Hi there! Mrs. 1500 back after an exhausting few weeks of working on the house.
Last time I posted an Ask the Readers question, I asked what YOU wanted to know. I originally started this (mostly) weekly series of questions because I had some questions that I wanted answers to. I have been scraping the bottom of my barrel lately, so I thought I would open it up to you and see if there was anything you wanted to ask others. Turns out there are LOTS of great financial-related questions to be asked, and I start next week with a reader-generated Ask the Readers.
But today, I have come up with a question that both Mr. 1500 and I want to hear from you about. How would you divvy up one million dollars? (Of course, you have to say one million dollars like Dr. Evil from Austin Powers…)
Mr. 1500 and I were at the Berkshire Hathaway annual meeting this past weekend (his take on the meeting tomorrow, stay tuned…). Our children were at home with Grandma 1500 (thanks, Mom!) so we had time to have adult conversation. We started talking about the promising jobs report that came out on Friday and the expected rate hike from the feds. Mr. 1500 is happy about the hike, as it will limit buying power in the housing market and favor people with cash.
Yada, yada, yada and I asked him what his ideal mix of stocks and rental properties would be. Then I jumped up, grabbed the computer and typed this out, because I want to know what YOU think would be the ideal mix of stocks and real estate.
Right now, we are heavily invested in growth stocks, which was awesome when we were in our 20s. Now that we are in our 40s with 2 children, we need a little more stability.
We currently have approximately $850,000. Almost all of this is in the stock market. Technology is what Mr. 1500 knows, so that is what he has invested in. Think Apple, Facebook, and Google. (Someday, he will sit down and write a series of posts about what he owns and why he purchased it.) We also have a teeny bit in bonds and in peer-to-peer lending through Lending Club and Prosper. Our primary home does not factor into the $850k or the real estate investments.
So, let’s play pretend. Pretend you have one million dollars (again, in your Dr. Evil voice) and you want to invest in stocks, real estate and peer-to-peer lending. I am not looking for specific stocks you would buy, but for percentages. Don’t limit yourself to these categories, this is just what I was thinking about. If you have another investment vehicle, such as REITs, bonds, etc., please let us know why you advocate for those.
Thanks for reading!
I would invest a large portion of it (way way overweight… crazy overweight) into the REIT sector. (Tax advantages of REITs in my home jurisdiction is huge) Probably 25% of my holdings. I would also put 25% into my home grown Canadian Banks. There are really only 5 big ones. None of them had any trouble paying dividends during the 08/09 crash and recession. None folded. They have been dividend aristocrats since forever. I wouldn’t allocate more than 15% into tech. There are some great names yes, but you have to choose carefully AND not be afraid to hold if the market darling falls out of favour for 3-15 years.
Lastly, I would put 25% in cash to cover my short-put trades. Doing what I do with them, I would bank $2500 a week (on average) with completely controlled risk. (you short-sell the weeklies on leveraged bullish ETFs, and BUY the longest expiration puts to cover a market explosion… The long positions do nothing buy lose money of course, until the market explodes, as it does on a regular basis. Exercising the long puts lets me wash my hands of the losses (except of course for the cost of the puts) and go along my merry way to restart everything)
The Starving Artist Canada (@blerghhh) recently posted…The short put
Whoa! I recognize several of those words, and know they have to do with investing, but I think I need to mosey on over to your site and read your most recent post about “The Short Put.” Thanks for the ideas.
So if I happened across a cool million today, I would:
Immediately take 50% and purchase rental properties, outright, with no financing. In the turnkey markets that I look at, this would probably get me about 5 new properties and instantly create (conservatively) about $3,500 in cash flow per month, which would completely cover my monthly expenses.
I would then take 25% and put it in my vanguard total stock market index fund.
I would take 10% and invest it in my Lending Club account.
I would take 15% and look for a business to invest in that I believed in.
Now, coming into $1,000,000 extra dollars would put me way over my goals, so if this wasn’t only about investing, I would probably adjust these percentages and add a travel and donation component (Kiva.org would get a nice bump from me for sure!)
Either way, I would easily be able to quit my 9-5 job.
Dave @ The New York Budget recently posted…How to Make Money with Airbnb and How it Helped My Startup
I like this strategy. I want to have some rental properties, I already have a Vanguard Index Fund, My available funds to lend over at Lending Tree is always lower than I would like, and know an investment that looks good on paper. Thanks for the advice.
Man, that’s tough.
First, I’d get rid of PMI (BOOOOOOO, I KNOW!)
Then, I would probably put 60% in Vanguard Total Stock market Fund and drop 40% into a few paid-for rental properties. Would love for those to cover my personal mortgage, and then would be able to save most of my income. Ideally, house would be paid off in the next 10 years, and I would retire (with about a million in the bank, a paid for house and two paid-for rentals).
Of course, that would take a LOT of research and managing, but would be fun nonetheless 🙂
Jacob recently posted…Life Is Too Short To Be Lazy
My neck of the woods is too tight right now for inexpensive rentals. I have to wait for the right place to go up. I have a new strategy, where I walk the neighborhood and knock on peoples doors, telling them I am looking to buy, and if they are looking to see, we should talk. Perhaps they could save the real estate fees if they didn’t list, but sold to me. We have the supply/demand problem in this area of the world. Too much demand, too little supply.
I’m going to make a couple assumptions here, one is that I would be retired/financially independent and that this money is what I would rely on during this time.
25% in Rental Real Estate-assuming 1% Cash Flow or $2500 month(The Rental cash flow should be equal to covering your expenses)
25% in Dividend Producing Stocks-Vanguard’s Dividend Index to keep it simple
25% in Total Stock Market Index-Vanguard would work also
15% in Bond Fund
10% of Fun Investment Money(small biz, peer to peer, riskier stocks)
This is pretty close to what I would prefer(i’m a little heavier in real estate, so maybe 25-50% real estate and reduce the Stocks by that much), So at all times you would have 3 or 4 different sources of income, the percentages/dollar amounts can be adjusted to equal your expenses.
Even Steven recently posted…I Joined the Yakezie Challenge
Thanks for answering, Even. I am curious about the bond recommendation. With so little yeild, what’s the point?
Remember I’m making the assumption that this is my financial independence income I will be using to live on. So if you are getting 2-3% on 150K, it’s still a 3rd or 4th source of income with about as close to Zero risk as you will find. I would put a small amount in a bond, CD, something income producing with very little risk. Thanks for the follow up.
Even Steven recently posted…I Joined the Yakezie Challenge
A million dollars woopee! I would invest 70% in ETFs or index funds. I would pay off our house, then help my mom buy a nice house. Maybe give her this current house, and have us move into a new house. Go on a really nice vacation! I probably wouldn’t quit my job because I don’t think $700K is enough to provide income. But maybe, I would find a cooler job?
SavvyFinancialLatina recently posted…The Confidence Gap
To know whether $700k is enough to live on, you should talk to Mr. 1500. He can explain the 4% rule much better than I can.
for a cool 1mil, I’d pay off our house, and then invest the rest according to our allocation: 60% domestic stock indexes, 15% bond indexes, 5% REIT indexes, 10% small cap indexes and 10% international indexes. I moved out of emerging markets because I didn’t want the risk, but I still want to own things like Nestle, so I stayed with international “developed”. We’re still pretty “low” on bonds because we’re still OK with the risk of loss, but only 85% ok with it 🙂
Mom @ Three is Plenty recently posted…April 2014 Early Retirement Progress
I am curious why you would pay off your mortgage? If you have a high rate, refinance to today’s near-historical lows. I know a guy if you are interested. If he can’t get you a lower rate, no one can. If you are already at a low rate, keep the mortgage. Our rate is 3.25% for 15 years. We are happy to pay such a small amount for the loan.
Perhaps we need to first back up a little bit. I’m 31 years old, and would use the $1,000,000 to generate the highest returns possible, with the lowest hassle factor, and best tax efficiency I could find. Thus, I’d allocate 100% of it to individual stocks (matching the percentages I currently own).
Extremely cheap (I pay $1/trade), super tax efficient (I rarely sell), low hassle factor (I keep up with stocks for fun, so it wouldn’t be ‘work’ to do so), and great long term returns.
Even eeking out a 8% return would give you $80,000/year to compound. I’ll take that!
Long Term Brian
Brian recently posted…Why I love VRBO
Yeah, that would be easy. But what about the dips in the stocks? I am happy for growth, but not real excited about the inevitable drop in stock prices.
I’d go with an 80/20 stock/bond allocation broken down as described below:
50% – VTSAX Vanguard Total Stock Market Admiral Shares
22% – VTIAX Vanguard Total International Stock Admiral Shares
8% – VGSLX Vanguard REIT Index Admiral Shares
20% – VBTLX Vanguard Total Bond Market Admiral Shares
This isn’t taking into account tax-efficiency. If it’s all being invested in a taxable account I may just throw the entire thing split 70/30 to the Total Stock Market/Total International Market.
I haven’t had time to thoroughly research real estate investing, so my real estate would be in REITs until I had the time to become an ‘expert’.
Big Guy Money recently posted…April 2014: Let’s Change The World
Thanks Big Money Guy. I will put these on the list of things to investigate further. Mr. 1500 seems pretty fired up about REIT’s, but I would rather our real estate investments be our own.
Even can provide his own reasoning for bonds. My reasoning is I’ve never been through a downturn as an investor, so I can’t prove to myself that I won’t sell.
Also, there has been research done that shows investing in assets that are poorly correlated (like bonds compared to stocks) can reduce risk while providing essentially identical returns.
http://www.youngresearch.com/wp-content/uploads/2012/08/Efficient-Frontier.jpg
Big Guy Money recently posted…April 2014: Let’s Change The World
Yeah I like to think of Bonds as headgear for boxing, even when the stock market is getting hit in the head at least you have the headgear for a little protection. That and of course that extra source of income.
Even Steven recently posted…I Joined the Yakezie Challenge
Oh, always a fun exercise!
This would be super easy for me.
$800k in equities that pay dividends, and have a reasonable chance at raising them going forward – KO, JNJ, PM, AFL, PEP, etc.
$200k for a personal residence, in cash.
Best wishes!
Dividend Mantra recently posted…Freedom Fund Update – May 2014
I knew you would recommend dividend stocks! Thanks!
Great question! Right now I’d use 60% to buy income-generating real estate investments (levered up, given the low interest rates these days) and put the other 40% in my Wealthfront investment account.
Wealth Out West recently posted…How To Get A Federal Tax ID Number For Free
I would retire!!! I would likely put it in a mix of Vanguard Index/REIT/Bond funds and do the 4% withdrawal thing. That would just about cover my living expenses.
I would probably wait a couple of years though. I know it’s silly to think you can time the market, but it’s been 6 years since the last recession and history says we are “due” for another downturn sooner than later. I would invest 80% in the above funds and save 20% in cash for value investing. I would add 5-10% to cash every year until we hit the downturn.
Chattanooga Cheapster recently posted…The Cheapster Saves – With Ooma!!
Chattanooga, we think the exact same way. I think the same thing every day about a recession. My ideal time to retire would be in the middle of a big downturn. Bring the S&P 500 PE down to under 14 and I’d feel pretty good: http://www.multpl.com/
I would put it into a variation of the “Permanent Portfolio” by Harry Browne
25% – VTI Vanguard Total Stock Market ETF
25% – TLT iShares Barclays 20+ Yr Treas.Bond (ETF)
12.5% – GLD SPDR Gold Trust (ETF)
12.5% – Gold bullion American Eagles stored overseas
25% – US 1-3 Yr Treasury bonds
I would most likely split the above into a few equivalents i.e. some percentage in VTI some in SPY across two different brokerages to limit counter party risk. I would rebalance to these percentages once a year or so.
A portfolio like this has averaged a ~9% CAGR for 30 years with low volatility.
Ahhh, a gold bug! I admit to owning some gold, but not in these quantities. I have a hard time with it since it possesses little intrinsic value. I must admit that my curiosity is peaked by the ‘storing it overseas’ comment…
First of all congrats to your great and inspiring Blog!
Oh yes … the 1 Million $ Question … well I had to suffer a bit because of the spending cut for my luxury goods … but finally I guess I would make it 😉
Okay – to be honest, as HY and EM Bond Fan I would invest the Million as follows:
– 60 % iShares HY and EM Bond ETF (as a European Investor Vanguard is yet not an option)
– 40 % individual Bonds like Argentina, Province of Buenos Aires with a YTM of around 13% after Tax
Your Million combined with my existing Bond portfolio would provide enough (monthly) cash flow to pay all my bills … so as of today I would retire!
Wish you all the best
Anton (from good old Europe)
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I would travel and tip big to all minimum wage workers