nor accurately explaining how to hedge against it. there is also a lot of misrepresentation about the performance of various investment vehicles on this page), but I cannot be more specific without breaking my professional code of ethics.
I hope you take my warning seriously, that the advice in this forum comes, almost necessarily, from people who are not qualified or experienced with these matters. I do not want your business, and I am not soliciting it. I just don't want you ending up in a bad situation because you mistook a well-composed and well-intentioned internet comment for advice that is right for you.
I've seen way too many people lose way too much money because they didn't fully understand the ramifications of an idea.
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edit: I want to give you some advice, so let it be this: educate yourself. Treat it as a serious, full-time job. Don't think that reading a few books (or a few blogs) aimed at a lay audience is adequate. You might consider taking the CFA examinations, just so you can competently audit any advisors or managers that you hire to assist you.
You are in a situation that can make not only your life better, but to also improve the lives of your loved ones. Real education will help you determine if your advisors are doing what's best for you, and long-term, will make it easier to confident that you have outsourced the handling of your investments wisely... or if you decide to do it yourself, that you are doing so with a reasonable understanding of investment.
Please be careful.
That said, any advice on a strategy is going to be mostly guess work (ie predictions of the future based on an incomplete model) because we're living in interesting times.
You on the other hand, shouldn't have that as your only goal. You have a huge sum of money and you should be thinking about capital conservation. What happens if hyper-inflation kicks in? What happens if the American economy spirals into depression?
People with high networth have to plan for these things. That is where a financial advisor is actually useful. They might not be able to make you alot of money (because if they could they would be already rich by doing it with their own money) but they can help you preserve the wealth you already have.
I would recommend that is a line of questioning that you should definitely go over with anyone that is going to advise you on your new found wealth. It would be best that they bring it up with you without you having to mention it.
I think you have to expound on what you want to do with yourself before deciding what to do with this boon. Until you answer that, stick to highly liquid very low risk assets and forget about a target return.
split the rest between investments of various risk depending on how much risk you are comfortable with. a financial adviser will help with this.
http://www.bogleheads.org/forum/viewforum.php?f=1