I'm a 20 year old guy who sold his company last month for $5m in cash. I really don't know what to do with the money or how to manage it. I never gave it a thought and now suddenly I have $5m. Hacker News, please help me out. Should I deposit the money? Buy stock? Or what the heck am I supposed to do with it? I am just a regular guy who spends around $3000 a month. I don't buy fancy stuff and now suddenly I have more money than I can ever spend.
Here is what I would personally suggest, having encountered a similar scenario once a long time ago...
Find a place to park about $4.9M in a CD, Money Market account, or similar ultra low risk location. Don't get too hung up on getting the absolute best interest rate, just find a place that will give you easy liquidity (ie: DON'T make a 5 year investment right now).
Then, buy and read the following books:
"A Random Walk Guide to Investing" - Burton Malkiel
"The Only Investment Guide You'll Ever Need" - Andrew Tobias
(and/or any equivalent titles that catch your interest).
Then once you have a good/better understanding of financial investments interview some financial advisors and talk to them in depth about how they plan to manage your assets. Ideally you're looking for something more along the lines of a "wealth manager" vs. a financial advisor.
Killing a year finding the right investment approach while your money makes even a very low percentage rate is, for a 20 year old, a better approach than rushing out and making possibly a bad investment that incurs a big loss, or has tax liabilities you don't fully understand.
In the shorter term, you should find a good local CPA-for-hire and make sure you understand any possible income tax issues. In some (many) cases, if you will owe a large income tax return you will need to pre-pay or make estimated payments. Not doing so can take a big bite out of your ass later (ref: portion above about keeping funds semi-liquid).
BTW, congrats on your success. Take it slow and don't be tempted to believe you know what you're doing or can repeat this easily (learned advice ;) ). You have much time and luxury to plan your next move, and no matter what anyone tells you, you are not missing out on the investment opportunity of a lifetime in the next 24 months and do not need to make any rash decisions.
At the same time, you should sort of off-handedly tell family and friends that you locked in to a great investment and in 5 years or so will be able to access some of the funds. This proactive approach is better than having to say no to all the outreaches for "help" and "personal investments" that tend to come with a large chunk o' cash.
CD rates are at 1% and are only FDIC insured up to $250K. I'm not convinced any bank will let you buy a $4.9 million CD. Although I'm sure brk is as smart as anyone I wouldn't take tips from random people on the internet.
Whenever these types of questions appear I find them a bit hard to believe. The anonymous OP suddenly has $5M in cash? There's just a un-cashed check for $5M hidden in the sock drawer? Where is the money now? As soon as you show up at a bank with more than $100K you're going to be swarmed with people suggesting various things to do with your money. Hasn't the OP already had to deal with all the tax and legal surrounding a transaction like this? He or she should be familiar with a flotilla of financial professionals by now.
Yeah. Unless you're going to Mom's Bank of Sheboygan, $5m isn't that big of a deal. I only have experience with 7 figure sums in corporate accounts, but even the bank teller at the supermarket isn't wowed by that.
If you tell a bank you have $5m to to put in CD's they'll wet their pants alright, but it won't be security they call. It'll be their boss to gloat. (Unless maybe you bring it in in $100's in a duffel bag.)
Credit ratings are BS. It's as if we didn't learn anything from watching the disaster that occurred when the world believed AAA-rated MBSs were sound investments. Don't let someone else tell you what investments are "safe".
That sounds impressive and popular with all the 'the market doesn't work/they're all corrupt' type of outrage currently doing the rounds, but the failures of ratings companies to correctly rate highly complex debt instruments doesn't make them all useless.
The fact remains there are a lot of simple, understandable securities which the ratings companies are across and have a long history of payments to look back on. I'm talking about corporate bonds where you can assess the creditworthiness of the company, government (non-US) bonds of stable and credit-worthy nations that pay much more than 0-1%
You can buy Tbills directly from the Treasury at http://treasurydirect.gov/ Lower rates than a CD, but safer if you are worried about your bank going belly up (if you own a Tbill, the US Govt would have to go bankrupt for you to lose your money).
Just be careful with wealth advisers. I have heard more than one story about people losing their inheritances and stuff because of advisers. Also people who lost 100K+ by investing in the stock market by themselves.
I've come to the opinion that there really is no way around getting a little bit savvy about investing oneself. Until then, I would probably also stick to something fairly conservative. Or at least decide on a basic split into risky and less risky investments.
I'd recommend Ben Graham's "The Intelligent Investor". One doesn't have to buy individual stocks, or follow the strategy proposed in the book, but books like these will keep you from doing something dumb like, say, buying into the S&P 500 when its P/E is >30, and give you some perspective on and a valuable defense mechanism against all the stupid investment advice out there.
The Intelligent Investor is good, however, it's a bit dated. It's from an age when values could be found by carefully checking the companies books (and or paper files) and finding it owned a utility that had a book value worth more than the stock of the owning company.
Even Graham has said that for most people a low cost index fund is the way to go. Competing against a computerized/connected/inside information Wall Street is very hard and because of transaction costs (higher to the individual than the institution) winning stock trading strategies are non-trivial.
The risk involved to start a business is time and money. You take one year off as a high paid engineer your losing over 100K. What if you need to boot strap your business because venture funds aren't available. The risk is low if you coded something on your spare time and somehow got a huge amount of VC funds(CD style investing). Wise investments are key to success of any business. How will you allocate your first millions in VC funds. Are you going to invest in staff, equipment or acquisitions. Sure you will have advisers at this point but it's important to understand the value of investments. If you are not surprised I would imagine you view the majority of start ups as the former kind I mentioned. Spare time and lots of vc money. I don't have any evidence to say that isn't always the case but it would appear odd to me if it was.
It's also a site frequented by people working salaried jobs and moderately successful freelancers who will never, ever see more than perhaps $100,000 in their bank accounts at any one moment for their entire lives.
Thus, we may be thinking of it in terms of "how can I use this money to invest such that I can live off of the interest for the rest of my life, getting the equivalent of a decent salary but without the actual work"? If I got millions of dollars, this would be the first thing I would be thinking about, not about how to risk it all just so I can be another greedy douchebag unhappy with their single-digit millions.
> I'm surprised that the ultra conservative advice got voted up on a start up geared website. I would have thought I'd see more risk taking from the users
The "conservative advice" is intended to buy him time so he can figure out what he should do.
Note that startups aren't about seeking risk. They're about exploiting cases where the perceived risk is greater than the actual risk. The advice givers think that his perceived risk is currently lower than his actual risk. They're trying to reduce the latter.
Yes, you are 100% correct. What I was trying to say is that overall he is better parking the cash and learning more about how to properly invest a large sum of money vs. just going out to the closest Edward Jones office and plunking down a check.
It would hardly be a sacrifice, it would be an opportunity to learn about investing and wealth management in a non-rushed manner while you carry on with the rest of your life more or less however you like.
Questions like this one puzzle me, not least of which because I was recently in a very similar situation, and it never in a million years would have occurred to me to ask HN for advice. I mean, I love you people here, honest I do, but when I need legal advice, I go to my lawyer. When I need medical advice, I go to my doctor. And when I need financial advice, I go to my financial advisor.
You don't have a financial advisor? Well, I assume you have a lawyer, and I assume you have a banker-- ask them for recommendations. You might also ask the pros who were on your board of directors prior to the sale.
You don't have a financial advisor? Well, I assume you have a lawyer, and I assume you have a banker-- ask them for recommendations. You might also ask the pros who were on your board of directors prior to the sale.
I wouldn't assume any of these things. Did YOU have a lawyer or financial advisor when you were 20?
The OP reads as if it was basically a 1-man shop sale. If he sold a company for $5M that had a board of directors and all the typical formalities, it probably would have been VC or angel backed, and the terms of the deal for a $5M sale would have probably netted him $500K at best. Let's face it, almost any investor-backed equity event of $5M is pretty much a failure and returns little if anything to the management team.
So, I read this as a "guy in a basement" sort of scenario who managed to create some webapp, service, or widget pretty much solo and was wise enough to be able to flip it for a nice chunk of change.
I also happen to think he was smart for reaching out here to get broader advice. I've met TONS of financial advisors that can't manage funds for shit. Not to mention in the current market a lot of funds are down, and I'm sure he would have no trouble finding a bad financial planner or lawyer that would love the opportunity to manage the portfolio of someone naive in that regard.
I didn't have a lawyer or financial advisor when I was 20, but I also hadn't closed a $5M sale, either. And when I did so (at a more advanced age), I certainly did.
It strains credulity to imagine that anyone, of any age, would be able to close such a deal without a lawyer or a banker being involved. (And believe me, when you show up at the bank with a $5M deposit, you get introduced to financial advisors, like, fast.)
Seriously: just the practical mechanics involved in the sale of a corporation requires a small team of professionals. No one hands a check for $5M to a "guy in a basement" without some due diligence, and that involves accountants, auditors, lawyers and bankers.
A banker and a bank-account are two different things.
Pro-bono lawyers aren't going to be pro-bono for long when they figure out you can actually pay them. That doesn't really help his cause though.
The serious lack of any understanding with regards to how difficult a situation not having responsible parents that give you a serious leg up is betrays both your youth and your own upbringing.
I'm not attacking you, I'm just saying that it pays to remember that not everyone has all the options you do available to them. Certainly not to the extent that it means they would never see the benefit in asking HN for advice.
I was just going to say almost exactly this. The problem is that your financial advisor's purpose is probably to make money, which he or she probably does most efficiently by separating you from yours through fees. A few minutes ago I recommended the book The Millionaire Next Door, which points out how fees can quickly kill your returns, which can't beat the market over time anyway.
You have a major principle-agent problem with financial advisers, and that's why I suspect many are better off without, especially if they can find an investment column in a newspaper or something like that. Years ago I read a guy named "The Coffeehouse Investor," which helped me enormously, as did the books I recommended previously.
Your post contains no information and bears no insight. Why are you posting it? Simply for the joy of contradiction?
There's nothing an half-rational person can't do that your garden variety financial advisor can. If you can build a business, then basic ETFs, mutual funds, and bonds are easy to understand, and if you want to move into individual investments or private funds... you should not be relying on a financial advisor for this. If you think otherwise, I have some stocks I'd like to recommend. And a shady commercial real estate deal that will net me a fat commission. And a bridge in Brooklyn.
Legend has it there exist good financial advisors--but you have to find them. "Delegating" this because you "don't want to do" this is entirely the wrong attitude. If you don't take responsibility for your money, it will go away. It's 5 million freaking dollars, probably the entire net worth of this person, and the fruit of his business which he built.
since it's a brand new user it's probably bullshit, especially when you remember that it's next to impossible to sell a company as a cash only deal. There is always an earn out/stock play, to make sure the buying company isn't buying a lemon
I don't want to ignore your comment, but these were generally private sales, and the private part implies a certain amount of trust and non-disclosure.
I know this probably doesn't do anything to convince you I'm not full of shit, so I apologize for not offering concrete details. If you stop and think about it though, there is a lot more private money out there moving hands than you might think.
The flip side of this is that at 20 something he may not have those relationships established, or may not be sure about the lawyer/banker he's chosen. There also seem to be quite a few people here that have been through similar circumstances and may be able to offer advice. In my own experience in my early 20's when I suddenly came into a large sum of money I had a good financial advisor in the sense that he helped me make more money from my investments in the short term, but I had no long term strategy. When the bubble burst I lost a lot of money. I also didn't have a good tax strategy and ended up with some very large unforeseen consequences of my decisions. Then there were the people looking for handouts and investments in their "amazing ideas." I lost every penny I put into investments or loans, though I was smart enough not to expect to see any of that money again.
The best advice I would give is to be quiet about how much money has been made. Find a good CPA and wealth manager. Talk about long term strategies, be sure to look at tax issues up front. People will come looking for hand outs and investments, avoid those for the most part. Make sure you trust your advisors and fully understand the decisions you are making. Don't take specific advice from somewhere like HN, try to look at patterns that may emerge from that advice however. So far it seems like everyone is advocating a conservative approach.
Unless your financial advisor is rich from investing themself then no, DON'T talk to a financial advisor. All they will do is try and sell you stuff to get comission.
Seriously just learn about it yourself. My favourite book is "The Richest Man In Babylon" and it a phrase similar to yours: Don't go to a plumber to get bricklaying advice, go to a bricklayer, so don't get advice about your money from someone who isn't rich himself.
Now if your financial advisor is rich, what is he doing working for you?
I have a suspicion that this is not true... or at least is just for the purpose of bragging. But the replies at least could be interesting. Here's mine:
At 21 I came into a pretty useful 6 figure sum, essentially through good luck and timing. At that age you're used to living on a shoe string (especially if a student like I was) and so that can seem an extraordinary amount of money. I'd say it's a pretty scary age to become affluent, you may have grown up in the last couple of years since leaving school but it hardly counts as worldly.
I spent about £30,000 within a couple of months before I stopped and thought about it properly. So the first piece of advice is: avoid too much temptation! That can be hard and I still have trouble controlling impulse purchases (Amazon Prime is the worst invention ever :P my book buying budget is still about £300/month, and I've actually worked to get that down).
As to what to do with the money; while plenty of HNers will be able to give you advice (hopefully from experience!) the other posters are right - you need to talk to a financial advisor.
My take? Put it somewhere safe and take the interest - then just ignore it. If you want to take the $5M and do something with it (i.e. start a firm, pursue your dream) then do that. Otherwise I advise ignoring it and just carrying on with your career how you want - albeit slightly more comfortable/financially secure. In 5 years when you want a nice house the money is there and ready. etc etc.
Certainly having money is going to change you; but I'd suggest it needn't change your life path too much. Don't let it derail what you want to do :) allow it to facilitate those things!
This is pretty much what I have done and it sees to have worked. YMMV.
Now, to business.. If you sold company stock, and live in the states, you now owe about $1m in taxes, or a little less depending on what state you live in.
Your very first job is to sit down with an accountant and get your 2010 taxes estimated. Then set aside the money for this. Seriously, do it today. Then lock in your head "I sold my company for $4m." It will help you in the future days to remember that.
If it was an asset sale, you got f-ed, and now owe a lot of tax money. Live and learn.
Next, let's talk about 'more money than I can ever spend'. If you keep your current spending rates, and you keep your money in a completely 'safe' vehicle that exactly matches inflation, you have about 94 years of spending ahead of you at your current rates, and at 15% cap gains tax on the 'earnings'.
It is nearly psychologically impossible for a newly minted 20-something millionaire to keep at their current level of spending. Since you do not already have a plan for this money, I would say that it is 100% likely you are not the sort who can go about his business without some change in lifestyle. So I would suggest that you expect either to keep working or get good at investing.
Along with the books recommended here, I would strongly recommend you pick up one called "How To Retire Early and Live Well on Less than a Million Dollars." It's written by a financial writer who decided to do what the title says in the 1970s. He talks through a number of items and considerations that financial advisors will not think about. Simple example: what's the proper amount of real estate leverage for someone who needs some income, and wants to be able to hold on to the building in a real estate crash? This is not typically discussed in most investing books.
It is not unreasonable, based on all this, to put almost all of this money into a one year, low-risk, locked-away investment just to give yourself time to think, plan,and get on with a new part of your life.
Now, if you built this company up, and are now unemployed, expect to be depressed. You should consider (along with some celebrating) doing some fun things (I like to travel), and also learning some new skills.
You will need some new friends, because your old ones will all still be working,and won't be able to hang out most of the time. You might want to find a new hobby, or pick up an old one.
Put 30% in VTI - the Vanguard Total Market Index (basically all US stocks).
Put 30% in EFA - the Europe, Australasia, Far East first world country index.
Put 10% in RWR - an index of U.S. real estate.
Put 10% in RWX - an index of international real estate.
Put 15% in Treasury Inflation Protected Securities.
Leave 5% highly liquid.
Minor variations on this are fine. The key is invest in broad market indices, diversified among stocks and real estate, domestic and internationally, with a bit of cash set aside for rainy days. Any other strategy involves speculation (trying to be smarter than the market), and unless you think you really know what you're doing, you shouldn't speculate.
Sorry, I have to take issue with this approach. You're tying 60% of your total assets to the market indexes of countries that are likely to decrease in value over the next several years. You're tying 20% to real estate indexes that are also extremely overvalued.
You're young. Stick it in a money market account or something safe for a few months until you can get some real financial advice.
Personally, if I had $5 million I would probably leave it in money market and safe CDs until this period of global deflation and low interest rates is past us. I would wait until the inevitable inflation that is coming in a few years, and when interest rates are over 10% (hopefully), put a couple million in fixed annuities that will pay out monthly for the rest of my life, put 1-2 million in safer investments, and invest the other million in risky stocks with a high potential payout.
That way, I have guaranteed income for the rest of my life from the annuities, enough to live off of, and can hopefully see some better returns from the rest of the money. A good financial advisor can give you a better strategy.
It doesn't take a genius to see that Europe is in a deflationary spiral right now, with Greece and Portugal leading the way. Why would you want to bet 30% of your portfolio against the trend of Euro/Dollar weakness?
Being able to see the future isn't enough for a financial bet. You have to be able to see the future before other people with money. If something is sufficiently obvious, it will already be priced into the market.
In other words, a financial trade isn't a bet on your insight. It's a bet that your insight is sharper than the person on the other side of the trade.
I don't buy fancy stuff and now suddenly I have more money than I can ever spend.
When you're young and/or of average means, you mostly think of money as something to spend for either the necessities or luxuries of life.
But past a certain scale, another important function of money comes into play: money signifies control/ownership. These amounts can't be spent; they are instead placed in assets -- and if placed and steered well, more control is earned.
It's confusing because the two functions -- spending and controlling -- are denominated in the same unit, dollars. But the dollars of a billionaire -- deployed in assets -- and the dollars of a thousandaire -- deployed for daily needs -- aren't even serving the same social function.
They are still intrinsicly convertible: you can give up control for consumption, or vice versa. But anyone who casually observes about someone else, "he has more in assets than he could ever need, some should be given to others" is in the grips of this confusion -- because as much effect the redistribution will have on consumption, it will also have on control. Ceteris paribus, it will mean transferring relative control to people with more of a consumption mindset than a control/expansion mindset. Done too much, this 'eats the seed corn' for future wealth.
Park your money in a few diverse investments and take the time to change your conception of money, because if you stay in the usual "how can I spend this" mindset, any amount of windfall can be consumed or frittered away. Become comfortable with the idea your windfall is not a consumption bonus, but a control bonus -- giving you a slightly disproportionate say in how societies' wealth should be deployed so as to keep delivering, rather than deliver once and disappear.
Although I have only 50K that I want to set to work, I'm facing the same basic question. However, given the current economic climate, I think sound advice is impossible. The usual safe advice, park it somewhere 'low risk', is virtually useless, as nothing is 'low risk' at the moment. Banks and complete countries are on the verge of collapse, which makes savings accounts, deposits and bonds risky. Something reasonably stable, like gold, also has problems: unless you have the stuff physically in your posession, the investment may turn out to be worthless, as the one that owes you the stuff can't deliver. And should the worst happen, than even gold physically in your possession may be worthless, because: who will take it, when its value is unclear and everyone wants food and fuel? The nutritional value of gold is pretty low.
If the world turns into a mad max apocalypse, we're all fucked anyway so why care where your money is? 50K is barely anything, just leave it in a bank account. (or buy a cabin far away from everyone, if you really think society is going to collapse)
I doubt it'll be a fullblown apocalypse, but I think there'll be a period of unrest, after which civilization will soon reestablish itself. If you manage to invest 50K of your money in something tangible that is considered to be of value in that period of unrest, you'll have a much easier time surviving it.
For us, 50K is enough to survive for at least three years, without requiring any kind of austerity. I certainly don't call that 'nothing.
Given the state of things right now, I'd park your money somewhere secure and live off the interest. Then learn two disciplines : real estate investing and stock market.
Don't turn your money over to a financial advisor, unless they are personally referred by someone with a lot more cash than you. Any advisor you can afford is no good to you because you probably have more cash than them. By all means take advice, but don't blindly follow it and don't turn over control of your cash.
Learn a specific part of the real estate business that attracts you, and steer clear of single family residence homes. With that sort of cash you should be in multiple dwelling properties, or commercial retail, industrial or office buildings. The real estate market is dead and dying a bit more, so in the next couple of years that plum bargain is going to turn up, and you can be johnny on the spot, if you have done the study and learnt what is what. One good commercial property investment and you and your future family could be set for life with a healthy tax advantaged income and growing asset base.
With the stock market, I see a lot of advice here to approach the market, I would do so with a very limited amount of cash, certainly less than $50,000. If you lose that consider it a quality education on the perils of the market.
Learning to be an investor is like any other field and just because you win big in business doesn't make you an automatic whiz at investing. Capital protection is now your number 1 priority.
Oh, and if you're single, don't tell prospective girlfriends about it. You want to know which ones like you for who you are, not your bank account.
Oh, and if you're single, don't tell prospective girlfriends about it. You want to know which ones like you for who you are, not your bank account.
I read an article on HN the other day about signing a contract with a third party entity, that states if you do not sign a prenuptial agreement, when you meet that prospective mate and decide to get hitched. Then said third party is entitled to half of your current net worth.
It is a poison pill, but one that they have to swallow. If you are not married, I would consult a lawyer about setting up that contract with a parent, sibling, best friend or me. The good part is it gives you an out without being awkward when the time comes, you can use the:
"My parents begged me to do it, because they where concerned about my partying with rock stars, the coke and running with the wrong kind of girls, and at the time I had not met my one true love, It's no big deal because we are going to be together forever, right?".
I was in a similar situation recently. The best thing I did was to find a VERY GOOD investment advisor who handles my finance. By very good, I don't mean Madoff good, I mean somebody who doesn't promise the moon and really knows what he's doing.
The problem is that 99% of these people are jackasses and have no clue what they're doing. Ask rich people around you who they use and interview a few of them. Only go with someone you feel 100% comfortable with.
I would also advise you not put all your eggs in the same basket. And put some money aside for your next startup!
I'd imagine hiring a good financial planner is like hiring a good programmer: it takes one to know one. Are you sure your financial planner is so good? How do you know? Gains aren't necessarily a signal -- Madoff produced "gains" for his clients for decades.
I'd decide where I wanted to live and buy a house that I could see myself living in for 10 - 20 years for cash. Probably wouldn't spend more than 2m on that, perhaps quite a bit less.
I'd put the rest into a money market fund for the time being--low return, but very low risk, and I'd take 18-24 months to travel and see the world and figure out what I want to do with the rest of my life.
Figure that you hit the jackpot--you'll never really need to work, other than to stave off boredom--take a little time and determine how you want to spend the rest of your life. Don't worry about missing current opportunities--there will be more, especially for someone who's already had a successful exit.
Cultivate a solid understanding of the exponential function?
In all seriousness, congratulations. Seems like a good problem to have. I don't have a lot of advice, but if it were me, I would avoid trying to leverage the money too much. It might be a good way to turn $5MM into $50MM, but it's also the best way to turn it into $0.
The utility of a lot of extra money is likely to be low for you.
Buy a few houses/condos near your local University campus and rent it out. Rinse and repeat. :)
Spend a few grand to renovate, put lock on each door etc. and just sit back and watch the money come in. (not much sitting back really, you need to make visits, collect checks etc) but still..
On average students pay $500-700/month for school housing and most of those are in homes with multiple house-mates to lower the rate. There's school all year round, no shortage of students.
You don't even need to buy the house outright inc ash. Put a modest amount as down payment to lower the interest, and pay for it with all the rental income.
Trust me this works. I was one of those students and the landlord was a 26 year old cop who had enough common and financial sense to do this with very little money down. He earns $3500-4500 a month in rentals, depending how many people you can legally (or illegally) fit in the house.
Congrats! Don't forget to look after the most important people in your life, and set aside a percentage for good-will and charities.
In my opinion since you don't know what to do I'd do the following.
1) Go on holiday and chill out sit and mull things over. It doesn't have to be over the top or anything
2) Forget all this reading books crap, whats the point they will in most cases be dated advice, better you go talk to someone and get some advice maybe from a few people not just one so called expert wealth manager.
I think for someone your age you should think about
a) preserving your wealth
b) building a portfolio of investments albeit a small one just to start off with (a % you'd be happy to lose in the very worst case scenario)
c) you're a founder so possibly think about starting another company
But in all seriousness, take a holiday, I think you deserve it.
I'm an independent, fee-only wealth manager, so take this comment in stride . . .
The answer is "it depends".
If you truly have "more money than I can ever spend", then you might not need to take much investment risk at all. While you're only 20 years old, you can still go through the exercise of thinking about what you want your future to look like in terms of goals, objectives, dreams, etc.
Of course, if/when a significant other comes into play, things change. Even more so with children.
Whatever you do, don't lock yourself into anything -- you don't want to paint yourself into a corner.
Do you have an interest in another startup? This will impact your liquidity and ability to take risk elsewhere with your finances.
If you really don't buy fancy stuff and can live within your means, don't let anyone talk you into anything just because "you're young" or any of that bullshit.
If you want help from a professional, interview at least 5 candidates, all of whom should come from recommendations from friends, family, board of advisors, etc.
Bottom line. . . it's your life, and you only get one shot to make the most of it. Your need to take risks with your money is only dependent upon what you want to do in the future. If you have big goals and/or short time-frames, this might call for more risk. However, if you have modest goals and longer-term time frames, you might need to take little or no risk, but be sure to take taxes and inflation into account.
This is a challenging topic to address online because the answer is and should be highly personalized based on your own situation and preferences.
There was an article a year or two ago on SFGate or the SF Chronicle about Google's what Google did when their set of early employees vested. Their first 1000 employees' stock options were all worth over $1M if I remember correctly. They paid a number of investment advisers come in and give talks on what to do with the money. They all suggested index funds.
Unfortunately, if you took that advice back in 2000 you're probably still underwater.
Index funds are great over long period time frames like 25+ years, but as always, you need to time your entry and exit strategies. Index funds work great overall for 401k and retirement funds because you're buying in every month so fluctuations up or down help you out. Just don't stick 100% in an index fund in the middle of an overvalued bubblish market.
Hire a professional. You have the money now so you can afford one. So you don't get taken, I would ask around for suggestions. You could also call up Vanguard they offer financial planning for people with that amount of money. With them, you don't have to worry about ulterior motives because of their corporate structure.
- It's not as much money as you think. That might sound ridiculous to people without it, but you're not going to start living the Entourage lifestyle on 5m. You are 20, not 60 and it's unlikely you will ever get a higher return on an investment. It's your duty to protect and grow this wealth.
- You can't stop working, I tried and failed. Take some time off, travel, find a new passion or start over with a new company. Your life is just beginning.
- I'd suggest reading about Value Investing. I'm not saying you should invest your own money, but you damn well better know what's going on with it and why. Understand that inflation will eat away at this without the proper defense. Understand the ramifications of investments: liquidity, taxes, cash flow, etc.
- Keep a low profile, people are going to come out of the woodwork for lunches/pitches/loans/gimmicks. Be polite, but be stern (the answer should almost always be no).
- Get a good local attorney and a good accountant ASAP, an afternoon of research should point you in the right direction. Talk to them about asset protection plans.
- Stick with what you know (assuming it's computers). People are going to suggest all sorts of things, but do you really want to be a landlord, run a Subway, own a carwash, etc? I'm not saying you can never go in a new direction, but be careful. It's about 1000x easier to lose a fortune than make one.
- Buy yourself a nice, not extravagant house. Treat yourself to something "fancy" (say a slightly used BMW, not a Ferrari) and the rest goes away. Set a comfortable monthly budget, DO NOT GO OVER THAT BUDGET. Make a spreadsheet of your investments, get a Mint account, find leaks and plug the holes.
- Invest your money in a mix of stocks/bonds/treasuries. Spread the stocks across different markets (US/China/Asia/Japan/Europe), it should be about half of your asset allocation. Keep about 5% accessible.
- Stick with your friends and family, be careful with girls and sign a prenup.
When you get on a sum of money quickly, you lack the neccessary skills to manage it. And you will blow it quicker than you think, because there are many toys out there. So invest your time in learning how to manage a larger sum of money, and you will be able to increase it quickly.
if he really did sell it for $5M, and assuming they didnt load him up with an earn out or an escrow (which is unlikely) then after taxes (because he was proly too dumb to do an 83b election) then he'll get hit with 35% federal, and probably about 10% state, depending on where he lives.
so that leaves him like $2.8M, and say he's conservative and invests in muni bonds, he'll get like 3.5% after tax every year, so that's like $100K per year.
of course, he would still want to buy a house and maybe a car, and depending on where he lives, that could eat up $1M or so, which would knock him down to about $60K a year in income, which is not bad, but not exactly a wealthy lifestyle.
sit down with a copy of Rich Dad Poor dad. Do you live near a college? Is this a good college? If so, look into buying a few houses around there and rent them to students, and if you can, buy adjacent houses when they become available.
Say you buy 2 houses for $350k(random example for bloomington, In, can be much less.
I'd buy these in cash, which goes against everything you will ever read about total leverage and all of that, but then you can buy two more houses and put 20% down other two as collateral if they require it(they shouldn't), so you have 4 houses at the cost of 2.4 houses, which means you will be collecting a lot of rent. Since you have 4 houses you are depreciating as they are investments, that income will probably come in right around being tax-free as long as it is something around $1.2m in property so like $45k/ish a year income, if not more.
Then you buy up a few houses with this income, maybe you can get 3 houses in a row, then maybe you can build a row of townhouses you can rent(cheaper to maintain)
So that's just an idea, arguably better than letting it sit in an account, and you are buying something that has a relatively high demand, student housing.
Other housing also works, but students are better to deal with.
So you're making a bunch of money off of 1.2m of your 5m and if you ever have to sell or get money out of those houses you could borrow against them or you could sell them outright.
Problem is, the amount of work it takes to maintain a group of rentals is huge. My old landlord did this instead of investing in the market, and it turned out way better for him in the long run, however he works his ASS off maintaining, finding tenants, evicting, fixing stuff after bad tenants etc etc. Doing it in a college town? It's asking for $3k in expenses every year as a new group of party kids move out/in.
Don't jump into landlording without having experience with contracting and home repair, or at least without a family member that does. A single rental is fine, but managing five? Huge time sink.
"So what to do if you want to invest your money ? What to do if you want to end this year with more than you started with ?
Simple, avoid risk.
Risk is what Wall Street lies about every day. Risk is what they try to sweep under the covers knowing that we all are addicted to the dream of financial freedom. Risk is the poison that is masked by the commercials."
Start an Incubator. Help other people like you make money from their ideas.
Take a million dollars and rent an office space in some big city (Toronto is a good option). Post on HN that you are starting an incubator where you give $30k to help fund startup costs. Housing is provided. Food allowances, etc...
total cost per startup would run around 50K giving you enough to help start 20 companies. And the potential to make money is there so it might turn into a revenue stream.
If I ever ran into that much, I would probably get into a sort of low amount angel investment with a small slice of it. (After putting the bulk of it in the more sensible forms of investment.)
I don't have enough fingers to count how many low key projects I have tried to start that have never achieved fruition because of my lack of other skills that I would need to pay someone to do, but didn't have enough money to pay for it. (Stuff like art, or audio work).
I'm not talking that stuff like million dollar angelling that those guys do in California, I'm talking $5k to $10k or less. With the project I am on now, I'm trying to get the $10k minimum from the Intel App-Up program so that I can pay an artist to make some art, a voice person to do some speaking, and a "blank" to do some "blanking" (saying this would give away my idea for an app missing from it). I would pull a loan, but I'm already $30k in the downside from a previous side business that was more physical product heavy that failed and is going to take me a few years to pay off.
But if I ever hit my dream of making it to not having to work for someone elses dream as day job. That would be what I would do with my money.
Hire a professional financial planner to build you a long-term financial plan. By this, I mean somebody with a CFP (Certified Financial Planner) designation. Most CFPs can also make investments for you and will charge you a percentage based on your assets. At your wealth level it should be <1% annually. There may be a small charge for building the financial plan if you don't end up using the investment services.
I'll plug the guy who taught my CFP course, Jeff Ratizner:
I am not going to give you the "this is what you should do advice" because it is your money and you really need to figure out your goals, but for me personally, I would pick up as much prime real estate as possible while keeping a good portion liquid. Oceanfront residential, land not houses.
The point is, this property is always in high demand and even though it fluctuates with the market and did burst with everything else, prime real estate is always worth the same relative to the broad market of consumable goods. Which is really what you want to measure by (if you are only looking to protect your net worth), economies will inflate and deflate, as well currency and debt backed assets are a horrible way to keep net worth (its a good way to get rich quick, if you know what you are doing). Take gold for example (a true asset) it was once said that "an ounce gold in the 1800's would buy you a nice suit, and today an ounce of gold will still buy you a nice suit" the economy has changed but the worth is relatively constant.
That is the crux of what you are looking for if you are just trying to protect your net worth. If we look at it in a simple analogy x piece of property is worth y horses. x property may be worth $100 at current market and y horses may be worth $10 at current market, but general x property is worth y horses. It may vary slightly but the two stay relatively in sync.
This is how you need to think about assets and protecting net worth not in terms of dollars. When you do this it makes the picture of investing far simpler (for inflationary hedging and protecting net worth).
Now if you are looking for speculation to try to increase net worth then it is a whole different ball game and requires educating yourself extensively because as it was said before financial adviser really have no incentive to make you rich. If that is what you are looking for advice on the best advice is don't take any, you have to educate yourself and by all means start small.
Figure out how much you really have after taxes, fees, other reductions, etc. Keep it in a safe bank account (i.e. the bank will not become bankrupt and your money will disappear; no matter where you keep it, make sure it doesn't vanish) Then sit down and figure out what you want to do. Others have already provided a comprehensive guide to immediate tasks. I think it will help to define a purpose for this money. Your modest living should help greatly; just make sure you don't take purely financial risk with the money (like becoming an investor disconnected absolutely with what he's investing in).
Some personal suggestions of mine include starting another company that you have passion to start and fund. It seems that you won't waste money, but it goes without saying to start as though you has no money at all. If you start anything whether it's a non-profit or company, start immediately with what you need. Ask if you can start with the least you have. Read REWORK by 37signals. (this book will provide invaluable experience) Read Getting Things Done by David Allen. Not only will it help to organize yourself, but refocus yourself on a 50,000 feet level and realize what you want to do with your life. The book can prompt internal self-actualization, but you have to be the one to figure it out. (though their workflow coaching can help setup your system for the first time, you can do it yourself too) Some of this advice, you probably know already, but this can be a refresher.
Ask yourself questions! Feel that you want to help other in your community? Do that. See an incredible opportunity on the horizon? Do that. Work with what you have a passion for.
I hope others on the internet and I have been able to provide sound ideas for what to do. Whatever the case, you already came this far. I wish you the best of luck in what you plan to pursue, and hopefully you'll be able to benefit our world and yourself. Make sure that you make the decision you know are the best for you. Personally, please use the money constructively...help someone with it if you don't know what else to do after making sure you have enough for the rest of your life.
Personally, I would buy pay off my mortgage and buy apartments/homes for my siblings/parents and still have money to spare. Being that you are only 20, you probably don't know where you want to live yet but that said, I bought my first place when I was 21. The way I looked at it, my family had always been renters and so buying was a good way to pay myself back for my housing expenses.
After considering a real estate purchase, I would simply park the money in liquid CD's while I consulted and interviewed a fair number of advisers. Don't jump in bed with the first fancy adviser who comes along.
This is a difficult decision that can take a while to sort out. Even consulting professional can take a while. So my simple rule is this.
Take 10% of the money and put it into an easily accessible account you can use day-to-day. The other 90% put in a high-interest account and forget about for 12 months.
You can then use that 12-month period to decide what you want to do, but safe in the knowledge, in this case, you have enough money readily available to live and not worry about bills. You also have the bonus of a nice lot of interest added to your sum next year.
Everyone here might think I sound crazy but giving other people the opportunity to help other people is about the most rewarding thing a human can do. You have start up experience, help other start ups looking to help mankind get on their feet. You'll start a chain reaction. You can be as idealistic as you want, but on one condition. Don't ever invest more than $20,000 per person. You want to get someone on their feet so they can get 2 other people on their feet and so on and so forth, you don't actually want to invest.
There is already lots of good general advice here, so I'll give you some very _specific_ advice: place a few million with Mohnish Pabrai ( http://www.pabraifunds.com/ , though you'll need to contact them as an accredited investor before you get access to the website). I spent a lot of time researching him and his way of working, and have not regretted it. Long term, Buffett-like approach, very sensible and fair.
First, do some math. Assuming no inflation, you have 138 years worth of money. Come on, you'll splurge some, have a friend that needs help, give to charity, have some unexpected bills, and have inflation. So it's not really more than you can ever spend. In your shoes, I'd think about what I wanted out of life, and use the cash to subsidize getting there. Don't try to make it last forever-- just try to obtain your goals.
I would (and will) go for platinum. It's like gold, in that it's bullion, but the mines that produce it in Africa are getting hosed by local governments. It also has more industrial uses than gold, and most importantly, it can't be salted without other precious metals. I'd go for physical delivery; it should come to a few hundred pounds. I'm all in in gold, and trying to switch to platinum.
Yes, there is quite a bit of detail in there for them to talk about.
I'm not really interested about the details, as I do not have the same problem. My advice is to find similar people who have been there, reach out, and ask them to explain what they did and why. I would use at least one example, maybe several.
This seems like a better use of time than trying to become an expert on managing finances. You still might (probably) will have to do quite a bit of this, but first things first. Figure out where the big rocks are.
Put half with Goldman Sachs and half with Smith Barney. Tell them both what you are doing. Make it a competition. Tell them that within 5 years you will choose a winner based on returns. You will soon be making over $400,000 a year in income, if not closer to $750,000 if you go aggressive.
At this rate you can fund a startup every 6 months as an angel.
This is the punchline as I remember it of a joke I heard many years ago (in bubble 1.0 times) that started "How do I get funding for my start-up in the Silicon Valley? -- Step 1: go and kick a tree ..."
I couldn't get Google to dig up the original joke. Anyone has a reference or cares to re-tell it?
The key is to create a cash flow with your windfall. Something that will sustain you permanently. There are many ways to do this. You may want to allocate a chunk (say 20%) to use in high risk investments but the rest should go into rental properties, or cash flow type businesses.
Pay your taxes ,
Put 75% away for long term needs
- High interest accounts
Use 25 % to enjoy what you earned on medium term needs like
- Paying loans off / Credit cards
- Paying off your car
- Maybe enjoy a treat /holiday.
They have about the most realistic view of the world around. (Read: matches my biases. ;-) Seriously, their founder, Bill Bonner (and his main side-kick, Addison Wiggin) have written a couple of NYT best-sellers that were prescient about the current and past crises.
I also like the fact that they mostly hire St. John's grads, people who've actually gotten something close to a real education.
Back a few years ago when I had money to invest ;-), I used a couple of their newsletters (Penny Stock Fortunes and another I forget right now) over the period of a year or so and (though "the plural of anecdote is not data") made about 40% on my medium-sized investments.
Have you ever considered investing in an organization that specializes in micro-finance? The potential to do good and impact impoverished people with even a small portion of your recent earnings (congrats, by the way!) is incredible.
A high-level summary of micro-finance is the issuing of small loans (often just $100-$200) to small groups of 3-4 extremely poor people. The borrower then uses that previously unattainable capital to purchase supplies and equipment to open their own business.
A classic example would be a poor woman in rural Mexico. Her husband works in the fields and they make just barely enough to get by and feed their kids, there's no capital left over even in a good season, and therefore no way to get ahead. If someone were to offer her the opportunity for a micro-loan, she would have a chance to overcome that barrier of extreme poverty.
The lender of the micro-loan would have the woman find another two or three of her friends, and they would form a borrowing group. The borrowing group puts together their aggregate financial needs, and a loan is issued to the group. The purpose of the group is accountability and camaraderie, and receiving additional loans is contingent on every member paying back their loan on time The group will meet together once a week with the lender and pay back a small portion of their loan plus interest over the course of 6 to 8 months.
Upon receiving the loan, the woman would buy a large pot, supplies, ingredients, and a table, and begin making and selling tamales out of the front of her house. She'd make enough to cover her own living expenses and pay off the weekly loan repayment amounts, while improving her own quality of life and gaining confidence.
This extends credit to people who would have never qualified under the existing banking system, and I have story upon story of people's lives who were absolutely changed by what we would consider an absolutely trivial amount.
I don't do this for a living, but I firmly believe in it, and will be putting that belief into practice within the next year.
Sounds like a great time to become an angel investor in the market that you're familiar with. Join an angel group, spend 6 months learning your way around before you make an investment. Spend the first five years making small investments, but don't lead rounds, rather find successful angels who you respect and trust, and join rounds that they're funding. At least, that's what I would do.
Because there's an endless supply of oil to make plastics with? I think it will be hard to drag the price of plastics up to match the price of crude as it runs out. Would be interested in an economists view on this though.
Maybe you'd want to be an angel :) I'm a co-founder at a company that is growing very fast and we are looking for some investors. The company is incorporated in Hong Kong so it's very hard to get VC. If you'd like to hear more, add me on Skype (o-lalonde) (sorry for the shameless plug)
Consider acquiring a new hobby: buying and selling real estate. In this environment it's not hard to get good deals if you have the cash. I've bought over 20 properties in at courthouse foreclosure auctions in conjunction with other investors, and all I have is $1M or so. I've sold 8 of them, and average 30% returns over 6 months.
And it's not hard, it just takes patience and time. Get a good agent and start small, 50 to 100K per deal. Buy AT LEAST 30% below market value for flips, or aim for 2% of the property's value in rent per month for rentals. Read biggerpockets.com. Most deals on the MLS are market price and not worth it. Never buy at market price.
For example, 16143 CAMINO DEL SOL, Los Gatos is being auctioned off RIGHT NOW, as in Thurs 5/27 11:30 AM. It's 3 bed 2 bath 1700 square feet built in 1955. Its estimated at around $1M but bidding is starting at $650K at the Santa Clara County Courthouse. I bet someone's going to get it for 700 to 800K or so and flip it.
For now, leave the money in a bank or Vanguard low-risk bond fund (see www.vanguard.com) and don't do much of anything with it. Read a lot until you understand what you're doing. Don't trust any single source of advice, and don't trust financial advisers. Their interest is often in high fees and is often opposed to yours.
Finally, remember that no one can beat the market over the long term. Anyone who claims they can should be doubted (although they'll undoubted say that I should be doubted. The difference is that I have Efficient Market Hypothesis: http://en.wikipedia.org/wiki/Efficient-market_hypothesis on my side, and they have... promises).