What to do with a large cash windfall?
March 17, 2010 11:37 PM   Subscribe

I will be receiving roughly $300,000 in the next year that I do not need for living expenses. I'm 31, salaried, and have no debt. I'm currently renting. Aside from buying a house or investing in the stock market, what are other longer-term investment options that I might consider? What would you invest in right now, and why?

I'm quite open-minded and would love to hear any ideas. (And yes, I will discuss my options with a financial advisor--just want to think broadly first.) Many thanks in advance.
posted by Household Tipster to Work & Money (22 answers total) 15 users marked this as a favorite
 
I would put $25,000 in an easily accessible cash account and $75,000 in longer term investments. Then I'd use the remaining $200,000 to buy a condo or two with a lot down and rent them out. I'd have them managed by someone else who can deal with the renting/maintenance/etc. and then invest the cash flow generated in other long term investments.
posted by thorny at 12:08 AM on March 18, 2010 [2 favorites]


If you want something low-maintenance and low-risk, index funds are great - they almost always outperform managed mutual and hedge funds.

Source 1 (NYT)
Source 2 (UMich econ professor)
posted by ripley_ at 12:11 AM on March 18, 2010 [6 favorites]


Something charitable to directly improve your community. After investing, fund something to benefit others.

I can't even begin to ponder having an extra six figures laying around. Or an extra three for that matter. But there's certainly a lot of good that money can do.

Alternatively, you can make my student loans disappear with a scant fraction of that and I'll take time away from my 501c3 job to be your personal askmefi - spending my days hunting down electric mixers, quotes, books, and ever ready to tell you to use audacity to edit sound.

Seriously though, at least get your name on some plaques at some parks or gardens.
posted by beardlace at 12:29 AM on March 18, 2010 [5 favorites]


Pay a few hundred dollars for a professional fee-based financial planner. Ignore investment advice you find on the internet.
posted by mr_roboto at 1:04 AM on March 18, 2010 [25 favorites]


consider investing in anything China. While the rest of the world has been in a slump China has been growing at 8 to 10%. I'm running a business here teaching foreigners Chinese and the growth here is astounding. It will continue to grow this way for quite some time

chinabound, we're 180-degrees off of one another on this. China's "growth" is artificially controlled (so much so that native reporters who ask the wrong questions can be jailed). While the rest of the entire world is reeling in a recession last year, China claimed "growth". Yeah. Oh, except electrical power usage plummeted - a metric for which they didn't control the reporting. And exports (ditto), which are down 25% (slide #7) - 25-FREAKING-percent!, and yet they claim 8% GDP growth!!! Riddle: how do you increase productivity metrics while dramatically reducing energy usage? Answer: by lying.

(note: all links are to articles by a single author)

--

Household Tipster, if I were you, I'd put most of it in an extremely low-fee index fund, like FUSEX (tracks S&P 500, 0.10% yearly fees) or FNCMX (tracks NASDAQ, 0.35% yearly fees) - just to name a couple. And LEAVE THEM BE... for at least 2 years. Don't screw with them, while the recession settles out, they bounce up & down, and eventually head up again. (I'm not you, but that's what I'm doing.)

Unless you are willing to follow the market, and spend a substantial amount of time learning about investments and current financial news, do not invest in individual stocks. Stick with mutual funds, which are managed by trained individuals who do the work for you. And pick low-fee funds, which means the individuals aren't eating up your profits.

--

Index funds aren't sexy. Neither is the argument I'm about to present. But it's sound, especially for novice investors (and, truthfully, for most investors).

Let me walk you through a thought experiment. Pick a stock broker at random. (That's essentially what you're doing, since every broker in the world has investors who believe that he/she has a good angle on the market.) Versus the average investor, how will they fare? On average, they will perform... average. Duh. Now, remove the broker's fees from their returns. Now that performance is below the market average (by the amount paid out to fees). And that is (on average) how a fund you pick will perform, on average: below average.

Obviously, gifted investors (like Warren Buffet, Peter Lynch, and so on) can beat the average, most of the time. But most of us can't in the long term - in fact, the best we can hope for, without luck, is to do below average (as I showed above). If average is as high as you can reasonably aim for, aim as close to average as you can make. And that means buying a fund that intends to perform "average" (that is, an index fund) with minimal fees.

It isn't sexy. But it will maximize returns.
posted by IAmBroom at 2:20 AM on March 18, 2010 [3 favorites]


On review, I am really seconding ripley_'s index fund advice above.

And, I like saying "on average" too much.
posted by IAmBroom at 2:25 AM on March 18, 2010


I'm facing a similar situation in a few years and this is what is determining my thinking.

Climate and environmental change is going to effect many things we take for granted these days. I believe that economic values are going the change in radical ways. No matter how much we hope they won't, hoping is not a constructive financial plan. Change is going to happen a lot quicker than we think and I want to be riding the high, first wave to survival.

So I am thinking about my future in a purely selfish sense. How do I want to live? What will happen to me if social structures crack and weaken under the pressure of climate/social change? What will be the most secure and long lasting personal investments I can make with my money?

And my thinking leads me to believe that I need to be innovative and futuristic in my thinking. The old ways won't work in the new days ahead. I wouldn't trust an investment advisor with my coin jar if s/he didn't accept or understand that the traditional concepts of investment are going to change radically in the next 3 to 10 years.

So this is what I'm planning to invest in.

A piece of quality rural land in a good social setting that can support me physically and socially if/when the excrement hits the breeze producer.

A sustainable design for my abode on the piece of land. Sustainable meaning off the grid as much as possible but with no shortage of creature comforts (aka I love my dishwasher and high tech goodies).

Stocks and shares in sustainable industries, especially industries that are aware, take account of, and plan to make money in the economy of the future (which is not the one we have now).

And I'm going to leave some to play with foreign currency fluctuations. Because I believe that some currencies are the canary and some currencies are the owner in the 'coal mine' of our future. Picking which is which is a lot of the (morbid) fun.
posted by doost at 3:12 AM on March 18, 2010 [2 favorites]


Taxes will eat a huge amount of this. Talk to a financial advisor.
posted by futility closet at 4:40 AM on March 18, 2010


As noted above, index funds, particularly from Vanguard because of the low maintenance fees. Read this and then go get you some....... Want some real-estate? Buy the Vanguard Index REIT ( VGSIX ). Want some Brazil, China, India, etc. Buy the Vanguard Emerging Markets Index ( VEIEX ).

If you want to have some fun, take 5% and play the market on some individual stocks, ADR's, and ETF's.

Doost - That sustainable value you talk about is how Buffet made his money.
posted by jasondigitized at 5:28 AM on March 18, 2010


My 2 cents.

Let your emotions settle and put it in a bank account for at least 6 months and don't do anything. Don't worry about investments,returns,interest...yadda yadda. Take the next 6 months to educate yourself and think about what to do.

Me personally I think we are in such a financial mess that speculation in anything is extremely risky. I'm investing in myself: taking a leave of absence and going to school.

Good luck. Nice problem to have all things considered.
posted by larry_darrell at 5:34 AM on March 18, 2010 [2 favorites]


Wait - you marked the real estate answer as the best one? Why? That's quite possibly the worst answer anyone has given on this thread (and there are some pretty other bad ones)

I thought we've learned this lesson. Real Estate long-term nationwide is at best a 1-2% real return asset. Seriously that's what the data says.
posted by JPD at 6:18 AM on March 18, 2010 [6 favorites]


JPD, appreciation on real estate is 1-2% long term, but using real estate as an income source, i.e. actually renting it out and not simply counting on the cost to go up, can make you a lot more money than that. 5-10% is entirely reasonable.

Still, there's a lot of hassle involved. Being a landlord can be a full-time job, and there's always risks of vacancy, defaulting tenants, etc. So while it's a better investment than you make it out to be, it's not a sure thing.

Then again, nothing else is either. But unlike nebulous financial instruments which may lose 100% of their value overnight, real property isn't going anywhere. It may not be worth what you paid for it, but as long as you're renting it out--and beating your costs--who cares?

Still, the only good advice on here so far is to get a financial advisor. Depending on the source, the OP could easily lose six figures on taxes if he isn't careful, and there's enough money at stake that doing this wrong will be far more costly than paying someone to do it right. With that kind of money you'll be able to attract a competent, independent financial planner. Do that.
posted by valkyryn at 6:54 AM on March 18, 2010 [1 favorite]


I'd launch a diversified investment portfolio from the getgo:

25% cash
25% inflationary hedge (i.e. gold)
25% equities
25% bonds (in today's environment, I would look more to dividend paying stocks as bond markets are dormant, but revisit in 2-3 years).

With said diversification, the idea is to rebalance the portfolio periodically so no one bucket runs out of wack. Let's say you did this 10 (2000) years ago. After 5 (2005) years, your distribution would look more like this:

15% cash
29% gold
33% equities
23% bonds

At which point you would take money out of equities and gold and divest into bonds and cash.

When there is a sudden jolt in the market (e.g. great crash of 08) your portfolio is not as stung due to your rebalancing. Let's take a look at how it would look in 2009:

32% cash
33% gold
16% equities
19% bonds

At which point you would divest more money out of gold and cash into equities and bonds (a brilliant move in 20/20 hindsight).

This takes a lot of pressure off the casual investor who doesn't want to necessarily time trends in markets. As long as you rebalance periodically/after major jolts etc, your portfolio will grow and your risk will be diminished.

Best of luck.
posted by Hurst at 8:16 AM on March 18, 2010 [2 favorites]


After taxes (assuming this is probably an inheritance), you're going to be left with maybe 200K and change. That's not really so much money.

If you rent, buy a house. You've got just about enough for a decent house in a modest neighborhood in most American cities. It's an excellent time to do that. Forget appreciation; you will have a place to live without paying rent to anyone but yourself. Buy smartly and you could get something well below recent market values in a market that is starting to bounce back.

Of course, I'd buy a restored 1972 Dodge Charger and go on a cross country spending spree, so you probably shouldn't listen to me.
posted by fourcheesemac at 11:40 AM on March 18, 2010


Ps -- I don't think you could touch the scenario of buying an off-the-grid escape pod for less than a million bucks.
posted by fourcheesemac at 11:42 AM on March 18, 2010


If I were you, I would just buy a modest house with a huge down-payment. Save some of the money to go towards taxes and homeowner's insurance after the house is paid off. Use your current money going to rent to pay off the mortgage. Once that's done, bump up you retirement fund contributions to some rediculous percentage of your paycheck since by then you will have one of most people's major expenses throughout their lives already dealt with.
posted by WeekendJen at 12:06 PM on March 18, 2010


Hurst - you do realize the long term return on gold is about zero, yes? Don't get me wrong, I have a gold fund in my portfolio, but it's only 5%. It has a place, but in most peoples portfolios, that place is probably not higher than 10%.

This site states that the annualized return of gold over 202 years is .09%.

And William Bernstein says to be very careful of gold.

HT, if you want to educate yourself about how to invest on your own pick up a copy of Bernstein's "The Four Pillars of Investing". If you like math and really dig into topics, get his shorter but more intense book, "The Intelligent Asset Allocator". Burton Malkiel's "A Random Walk Down Wall Street" is also in the same vein and quite good. Both authors strongly advocate index funds, as have others in this thread. It is the way to go.
posted by dave*p at 12:07 PM on March 18, 2010 [1 favorite]


After taxes (assuming this is probably an inheritance), you're going to be left with maybe 200K and change.

Do you know what country Household Tipster lives in? It seems most other people are assuming the United States, in which there would be no tax burden on an inheritance of this size. Inheritance is not income on the Federal level (though it can be in some states), and the estate tax (which is a burden on the estate, not the heir) will be kicking in again after this year only at much higher estate values than this.
posted by mr_roboto at 12:40 PM on March 18, 2010


Seriously. Investment advice on the internet is a fools game. Outside of a few restricted venues, its just awful. I mean, Metafilter is pretty smart, but this tread is an absolute mess.

Try asking again over at GRS.
posted by mr_roboto at 12:42 PM on March 18, 2010


Ps -- I don't think you could touch the scenario of buying an off-the-grid escape pod for less than a million bucks.

You're projecting a lot of assumptions there, fourcheesemac. You can live off-the-grid for free (bridges & homeless shelters), under $100k (in minimalist, but not uncomfortable, housing), or as much as you want to pay. It doesn't have to be Scott Adams' dream house for Dilbert (I'd link to that contest, but it seems to have been removed).


Wait - you marked the real estate answer as the best one? Why? That's quite possibly the worst answer anyone has given on this thread (and there are some pretty other bad ones)

JPD, you're confusing real estate property investment, in which the properties are the goods traded, with rental income, in which the properties are the capital investment from which steady income is generated.

Landlords who rent properties have been doing fairly well throughout this crisis, since everyone who loses a house still has to live somewhere (and can't get a new mortgage, clearly). It's hella time to buy rental properties.
posted by IAmBroom at 12:53 PM on March 18, 2010 [1 favorite]


dave*p - gold return statistics are easily manipulated w/r/t the specious bogey man known as the precious medals taxes. There are ways around this and there is plenty of statistical evidence that says the annualized returns have been substantial in the last decade or two.

With that being said, I stake no position in Gold at the moment, as a lot of the 08-09 runup was percipitated upon inflationary fears which were largely mitigated by effectively coordinated central banking. I don't want to get into the specifics of trends and investment strategies; hence the buckets concept aides the neophyte who cannot understand or spend time in deciphering trends.
posted by Hurst at 1:03 PM on March 18, 2010


No I'm not conflating total return and capital appreciation. Literally long-term returns on real estate including rental income and appreciation are in 1-2% in real terms. The fact that some of you refuse to believe this is precisely why its a bad investment. Great time to buy rental property? What? Fine me a place with rental yields that actually make sense and where affordability relative to history is rational (other wise rents are too high)

Do you want to know what long-term real returns on commerical property in midtown manhattan are? back in 2006 - at the peak - they were 2%. Real. For an incredibly illiquid asset.
posted by JPD at 7:03 AM on March 19, 2010


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