What to do when $10m drops into your lap …

I was asked the following question:

I’m 28 and just came into some money (8 figures). About 70% is invested in stocks and the rest is cash. I don’t want all the money tied up in stocks. Should I buy apartments or land and build my own apartments?

Now ” 8 figures” is a lot of money … somewhere between $10 million and $99 million; I imagine, more than enough to retire on for any of my readers.

I retired at 49 years old having made $7 million (in 7 years), and had no desire to continue growing my money.

In fact, there’s two things to consider:

1. You can retire very happily on $10 million, and

2. There’s very little likelihood that whatever set of circumstances took you to, say, $10 million will be repeated.

In other words, if you are lucky enough to cash out a life changing amount of money, it’s time to go into ‘lock down mode’ with your money …
So I told her that this was very much the position that I was in, with three key exceptions:

1. You are a lot younger (I was 49; you are much younger)

2. I put $6m cash into my house, you won’t be that stupid

3. I embarked on an active asset management strategy, when I should have aimed for passive much sooner.

This means that I own a house, some real-estate developments, a couple of businesses, and I invest in startups.

Whilst fun & interesting, sometimes, they do nothing to improve my standard of living (ie I already have enough), and mostly & unnecessarily increase stress.

Instead, this is the strategy that I am slowly putting in place now, and the one you should begin with.

a) Stocks are too volatile as a retirement portfolio.

You will suffer mentally when your portfolio drops 10% in a single day … then, keeps dropping. It’s fine when it’s sitting in your 401k & you can tell yourself: “it’s OK, the market always bounces back & I still have my job”.

I have a friend in a similar situation to you; he sold his business and keeps 100% in stocks: he has watched his net worth halve 2 or 3 times since he sold his company … he has not enjoyed that ride.

b) Property is the right place to keep the bulk of your portfolio; but buy to own 100%, live from the income; and, never plan on selling.

Sure property can also correct – Hawaii has been victim of that, more than once – but, in every correction, people still need somewhere to live and must pay rent. Since you are never planning on selling, however, the notional value of your property at any specific point in time becomes moot.

c) Here’s how to put it all together:

1. Keep your cash in place for now. Instead, move your stock market holdings into real-estate. How much you move, and how quickly you move it depends on how bullish you are on the stock market.

I would be comfortable with a max. of 20% or 30% of my net worth in stocks. At the moment, it’s much less, but I still have too many even riskier assets in my portfolio, so my opinion doesn’t count, here.

2. Start buying a balanced portfolio of smaller residential and commercial properties in prime, established areas. Avoid new areas & new (e.g. off the plan) properties. I always buy small, entire buildings (e.g. quadruplex apartment blocks; self-contained office buildings on own title; etc.). Look for current (e.g. modest rehab) and/or future upside potential to increase long-term returns.

3. If you are slightly aggressive, plan to partially-gear these (e.g. borrow up to 50%), so that you can optimize for number of properties owned. Try to make sure that each property is at least slightly cashflow positive, after expenses (incl. mortgage, taxes, repairs, vacancies, etc.).

As you get older, aim to move to 100% owned: no borrowings.

4. After you have become comfortable with owning one or two of these types of rental properties for at least a year or two, you can think about developing your own. This should increase your returns, as you get to keep the developer’s margin & there may be depreciation or other tax benefits.

Warning: developing property is very attractive and very lucrative. In theory.

In practice, it’s also very risky & the great source of my personal stress. When markets turn, developers go bankrupt.

So, here’s the secret:

Only develop real-estate that you can afford to keep.

That way, if you’re having fun and the market is strong, you can sell and do it all over again, but if the market is weak, you simply add the property to your rental portfolio & ride the market out.

5. Aim for a cash buffer of two year’s living expenses at all times.

Since you are young, your expenses do not reflect your likely future expenses. In that case, aim for $500k cash buffer (2 x $250k pa likely future expenses, when you have a family). Double every 20 years, to account for inflation.

Every year, or two, if you have an excess of cash in your buffer, buy – or build – another property. Do not put more money into stocks, unless you plan on keeping it there for 7 to 10 years … even (especially) if the market drops!

6. You will also need to have a plan to buy a proper house (use cash) one day; you could reduce your stock portfolio when the time comes, to further reduce volatility, since you will probably have a family by then and risk will be even more of an issue then, than it is (should be) today.

In all other respects, live like any other person of your age, spending – and living – no more than 20% more/better than your peers. Aspire & create in the same way they do.

Take chances & enjoy life in the knowledge that you have a secret safety net that you can rely on for when times get tough.

Do nothing, though, that could destroy that net, even if you think it might make you even richer in the long-term. That would not be an optimal Life  Decision.

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10 thoughts on “What to do when $10m drops into your lap …

  1. Real estate does require WORK.. plenty of it its not a lazy mans game… just something to keep in mind….. I own a lot of property its more work than I ever expected. I would also suggest if you do own property to TRACK YOUR RETURN on at least an annual basis. This should include the value of your properties if sold ( be conservative on this one) and the amount of return you are getting each year against that total value. If you dont know how to do this ask a fee free financial planner they can help you with that calculation or a few internet searches even if you have to pay them a few bucks to help you. I am personally struggling with the same question you have here and HAVE not found the magical formula but here is where I stand… 40% of my net worth is in real estate ( aprox return 6% per year ) this real estate takes me about 20 hours per week of my time to manage plus 2 employees to manage ugggg… 20% of my net worth is in my hand picked stocks ( about 10% return over the last 2 years) I spend about 3 hours a week trying to keep an eye on them and manage them but its work… and 20% of my net worth is in Mutual funds – Locked in my 401k ( about 50% in US stocks and 50% in international stock) aprox return this year = -3.5% and over the last 5 years has been 6% I spend only about 5 min a week looking at this and about 1 hour per year with a finacial planner to re-ballance these and the remaining 17% is in cash at a .88% annual return ( negotiated that rate with the bank)… I also have about 3% of my net worth in gold via an etf, thats been terrible lost like 10% per year on that so far from purchase date 3 years ago. So the real question is this a good mix?? well I dont like the active part of managing real estate.. but I want the returns. Investing is difficult… even more difficult if you want a good guaranteed return… as for me I’m searching in the future for a good annuity with a guaranteed return that I don’t have to be active at all with… but I have not found the right one yet.. I have seen some i DONT like but I hope I can find one to get out of this active management game..
    Other things that interest me is being an investor like shark tank… give a little money to get equity in a company.. .have not done it yet, but I have thought about it. I have considerable position in cash that I need to put to work but the stock markets frighten me right now.

  2. @jimbomillions – thanks for sharing.

    Since this is a wealth preservation strategy – not a wealth-building strategy (which, if you follow my writings, is vastly different) – I am not concerned about spending money on property management. But, I outsource, not employ.

    Even on my property development projects (which have been large, but I am now downsizing per this post), I have a project manager on a v generous profit share. HE gets to do the worrying for both of us 😉

  3. I respectfully disagree with this approach wholeheartedly, for a number of reasons.

    1.) I am assuming the person in question has a friend or relative that died that left them their portfolio. Pulling that money out of stocks could have disastrous consequences. The amount of taxes that would suddenly, and needlessly, need to be paid, would be astounding. Keeping the stocks intact would certainly be a priority for me to avoid the tax penalty and keep the deferment afloat.

    2.) I would take the cash portion and purchase a home outright. Not a fancy home – even with that found money, I’d keep it in the $300,000-400,000 range. Something nice, but conservative. If you are 28, you have a lot to learn and will make mistakes. Blowing your money on a home you live in, which is in actuality a liability, is not smart.

    3.) Live off the dividends. The notion of watching your net worth fluctuate should not bother you at all. Adrian, if your friend was losing that much sleep watching his net worth move like that he is not a very good investor. All that should matter is that the dividends keep rolling in. The market value of the investment shouldn’t matter.

    It is crucial that this person learns that stocks are living, breathing businesses. They aren’t pieces of paper. You have to treat them like a family business. If you owned a corner deli and the market value of your business dropped during the real estate crisis but profits from sales of sandwiches were rolling in as strong as ever, you wouldn’t sell. The business is doing fine. Grade an investment based on their earnings, which should increase year-over-year, and their dividend payout, which should also increase year-over-year.

    Look into the Dividend Aristrocrat’s.

    4.) If 70% of the portfolio is in stock, use the dividends that roll in to purchase new positions in industries that are of tremendous value. There are some values to be had in the oil industry. Watch them closely. You are going for dividend income, here, not capital appreciation. You don’t want to cash out, you want that check every 3 months.

    Having a small portion of your portfolio being rental properties is fine, but that’s a lot of work and a lot of liability. Simply investing in reliable blue chip dividend stocks with a history of raising their dividends year over year, like the Dividend Aristocrats and Dividend Champions, can provide a steadier stream of income than rental properties. You don’t have to deal with vacancies, frozen pipes, broken dishwashers, clogged toilets, flooded basements, tenants that don’t pay their rent, painting walls, replacing carpet or spraying for roaches, either.

  4. Great, well-thought out responses. You may be correct on 1); he will need to seek professional guidance on that, which may lead him to change his mind on relinquishing some/all of the stocks.

    As to the rest, well, when you have 70% of your net worth tied up in stocks, are totally reliant on the dividend income, and are in the midst of a market crash (~ every 10 years), please report back as to your state of mind.

  5. Adrian,

    I think that the benefits of real estate is that you cannot view the market value fluctuate wildly day by day. I think most people do not have the stomach for that. If you are the type of person that will sell low and buy high because the market fluctuations scare you, you have no business in stocks and real estate would probably be a safer game (or something like purchasing a car wash, a parking lot, etc.).

    I vastly prefer the game of dividend stocks to real estate because the market price fluctuations don’t bother me as long as the dividends increase steadily over time. It is easier – real estate is a whole lot of work. Truly, stocks have increased at a faster rate than real estate. 30 year returns of the S&P 500 exceed that of real estate in general (obviously up and coming neighborhoods could yield greater results versus a poorly constructed stock portfolio). I’m just not a fan of real estate because of the need for leverage, the fact that you must deal with people that may or may not pay rent, the repairs…yeesh.

    The OP, being such a young person, I think would be better off staying in stocks if they can teach themselves discipline. Withdrawing enough money to purchase a house outright so they have no mortgage could be good as well if they funnel that would-be mortgage payment into more investments, though. With that type of money, you could very easily purchase a $300,000 home, nothing flashy, put the rest in diversified blue chip stocks with an average yield of 4.5%, collect $450,000 in dividend checks a year, use $50,000/year to live off of, reinvest the other $400,000, then work a low stress part time job just to occupy your time and have play money…or even start a low risk business of your own. So many possibilities. This would be a dream come true for me.

  6. I agree- live off a portion of the dividends and keep reinvesting the rest in quality companies that have proven business models that continue to raise their dividends in good and bad markets. You can expect the portfolio to fluctuate, especially over long periods of time. Munger said that he went through four 50% portfolio draw downs in his 40 years of investing, so you need to be ready for that. He kept investing through the entire time with the extra cash flow coming in.


  7. OP needs to do some serious research and soul-searching before making any sudden moves — not just for tax reasons but for sanity. Needs to decide what most fulfills her, how and how much to fund that acceptably, how to handle family and friends and their reactions, what types of professionals to recruit into the wealth-management team, and such. Hope she’s already used your advice here in setting her Number ….

    OP might consider using bonds and dividend stocks to generate current income off untouched principal, if real estate doesn’t entice. Essentially your recommendation using well-examined securities instead of well-examined land and buildings. 🙂 Investigate suitability of this path with e.g. JLCollins’ well-regarded “Stock Series” http://jlcollinsnh.com/stock-series/ — check where he’s coming from by his blog post http://jlcollinsnh.com/2011/06/08/how-i-failed-my-daughter-and-a-simple-path-to-wealth/

    Were I to find $10M drop in my lap, I’d gradually integrate it into my current portfolio of bonds and dividend stocks. Even an anemic 3% yield throws off $25k/month, four times more income than I need for a fulfilling life. Per my current (written!) plan, I’d support several scholarships, arts groups, and local charities with such excess.

  8. @ Mike – Ditto. Great strategy for building wealth (although, the Dalbar Study shows that the vast majority of people panic in a crash and withdraw their money … hell, I’ve done this & I [should] know better). Too scary for my little heart in retirement.

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