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How to Invest if You Do Not Have $1 Billion

August 1, 2017

Last Tuesday I posted a blog about how someone with $1 billion should invest it. Today I want to relate it to those that do not have $1 billion. To put it in perspective, this can apply to anyone that has money they want to invest to be used to secure their financial future, be it $200,000, $2,000,000 or $20,000,000.

For starters investable funds that are needed to secure a financial future refer to providing necessary cash flow, and reasonable asset preservation and growth. Here is a template of what to do.

Introductory comments

  • The suggestion to put a substantial amount into a charitable foundation was a one-time only maneuver that was to take place in the year the $1 billion was received from the sale of a business. That size donation would be tax deductible in that year and that year only, so is not recommended for others or for that person in a later year unless they have similar income then.
    • There was a presumption that the cash flow from the entire $1 billion would not be needed for living costs, so the diversion into the charitable fund would not cause any type of hardship or place the donor in a future position where they would regret doing it because of this.
    • There were three plans suggested. I would not use any of them for those without such a large amount of money, but would alter in the suggested plan that follows along with my reasons.
    • The plan I would use as a start would be Plan 2.
    • Plan 1 is too conservative and does not allow for asset and cash flow growth, inflationary pressures and a “rainy day” fund which I think is essential.

Suggested plan

  • The amount available for investment should be reduced by what I call a rainy day fund. This is an amount of cash would cover expenses for a minimum of six months to a maximum of 18 months (depending on your circumstances) should there be sudden or unexpected changes in your personal situation cutting off expected cash flow. An example of this could be either from the loss of the job or the result of a medical or physical condition that curtails or stops cash flow for a period of time. The rainy day fund would provide the money needed to be used for living expenses until there is a normalization or change in your circumstances that you have or needed to adapt to.
    • These funds can be kept in a money market fund for periods up to six months and then in laddered CDs at six month intervals thereafter so interest will be earned until the CDs mature, with one maturing every six months. The matured CD would either provide the needed cash or would be reinvested for the tail end period of the ladder.
    • Next would be to determine your goals and a plan to achieve them. This could be for someone at or older than retirement age to never run out of money or cash flow; for someone about 15 years younger than retirement age to be able to retire when planned for; for someone with a young family to be able to get the kids through college without accumulating large debt, or to be able to buy a house in a few years; or to quit your job and start a business. Each person would have different goals. The plan would then be the method of attaining the goals.
    • Any plan would be integrated with other sources of cash flow such as Social Security and/or pension distributions.
    • A word of caution or a warning. I do not believe that any investment plan shorter than seven years should put the money at risk, i.e. in the stock market, bond funds or long term bonds. If you needs are less than seven years, nothing I am suggesting beyond this point would pertain to you, so stop reading. Therefore I am addressing people with longer term goals.
    • Determine an asset allocation plan for the percentage of your investible funds that would go into fixed income and the stock market. I’ve written many blogs on this and each separate topic referred to, so will not expand upon this here. To get a reprint see the end for information.
    • In plan 2, I had seven bulleted suggestions. I would suggest now only the second and third bullets for your plan. The first which was the U.S. Treasuries was the rainy day fund I mentioned earlier and for which I suggested insured bank CDs. The second and third bullets are split 1) 33% in longer term bonds that are intended to be held until maturity. Whether they are tax-free or taxable bonds would depend on your tax situation and whether the funds being invested are in your own name or a tax deferred retirement account; and 2) for the 67% balance I suggest the largest three or four index funds to provide some stock market diversification along with regular dividends. Obviously your risk tolerance and comfort level will be important here, but these are my generic suggestions and should be used as a starting point. The latter four bullets should not be considered as they are much riskier than the index fund choices I suggested and you should not take on a greater risk, in my opinion, than investing in funds that track the major stock indexes.
    • With $1 billion, risks are certainly not needed, but there is greater ability to absorb losses in attempts to diversify holdings. Not so, with less money. Regardless of who you are, and the amount of your savings, whatever you have to invest is very important to you and should not be disparaged or given short-shrift by your advisor. To highlight the importance, let me suggest that how it is managed could be the reason that you achieve your goals or not. This is very important stuff!

The above is a suggested plan for most people to consider. I have written about each separate piece of this plan and will send you a reprint of blogs on these topics if you email me your request at emendlowitz@withum.com. Good luck! Be smart, and work at attaining your financial security.

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