John in Jersey
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No you don't.
But I'll give you the best advice you'll ever get anyway. And when it's time to actually DO the investing, call me.
Now, the answer to this usually depends on what you will need the money for, and when you'll need it. In a case like the one you're presenting, you'll never "need" any of it, although I have to ask in your fictional universe, why you would only invest $10 million of the $43 million. What's the rest of the $33 million for, wallpapering your garage? Burning it in lieu of heating oil? No, you'd invest all of it. The Harvard and Yale endowments are each over $15 billion with a b. They don't invest a quarter of it, they invest all of it. So smarten up.
Now, of course you're going to want equities-based investments for a large portion of your portfolio. Long term, they've average an 11% return, compared to 6.8% for real estate, 5% for bonds, and 2.5% for cash investments. Of course, stocks are a lot more volatile than most other kinds of investments, excepting commodities, of course.
Indiviudal stocks are usually way too risky to even bother with, to be even more forthcoming. In 2000, you could have invested in the #1 energy company in the U.S., or the #2 phone company. What could have been more stable than a couple of leading utilities? Ask the shareholders of Enron and Worldcom, respectively. No, a far smarter, and safer, way to get that needed equity exposure is through high-quality mutual funds. I'm not talking the junky tech-bombs that exploded on the scene the late 90's. I'm talking about quality funds that own quality stocks, and have a quality track record to back it up.
No matter what route you go with, the most important thing is to DIVERSIFY. Diversify, diversify, diversify. I can't say it enough. A good rule of thumb for most people is that your age should be the percentage you are in fixed income investments, like bonds, CDs, and cash. Thus, the older you get, the more conservative you'll become. Of course, your individual risk tolerance will vary.
Assuming you are 30, a sample portfolio like the following will be sufficient:
10% Large-cap stocks
10% Mid-cap stocks
10% Small-cap stocks
10% International developmed markets stocks
10% Emerging markets stocks
10% Real Estate Investments
5% Commodities
5% Precious Metals
10% Government bonds
10% Corporate Bonds (including High-yield)
5% International Bonds
5% Emerging Markets Bonds
As daunting as that may or may not look, it can be achieved very easily through just a few mutual funds. The key of course, is which funds, and that's where a good advisor with good research earns his money. Properly managed money will always beats ANY index, and I have tons of data to back that up for any cheapskates who think an S&P 500 index fund is the way to go. Ask anyone who has any REAL amount of money and they will laugh at that idea. And they'll laugh even harder at the idiots that suggest it. The aforementioned Harvard and Yale endowments? The ones in excess of $15 billion? They average about 15% return a year. No index funds there.
That said, a properly diversifed and asset-allocated portfolio like the one I suggested above should average 8-12% annually, or better. They key is that all the different asset classes behave differently when the same economic event happens, like, say, interest rates rising, or a war starting in Bulgaria. Stocks behave differently than bonds, which behave differently than commodities, which behave differently than real estate, etc.
Using the "Rule of 72", where you divide the number 72 by your return % to see how often your money will double, we see that if this portfolio is earning 10%, it will double every 7 years. Compare that to a money market earning 2%, which will double every 36 years!
So, in 7 years you should have about $86 million.
in 14 years you should have about $172 million.
in 21 years you should have about $344 million.
in 28 years you should have about $688 million.
in 35 years you should have about $1.3 billion.
in 42 years you should have about $2.6 billion.
in 49 years you should have about $5.2 billion.
in 56 years you should have about $10.4 billion.
and on and on and on.....
Hope that's enough for you.
Thus we illustrate the power of compounding, which Albert Einstein called mankind's greatest invention. It also illustrates the power of starting early!
As a completist, I'll just mention that if the portfolio earned 12% it would double every 6 years or so, so that it would actually reach that 1 billion number in only 30 years instead of 35, and the 10 billion number in only 48 years instead of 56.
Now quit jerking everyone around and get back to some real questions.
Hope this helps!
--J |
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