Invest a half-million
July 8, 2005 10:06 AM   Subscribe

What's the best way to invest a half-million dollars?

Say you win the lottery tomorrow and end up with a half-million tax-free bucks in your pocket. Being a sensible sort of person, you wish to make this money the sort of thing that sets you up for life. What do you do with it?

(The half-million is just an arbitrary figure.)
posted by five fresh fish to Work & Money (29 answers total) 4 users marked this as a favorite
Buy a bunch of SPY, DIA, or BRKA shares. If you want less risk, put it into bonds I guess.
posted by driveler at 10:12 AM on July 8, 2005

Most cool investors look to double their money ever 3-5 years. You can be less risky, sure, and just let the money maybe rise with inflation and maintain its value. Really depends on what you feel comfortable in investing in and how much you know about a paticular industry. There's a lot of things to invest in that will make you money.
posted by geoff. at 10:21 AM on July 8, 2005

See here and here. And I stand by my advice from the first thread.
posted by googly at 10:28 AM on July 8, 2005 [1 favorite]

Depending on where you live, I'd either buy 1 house (if that's all you could afford...) or buy a few houses and rent them out. Duplexes or bigger would be better. They'll pay for themselves as long as the economy stays ok; proximity to a college or a large low to medium wage employer will nearly guarantee future people who are willing or are forced to rent rather than own.

In 30 years you'll have paid them off, faster maybe. Before that though, think 20 years down the road, your mortgage payments will be half if not less then, the going rate for rent. Think how much rent has increased in the last 20 years... At that point, you're sitting on money trees.

At some point down the road, you're living in your own place, rent free and mortgage free and can either live off of the income produced by the properties or sell them off and take the cash to live off of or reinvest.

Short answer: real estate - there isn't a better investment.
posted by pwb503 at 11:03 AM on July 8, 2005

Any financial planner worth their salt will tell you to diversify your investments.

Personally, I'd first use about a quarter million to invest in desirable real estate as a safe bet. Among other investments, I'd pick a few clean energy technology companies to invest in as long-term bets. And I'd likely find honorable health-care and/or bio-tech companies to invest in.

At any rate, socially responsible investing has been proven it can have return rates as high as any other stock market investments.
posted by McGuillicuddy at 11:28 AM on July 8, 2005 [1 favorite]

If your cash is making 8%ish (the historical rate of return on the stock markets taken as a whole), then your money will double in 7 years. What you want to do is maximize the number of times you can double your money -- that's why it's 90% better (nearly twice as much money) to start saving at 20 than it is to start at 30.

But yeah, an aggressive investor wants to double her money in 3-5 years, but a conservative investor is ok with doubling the money in 7 or 8.

Half a million dollars certainly brings a lot of nice choices, but it's probably not quite enough to set you up for life. You'll have to keep working, at least for a while, because you want to have the money working for you (not you depleting the reserves by spending it). To invest the money and live off of the appreciation in the assets that you buy --the house(s) or the stocks -- is going to be pretty hard on $500,000. That's why they always say "it's the first million that's really hard."

I'd dump some into bonds and index the market on the rest. Indexs do better than 70% of the mututal funds. And those guys are pros, so it's hard to do better than them without some tremendous mid-1990s luck.
posted by zpousman at 11:57 AM on July 8, 2005

Disclaimer: I work in the mortgage industry and I'm a big believer that there is a housing bubble.

At least in the USA, I'd consider Real Estate a terrible investment at the moment, akin to buying at the top of a stock bubble.

In the areas that have experienced rapid price appreciation market rents are nowhere close to covering mortgage payments + property taxes.

Consider taking some time to read through:

before considering buying real estate, a REIT or a homebuilder stock as an investment.
posted by de void at 12:11 PM on July 8, 2005 [2 favorites]

50% Real estate anywhere rents will pay your 75% morgage and 50% into a pawnbroker business.
posted by Mitheral at 12:48 PM on July 8, 2005

Pay off all non-tax-deductable debt in the order of most expensive debt first. For us canucks that includes mortgage debt.

If you don't own your own home, buy one that you can afford. Whether or not you think there's a bubble, you have to live somewhere and rent comes out of your after tax income.

Maximize your RRSP.

In our part of the world, that's not likely to leave you with much to invest out of your half million.
posted by timeistight at 12:53 PM on July 8, 2005

One thing about the "buy real estate, rend it out" advice: This is a strategy that requires constant active participation. If you buy stocks, mutual funds, bonds, whatever you don't necessarily have to be constantly involved. Rent out a place and you are potentially getting involved in a massive time and energy sink. One bad tenant and it is months of hell.
posted by Justinian at 1:04 PM on July 8, 2005

Two words, Ponzi Scheme.
posted by 517 at 1:22 PM on July 8, 2005 [1 favorite]

1. Ignore any advice that begins with a phrase like "Most cool investors . . . "

2. $500,000, while arbitrary, won't be near enough to set a person up for life. The rule of thumb is that if you have a diversified stock/bond portfolio, you can withdraw about 5% of the value per year. $25,000 per year is only slightly above the poverty line, depending on where you live and what your family situation is.

3. $5 million, though, and now yer talkin'. I would buy AAA-rated non-AMT tax-free bonds, with a laddered portfolio of $250,000 coming due each year for 20 years. You'd get about $150,000/year in interest with no federal taxes. If you need each year's maturing bond proceeds for a good/bad emergency, you can cash it in. Otherwise, you roll it over into a new bond, maturing in another 20 years.
posted by Kibbutz at 1:28 PM on July 8, 2005 [2 favorites]

Response by poster: Pawnshop? An intriguing idea, that.

What other businesses would be relatively sure-fire?

Pay off all non-tax-deductable debt in the order of most expensive debt first. For us canucks that includes mortgage debt.

At the current sub-5% interest rates, it seems to me that investing in almost anything but the mortgage is going to make more money.

It is the first million that's the hardest, I'm sure. If it were invested conservatively, it'd be a million within a decade, and one can really start to roll.

What to do with a half-million seems much more interesting to me than what to do with a million, or to do with a hundred grand. The latter, pay off the mortgage; the former, pay off a financial advisor.

But in between... that's interesting territory.
posted by five fresh fish at 1:31 PM on July 8, 2005

No way is $500K "set for life" - as Kibbutz says. But it will make for some nice fun to invest. My $.02:
- $100 in municipal bonds
- $100 in laddered CDs
- $100 T-Bills
- $100 an S&P 500 mutual fund
- $100 in lottery tickets (then, when you get the BIG money, see Kibbutz's advice above.)
posted by ObscureReferenceMan at 1:48 PM on July 8, 2005

At the current sub-5% interest rates, it seems to me that investing in almost anything but the mortgage is going to make more money.

Maybe so, but you have to pay income tax on that money. You'll need to be making quite a bit more than 5% to simply break even. Also, there's absolutely no risk to paying of debt whereas all investments carry some risk.
posted by timeistight at 1:54 PM on July 8, 2005

Kibbutz is right, half a million dollars won't set you up for life. I would put it into a business. What business? Well that is the half million dollar question. Preferably something profitable and in which you already have some experience.
posted by caddis at 2:22 PM on July 8, 2005

Response by poster: 'struenuff. Mind, if it's a Canuck investment, something less than 50% of income earned is taxable. So while the investment would have to earn more than 5%, it's going to be well under 10% to break even.

A relative had an investment that was principle-insured and paid a monthly dividend in excess of his mortgage: ie. it paid the mortgage and then some. Pretty cool, that.
posted by five fresh fish at 2:24 PM on July 8, 2005

I would only buy real estate if the rent covered the mortgage, all taxes, and maintenance.
posted by malp at 2:37 PM on July 8, 2005

five fresh fish writes "Pawnshop? An intriguing idea, that."

Practically a license to print money if you don't mind dealing with the lower end of society[1] and taking their stuff when they are down. One big advantage is you can back channel anything that catches your fancy (CDs, tools, music equipment, home theatre, jewlery) and write it down as a loss against the business avoid tax twice. A previous pawn shop owner I know has a totally unbelivable auto shop stocked at pennies on the dollar.

The big advantage of RE, in a sane market[2] of course, is the ability to easily leverage a 1/4 million into 1 to 2.5 million worth of capital.

[1] Fallen middle and upper class too, it's amazing what a heroin, alcohol or gambling habit will convince you to do. I wouldn't feel as much guilt for those guys though.

[2]where rent covers all your expenses plus pays you for your time.
posted by Mitheral at 2:43 PM on July 8, 2005

Oh man-- I thought I posted an answer here but if I did it's gone. Possible that I forgot to hit 'post'.

Allow me to try again:

As others have noted, the answer to this question depends on your investment timeframe and your risk tolerance. But historically dividend-yielding stocks have beaten pretty much everything else in the market.

Personally I'd put $100,000 into a ladder of inflation-indexed bonds and sink the other $400,000 into dividend-yielding stocks from all over the world. Then I would channel the dividends into a money market fund, which sets up the potential for a triple revenue stream: (1) Capital Gains (2) Dividends (3) Interest from Dividends.

Then, if I didn't need the money to live on, I'd re-invest the capital gains, dividends and interest into more dividend-yielding stocks and interest-yielding bonds.
posted by Fuzzy Monster at 3:07 PM on July 8, 2005

If you can move to a cheap(er) country you could set yourself up for a nice retirement. For instance if you come to South Africa (USD 1.00 = ZAR 6.86) you would have ZAR 3.43 million. With ZAR 1 million you could get a small house or decent apartment in a nice middle class suburb. Then put the ZAR2.43 million left over in any investment that gets you over 8% return annually. That gives you ZAR 275 000 a year which is more than enough to live comfortably on. Put any surplus back into your investment and hopefully you'll beat inflation as well.
posted by PenDevil at 3:22 PM on July 8, 2005

The "best way" depends on how attached you are to the money and how likely you are to continue to be able to earn income if your investment plans don't work out. This probably isn't what you want to hear but if you want to preserve your capital (which is what I get out of "set for life") then you will probably end up with the bulk of your portfolio in pretty non-sexy investments.

The best way to do this until you get to the stage where you can handle it on your own is to let a responsible professional advise you.

Note: IAAFP (I am a financial planner) by training, although my practice has been limited to advising large corporations on very specific sorts of deals so my recommendations will have to be on a very general basis.

First, understand that a half million, after taxes, is not likely to set you up for life unless you have an EXTREMELY frugal lifestyle or live someplace where $25k-ish / year (after taxes) can support you. Don't plan on taking too many vacations on the Riviera.

Next: Find a reputable financial planner (or two) who works on a fixed-fee (as opposed to a percentage) basis. The local financial analysts'/financial planners' organization should be able to help out here. Keep looking until you find one who you are comfortable with and who doesn't set off any sleaze flags. These people do exist so don't be discouraged if it takes a while to find one.

Planners who are paid on a percentage of assets managed have an inherent conflict of interest in that they are motivated to recommend riskier investments offering higher potential rates of return (but higher chance of loss, too) -- i.o.w., they will gamble with your money on the chance they can increase it faster and thus increase their fees faster. This might not be what you need if you want to preserve your capital (which sounds like the case.)

Especially stay away from people who work on a commission basis (e.g., stock brokers, mutual fund salespeople, folks who work for brokers, etc.) Most of the folks you see advertising on the Sunday TV shows and golf/tennis tournaments work this way. They can really take advantage of you if you are uncomfortable making financial decisions or have a hard time saying "no" to their recommendations. These people get paid when you make trades -- commissions can eat into returns incredibly quickly so you don't want to be trading very frequently if you are looking for capital preservation.

If your person is uncomfortable discussing how they are paid, you especially don't want to do business with them.

A responsible professional should spend at least an hour with you going over your current financial situation (existing debts, income and expenses) as well as short-term and long-term goals (e.g., are you planning on funding education, retirement or a trip), tax and estate considerations (do you want to leave any money to your kids, for example) and developing a risk tolerance profile. Your risk tolerance is going to be dependent on all of the above, plus your ability to make a living working if your portfolio's return doesn't meet your requirements.

The above profile should be reviewed at least annually and updated to take into account any changes in your living situation, financial situation, plans and timeline. If major changes to any of the above occur before the next scheduled review, you should probably make an appointment to discuss them with your planner asap. Changes in your profile will almost certainly lead to changes in recommended allocations, as will changes in long-term return projections for various investment types and segments.

If your planner PROMISES you a specific level of return on most kinds of investments (basically, anything apart from U.S. Treasuries and related), don't even take the time to wish him/her a good day before walking out of the office. They are almost certainly breaking the law by doing this. They are absolutely being unethical.

The same advice applies if the planner tries to focus on quick, short-term returns or suggests that action on any recommendations is necessary RIGHT NOW. The exception here is on whatever portion of the portfolio you set aside for speculative-type plays. Keep in mind any speculative portion of your portfolio should be money you can afford to lose and not care -- if you plan on the portfolio being a long-term reliable source of income you probably wouldn't want to put more than 5-ish percent into speculative plays.

Never invest in anything you don't understand backwards and forwards. Give yourself 48 to 72 hours after you get a recommendation to determine if it's an action you feel comfortable with. Ask a lot of questions before giving a yes/no. Always remember you're in it for the long haul, so a couple of days wait shouldn't systematically affect your returns to any significant degree.

Chances are you will, over the long run, earn 6 to 10% annual return on a well-diversified portfolio including equities, bonds, real estate and other investments. If you want to play with leverage (playing options or futures or buying stock on margin) this should be limited to the speculative segment of your portfolio. Before taxes, 6 to 10% on $500k is $30-50k/year so you see why I say that "set for life" is cutting it kind of close. Inflation will, over time, eat into the purchasing power of your return as well.

Unless the advisor has a long-lived (over tens of years after taking out their fees and taxes) history of being an exceptional stock picker (these people are much rarer than you might think,) your best bet at achieving market returns on the equity portion is to put most/all of that portion into no-load index mutual funds. Study after study shows that the majority of stock pickers and fund managers underperform the market after their fees are taken into account. Given current U.S. (I'm assuming you're in the U.S.) and world events, global diversification considerations should also enter into the selection process.

Taxes can eat into your return pretty significantly. A good planner will consider your tax situation both today and down the road to help maximize your after-tax return within your investment profile.

I know this is boring advice and seemingly contrary to the stories your brother-in-law or co-workers tell you about how they're making a killing in the market; just keep in mind that most people never tell you about the money they lose.
posted by Opposite George at 3:41 PM on July 8, 2005 [1 favorite]

Response by poster: It sounds mostly like the best thing a person can do with a large wodge of money, then, is invest it at somewhere around the 8-10% level, and roll the returns back into the kitty until there's a million bucks (ie. in 7 to 9 years), then get serious about making some real money.

I think that's pretty interesting. I thought the barrier to greater self-sufficiency was far lower.

What about purchasing an existing business? Surely there are businesses that one can run as a part-time/casual sort of job, that would pay enough to earn 10% on the investment plus provide a living income.
posted by five fresh fish at 8:13 PM on July 8, 2005

Response by poster: In Canada, btw, but I don't think it's particularly relevant. I should think the advice applies pretty much universally.
posted by five fresh fish at 8:14 PM on July 8, 2005

Buying an existing business is a much bigger crapshoot than buying bonds, mutual funds, or even stocks. The dirty little secret about business ownership and entrepeneurship is that even if your venture is successful (most aren't), to get continued growth you need to continually reinvest any profits in marketing and infrastructure. To pull out an okay salary, you have to be responsible for everything from hiring and firing to restocking the pop machine. For 60-plus hours per week. Or, you can hire a qualified person to run the business for you--and then her salary will eat up most of your profits.

Business ownership is still the best way to get rich slowly in America. But the big payoff in dollars usually comes when the owner sells the business--not while he owns it. And most successful business owners are not driven by a desire to make millions, but because they like to run their business.

(Reading the above information qualifies you for four adult Continuing Education credits towards your MBA).
posted by Kibbutz at 10:15 PM on July 8, 2005

Like Kibbutz said, you can probably find a business that'll give you a 10% return on your kitty or let you work part time but not both.

One thing that gets tricky with running a small business is managing your working capital so you have enough to float you through the inevitable lean times. You earn little if any interest on funds you keep close at hand, so that drags your overall return down and limits your reinvestment opportunites. And lenders and vendors are often reluctant to offer lines of credit or terms to small businesses. As a new business you probably won't be able to get them at any price.

Inability to finesse the cash situation blows up more small businesses than most people are aware of.
posted by Opposite George at 11:36 PM on July 8, 2005

All good suggestions, in various ways. But really, what do you want to do with your money?

When I get my half mill, I will be buying a small house freehold, and investing the rest in a diversified portfolio of debentures, which in my country run at between 8 and 10% after tax. And then I'll never work in a fulltime job again.

But blowing the lot on a few years of international travel, or a few terms at Cambridge, or commissioning a symphony are equally valid ways to use the money.

And if you want to keep your money as a true investment - ie an operation that promises the safety of the principal, plus some level of return - then the "best" answer can only be decided if you can say how much risk you stand, how much return you want, and how much personal time and energy you wish to devote to your fortune.
posted by i_am_joe's_spleen at 12:56 AM on July 9, 2005

That should read 8 and 10% BEFORE tax. Sorry.
posted by i_am_joe's_spleen at 1:16 AM on July 9, 2005

I'd invest $500k into something fairly high-risk, looking to try to turn it into a lot more\, or lose it. Most likely, I'd look at starting some sort of business.

Of course, I have a fairly high emotional tolerance for risk, and wouldn't really be upset if I went broke and had to start over.
posted by mosch at 2:16 AM on July 9, 2005

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