How to Invest $1 Million | A Simple Strategy to Invest a Windfall

hey everybody welcome back to the financial freedom show my name is rob berger in today's episode going to answer a deceptively simple question it's a question that seems hard and it's really pretty easy and it's this how should you invest a million bucks now a lot of you may be saying rob that's the last thing i need to worry about i'm just trying to save 50 bucks a month or 500 bucks a month or whatever it actually turns out to be i think a pretty significant question and we can learn a lot about ourselves and investing generally by asking this question and answering it even if maybe it's not directly applicable to you right at this moment i will tell you it can come up in some surprising ways so obviously you could inherit a million dollars you could sell a business a liquidate an investment you know some sort of business or other type of investment and have a million bucks or 10 million bucks or i don't know some of you big spenders maybe you've got a 100 million dollars just burning a hole in your pocket right but there's another way this can come up and it's when you retire so you may save you know for a 30 or 40 year career in a 401k or an ira perhaps but a lot of folks have workplace retirement accounts and when you retire it's kind of like what do i do with all that money and a lot of folks end up rolling it over to an ira not necessarily a bad decision at all and all you've really done is moved it from one account to another but psychologically it has a different feel to it now it's like you're taking this big chunk of money that you had invested in some way for a very long time usually on your own inside of 401k you're not using not using the help of an advisor you move it over to an ira and all of a sudden it kind of feels different they go now now what have i done what do i do with all of this money not only is that a big question but you know you're not going to start living on it and it gets really scary so that's what we're going to try to tackle today how should you invest a million dollars conceptually how should we think about it another way to ask i think a similar question is how do you invest a windfall it's kind of the same thing and it may not be exactly a million bucks for you maybe it's 50 000 500 000 or as i said 100 million here's the thing i think the answer is the same regardless of the amount of money now a lot of people would disagree with me on that in fact let me show you my computer screen here i'll put my ugly mug in the corner there we go this is chewie's founder right ryan cohen he he had a big uh liquidity event and uh this was just last year he piled most of 3.4 billion that's with a b into just two stocks apple and wells fargo that was it 3.4 billion we're going to just show all our chips are on the table we're just going to shove them into apple and wells fargo and call it today by the way his name has come up more recently because he joined games gamestop and of course you all know the the craziness behind that stock and a wall street bets and that whole story but it was interesting to me uh that he would put all that money into just two stocks of course you could say before that all his wealth was in one company so it's in some ways you could you could say he diversified and you could also say yeah but he's got like three billion dollars so does it really matter i mean even if the investments turned out to be horrible uh you know he's still going to be fine true enough but i want you to know i searched high and low for answers to this question even went of course to reddit and there was a question that someone asked in in reddit and it was how do you invest you know a million bucks my favorite answer and i went through like over 100 replies just to get an idea of how people think through uh this question and my favorite answer above all of them and now of course i can't find it so let me search for it oh here it is it's right here you are on reddit a majority of basement dwelling individuals asking them what to do with the million dollars you are doomed that seems about right so that's the context of the question we're going to answer it today and i think to begin with we should understand why it's hard why is investing a windfall a million bucks so difficult and i think there are a couple of reasons the first one is what i call the small big dilemma and i call it that because i'm just not creative enough to give it a better name but it's the small big dilemma let's think about it this way most of us don't just fall into a million bucks so you invest maybe let's say in an ira it's six grand a year you're investing mainly in mutual funds probably maybe etfs and you do it year in and year out and depending on your returns you know in roughly 20 years you're a millionaire here's the thing you accomplish that one small step at a time right there was never some big mass event where you had you know several hundred grand to invest it's usually 50 bucks a month 100 bucks a month if you're doing six grand a year maybe it's 500 bucks a month or once a quarter or whatever the point is all of these decisions are relatively small they're relatively insignificant we don't normally fret over how do i put 500 to work you just stick in the ira wherever you've got it and uh and you invested you know again three fun portfolios six fun portfolio maybe use a robo advisor or whatever it's not like it's a it's a big deal and just slowly over time you know you wake up and you look at your account one day it's over a million dollars and at that point you don't stop and say wow a million bucks now what do i do how do i invest it you know you just kind of maybe marvel at the amount maybe you tell your significant other then you just go about your day it's not a big deal on the other hand if you're given a million bucks again it could be inheritance you sell a business whatever that feels completely different even though the end result is the same in both scenarios it's a million bucks when you get it all at once emotionally psychologically it's different and i think we tend to put a lot of pressure on ourselves it's like well don't blow this he got a million bucks you got to get this right yes it's important yes we do want to get it right but what i want to kind of convey today is that i think the best approach to investing is the same whether you're investing 500 bucks a month or you get a million bucks or even a 100 million dollars at one time i don't think the approach should change and i'll explain the details in just a minute that's the first thing that makes investing a windfall or a million bucks difficult the second thing is what again sorry for the names the road less traveled dilemma and the idea is this when you come across a windfall it often coincides with a big event in your own life so again you have a business and you sell it that's a big life change it's not just about the money it's about now what am i going to do with my life and so you're not just answering the question how do i invest this money you're answering even more profound questions about your future i think that's the same thing if you inherit money maybe you've lost a loved one maybe it could be insurance proceeds right your your spouse passed away and you've inherited or received a life insurance payment and so you're dealing with the emotions of that loss and what your life is going to be like you know in the days weeks and months and years going forward the same is true when you retire that's obviously a big life event you've left your career and now what's next so in answering this question we're often dealing with a lot more than just dollars and mutual funds and that i think can add a lot of pressure and anxiety to the decision the third thing and it's related and that has to do specifically with retirement i can speak from experience on this you know you can read all the retirement books you want you can have all of the plans you can know the four percent rule backwards and forwards that's great but when it comes to actually retiring and living off of your nest egg it's scary and that's true even if you can live off of well below four percent again i'm speaking from experience i'm not living off of our we're not living off our nest egg at the moment we ended up just fortuitously ended up getting some uh work that you know helps us pay for our expenses i wasn't planning that when i sold my business two years ago and i can tell you the there's a big fear of starting to live off of your your nest egg so again you're dealing not only with the investing decisions but sort of the the bigger sort of life questions now that's what makes it so difficult i think it also though helps us get to the right answer on actually how should you invest a million bucks how should you invest a windfall and when we're doing that i think there's sort of three questions high level questions we should at least think about and then let's get to the specifics so what are the three questions the first of course are your your short-term liquidity uh needs if you're going to need money in the next five years i would pull that out of investing if i've got a big windfall a lot of money but i'm going to renovate the house or i'm going to take a trip around the world or you know a son or daughter is getting married or there's you know there's some big expense we're going to need the money i pull that out immediately that's not going to get invested because you know the volatility of the market you need to set aside in my mind it's five years it's not set in stone but that's kind of what i'm comfortable with whatever you choose think about what you're going to need over the next several years to pull out of that money before you invested that's the first first thing right the second thing is lump sum versus dollar cost averaging whatever you have left that you're going to invest you just shove it all in your chips go right in just push your chips into the middle of the table or do you do it you know over 12 months or 24 months i've done a video on this i won't get into the details again i'll link to the video uh below i will just say briefly the the math and history tells us lump sum investing is probably it has a greater chance of a better result but at the same time i think our own fears and sort of the psychology of it can make dollar cost averaging better for a lot of folks at the end of the day i wouldn't lose a lot of sleep over your decision again that being said i'll link to a video below that goes into more detail on that issue but it's an important one i can tell you when i had the liquidity event in 2018 i sold part of my business basically doubled the amount of money we had to invest i chose lump sum it worked out for me yeah but it could have worked out the other way and men not as uh good an outcome maybe i just got lucky i don't know but it's an important decision it's one that you should give some thought to i'll link to the video and then the last thing is uh to consider before we get to specifics are your investing goals and here's what i mean about that i'm not talking about life goals are you going to retire or not obviously those are important but rather how involved do you want to be in the investing process right some folks view investing as sort of a calling right and they do that because in part they want to give a lot to charity and they want to be very involved in their investments so for a lot of these folks they're investing in real estate and helping manage the real estate uh they're buying private businesses and getting involved in in those businesses that's one extreme another type of investor is someone who's actively engaged in in analyzing stocks and investing in individual stocks again that's a certain kind of person personality interest i think a lot of folks are the exact opposite it's like look i don't want to spend a lot of time with my investments i just want to put them in something that makes sense maybe review it once a quarter whatever and then go about doing other things in my life there's not that there's a right or wrong here the key is to understand where you want to be within that sort of continuum of investors and what your goals are for investing so having said all of that as i like to say enough chit chat let's get right to how you should invest i hope this surprises absolutely none of you watching this video at least if you've watched any of my past videos i think the starting point is the buffett portfolio which is why i did the last video called the warren buffett portfolio if you haven't watched it it's pretty simple he proposes a two fund portfolio for the average investor 90 an s p 500 index fund 10 percent of short-term us government bond fund and what he says is that kind of low-cost portfolio will outperform the vast majority of pensions hedge funds institutional investors or anyone else who pays a a large fee to have someone manage their money now one thing i want to stress is i don't think the important point to take away from the warren buffett portfolio is the specific portfolio 90 in s p 500 uh 10 and short-term government bonds the real key takeaway is is two-fold low-cost investments that cover the market right um and that are are heavily weighted to equities doesn't mean it's got to be 90-10 could even be 60 40. but to me those are the two big takeaways from the warren buffett uh portfolio i will add you know i've done a lot of work on the four percent rule i've recorded a lot of videos on it and if you've watched them you know that bill bengan who was sort of the father of the four percent rule he published the first paper in 1994 that sort of introduced what we now know as the four percent rule he effectively used the warren buffett portfolio it wasn't called that at the time warren buffett didn't write about this until the 2013 berkshire hathaway shareholder letter but his primary portfolio when he was doing his four percent analysis uh was s p 500 index and he used intermediate term us government bonds not short term but that was it two classes and he looked at different allocations between those two classes and coming up with the four percent rule he basically found that for the four percent rule of work you want 50 to 75 percent in stocks and the rest in bonds so again a portfolio that is weighted in favor of equity so in some ways you know there's a lot of similarity between the warren buffett portfolio and what bill bingan did with his paper in 1994 now since then a lot of academics have done a lot of work on the four percent rule and suggested other asset classes including uh bill bengan himself and so that gets me to uh sort of the next step i think the warren buffett portfolio that is low-cost index funds that are weighted uh more towards equities than bonds is the absolute starting point and should be the foundation of an investment portfolio that would be true if i had 100 million dollars to invest i would not invest it differently than i would how i would invest a million bucks or 500 000 that would be the core now in my case i prefer a little more diversity so i prefer at a minimum the three fund portfolio and what it adds is international exposure so again a vanguard international index fund or a fidelity international index fund i've done a video on the refund portfolio i'll link to it below this video that to me i just feel more comfortable having exposure beyond just the s p 500 index frankly i don't think it will outperform the two fund portfolio but i do think it probably smooths it a little bit that would be my guess of course time will tell and i just take some comfort and a little more diversity i think a three three-fund portfolio it would make absolutely perfect sense to take a hundred million dollars and put in a refund portfolio simple as can be now that's not what you'll hear if you go to a high-cost investment advisor that's some that either a commissioned broker who's gonna make a fortune by selling you you know non-traded reits and expensive insurance products you're not going to hear this from them because it you know a three-fund portfolio won't make them any money you're going to hear complicated investment strategies you'll hear the same thing from expensive advisors who just charge a percentage of assets under management many of them by the way are fiduciaries right they're not going to make any money if you just want to stick a million bucks in a three-funded portfolio they have to complicate it and and and they will and in fact when i sold my business i sat down with a fiduciary someone a registered investment advisor who charges a percentage of fees under management they wanted to put me in expensive complicated real estate transactions they wanted to put me in my favorite was the black swan portfolio i said well that's interesting tell me about the black swan portfolio well this this will help you in case of a black swan event i said you mean those events that can't be predicted yeah right those huh so how do you have a portfolio that's going to protect me against an event that we don't know what it is and can't predict it silence anyway that's all nonsense a three fund portfolio is a great core foundational portfolio for a million bucks for 10 million bucks for 100 million bucks now i tend to use what's called a six fund portfolio and let me kind of show you some of this on the screen this is me not logged into m1 finance let me try it again here we go here are some portfolios i've put together i've linked to them in the past i'll link to it again this was the warren buffett portfolio that i put together for the last video here's the three fund portfolio and it's very very simple you can see at the bottom i can't bring it up any higher than that but you know it's 50 in a vanguard total stock market etf 30 percent international and then the rest there in a total bond market i tend to use for my own investing the six fund portfolio and it adds exposure to reits small cap value and emerging markets now is this necessary no i think a three-fund portfolio would be being uh perfect so then why do i do this i just take a little more comfort in having the the added uh diversity and i think i i think what the added diversity will do it will in theory give me the potential to maybe perform a little better than the three fund portfolio although again you know time will tell and i think even though many of these asset classes are very volatile think emerging markets very volatile small cap same when you when you put together volatile assets that don't move in lockstep uh then um i think you actually can smooth out the over overall volatility of the portfolio if you've ever seen the seinfeld episode with elaine bennis uh dancing that's what you want your portfolio to look like you want one asset class you know going over here and then another one going over there is this how she danced something like that anyway you don't want your portfolio to look like ginger rogers and fred astaire and for you for your young folks you're just gonna have to google who they are you want your your portfolio to dance like a laying dennis and um so that's kind of like why i like the six fund portfolio but honestly a refund portfolio i think would be great and that's how i invest my money now uh i will say in sort of sort of a last thought on this video is that if there's part of you you just have an itch you need to scratch you just need to invest in in some stocks or you just need to do some day trading or you just can't help but invest in some bitcoin i think what's important is to wall off those investments say okay i'm gonna put five percent or ten percent uh of my portfolio and i'm gonna invest in this and that's effectively what i've done uh i invest some in individual stocks it started out as five percent i'll be honest it's done really well uh and so it's now about 15 of my portfolio because it's grown largely because of apple uh i don't own a lot of stocks for a long time just apple and berkshire since i've added uh wells fargo and bank of america and in like in six months i've earned like 60 percent which scares me a little bit because i have to keep reminding myself that doesn't make you a great investor and it doesn't it makes you lucky uh now if i do that over the next 40 years then maybe i'll reassess that but my point is if if you've just got to invest in something you know because it's fun whatever that's great but just figure out a relatively small percentage invest it that way and and then the rest should be in low-cost index funds now again for some of you you may just enjoy buying real estate and that's terrific just figure out what percentage of your portfolio you want to put towards real estate i have a cousin who sold a restaurant many years ago in blacksburg virginia and he took his money and he bought homes and he fixed them up and he rents them to students at virginia tech and he's been doing that for years the students love him because he makes the places he builds are just incredible i mean they're really nice and he's done very well for himself so if you have a passion for something like that i think that's terrific but for those that want to just you know invest forget all the fanciness forget the private equity and the hedge funds and uh you know the expensive investment advisors the odds of beating a low-cost index fund approach over the long terms are practically a million to one i mean you're just not going to do it now the question still remains what if you want help and i understand why you would and i have family members and friends that talk to me about this they want help so i have a couple things here that i want to give you as we bring the video to a close that i think it could help you the first is you really need to avoid commissioned brokers and expensive registered investment advisors that want to charge you a percentage of your assets under management and sort of my rule is you don't want to pay anyone more than 50 basis points that's at the high end and most registered investment advisors these are fiduciaries are going to charge you more than that they're going to charge you one percent or even more just doesn't make any sense you're giving away too much wealth and there are plenty of alternatives vanguard offers advisory services for 30 basis points so that's one option and there are plenty of hourly folks that will work with you to help build a portfolio and charge you just an hourly fee i work with mark zorrel and he's been great i don't have any financial relations with i don't get paid to say his name in this video um in fact i pay him uh and he doesn't manage my portfolio and in fact he hasn't even built my portfolio i did but i like to talk to him once or twice a year and uh just you know get his take on different issues like roth conversions and the market and my portfolio and so i i do that um so those are there are plenty of options my point is there are plenty of options for finding really good low-cost advice and if you're going to get help i think that's what you should do the last thing is there are some books if you want to sort of start learning on your own hopefully you're learning something from these videos and thank you for watching the channel has grown 10x over the last year in terms of subscribers and traffic and views so i'm i'm grateful for that but uh there are some books now i've written a book retired before mom and dad and i like the book i hope you do too if you've read it but that's actually not one of the books i'm going to recommend for this specific purpose because that book really isn't about investing a windfall or a million bucks it's about how to go from nothing to financial freedom which is different so let me show you the books that i would recommend as a starting point i've got them on the screen here the first one is and i'd start with this one the bogle vogelhead's guide to investing boglehead's great forum by the way just google boglehead's forum and uh uh it's a great a great uh forum and it's named after uh john bogle jack bogle the founder of vanguard i've got this book i've read it excellent book and really all you really need to know to be honest with you great book the other one this is an older one the four pillars of investing by william bernstein this is one of the books i read many years ago and this says 2010 i think the original is actually older than that this may be an updated version but i think it's a good solid book to understand investing and portfolio construction and then the last one is actually by john bogle himself the little book of common sense investing a great book and honestly i think these three books can tell you everything you need to know the big takeaway that i hope you you hear is this investing a million dollars or some other windfall is really no different than investing 500 bucks a month in an ira or investing 10 000 or or whatever the market the industry they'll tell you it's different oh a million dollars but now we need to get sophisticated with how we invest now that's just all that does is it lines the pockets of advisors and what warren buffett calls helpers it doesn't actually make you wealthier in the long run investing a million dollars is no different or more difficult than investing ten thousand dollars that's the real takeaway so uh if you're lucky enough to have this problem i wish you the best uh keep learning keep educating yourself watch those fees if you need help get low cost help i think some of the books i've mentioned can help you hopefully some of my videos have helped you too if you have questions leave them in the comments below would be happy to help you out any way that i can and until next time remember the best thing money can buy is financial freedom

Channel: Rob Berger

Views: 362,677

Keywords: inheriting money, what to do with inheritance, how to invest one million dollars, how to invest money, million dollar investment, invest 1 million, how to invest a million dollars, million dollars, 1 million dollars, inherited 1 million dollars, financial advice for lottery winners, how to invest a large sum of money, inheriting money what to do

Id: ikFhiIKglos

Length: 26min 15sec (1575 seconds)

Published: Fri Apr 02 2021