Where to invest $1 million
It’s easy to want to play it safe with a large chunk of cash. But being too safe can be a big risk.
Question: I’m 49 years old and have about $1 million to invest. My mother has advised me to put it all in 30-year muni bonds and CDs, but I wonder whether I ought to be more diversified. Do you think I should take my mom’s advice? —C. Hilliard
Answer: Normally, moms are a font of good common-sense advice, encouraging us to eat our vegetables, play nicely with others and, of course, imparting that time-honored admonition: “Don’t run holding that stick. You’ll poke your eye out!”
But as much as I hate to do it, I’m afraid I have to tell you that you should ignore your mom’s investing advice, which is bad on several levels.
Take her muni bond recommendation. Sure, bonds should be part of a well-balanced portfolio and, depending on your tax rate, munis can be an excellent way to get that exposure in taxable accounts, especially today when muni yields are competitive with those of Treasury bonds in many cases, even without factoring in munis’ tax benefits.
But by investing solely in long-term munis - as opposed to also holding short- and/or intermediate-term bonds - you are taking a big risk. The threat isn’t that the bonds might default. As long as you stick to high-quality munis the chances of that are actually pretty slim. Rather, the problem has to do with the seesaw relationship between interest rates and bond prices - namely, when interest rates rise, bond prices fall. And generally the longer the maturity, the steeper the drop.
I’m not in the business of making interest-rate predictions. But given all that Big Ben Bernanke and his colleagues at the Fed have been doing to stimulate the economy, I don’t think it’s a stretch to wonder whether we might be in for higher inflation and higher interest rates at some point in the near future.
But whatever the outlook, I still think it’s best to hedge your bets by sticking to bonds, or bond funds, with maturities at the short- to intermediate-end of the maturity spectrum. You’ll collect most of the yield of longer-term issues with much less volatility.
But the even bigger problem with mom’s recommendation is that it would leave you with all of your money in fixed-income investments. That might be fine if you were, like, 90 years old. (Even then, 100% in fixed-income wouldn’t automatically be the way to go.) But you’re a mere youngster of 49, for goodness sake. At this point in your life, you still need some long-term growth to boost the purchasing power of your portfolio so it can support you throughout retirement. And to get that growth, you’ve got to diversify into stocks.
So the challenge you face is putting together a diversified portfolio of stocks and bonds that gives you a decent shot at long-term growth but also provides enough stability so that your portfolio won’t get totally hammered if the stock market drops or interest rates rise.
In order to meet that challenge, you’ll have to grapple with two fundamental questions: How should you divvy up your holdings between stocks and bonds? And then, which types of stocks and bonds should you invest in?
There are no one-size-fits-all answers. It largely comes down to how much risk you’re willing to take, what size returns you want to shoot for and how hard you want to work at creating and then monitoring your portfolio. But you can get advice both on how to allocate your holdings between stocks and bonds as well as on specific investments by checking out this month’s Money cover story, “The Only 7 Investments You Need Now.”
I’ll leave it to you as to the best way to handle your mother if she asks you whether you followed her advice. But there is a way you can be truthful but also let her down easy. Just say, “Remember, mom, how you always told me to eat a balanced diet? Well, I’m applying your excellent advice to my investment portfolio.”
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Dudes stuck on the fee issue,
The guy has $1,000,000.00. Most brokers and funds waive the fees at that level.
CBB - looks like you’re on your own with this annuity crap.
Best of luck with the fishbowl-business card lunches….
CBB, taking cheap shots at Suze Orman and financial writers might impress an
investor who’s never cracked a book. But it’s is not going to fool anyone who’s been around the block more than once.
Now, John Bogle and Jane Bryant Quinn vs the annuity all-star cheerleading
squad, that would get my attention. I might even pay a small commission to
watch that debate.
“Tax code enacted in 2001 and 2003 expires in 2010 and will capture all kinds of your income dead or alive, the largest increase since WWII. Alternative minimum tax will bleed the middleclass yet more and capture 25 million new victims… akin to a plague.”
============playful snip==============
Fear and greed… one free lunch seminar coming up!
Jambur, the answer may indeed lie in life insurance. Unless you’re an OINK (one income no kids). Or a DINK (double income no kids). Or a juvenile-onset diabetic.
The Roth sounds a lot more attractive to me.
To the guy who said you are also an “Angel” investor, thank you! We need more people like you.
If you have $1 million to invest, yes, diversify it with stocks and bonds but also please consider being an “Angel” investor. Angel investors help keep the economy going, and help peoples’ dreams come true.
Another thing to watch with indexed annuities is that you almost never get the dividends that the stocks in the index are generating.
There goes another 2% off your annual return.
Ka-ching!
CBB wrote, “And as far as the comment, only for those that sell them, tell me
how your broker or advisor makes their living.”
CBB, I don’t have a broker or an advisor. I’ve been managing my own investments ever since I was 28. Its not exactly rocket science.
Buying annuities from an advisor who’s working on commission is much riskier than the stock market. If I needed help, I would look for someone who works on a fee for service basis.
cbb,
A guaranteed 7.2% return with no downside risk?
People, if it sounds too good to be true, it probably is. Read the fine print and make sure your advisor explains every last word in that contract before you sign the bottom line. By the time you get past all the cleverly disguised fees, your 7.2% return will probably look a lot more like T-bills.
And don’t forget those outrageous surrender charges. By the time you realize your “investment” is going nowhere, the only way to get it back is to leave a big chunk of it behind.
Think about it for a moment.. if the annuity is really that good a deal, why are they always so desperately anxious to lock you in?
Anonymous,
In bold letters, FEES.
Could you please give us a long paragraph or two full of detailed information about FEES?
Don’t forget to mention the serious CONFLICT OF INTEREST that arises when naive investors get their investment advice from advisors selling products on COMMISSION.
I am waiting. Let me know when you have an answer.
In the meantime I would encourage anyone who’s considering an indexed annuity to research the SEC and FINRA websites, take a trip to the library or the bookstore and check out a few good books on personal finance, and talk to at least one advisor who’s not working on COMMISSION.
Caveat emptor.
To Anonymous, plugging the index annuities..
I was waiting for the EIA pitch, and was shocked that there werent more posts like it.
You cannot discuss market losses without discussing gains. Sure EIA help to minimize those, but at significant costs in fees, capped gains, and surrender charges.
Using the posted example of a 7.5% annual return (and I have yet to see one with that as the minimum–most are more like 3-4%–buried in the fine print, of course)less 2-2.5% in fees = 5% or so in annual gains. Whoop-dee-doo.
An average person could probably ladder some CD’s and get that with no surrender penalties and FDIC insurance to boot. A diversified portfolio of no-load funds could do even better.
We are facing the perfect storm in that whoever the next president is, tax rates will undoubtedly go up. Tax code enacted in 2001 and 2003 expires in 2010 and will capture all kinds of your income dead or alive, the largest increase since WWII. The Marginal tax rate will increase across the board from 13% by highest tax brackets to 50% by the lowest…go figure. Top tax rate on dividends will nearly triple to 39.6% from 15% most likely lowering stock performance. Capital gains will rise from 15% to 20% + state. Alternative minimum tax will bleed the middleclass yet more and capture 25 million new victims…akin to a plague. When you think about traditional tax deferred vehicles it does not make sense to defer taxes to what inevitably will be a higher tax bracket in the future at ordinary income. The answer may lie in life insurance structured for income and a self-directed solo-401(k)s since there are not income limits to ROTH on the solo-401(k). This is the dynamic duo of tax-free retirement income.
For goodness sake, anyone with a dime to invest and a lick of sense, listen to no one who tells you to put your money in one investment. If you’re going to be silly and chase performance, forget about commodities and precious metals. Buy Mosaic stock. It went up ~400% last year.
Seriously folks, buy a balanced, diversified portfolio.
Indexed annuities are not some magical panacea. Your total gains may be capped percentage-wise or dollar-wise and you may not earn the dividends from the holdings (since you’re not actually holding the stock). Also, you’ll suffer penalties if you withdraw within a specified time period, typically calculated in many years.
As always, do your own research and don’t depend on a glossy brochure or a salesman’s “assurances” before you invest.
Invest 20% each in Energy, Water, Food, Precious Metals and Infrastructure ETF’s/Mutual Funds/Stocks.
yep Dave in IL, youre right. $100,000-$300,000 year for life no matter what the market does……I guess that does “suck.” Are you kidding me? Post something useful next time. Or, lets keep paying brokers to guess at what the market is going to do and possibly……possibly come somewhere near those guaranteed returns….OR lose your retirement or atleast stunt its growth if there is a down year or two in the future. But you are a smart cookie calling me out on it being an ANNUITY. Shame on me for providing some real info.
Flip to the other side of annuities:
- Once you put your money, you’re locked in and can’t withdraw your money out without penalties. Should you have a financial emergency a year after you put the money into an annuity, too bad.
- For those who sell it, conflict on interest comes to mind. How can you meet a client who wants to invest without this little salesman on your shoulder saying “Sell them the annuity, it will make you more money.” No matter how ethical and client-focused you say you are, that “voice” will ALWAYS be there.
- 9/11 : the market took 57 days to return to the level it had previously been on 9/10.
- My wife’s a teacher. She has TRS. She also has a Roth IRA should the whole thing fall apart. I wish she could take her automatic deductions of 8% of her paycheck and invest it herself and control her own destiny rather than rely on a corrupt system. Sure it may provide for good benefits in the end, but only if she teaches for 25+ years.
- There are no guarantees without the risk in the stock market. That’s why every invester who comes to our FEE-ONLY firm must fill out a RISK-TOLERANCE questionnaire. Don’t fool yourself thinking there is a product with NO risk what-so-ever and a GUARANTEED return. Plus if you tell this to your clients - pretty unethical.
Anyway, I think we can agree that we disagree on this product - but as long as we’re awesome fiduciaries for our clients then I think we’ll both make it.
I bid you good day, sir.
CBB –
What is the commission for the annuity you are suggesting? And what are the annual fees as a %?
Any savvy investor knows the drag these fees have on overall investment return. And it’s NOT necessary to use commission based salespeople to guide your finances. It’s kinda like having the car seller choose the car you buy.
Your best bet is to go find yourself a reputable financial advisor, not one from an internet company, one you can actually go and see when you have questions. Have them put together a plan for you. You are in a great position and should certainly have a good portion in the market, not commodities. Buy quality companies!!! Now is possibly the best time to be getting into the market. Don’t get mulled by buying an indexed annuity that promises “all the upside of the market” they are so prominent because they are an easy sell from the advisor’s standpoint. They are expensive and they aren’t as great as they seem. (I’ll agree there are quality annuities out there, but you need to know all the facts first) Good Luck!
RS in Bridgewater….easy answer, depends on your age. Prior to 59 1/2, watch out for IRS penalties, etc. Unless you have to have it and set up a 72t. After then, many options depending on what you are trying to accomplish. All that changes is taxes.
Dave….In BOLD letters. It is an indexed annuity. When the market goes up, it trends upwards as well. When the market tanks like it has recently, those poor souls in alot of stocks and mutual funds lose. Remember after 9/11? 20-40% for some. This ANNUITY wont lose the return they had made the year before and the benchmark for the next year resets and automatically “buys” low. And for someone wanting guarantees and an income stream later, they are very good. Instead of bashing someone elses info, why dont you share an idea that someone may benefit from? Show me another idea that gives you those guarantees without the risk. I am waiting…….Let me know when you have an answer. Let’s see, teachers retirement are annuities and one of the strongest out there when everyone elses pensions, benefits, etc are dropping like flies or the market today. Annuities are only as good as the person that sells it to you. There are many out there that arent as good but to say they suck in general is just……ignorant. And as far as the comment “only for those that sell them”, tell me how your broker or advisor makes their living. I actually provide those products, too, but when someone doesnt want to accept the risk and wants a guarantee in these crazy times….Beat it. Please show me the way to. Otherwise, keep your throw away comments to yourself.
Could I see some more ideas on this? I also have about a million, but in an IRA, so munis don’t make sense. So what would you say to me if I want to use this for an income stream for life starting in 4-5 years?
cbb - How come in your description you didn’t mention the word “annuity” as that was the product you were talking about? Oh that’s right, because they SUCK!!
Except for those who sell them of course.
that is precisely where you should invest “lol”, the good thing is that the masses are going the other direction. if the masses were smart they would all be millionaires. if they were all millionaires then a loaf of bread and a gallon of milk would cost a million dollars. hopefully everyone listens to you so the rest of us can continue to get rich.
If I had 40 Mil, I would put in the safest investment and live off the interest. I currently live on less than 60K a year. Think I could do fine on a million or 2 and not worry about losing the principle.
yeah go buy a bunch of real esate in a declining market that hasn’t bottomed out. HAHAHAHA, matter of fact, go buy a few houses inDetroit ans Las Vegas and maybe the Orlando area. HAHAHAHAHAHA
welp ttyl
And on another note. Advisors hate this concept because it doesnt fit their plans, but there is a product out there right now that you need to know about. It is an indexed product with a guaranteed income account that grows at a minimum of 7.2% a year. At 49, a person who invested $1 million would at 60 be able to begin guaranteed annual payments of $118,000 for life. If they waited until 65, $184,000 for life and if they were able to wait until 70, $284,000/yr for life guaranteed. No matter what the market does. If it does better than 7.2% in a year then it would be even more. When they pass away, the remainder of the account is passed on to beneficiaries in a lump sum. Things dont have to be difficult, but Suze Orman and others would hate this plan. Too simple and not enough room for debate to sell enough books or fill enough air time. Just look at all the options and dont make things harder than they are. Who couldnt live of that much money?
How many of you are fooled by Suze Orman? She is a book seller. Nothing more. An average advisor could poke holes in her advice all day. Think for yourselves and make a decision based on the facts.
You’re 49 and you ask your mother how to invest $1M???
I am 42 and had invested (I think prudently) $1.4M with the advise of a trusted financial adviser. Diversification is the key to preserving and growing your capital reserves. I am invested in several mutual funds (large value cap US, small growth cap US/Overseas, investment grade bonds, etc), muni bonds, REITs, real estate, some individual stocks from my “play $$), and finally as an “angel” investor in a small start-up.
If I had that kind of money for investing, I would not be asking “The Expert” from CNN Money for his advice over the internet. I would open a managed investment account at a reputable financial services firm such as Morgan Stanley and seek the advice of a seasoned financial advisor. I would develop an investment plan depending on my financial goals and tailor a porfolio to meet those goals. I can’t believe that people actually are asking for investment advice over the internet. For more information regarding Morgan Stanley account, please visit the following website.
http://www.morganstanleyindividual.com/customerservice/gettingstarted/
Best advice that should have been discussed in this article with the limited knowledge you portrayed: Go to Vanguard or Fidelity and get a FREE financial plan, with a CFP! This is your best option and should be your only option! Majority of people can’t invest $100,000 by themselves you have a million. Even if you have to pay $1,000 for a CFP, it’s worth a thousand times over not to loose 50% of your easy million. As they say easy come, easy go!
mike from ca - if you think this person has done it and retired just by accumulating $1 mil, then i feel sorry for you, has anyone here ever heard of real estate? this is the best time to invest, putting the money anywhere else is crazy
Invest in foreclosure properties . Real Estate is all about location. At this point 1,000,000 can get you 3 nice condo in upscale south orange county in california and get you about $7,000 a month income and a secure way to double or triple your money in the next 10-15 years
Please ,please donot invest in Bonds and commodities. You may see a 10% gains and than a 50% loss..That cycle is at the top. You are better off investing in major techs. They will be here for centuries
Good Luck
10% in commodities - 100k generally represents the smallest initial investment for a “seasoned” CTA(commodity fund manager) that may be able to provide you with a 5 year track record - many will post 9% to 30% returns with top performers exceeding these returns..but do your research. you will pay a “juice” fee to initiate your account, fee may vary, up to 6% of initial investment i would guesstimate.
My mom has an MBA too!
I think you called Mr. Updegrave out on that one for sure.
What’s with all that anti-mom M.B.A. bias anyway Walter? It’s really palpable.
Amazing!
A person who made and has $40 million asks what to do with the money from a person who probably does even have a million.
Only in America kids!
Updegrave’s column was more than slightly condescending toward mothers. Implicit in Updegrave’s assumption is that no mother could have an M.B.A. Mine does. It would be interesting to know whether Updegrave has an M.B.A. I doubt it.
I’m surprised that Walter didn’t make a point about timeline — he assumes the questioner plans to use the money only in retirement, whether that starts tomorrow (unlikely, since 1M won’t last 30 or 40 years at most people’s need for income) or years from now. In fact, if the person planned to use the full 1M or some large portion of it in the near future, say, to buy his/her mother a home outright or to take the extended family on a major trip, then the safer investments would be the way to go.
For an relative safe portfolio I would say:
Minimum 10% up to 20% Precious Metals
10% Commodity Stocks
10% International Stocks
20-30% in some good mutual funds
Put the balance in bonds.
Taylor,
I agree that the woman on Suze Orman could live off of the dividends produced by the muni’s.
However, Suze didn’t qualify it enough. She didn’t mention anything about diversifying in the muni’s - what if she threw all $40mm into one muni and the municipality behind it went bankrupt? (This happened recently in California) Sure, as Suze is on TV she is not liable for her advice (per her disclaimers) - but that vague advice to someone with a large amount of money and then not telling her to seek professional advice is what sent me yelling at the tv.
BTW, did you here her saying anything about Estate Planning………? I don’t remember, but it felt like a half-a**ed answer by someone who is usually on the ball.
My 2 cents.
Dave,
I watched that Suze Orman and had to agree with her. Although it wouldn’t be the right choice for you or me, it was very clear that that caller had absolutely no idea what to do with her money. She also did not seem like the kind that needed anywhere near that amount to live or be happy. So in the case of the person having $40M, what’s wrong with very safe, very simple investments.
And Suze asked something like “Are you OK living on $2M per year?”
For alot of people, there is great value in simplicity and security. Not everyone’s needs and wants are the same.
To C. Hilliard:
Please share with us how you came upon $1 million to invest. With the saving rate as low as it is for most Americans, we all could profit by how you did it. Thanks.
Well, if I had $40M, I’d be tempted to put most of it in tax-exempt munis. It’s the old Groucho Marx-George Feniman joke:
Feniman: What are you invested in?
Groucho: Tax-exempt municipals.
Feniman: But bonds don’t pay anything!
Groucho: They do if you have enough of them!!!!!!!
You might consider allocating a marginal amount for high prospect foreign markets, like China and India. Do good homework and research, however.
Mr./Ms. Hilliard, congratulations, you’ve won the game, retired at 49!
When you’re this far ahead this early in the game, you don’t want to take on excessive risk, or you’ll find yourself a wage-slave once again.
My advice would be to go with about a 50-50 portfolio, 50% in equities and 50% in fixed-income, reducing the equity percentage about 1% per year as you age and do your quarterly or annual rebalancing.
The equities could be divided among diversified mutual funds in US value, US growth, and Developed International (like EAFE), you pick the mix.
The fixed-income could be a diversified muni bond fund in your taxable account or a diversified TIPS fund in your tax-deferred account or some of each. You can also substitute CDs for either of the above, as they are not sensitive to Fed interest rates. Interest rates are now very low, so you may want to stick with 3 to 7 year maturities until rates go back up, then lock in high rates with much longer maturities when the Fed has stopped raising rates in the upcoming next increase cycle.
Oh! Take care of yourself so that you can live long and enjoy your winnings.
If you take the $1,000,000 and invest it is a diversified, high-yield fund like Alpine’s AOD fund, you would have pocketed $160,139.70 in annual dividends for the year 2007. This money would have been mostly taxed at the low 15% tax bracket. You would still have your $1,000,000 capital growing and you would be looking at higher dividends as the market improves after the credit crunch crisis. Lastly, AOD is a diversifiend, closed-end fund that owns more than 150 individual company stocks.
If a person has a certain amount of wealth that is adequate, why take the risk and effort of investing in stocks?
One million may be worth investing to make it grow. But a person with $40 million who isn’t greedy, can live off the interest. Spend the time saved not worrying about the market and vacation.
“Your mom watches too much Suze Orman (she advised someone with $40m to be mostly in T/E bonds - I screamed at the TV for a while!).”
I hear you! But don’t blame Suze for this one. The priorities for investing $40 million are very different from investing $1 million. A person with $40 million can live comfortably on $1 million per year tax free for the rest of his life, but a person with $1 million doesn’t want to live on $20,000 a year forever. Suze would never have given this kind of advice.
Another very effective and secure, but little known avenue for investing for high yields is by investing in Trust Deeds. Individual trust deed investing is good, but you are tied to one deed. I’ve been investing in a high yield income fund (mortgage pool) for years and have earned a solid 10-12%, and by investing in the pool my risk is diversified through all of the loans in that pool. Most pools are state-specific, so Google ‘high yield income fund’ and see what comes up for your area.
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Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).
Brokers commonly refer to clients with $1M or more as “cash cows”. Milk em til they’re dry.