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How to Invest a Billion Dollars

July 25, 2017

This is for real. Someone that just ended up with $1 billion after taxes from the sale of their business asked for suggestions. Here is some preliminary information prior to finding out the details, family considerations, preferences, bias’, risk tolerance, level of investment sophistication and experience and really most everything else about him. I present here three basic generic plans as conversation starters.

Preliminary comments before any recommendations

  • Sometime before the end of the year he should consider donating $200 million or thereabouts to a private charitable foundation that he will control. The way foundations work, all income is generally tax free but 5% of the assets must be distributed annually to qualified charities. So, $10 million a year, for starters will be disposed of. This can be a lot of fun, create immense satisfaction, some power depending upon the organizations and great good.
  • An estate plan should be done so the client will be aware of what money he has that is being held for his heirs, the government’s and/or his charitable foundation’s future benefit.
  • A financial plan showing cash flow should be prepared although it should be very difficult to spend all of the income, but there should be a look at the numbers.
  • A team should be assembled that would be comprised of an accountant, attorney, tax specialist, investment advisor, investment manager and an insurance agent.
  • Decide how much money will be needed that will be spent in the next five years on asset acquisition and set that aside and away from the investment pool.

Plan 1 – Fully secure plan

  • Put it all in laddered U.S. Treasuries. This will initially provide about 1.5% interest net after taxes. That should be enough to live on and why take any risk? Boring but secure! Dealing with financial security should be about being secure and not treating your future security like fun and games.

Plan 2 – Diversified cash flow, growth and asset preservation plan

  • $50 million in laddered U.S. Treasuries
  • $50 million in laddered tax free interest bonds
  • $100 million in S&P 500 index fund
  • $400 million with 16 investment managers with diversified styles and specialties
  • $50 million spread over three to four hedge funds
  • $50 million spread over three to four private equity funds
  • Other asset classes to be explored

Plan 3 – Diversified plan but with a set aside to buy a business

  • Similar to Plan 2 but the amounts with investment managers would be reduced by funds set aside to either buy a business, start a new business or set up a private equity fund

What would I do if it was me?

  • Probably a combination of laddered Treasuries, tax free bonds and a portfolio mimicking the major indexes. In actuality, no one knows what they would do unless they were in that position. Academically the formula is easy. In practice with the weight of the responsibility, it is hard to predict until in that situation. But I wouldn’t mind having that responsibility.
  • Also, what I would do is not relevant – it is not about me. It is about the client!
  • The job of an effective advisor is to get to understand the client and to make recommendations that they can feel fully secure with, not what I am fully secure with.

Book to read

  • With this money, $25 million here and $25 million there won’t even make a dent. Spending money should never be treated flippantly but a light toned, interesting novel on this subject is Sex, Lies and Serious Money by Stuart Woods. Here someone wins a humongous lottery and asks Stone Barrington [possibly a bad choice in conservative wealth preservation] on how to handle it. It is a quick read. Check it out!

This is obviously a brief sketch of how to handle $1 billion, but I feel it is a good way to start the conversation. Another tip is to put the funds in Treasury bills for a few months until the plan is set up and then allow about a year to fully implement it which also includes interviewing investment managers.

If you are one of those that do not have a billion dollars, use this blog as a glimpse into the myriad issues that those that do face. Interesting? Huh?

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