How To Invest 10 Million Dollars
Engaging in hypotheticals can go one of two ways: you either end up feeling like you’ve wasted a bunch of time talking about something that would never happen, or you spend 20 minutes reveling in a dream-like state. For me, I generally like engaging in hypotheticals. Call me a dreamer (or a typical millennial) but it’s nice to think about fixing the education system, becoming POTUS, falling into a ton of money, being a big time CEO, etc. One thing that I like to think about is how I would invest if I actually came across enough money to finance my independence for the rest of my life. So, today I’m going to be discussing how I would invest 10 million dollars in a wide range of different scenarios.
There are a few questions we have to answer, though, before we just jump right into the investment side of things. Those questions are, in no particular order:
- When am I going to die? (wow, morbid much?)
- What is risk?
- What would my goals be if I came into this kind of money
At the end, I’ll give you some pretty specific asset allocations that will line up with the answers to these three questions.
Morbid and important – When am I going to die?
This is arguably the most important question that needs an answer when talking about the longevity of your money. Now, it’s not easy to think about, I’ll grant you. But you need to have some rough idea of how long you want the money to last.
Keep in mind that you’re probably not going to get it down to the year. I’d also argue that you’re better off to have it extend further. That way, you’ll have at least some money to left over to your kiddos/loved ones when… well, you know…
Up until you’re 30 – Pile on that risk
Let’s call it out for what it is: you’re young, you have very few real financial obligations, your family is small and not needing things like hockey gear/dance outfits/college educations. You may or may not have a mortgage, and you may or may not have little urchins running around that deserve to have a parent with life insurance.
So? TAKE. RISK. Which means you should be 90% in stocks, and more if you feel like you can hack it. For example, right now, all my investments are in stocks (lots and lots of them). Right now, my asset allocation is pretty straightforward: I’m 50% in American stocks (an S&P 500 index fund), 30% in small cap stocks (another index fund) and 20% in foreign stocks (to get me a piece of that diversification). For right now, I’m ignoring bonds, real estate, and other investments. Yes, there are probably diversification benefits that I’m missing out on. But right now, I’m concerned about piling on as much risk as possible before I’m 30… becaaaaauuusseee…
30 years old – 80/20 split
If you come into 10 million dollars at some point in your thirties, I would start adding to the bond side of things. At this point, it’s not because you’re going to be spending the money soon. It’s really just to start getting that diversification up, and to start smoothing out the crazy rides that can/will occur in a stock only portfolio.
So, out of the 80%, I’d still keep 40% in American stock index funds, 20% in small caps, and 20% in foreign stocks. As for the bonds, I would just have 20% in some smaller company bond funds, something rated investment-grade, but probably not AAA rated.
40 years old – 70/30 split
At this point in your life, investing 10 million dollars becomes more and more about making money each and every year at the expense of achieving the highest returns possible. You’ll probably be hitched, have a couple of younglings, a mortgage, and maybe even a business to run.
So if I had 10 million dollars to invest at 40, I’d have 35% in my American stock index fund, I’d put 20% in foreign stocks, and 15% in small caps. This would be the point that the increased returns of small caps are probably not going to be worth the additional risk and volatility.
On the side of the bonds, I’d probably have 15% in “small cap” bonds, 10% in larger cap bonds, and have 5% in real estate. Again, mostly for the benefits of diversification. But a nice benefit is that there will be a lot more regular income, in the form of interest and dividends, in this portfolio than the previous two.
50 years old – 60/40 split
At this point, you’re approaching retirement time, which means you’re 10 million dollars should be well balanced between stocks and bonds. After all, we’re getting to a point that we care more about income than we do about growth. Well, most people would. Obviously, your situation is going to be different than mine.
The 60% split in stocks would be 30% American stocks, and 15% for both foreign and small cap stocks. 15% isn’t really going to give you a huge increase in returns, but the hope is that this is going to prevent any one grouping of stocks from ruining the returns of the others.
As far as the bonds are concerned, I’d probably do 10% in bonds for big companies (AAA rated), 10% in bonds for smaller companies (slightly less than AAA rated), 10% in municipal bonds, and 10% in real estate. Here’s the reasoning: the bonds in big and small companies will not only allow for different exposures to different risks, but practically guarantee that you’ll make some money. As for the municipals, the income from those bonds isn’t going to be taxed, which will be important as I/we/you move into retirement age. And the real estate provides both awesome diversification benefits AND income that’s needed at that point.
60 years old – 50/50 split
Alright, at this point you’re looking at retiring in a few short years. That means you’ve got to be pulling in enough income to live off of, but still maintain enough in riskier assets like stocks to keep the portfolio beating the rate of inflation.
My 50% split of stocks would be 25%/15%/10% between American stocks, foreign stocks, and small caps. Again, the goal is to maintain enough growth to beat inflation at this point.
As for the bonds, I’d split my 10 million dollars in a 20%/10%/10%/10% between AAA bonds, less than AAA bonds, munis, and real estate. $5 million split up that way would provide more than enough income for 98% of the population of the United States.
Quick note on asset allocation
There are lots and lots of studies that support the fact that asset allocation is responsible for 90% of the difference in returns of portfolios. That means if you want to make more money, and keep your risk minimized, then proper asset allocation is the best way to go.
But that doesn’t mean that I sat down with the data, filtered out the different stocks and bonds, computed the necessary variances and standard deviations, and ran the risk and return profiles of each portfolio. I’m a finance nerd, but I’m really not trying to put you all to sleep. Really, I just wanted to give you a rough idea of how I would invest 10 million dollars, if I ever came into it. I’m sure that there are mathematically better ways to optimize the portfolios, and if I didn’t work 60 hours a week, I’d run them.
But for now, these are just estimates to shoot for. 🙂
How to invest 10 million dollars – The Wrap Up
So there you have it! If you ever wanted to donate 10 million dollars to my cause, you’d know exactly how I would invest it at every stage of my life! But in all seriousness, these are pretty good allocation numbers to try to hit. You’ll get a lot of the diversification benefits because of the exposure to different industries, and you’ll see a small bump in average returns as well!
Buuutttt with all that being said, I’m down to hear what you think! For those CFPs and asset allocation wizards out there, how do you think I did? Are these portfolios well adjusted for risk, or are there some tweaks that need to occur? Or did I just do absolutely perfect? Let me know below!
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