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Ask HN: Steady 4-5% on $5 million?

78 points| rumpelstiltskin | 16 years ago | reply

I recently inherited a little over $5 million. I don't have exorbitant dreams of penthouses or private planes so I'm not looking to turn this amount into $50 million or anything. Instead, I'm looking for ways to generate a steady 4-5% annual return. I have meetings set up with tax/financial advisors later this month, but I wanted to ask the smart people on HN -

What would you do to generate a steady 4-5% annual return from $5 million?

106 comments

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[+] pg|16 years ago|reply
The returns you can get at a given risk are unfortunately not something you can dictate. E.g. I believe safe municipal bonds are now returning around 3% after tax. If you want to get more than that you have to buy bonds with a higher risk of default.

But if you put all your assets in bonds, you risk getting burned by inflation. Over the long term, stocks have higher returns than bonds. But over short periods they can have disastrously lower returns. So experts generally advise you split your assets between stocks and bonds depending on how soon you need the money. The usual advice is to put 100 - your age percent in stocks. E.g. if you're 20, to put 80% of your assets in stocks. But of course you'd have to put more in bonds if you need some of the money to live on.

The one question no one seems to talk about much is what to do when you have to invest a large sum at once, as you do. If your age implies you should put 70% in stocks, does that mean you should put 70% in stocks the next day? What if you're buying at a market peak? So whatever percent you decide to put in stocks, I'd bleed it in over a reasonably long period. Simulations would tell you how long a period; I'd guess years.

[+] diego|16 years ago|reply
That question is addressed A Random Walk Down Wall Street by Burton Malkiel (which the OP should read ASAP). If I remember correctly, he suggests figuring out a decided asset allocation and then buying into it over the course of a time period (say 20 months), on the first day of each month.

In this case, that would mean investing 250k per month. The idea is that if you buy a fixed amount dollars worth of whatever, you get more of it when it's down and less when it's up. The idea is to get at least the average of the market over 20 months and avoid being burned by a crash (of course, you might miss out on a market surge). By doing it in a methodical fashion you avoid the temptation of trying to time the market.

[+] bokonist|16 years ago|reply
Over the long term, stocks have higher returns than bonds.

What makes you think that is true? We simply do not have enough data to judge. Books like Stocks for the Long Run use incredibly poor methodology, because they left companies that failed out of their indexes ( http://gregmankiw.blogspot.com/2009/07/stocks-for-not-so-lon... ). And when we have reliable data, for the past forty years for instance, stocks have not necessarily had better returns. If you include other countries in the analysis, such as Japan, then the long term superiority of stocks looks even more suspect.

And of course, past data is not predictive of future performance because the nature of investing changes (changes in corporate governance, changes in shareholder accountability, too much "dumb money" entering the market due to 401k plans, etc). Dividend payout rates, for instance, have declined dramatically, and dividends are a major component of returns. So maybe stocks did perform better in the past, but will not in the future because of lower payouts.

Stocks may perform better in the next thirty years or they may not. There is no substitute for studying the market, understanding what is driving the returns, and making a judgement based on the current times.

[+] jeromec|16 years ago|reply
> E.g. I believe safe municipal bonds are now returning around 3% after tax. If you want to get more than that you have to buy bonds with a higher risk of default.

I heard California bonds had jumped because of debt/credit problems, and recently mentioned the option of buying such bonds to my parents who asked a similar money management question. They both cracked up laughing. I told them their reaction illustrated why our state had such borrowing problems. I would not have seriously advised getting the bonds but apparently they yielded annualized tax-free 4.7%. (http://latimesblogs.latimes.com/money_co/2009/06/californias...)

[+] Retric|16 years ago|reply
While I agree that increasing your stock to fixed income ratio as you grow older is a good idea, the 1% more each year seems to be based on a shorter lifespan. At 60 there is a reasonable chance you will be alive in 35 years so you still need to be fairly aggressive or inflation eat your nest egg. Also a major issue with bonds is taxes which can significantly impact returns.

The other major investment issue is fees which can dramatically reduce ROI over your lifetime. Do the math on what 1/2 of 1% will cost you ~13% of your returns over 30 years. 1-((x-.005)^30)/(x^30)) It works out to around 13% for most reasonable ROI.

[+] timdellinger|16 years ago|reply
Investing over a period of time instead of all-at-once, in order to diminish the effect of market peaks and make sure you hit some of the valleys, is called Dollar Cost Averaging. I think the reason no one seems to talk about it much is because it's a relatively rare occurrence that someone suddenly has a large lump sum to invest. Most financial talk is about more common personal finance scenarios. That said, there's lots of discussion on dollar cost averaging, which, like most things, is easier to find once you know its name.
[+] joshkaufman|16 years ago|reply
I'd use Harry Browne's "Permanent Portfolio" allocation - it performs as well or better than other passive portfolios while experiencing far less volatility. Here's a detailed analysis of historical returns: http://crawlingroad.com/blog/2008/12/22/permanent-portfolio-...

It's also simple enough that you don't have to pay a tax/financial advisor exorbitant fees to manage your money - you can do it yourself, saving a lot of money in "wealth management services" you don't really need. Remember, you're a financial advisor's dream come true, and they'll try to sell you everything they can.

Here's a review I wrote of "Fail Safe Investing," Browne's book: http://personalmba.com/review/fail-safe-investing/

Here's more solid supporting information: http://crawlingroad.com/blog/2010/02/06/permanent-portfolio-...

Hope this helps!

[+] barmstrong|16 years ago|reply
Thanks for posting this, hadn't heard about it before and looks like a good fit.
[+] jakarta|16 years ago|reply
I'm working as an analyst at a HF, here are some thoughts:

1. First, be aware that most financial advisors make their money by charging you fees. These can come in a variety of ways, some will take a simple 1% off the top, others will try to persuade you to invest in CDs and other products like mutual funds -- the actual returns on these vehicles may be mediocre and the advisor may earn fees for selling you the products.

So just be aware that their incentives may not be aligned with your goals of wealth protection.

2. Decide if you want to be a passive or active investor.

Passive investing means putting your money into index funds. John Bogle of the Vanguard Group has a series of books out on the topic, there is a slim one called The Little Book of Common Sense Investing. -I'd recommend reading some of his work.

Active investing is more difficult. To be honest, most people simply lack the time and effort necessary to invest intelligently in the market. They wont know how to read a balance sheet yet will buy the stocks of companies that they are familiar with. This is sort of like driving blind and it is not something I recommend. -If you want some I'll suggest some books for this area, but like I said, it is something that requires a big commitment from yourself.

[+] rumpelstiltskin|16 years ago|reply
If you want some I'll suggest some books for this area

Please do. Thank you.

[+] zupatol|16 years ago|reply
I'm in a similar situation as the original poster, but with less money. I have been thinking about passive investment, but I live in Switzerland, so I wouldn't want to have all my money in Dollars or even Euros. So if I want passive investment, I first have to take the active decision of what part of my money I invest in which currency. It's probably not a good idea to have everything in a swiss franc index, this would mean a big exposure to very few big swiss companies.

Do you have any idea if there is a 'passive' way to choose between currencies?

[+] portman|16 years ago|reply
With all due respect, I think you're asking the wrong question.

(a) Think of investments like a function with two inputs: risk and return. You've picked a desired level of return but haven't identified a desired level of risk, so by definition nobody can recommend an investment strategy.

(b) There's no such thing as a "steady 4-5% annual return from $5 million" for any meaningful definition of "steady".

(c) Where did 4-5% come from? Without understanding the thought process that went into those figures, it's hard to make any suggestions.

If you want to get the most out of free advice on HN, I think you should rephrase the question along the following lines:

"I recently inherited a little over $5 million. I am Y years old. I plan on working until I am R years old and expect to live until L years old. My current monthly expenses are M1 and I expect those to grow to M2 over the next 10 years. I want to use my inheritance to ______. What would you do with the money?"

[+] barmstrong|16 years ago|reply
I think this is nit-picky and unnecessary.

He is saying he wants the appropriate level of risk that would come with 4-5% return. There isn't anything unclear about it.

[+] smeatish|16 years ago|reply
I disagree with portman. Investment is a function of one input - risk OR return. If you follow the diversification strategy of portfolio theory, then you will generally be choosing a multiple of the market beta http://en.wikipedia.org/wiki/Beta_(finance) Your risk tolerance dictates an expected rate of return OR your desired rate of return dictates a variance of return. Of course these are averages and YMMV, but over a 30 year period there IS something approaching "steady".

I think your question is perfectly stated, and gives an investment advisor all the information they need to choose an asset allocation.

[+] jakarta|16 years ago|reply
portman makes a good point.

Usually, targeting returns is kind of a sucker's game. That's not to say that it is impossible to achieve the kinds of returns you are looking for, but rather that it creates a mindset that ignores risk.

The poster should first try to think of his $5M as money that stands to decline in value as the frictional forces of inflation approach.

The goal here should not be so much targeting 5% returns but at least initially, preserving that $5M. It's not as simple as parking money into gold either, because gold itself fluctuates based on when you buy it. Yes, people have lost money by purchasing gold in the past, at the wrong times.

TIPS aren't great either, because the calculations used by the government often understate inflation.

So to me, when I see questions like this I often advocate scrutinizing the individual's current personal finances and then doing like portman says with projecting goals and expenses. Then, you look at investing and target how to invest with the appropriate time horizon.

[+] steveeq1|16 years ago|reply
Good quote from Warren Buffett: > You only have to do a very few things right in your life so long > as you don't do too many things wrong.

I agree. You don't have to be too bright to be a good investor. In the long haul, you'll be ok if you don't do something stupid. So aim for loss MINIMIZATION rather than profit maximation.

Also, the markets are very, very tumultuous now and I believe it will get worse. The federal reserve just pumped a massive amount of US dollars in the system and the long term effects of this will be a staggering amount of inflation. So in my opinion, you should invest in assets that are not denominated in US dollars, such as gold bullion and other commodities.

Beware of commodities that are traded fractionally. Meaning they sell you more of the commodity than they actually have.

Finally, diversify, diversify, diversify. Don't put all your eggs in one basket. Beware of mutual funds that are diversified but charge exorbitant rates. Index funds have the same amount of diversification but at rock bottom prices.

- Stever

PS If you are worried about a major market crash (as am I), you might want to check out the Black Swan fund: http://online.wsj.com/article/SB124380234786770027.html .

[+] deyan|16 years ago|reply
Quite frankly I am surprised by the tone of some of the advice here. I see the point for informing yourself, but following it should undoubtedly teach you to never try to beat the market and "do it yourself" - unless you plan to make this your life.

Instead, I would shift the advice slightly to: inform yourself, find someone who knows this kind of stuff and give them your business, trusting but also verifying them. Far too many people think they can build that one model which guarantees success only to be burned. Granted, using a professional can still get you burned (uncertainty is a fundamental principle of our life and universe) but you at least increase your odds.

[+] nostrademons|16 years ago|reply
The problem with using a professional is that you have less information available for choosing professionals than you do for choosing stocks. If you pick one and he gets good returns, was it because of luck or skill? If he gets poor returns for the first 5 years, is it because he's investing in good values that are overlooked by the rest of the market (a long-term winning strategy) or because he's investing in the hot stock of the month that gets dumped soon after (a long-term losing strategy)? It's really hard to "verify" performance when that performance depends upon so many factors outside of the professional's control.

With individual stocks, companies are at least required to give a detailed report to the market every quarter. It's a lot of work to keep up on all the information that may be relevant to a company's performance (some would probably say it's impossible), but at least the information is out there. That's not the case when you're looking for information about a financial professional's performance.

If you really don't have time to spend on this yourself, I'd recommend passive investments. Index funds, treasuries, munis. When you buy an index fund, you're basically hiring the services of all financial professionals, everywhere, to do your research for you. And paying a significantly lower fee than if you'd actually hired one.

[+] barmstrong|16 years ago|reply
I agree, I think this is perhaps a better question: how can I find a competent money manager?

As many other posters (correctly) pointed out, typical money managers may not have your interests at heart.

[+] gonepostal|16 years ago|reply
Just wanted to point out the fact that most of the advice here will be biased (not negatively). Most if not everyone here has one financial goal in mind asset growth.

You on the other hand, shouldn't have that as your only goal. You have a huge sum of money and you should be thinking about capital conservation. What happens if hyper-inflation kicks in? What happens if the American economy spirals into depression?

People with high networth have to plan for these things. That is where a financial advisor is actually useful. They might not be able to make you alot of money (because if they could they would be already rich by doing it with their own money) but they can help you preserve the wealth you already have.

I would recommend that is a line of questioning that you should definitely go over with anyone that is going to advise you on your new found wealth. It would be best that they bring it up with you without you having to mention it.

[+] crawlingroad|16 years ago|reply
I run the site listed below on the Permanent Portfolio approach and saw all the hits coming in from this page. First let me say that if you want 4-5% a year you need to earn probably 8-9% a year. That's because you'll lose 4% or so just to inflation and taxes.

Next, with that much money you will have many people that may want to take it from you. So go out and get an umbrella insurance policy that covers your net worth to protect against ambulance chasers.

Also, you're going to have relatives and long lost friends coming and asking your for money for all sorts of things. I suggest you harden your heart and learn to tell them "NO" right now before you get burned. If you want to give them money, then make it a gift and not a "loan." Those types of loans are never repaid and if you are expecting them to be re-paid and they aren't it will ruin your relationship.

Now for actual investing advice.

First, you don't want to do anything stupid and lose that money. So be VERY conservative in your investment decisions. You do not need to risk 10-15% a year returns because you already are in the top 1% of net worth in the country at this point.

Second, most financial advisors do not have your best interests at heart. They will sell you expensive products that generate fees for them and probably underperform the market. So your best choice if you want exposure to stocks is to just buy a low cost index fund and not get into the stock market trading game.

Third, you will want bonds to work as fixed income and I'd only buy Treasury bonds as they have no credit or call risk. You don't save enough in taxes usually to make the risks of munis worth the price of admission. IMO. During the credit crisis in 2008 Munis went DOWN in value, but Treasury Bonds were up almost 30%. That tax savings people thought they had went out the window when the market panicked.

Fourth, you should have some hard assets for inflation shock insurance in your portfolio. Gold works best. IMO. It doesn't produce interest or dividends, but it can go up like a rocket when stocks and bonds are suffering.

Finally, you should keep a slug of cash sitting around to help you ride out market storms and support yourself so you don't have to sell assets out of desperation when they are down in price.

So I do think the Permanent Portfolio allocation would be a good choice. It gives you growth with an average CAGR of 9-10% the past 40 years. It gives you protection with the worst loss being in 1981 when it lost about -4-6%. It gives you stability because it won't have crazy swings in value. Lastly, it gives you control over your finances so you don't need to use a money manager and pay exorbitant fees.

For now, you may want to park that money in a very safe Treasury Money Market fund while you make your decision. They pay almost no interest, but it's better than jumping into something and losing your shirt. Don't let the financial advisors you're going to meet pressure you into expensive and dumb investment products. And, BTW, that's mostly what they're going to offer you.

If this sounds like too much to handle, then just go to www.vanguard.com and contact their money managers. They charge a small fee each year but will not do anything dumb with your money and their index funds are well run and cheap.

[+] paul|16 years ago|reply
This seems like some of the better advice here.

In general, most common investment advice is bad because it understates risk (e.g. telling people that the stock market will perform well over the long term). The truth is that it's difficult to get reasonable returns with low risk, but that's not what anybody wants to hear because they "need" higher returns.

[+] bokonist|16 years ago|reply
You don't save enough in taxes usually to make the risks of munis worth the price of admission. IMO. During the credit crisis in 2008 Munis went DOWN in value, but Treasury Bonds were up almost 30%. That tax savings people thought they had went out the window when the market panicked.

If you're investing for the long term, you don't care about temporary panics, the price will just come back up again ( which is what happened: https://personal.vanguard.com/us/funds/snapshot?FundId=0043&... ). Coming out of the worst financial crisis in many decades, corporate funds and tax free funds have performed pretty close to Treasuries over the last ten years. ( Compare https://personal.vanguard.com/us/funds/snapshot?FundId=0043&... to https://personal.vanguard.com/us/funds/snapshot?FundId=0083&... to https://personal.vanguard.com/us/funds/snapshot?FundId=0028&... ). If you figure the worst of the defaults is over, then corporates and munis are probably a better buy now. Of course, since interest rates are so abnormally low, buying any kind of long term bond or bond fund may not be a very good idea right now.

[+] bjoernw|16 years ago|reply
The problem with working in Gold or other commodities is that you can only prove a correlation based on past performance. Stocks and bonds on the other hand are inherently negatively correlated because of what they are. Gold is a highly volatile commodity and there is no guarantee that it will continue to be a useful inflation hedge.
[+] Dove|16 years ago|reply
This is the best advice in this thread, and what I would do.

Particularly the advice to park it in a Money Market fund until you are confident you know what you want to do.

[+] kingkongreveng_|16 years ago|reply
> Treasury bonds as they have no credit or call risk

Arguably not 100% true anymore. Some people are buying insurance on treasuries these days.

[+] mos1|16 years ago|reply
Here's the problem: anybody who is actually professionally qualified to help you will be ethically obligated not to do so in this forum.

As an example, I am a CFA Charterholder, and off the top of my head, I cannot give you advice for the following reasons:

1) I'm not familiar with your investment experience.

2) Your return objectives are unclear. Do you really just want a 4-5% return (and perhaps a 1-2% draw?) or are you looking to withdraw 4-5%?

3) Your risk tolerance and your understanding of various risks is unclear.

4) I have no understanding of any other financial goals you may have, such as intent to protect wealth in case of divorce, or intent to transfer wealth to children, etc.

5) I have no understanding of what your full financial situation is, and what your current portfolio looks like. Is this $5m all you have, or do you already have a variety of assets?

6) I have no understanding of what level of liquidity is required of your investments.

7) I do not know if you have any specific objectives, mandates or constraints. These could range from a desire to move to a particular country, to engage in a particular business, or to weight a particular sector more heavily when possible.

8) I do not have the ability to accurately and clearly communicate investment information via an internet forum comment. Doing so requires presenting you with the information in a manner that is clear, easy to understand, and where you have the opportunity to ask questions and allow both of us to be sure that you understand what is being said as well as what is not being said.

9) Any over-simplified recommendation I made for you would fail a test for diligence and adequate basis.

To be frank, I can see NUMEROUS problems with much of the advice given here (in particular, a lot of people are advocating strategies that carry serious risk, but are NOT disclosing that risk, nor accurately explaining how to hedge against it. there is also a lot of misrepresentation about the performance of various investment vehicles on this page), but I cannot be more specific without breaking my professional code of ethics.

I hope you take my warning seriously, that the advice in this forum comes, almost necessarily, from people who are not qualified or experienced with these matters. I do not want your business, and I am not soliciting it. I just don't want you ending up in a bad situation because you mistook a well-composed and well-intentioned internet comment for advice that is right for you.

I've seen way too many people lose way too much money because they didn't fully understand the ramifications of an idea.

----

edit: I want to give you some advice, so let it be this: educate yourself. Treat it as a serious, full-time job. Don't think that reading a few books (or a few blogs) aimed at a lay audience is adequate. You might consider taking the CFA examinations, just so you can competently audit any advisors or managers that you hire to assist you.

You are in a situation that can make not only your life better, but to also improve the lives of your loved ones. Real education will help you determine if your advisors are doing what's best for you, and long-term, will make it easier to confident that you have outsourced the handling of your investments wisely... or if you decide to do it yourself, that you are doing so with a reasonable understanding of investment.

Please be careful.

[+] skennedy|16 years ago|reply
Without realizing the dreams of a penthouse or private planes in the immediate future, I would suggest you act like a 20 year old making their initial 401k contributions. Invest aggressively. Investments regularly hit 10-15% annual return. The downside is your investments are almost entirely tied to the unpredictable stock market. But in 10-15 years, you can cash out larger portions without touching the principle.

If you want to play it safer with the 4-5% return, there are safer mutual funds to invest with. Less risk and less returns. But for arguments sake, will 4-5% cover the inflation you experience as you grow older?

[+] olegkikin|16 years ago|reply
1) What about buying property and renting it out? It requires maintenance and oversight, but it will most likely generate much more than 4-5%.

2) You can lend money on sites like prosper.com. If you spread your money of hundreds/thousands loans, it's pretty safe. I've seen some numbers somewhere, people were sharing their success/default rates, it's not that bad.

[+] mikedamas|16 years ago|reply
A few comments on the Permanent Portfolio (25% Gold, 25% Stocks, 25% Bonds, 25% Cash):

1) Cash is simply a bond - very short-term, but a bond. So, since the 25% that is in bonds is, presumably, a fund, they usually have a duration (interest-rate sensitivity) of around 5.0-6.0 (roughly equivalent to years). Add-in the same 25% allocation to cash (duration around zero), and you have a 50% bond allocation that is of duration around 3.0 - that is reasonable and happens to be the duration I target. However, 1) since I use individual bonds, I do not have the problem of realizing losses during rising interest-rates (laddered maturities, held to maturity), and 2) I manage the bond portfolio to capitalize on changing yield compensation for risk along the three dimensions of bond risk: credit, interest-rate (duration), and timing-of-cash-flow (ex. mortgage-backed securities) to achieve better fixed-income portfolios.

2) Gold of 25% is quite risky. A brief look at the historical volatility of Gold returns will show you that having such a large allocation to an investment class with such a high standard deviation increases portfolio volatility too much. Secondly, it is very difficult to determine when Gold is relatively "rich" or "cheap", because, unlike all other non-commodity investments that we all invest in, we cannot apply simple discounting math to either a) measure the market’s yield compensation for the risk (as with bonds), or b) measure the price relative to expected earnings/cash-flow (as with stocks) - Commodities have NO cash flows.

Last thought: What has been a better risk-adjusted hedge against inflation, Gold or 3-Month US Treasury Bills? Check it out. When inflation actually happens (not just inflation expectations), interest-rates rise -- that is not spurious correlation, that is just rational market behavior.

[+] bokonist|16 years ago|reply
Secondly, it is very difficult to determine when Gold is relatively "rich" or "cheap", because, unlike all other non-commodity investments that we all invest in, we cannot apply simple discounting math to either

Gold is a natural currency. Going long on gold is a bet on the collapse of the U.S. dollar as reserve currency and a fall back to some sort of international gold standard. In such a case, it's price will go up by 10-100X. If the U.S. tightens the money supply and returns to more responsible fiscal and monetary management, the price will drop dramatically.

The 25% in cash seems really high, especially for someone trying to live off $5 million. Such a person might want $50K in a savings account, but no need to have much more.

What has been a better risk-adjusted hedge against inflation, Gold or 3-Month US Treasury Bills? Check it out. When inflation actually happens (not just inflation expectations), interest-rates rise -- that is not spurious correlation, that is just rational market behavior.

In many cases (not always) inflation happens because of government subsidized credit expansion. Because loans are subsidized, you can get high inflation but low interest rates. This was the case from 2003-2008.

[+] nkh|16 years ago|reply
I say the following with great respect. I do not know much about you or your circumstances, but I do share the same opinion of inherited wealth as a lot of great American business men. For example:

“The idea that you get a lifetime of privately funded food stamps based on coming out of the right womb strikes at my idea of fairness.”

- Warren Buffett

And more importantly. “Great sums bequeathed often work more for the injury than the good of the recipients.”

-Andrew Carnegie

In The Millionaire Next Door (1996), researchers Thomas Stanley and William Danko conclude that lifetime and testamentary family gifts are both a disincentive to work as well as a disincentive to save. Their findings show that the more dollars adult children receive, the fewer they accumulate, while those who are given fewer dollars accumulate more.

While you may just be looking to "keep the nest egg safe" with a 4-5% return. I urge you not to drift into a life where you play it safe and do not contribute to society.

While you should protect your money and not do anything foolish with it, don't let it ruin your opportunity you have. You are one of the luckiest people to ever live. You have been given a lifetime of wealth at one of the most exciting times ever to be alive. While 5 million may not be a lot compared to Paris Hilton, I assure you it can be good enough to fund something truly worthwhile. Take Darwin for an example, or look at what Bill Gates is trying to do.

So while I doubt one comment on HackerNews could ever change your mind if you are already "spoiled", I urge you to stay apart of the HN community (and other communities of ambitious "doers") and find a way to contribute to a project that could really help the world.

[+] reasonattlm|16 years ago|reply
These are unusual and unstable times. There are no easy low risk strategies that require little thought any more. Even being in cash bears unknown risks nowadays. So talk to the usual sources advised by other people, and find the place to park your capital that makes you happy. For now.

Then put aside $50k. Use that $50k to learn to trade the market, and learn to read the market. Accept that you're going to lose it, and be happy that you have enough money to play with to trigger all the fight or flight reactions that you have to learn to overcome. It'll take you three years to wrap your head around it. It's a challenge. Aim to find a mix of the known low-risk trading strategies that can work for $5 million and for which 20%/year is more than reasonable. e.g. trading the ES opening gap.

Everything else is either (a) trusting people and pot luck, or (b) not much better than a high interest back account, or (c) a lot riskier than it used to be given present geopolitics.

If you want something done, you have to do it yourself.

[+] puresight|16 years ago|reply
1. Don't expect to be able to "bank" money and get a 5% annual return; in 2010, 5% is too high of an expectation for an autopilot. But check out TIPS http://www.treasurydirect.gov/indiv/products/prod_tips_glanc...

2. Get a financial education, really, because nobody cares more about your money than you. In fact, few really care very much at all, and 80% of money managers under-perform the S&P 500 index. So invest in YOURSELF first. Be very picky about your professor; make her or him someone who has successfully managed money before, not just an dime nerd. One of mine is Bernie Schaeffer, whose writing on expectational (sentiment) analysis was groundbreaking. http://SchaeffersResearch.com/

3. Capital preservation must always preclude capital appreciation; always look to how NOT to lose money and the making thereof will happen.

4. Making a return on investment requires you to have the vision of an assessor, who finds people, companies, commodities, or currencies who are undervalued. So find something in which you have uncommon insight, and invest there. Don't EVER risk money on things you don't understand.

5. Sow where you go; invest in yourself (if/when you're a good investment) and in causes or persons around you whom you TRUST to succeed. At the end of the day, creating value or enhancing worth is all about FAITH.

[+] cloudkj|16 years ago|reply
I think the best approach is to read up on asset allocation (other posters have discussed various books and resources), recognize the amount of risk you're willing to take on depending on your timeline, and make a plan for periodic allocations starting now. If you properly allocate your capital amongst different asset classes like stocks, bonds, real estate, commodities, and cash equivalents, you'll probably find a sweet spot for good returns balanced with reduced risk. The plethora of ETFs and index funds out there these days will definitely help with making this simple.

Another consideration is to become a direct investor in some sound businesses. Start looking through your networks. Being an angel investor may not be your cup of tea, but maybe you have friends or families that are running great small businesses. If you have good confidence in a business, there's no reason not to invest. There's a personal connection there, and you're likely to get the boost of great returns as well.

[+] chasingsparks|16 years ago|reply
Are you saying you want to live off the generated income forever? Do you have anything you are passionate about that you might want to build? Might you one day soon?

I think you have to expound on what you want to do with yourself before deciding what to do with this boon. Until you answer that, stick to highly liquid very low risk assets and forget about a target return.

[+] bokonist|16 years ago|reply
My personal planned allocation: 15% hand picked dividend stocks ( stuff like SXL, BPL ) 40% dividend stock mutual fund ( DVY) 30% long term bond fund 10% gold 5% treasury money market fund or CD's

DVY pays out a 3.9% dividend yield. Dividends will rise as nominal national income rises. The "general price level" will rise with national income minus productivity growth. In other words, if you put 100% in DVY you will be able to get an annual return of 3.9% that will rise with inflation. If productivity grows at 1% a year, then you will effectively get a return of 4.9% a year in terms of purchasing power.

You might wait on buying any long term bonds though, until interest rates return to any sort of normalcy.

(disclaimer: I'm not a professional, use at own risk, etc. etc.)

[+] mikedamas|16 years ago|reply
Recommended reading: The Intelligent Asset Allocator (Bernstein). My implementation of an asset allocation strategy includes a well-constructed bond portfolio using primarily individual bonds. see www.marylandcapitaladvisors.com, for example.