Advice/Ideas for investing a large amount of money?

[jively]

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What are your income requirements? Say you use Vanguard's intermediate term tax-exempt bond fund, which currently yields 3.77%. If your numbers are accurate, this will generate $1.3M per year in tax-exempt income without touching your principal.

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This is true for the first year, but using a high percentage in bonds (80-100%) means that your income stream is not going to grow with inflation. Even if you want to be extremently conservative, you probably want 30-40% in stock funds diversified throughout the world.

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I found "The Four Pillars of Investing" by William Bernstein [...] to be easy to understand and highly instructive introductions to investing that I'd strongly recommend.

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Great book - one of my favorites.

-Tom

[mntndrew]

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What are your income requirements? Say you use Vanguard's intermediate term tax-exempt bond fund, which currently yields 3.77%. If your numbers are accurate, this will generate $1.3M per year in tax-exempt income without touching your principal.

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This is true for the first year, but using a high percentage in bonds (80-100%) means that your income stream is not going to grow with inflation. Even if you want to be extremently conservative, you probably want 30-40% in stock funds diversified throughout the world.


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I guess I'm thinking of my miserly lifestyle where I could get by kinda OK on a mere $500K per year or so, which, along with a healthy dose of TIPS, would leave a lot of margin for inflation protection. Your point about inflation stands, though, but my main point was that his low need to take risk should make for a pretty easy-to-manage, simple portfolio.

Also, I might add that DFA's primary added value seems to me to be in its strategies on the equity side -- value tilting, aggressive tax management, block trading -- and that the benefits of using an advisor who charges a percentage of assets under management instead of a fixed annual fee might be greatly reduced in a portfolio that could safely be heavily in fixed income. In other words, you could be paying a lot for something you could save a lot of money by implementing yourself. This, of course, is not for everyone, just like fixing your own car can save you money but isn't for everyone. Regardless, my biggest piece of advice is to read a good book on investing to learn about it and see if it's something you'd feel comfortable doing.

Tom, I'm not sure if you're familiar with the Diehards forum, but there are a lot of DFA-friendly posters there who would be interested in hearing your contributions.

[pig4bill]

Cripes, you can get nearly 5% from U.S. Treasury bonds, no imagination needed.

It would be a crying shame to sink a wad like this into mutual funds that any ordinary schmoe can get. Hopefully Scorpion's contacts will put him onto some cool stuff.

[Hotel Detect]

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What are your income requirements? Say you use Vanguard's intermediate term tax-exempt bond fund, which currently yields 3.77%. If your numbers are accurate, this will generate $1.3M per year in tax-exempt income without touching your principal.

In designing any portfolio, you need to be aware of your need, ability and willingness to take risk. It seems that in your case, your low *need* to take risk should be the dominant factor. In that case, I'd recommend something like 80-90% in bonds -- probably split between short- to intermediate-term tax-exempt bonds and TIPS -- and 10-20% in equities -- split perhaps half and half between a US total stock market index fund and a total international fund.

A financial advisor is not necessarily a must. You'll need to educate yourself to understand what you need to look for in an advisor, and in so doing, you'll likely find that you know enough to feel comfortable handling the investments yourself. You should understand how your advisor gets paid, and how that fee structure may fail to align your fiscal interests with his. As many have indicated above, many financial advisors are nothing more than salesmen, and you need to be very careful about differentiating an advisor from a friend. I found "The Four Pillars of Investing" by William Bernstein and "The Bogleheads' Guide to Investing" by Taylor Larimore, Mel Lindauer and Michael LeBoeuf to be easy to understand and highly instructive introductions to investing that I'd strongly recommend.

I would also suggest trying out http://www.diehardsforum.org for excellent financial advice.

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Great advice,... I believe these are the types of investments I am in right now while we figure out where to go next. I will check out your book recommendations this weekend.

If you don't mind me asking, what are TIPS? Pardon my ignorance but I am a history major lol.. Everything else you mentioned I am familiar with.

Most likely I am going to stick with my advisor b/c my family has used him for a long time but I would like to study investing a bit so that I can know when it is a good idea to add small amounts of risk to my portfolio.

My advisor makes the same points that you make... If i can make 1.3-1.5 million a year without touching the principle then what's the point of pushing the envelope?

I am thinking that 500-700k a year would be more then enough cash to reinvest the rest. Saving 700k-1 Mil a year would surely stay ahead of inflation as well, correct?

All that being said, I wouldn't mind making as much money as safely possible, which would then allow me to be more charitable with the proceeds.

[Hotel Detect]

I have posted before regarding this. I feel strongly that passive (index) investments, balanced and diversified around the world can give you a very good investing experience, with the lowest amount of risk, and immediate liquidity. I am a financial advisor with access to Dimensional Fund Advisors (DFA) mutual funds. I believe DFA is the best mutual fund company out there. Vanguard is the second best mutual fund company out there. Hedge funds, private equity and so on are not necessary to have excellent investment returns with low risk.

The % of stocks depends on your lifetime goals, but just using a balanced 60% stock, 40% fixed, I like an allocation like:

12% US Large Cap
12% US Large Cap Value
6% US Micro Cap
6% US Small Cap Value
6% US REITs
12% International (tilted towards value and small stocks)
6% Emerging Markets (tilted towards value and small stocks)
20% Short-Term Municipal bond funds
20% Intermediate-Term Municipal bond funds

You can use DFA's "core equity funds" and tax-managed funds to lower the tax liability for many of these asset classes.

For $35 million, you can use an advisor that charges a very very small advisory fee and use managed accounts held directly by DFA.

This portfolio should average at least 5% after tax over a long period of time. "Low risk"? That really depends on what you think is risky. This portfolio is more of a medium risk portfolio. Every 20 years or so this portfolio will have a loss of 10% or more.

If you own $35 million in your own name, get married, and keep your assets separate throughout your marriage, then it should be considered a non-marital asset and your ex-spouse should not be entitled to any of it, even without a prenuptial agreement.

Now, every state is different, and you really should speak with a divorce attorney in your state.

In addition to the assets, you have to consider your income, and whether you are providing for your spouse and/or children. If you do, and later get divorced, you may be required to pay spousal and/or child support. That is separate from a spouse getting any of your separate assets.

Good luck,

-Tom

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Thanks Tom,

You clearly are very knowledgable. The portfolio you suggest is a bit over my head at this point but I hope that after referring to some of the books recommended in this thread I will have a better grasp of some of the terminology and principles you outlined.

Regarding your comments on marriage... This is something I also thought was true. That spouses are essentially only entitled to what you accrue over the course of the marriage. I am definitely going to check deeply into this before making the leap, which is probably a ways off yet anyway. [img]/images/graemlins/smile.gif[/img]

Thanks again,
Hotel

[Statutory]

I don't have anything useful to add.

But its [censored] awesome u have 35 mil! And I want to be u someday.

[wdcbooks]

Almost no one with that kind of asset base should be working with just one advisor. You should have at least a couple of different advisors pursuing different strategies. The basic questions of where the money should go will depend on your goals, liquidity and tolerance for risk. You have to understand that properly investing a sum of money this large involves lawyers, accountants and advisors working together for which they are typically paid a fee as a percentage of assets.

Most of the advice you will find on forums like this is geared towards relatively small time individual investors. That advice quite correctly stresses fairly simple asset allocation strategies and doing your own research. With a sum like 35 million a few things happen. First, the fee as a percentage of assets is generally lower than a smaller investor would pay. Second, your mistakes made from inexperience are a lot more expensive. Finally, there are strategies involving insurance, tax shelters and other estate planning tools that would take more research and expertise than most of us have.

So basically hire someone. A DFA planner is an excellent start, but I would divide your investable assets between at least two separate advisors who are aware of what the other advisor is doing, but operate separately.

[wdcbooks]

I forgot to add a couple of things:

First, PM Scorpion Man. Seriously.

Second, realize that an advisor who deals with average balances of 200k is not equipped to deal with that large a sum of money. Look for an advisor with a good reputation who works with clients who have similar asset bases.

[mntndrew]

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If you don't mind me asking, what are TIPS? Pardon my ignorance but I am a history major lol.. Everything else you mentioned I am familiar with.

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My wife's a history major and can understand this, so there you go! TIPS are Treasury Inflation Protected Securities. It's a type of bond that has two payment components -- a fixed real return, and an inflation adjusted return. The inflation adjusted component changes depending on a government defined inflation index and adjusts the principal value of the bond holding. If, say, the real return of the bond is 2%, and inflation is running at 3%, then the bond will return 5%. The real return is fixed at 2% for the life of the bond while the inflation return component adjusts according to the consumer price index (CPI). This guarantees you a real return that outpaces inflation, at least as the government defines it -- how much you want to believe the government definition of the inflation index is for you to decide.

TIPS are available either directly from the government at treasurydirect.gov if you want to build your own ladder of TIPS expense-free, or you can invest in the admiral version of Vanguard's TIPS fund for a much simpler investment at an expense of 0.11%.

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Most likely I am going to stick with my advisor b/c my family has used him for a long time but I would like to study investing a bit so that I can know when it is a good idea to add small amounts of risk to my portfolio.

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That is fine, but I just want to emphasize the chapter in the Bernstein book entitled "your broker is not your friend." This can make for delicate situations, but you should at least be aware of where everyone stands. From what you have said, the advice he's given sounds quite reasonable to me.

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I am thinking that 500-700k a year would be more then enough cash to reinvest the rest. Saving 700k-1 Mil a year would surely stay ahead of inflation as well, correct?

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Again, if your numbers are accurate, you are talking about living off of 2% of your portfolio or less. TIPS should offer you a *real* -- after inflation -- return in that ballpark. A small dose of equities should, IMHO, give you adequate additional inflation protection.

Some posters have indicated that it is ridiculous to try to squeeze such a large portfolio into funds available to average retail investors. I believe that the Bernstein book and others make a compelling argument that this is not the case, and that more exotic types of investments often offered to high net worth investors are things that are meant to be sold rather than invested in. You'll have to decide that for yourself.

[contortionist]

http://early-retirement.org/forums/index.php

good advice on the above forum