Leveraging a windfall

[Felonious Monk/Fignozzle]

Let's say hypothetically, that a reasonably smart, college-educated pro-RKBA guy should happen to win a judgement to the tune of low-mid 6 figures.  Beyond an average understanding of debt elimination, maxing out a 401k, and controlling expenses, he is not what you would consider financially sophisticated.

While this is in NO way a 'lottery win' that's going to change this person into a jet-setter overnight, he recognizes that it DOES represent a lump sum that provides many, many options for diversification and, IF PROPERLY LEVERAGED, the possibility of a little more financial security, and maybe even a shot at an early retirement, if the markets go his way.

If this person was your best bud in the entire world, and he came to you and said "Pal o' Mine, I need guidance on how to best make this grow into something that will provide the best gains of return on investment, with a reasonable amount of certainty that I will AT LEAST not lose my principal."

How would you advise him?

[Monkeyleg]

I've often fantasized about such a dilemna, but never had to face it.

If it were to happen to me, I'd ask as many people I know about their financial counselors and interview each.

Fifteen or so years ago, when things were going extremely well for me, I interviewed several. In hindsight, I should have selected the older gentleman who advised a slow, steady rate of growth.

Instead, I chose a hotdog who turned my nest egg into egg shells.

[onions!]

Plastics young man,plastics.

[Guest]

Class 3 stuff holds its value well,  and .50's are a sound bet too, since they are next on the choppin block

[garyk/nm]

Want steady growth?
Berkshire Hathaway B fund.

ps: free advice is worth exactly what you paid for it.

[Felonious Monk/Fignozzle]

Well, my thought was an Index fund, since over time it beats 90% of individual mutual funds.  That's what I suggested.

[280plus]

The thing I do is find some good solid fund groups, in my case Fidelity and Vanguard, and within those groups look for funds with moderate returns I like 10% myself, that's what I shoot for. I look over all their offerings and I pick those funds that have been around a while and show between say 10% and 13% average return since inception. Then I divide my money up between them and forget about it.. Go for no load funds too. That's about as in depth as I can get. I'm certainly no finacial avisor so take my advice with a pound of salt. It has been working for me though.

[Brad Johnson]

Put use it as a 50% down on some rental property on a 15 yr note. Turn it over to a managment co and let them deal with the day-to-day headaches. Nothing like doubling your money in 15 years (plus market appreciation).

Brad

[chud]

Whatever you do stay away from real estate, especially rental property.  A diversified portfolio of stocks, bonds, and precious metals is a start.  Also, get a good tax attorney who can advise you about the tax consequences of your new money.

[Brad Johnson]

Whatever you do stay away from real estate, especially rental property

Why?

Brad

[Paddy]

Not a thing wrong with a good rental property.  First, it can be a leveraged investment, meaning you enjoy appreciation on the full market value, even though you've only advanced a percentage of that out of pocket.  Second, the depreciation write off CAN put you in positive cash flow with a break even or loss for income tax purposes.  That's sweet.  You can borrow against the equity without paying any income taxes on the money.  Once it's paid off, you enjoy a steady relatively risk free income.  And you don't even have to pay capital gains taxes on it to get rid of it.  You can do a 1031 tax deferred exchange into something else.

What's the beef?

[Guest]

Fig,

Hypothetical congratulations on the windfall.  8^)  Not long ago a friend who took one of those six-figure a year contracting jobs overseas asked me the same general question.  Here is pretty much what I told him:

First, get out of debt- and stay out.  With any major upward change in financial status will come all sorts of wonderful offers to borrow.  Don't do it.

$100,000- 500,000 frankly isn't a lot of money, relatively speaking.  Yes, it is a nice nest egg and can provide a lot of security- but it will erode with astonishing speed if not properly looked after.  I have seen it happen to a literal lottery winner in my own family.  Withstanding all temptations to adopt a lifestyle in keeping with newfound prosperity is a difficult thing to do, but it is an absolute necessity.  The fewer people who know about the change in circumstances, the fewer who will be tempted to try and convince you to 'share the wealth' and the good times.  Make sure your self esteem/ego/whatever is up to the job of playing poor, that you don't feel obligated to try and impress people merely by flinging money around.  You still ARE poor if all you have is six figures, it isn't a stretch to act poor.  After you're a millionaire, you have my permission to buy the Rolex.  But just a Submariner, mind you- no Prez yet.  I follow my own advice BTW, my only watch is a Seiko blackface diver that I don't wear since I retired (at 51).  My vehicle is a 2002 Nissan pickup, bought used, for cash.  The house and property are modest and unassuming, but mortgaged so as to be like everyone else.  My wife still works outside the home.

SO, what to do with all that money...  decisions, decisions.  First of all, DON'T LOSE ANY OF IT.  Then, buy low and sell high.  In a nutshell that's all you need to know to make it grow.  The hardest part is figuring what to buy when, and then when to sell it.  But we will cover the 'don't lose any' part first.  

Here's your first hint:  Ben Bernanke is not your friend.

Don't know who the estimable Mr. Bernanke is?  Ah.  OK, that would be Ben "Helicopter Money" Bernanke, Mr. "I have a printing press and I am not afraid to use it" himself.  The newly installed chairman of the Federal Reserve that is, who is guaranteed not to pull the punchbowl off the party table.  All this gobbledygook is my attempt at finding a clever way of saying that you should NOT be keeping your newfound windfall denominated in US dollars in a US bank, nor in Treasuries, etc.  If you do you will be violating Rule 1 (Don't lose any).  Oh, sure.  You will still have the same number of dollars, and even a few more when the interest is paid.  But you WILL NOT be keeping up with inflation and the loss of purchasing power.  It is a sinister plot, it really is, and it will erode your money as surely as will chasing high times and loose women- it just won't be as exciting, or happen as fast.  But it is just as inexorable.  Be sure you understand what PURCHASING POWER is, and learn how to maintain it.  How many "dollars" you have is now completely irrelevant, and is guaranteed to get ever more irrelevant as time goes on and the dollar is further degraded.  Time WILL go on, and the dollar WILL be degraded.  It is about as certain as anything that politically motivated human beings will ever do- avoid as much fiscal pain as possible for as long as possible.

So, where should you keep your money and how should you invest it?  Now there's the rub.  You can listen to the Wall Street talking heads, and do what they say.  That's the conventional route, no one will blame you, everyone will think that's a good thing to do, that's what THEY would do if they were in your shoes.

Your average whiz kid financial analyst is going to talk about 'asset allocation,' which is to say how much of your windfall do you put where?  Well, look up asset allocation on the web and figure your own percentages, do it yourself and save.   Somehow a lot of the things El WhizKid suggests will have a way of putting some of your money in his pocket.  Of course, he makes his living selling you advice, no secret there.  And you can pay him his cut, and take his advice, no one would look crossways at you if you did.  Not even me, in fact.  But it isn't what I would do.

I would do something different if I were you.  I would pick a different star to hitch my wagon to, I would choose a different expert than Mr. WhizKid at the local franchise brokerage house office..

I would very first thing invest in a subscription to Uncle Harry's newsletter ( http://www.hsletter.com/ ) and I would read his advice carefully, very carefully, for at least a year before I did anything.  I would study and learn and observe results and try to understand all the different things this crazy old man was saying.  It might be a lot to work on, but I would try.  I might also send a couple of dead presidents to Richard Russell at http://ww1.dowtheoryletters.com/dtlol.nsf .  The thing I like about Uncle Harry is that his advice is international, and this is IMO a good century to be looking abroad for a lot of things.

While I read his letter for the first year I would put most of my money (50- 60% or so- heck you're YOUNG, and still working- still gonna KEEP ON working AND SAVING, right?) in a very safe place.  What safe place?  Well, SEVERAL safe places really- I don't like the 'all eggs in one basket' approach.  First of all I would put 10% of the total into physical gold and silver and take possession of it.  Ten percent of $100K is only $10,000 (do the math from there if the total is larger).  Right now $10K will get you one $1000 face value bag of junk 90% silver coins (pre-1964 circulated US dimes or quarters) and less than 10 ounces of gold.  We are not talking Scrooge McDuck here, you will not have to build a basement to hold your $10K miser's hoard.  A .50 cal ammo can will likely hold it all, in fact.  Granted it will be a HEAVY ammo can, but it should fit.  Check http://www.tulving.com/goldbull.html for prices, stay away from 'numismatic' gold, just get currently minted US eagles for the gold portion of your monetary insurance- for this is what you have, it is not an investment.  It is insurance for your money.

In the meantime I would be stashing the cash portion of my asset allocation into various specialty CDs (FDIC insured even) offered by Everbank ( http://www.everbank.com )- either Commodity CDs, various international currency CDs etc, and turning them over every three months depending on developments.

I would park the rest of the 'safe' portion of the asset allocation into some version of Harry Browne's Permanent Portfolio Plan- likely the fund by Vanguard  
( http://flagship.vanguard.com/VGApp/hnw/FundsProspectusReports?FundId=1476&FundIntExt=EXT ).  

For the growth, income producing and speculative portions of the allocation (everything other than the 'safe' part), I would be investing in natural resources and energy  right now.  Everything economic moves in cycles, you want to have your money invested in a cycle that is moving up and not down .  I can suggest GRI ( http://www.globalresourceinvestments.com/default ) as a good source for that area, yes they are a brokerage and yes, there is a transaction cost for each buy/sell- but for that level of expertise I will happily pay a small percentage.  

Of course YMMV, good luck and have fun...

lpl/nc

...edited spelling...

[Felonious Monk/Fignozzle]

Lee,

Thanks.  That's the level of detail I'd like to be able to pass along.

It's greatly appreciated.
Fig

[280plus]

Just out of curiosity, Silver is way up. I recently heard a talking head claim that it will NOT reach the levels seen in the 80's. Can it be expected to begin to decline at some point? I bought a bag of 40% 1963 Kennedy halfs about 5-6 years ago. It weighs 74 lbs btw. The reason I did it that way was that even if silver were to drop to substantially less than it was then ($5.11) that bag will never be worth less than it's $1000 face value. Right now I'm wondering if I should cash in and put the money elsewhere.

[Paddy]

On the CD's- sure they're federally insured up to 100k per bank, BUT they're taxable to both state and federal.  T Bills are state tax exempt, just as safe and pay roughly the same interest rate.  I Bonds are another cash equivalent AND they're adjusted for inflation twice a year-so, you make inflation plus earn interest.

So if the yield on the CD is equal to or less than the rate of inflation, YOU LOSE, especially after paying taxes.

[Art Eatman]

Silver has moved from $4/oz to $10, roughly, in the last few years, just as gold has risen from below $300oz to around $550/oz.  Even if you don't buy any more, at least hold on to see what happens.

It's less than "gold has gone up" than it is that the dollar not only is losing buying power from inflation, it's losing because of distrust of the overall financial health of the U.S.  

I can see gold climbing on another @200/oz and even more; I'm much less sure about silver going above, say, $20/oz.

Equities investments?  Companies selling commodities into China.  China outsources much of their food, so Bunge of Brazil is a strong company.  Short term, companies in the steel and cement business who sell into China.  And energy companies; Valero is worth looking into.

But don't buy any stock without doing a bunch of research about the company:  Debt, net worth of assets, all that stuff.  Track record over the last ten years or so.  

Rental property can be good in some areas.  E.g., there is a shortage of rentals in Alpine, Texas.  There is slow growth there, but rentals' availability is behind demand.   Same for here in Terlingua.  But, it can't be high-end stuff.

I'd stay away from any of the high-dollar housing markets.  Inventories of unsold homes are rising, and it's taking longer and longer to sell.  Prices are seeing some declines.  The interest-only speculators are moving out of the market, and those who could only afford an interest-only mortgage for the first years are gonna be in deep doo-doo--and that means more repos on the market.

Art

[Guest]

"I recently heard a talking head claim that it will NOT reach the levels seen in the 80's."
=======
I doubt it will stop there this time around, it will go higher IMO.  Silver is an industrial metal, it gets used up in manufacturing and chemical processes- unlike gold, which may get changed in form but not actually consumed so much as silver.  And silver is largely a byproduct of the mining and refining of other metals.  Once the US government had a huge stockpile of silver- no more, it's all been used up or sold.  Note the following:
*****
For the fourteenth year in a row, fabrication demand outstripped silver supply from mines and scrap sources, by about 60 million ounces. The accumulated silver supply deficit since 1992 is now more than 1.4 billion ounces, which has been satisfied through the disposal of above-ground inventories. In recent years the major source of such inventories has been government stockpiles. In 2004 the US government sold the last of its silver stockpile that had been as large as 2 billion ounces in the 1950s, and the Chinese government sold about 40 million ounces from its stockpile, a sharp reduction from earlier years. With US stockpiles gone and Chinese stockpiles drastically reduced, the only other known government stockpile is in India, which announced in early 2005 that it would sell off its entire 65 million ounce inventory over the next three years at a rate of about 20 million ounces a year.
- http://www.panamericansilver.com/silvermarket/silver_fundamentals.htm
*****
It's said that the Saudis bought a bunch of silver in England a few years back and left physical custody of the metal with their bank.  Recently they decided they'd rather have it on hand and asked for their metal- only to find it had been leased by the institution, sold into the market, and there was not enough metal available on the market to replace it immediately.  The Saudis settled the deal for cash and went shopping for their silver closer to home- and took immediate delivery of the physical metal this time. See story at http://www.safehaven.com/article-4528.htm .  Your TV talking head would no doubt dismiss all this as so much groundless conspiracy theory, by the way.
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"Right now I'm wondering if I should cash in and put the money elsewhere."
=================================================
It depends.  Why did you buy it in the first place, and have the circumstances which convinced you to buy it changed?  Do you really need for that money to be doing something else right now (note the operative word is need, not want)?  Once upon a time any reputable investment adviser told clients to have 5- 10% of their wealth in physical gold and silver as an absolute hedge against financial uncertainty.  Go back and read some of the 20- or 30-year-old investment guides and see for yourself.  I do not advise that ordinary people buy gold or silver as investments, but as monetary insurance- digits are a new thing, but gold and silver have been used as money for most of human history.  If you feel you don't need the insurance any more, someone else will be happy to buy your silver from you and you will no doubt realize a nice numerical profit in digital dollars.  But what will those dollars buy now as opposed to when you first spent them on silver?  Remember the importance of understanding the concept of purchasing power, do not get blinded by mere numbers with a dollar sign in front of them.  Those kinds of numbers are as useful in determining reality as a tape measure made of elastic.

lpl/nc

...edited to fix link...

[Art Eatman]

Having some very-liquid assets is a Good Thing if the economy goes south for any period of time.  With CDs, you can commonly borrow against them for 2% interest above what the bank pays.  So, if you run across a thousand-dollar item for $200, you can jump on it.  Same for a car deal or a house deal.  A buddy of mine recently bought a fairly clean '57 Chevy Belair for $2,500 just because he had ready greenbacks.  He could run it through the Barrett auction for at least $25K, as is.

In general, debt can be a tool if used wisely.  It ain't worth used toilet paper as a daily way of life for fun and gratification.

If you buy gold bullion coins at a coin show, for cash, you avoid sales tax.  Same for junk silver or collector coins (collector coins, of course, require a helluva lot of knowledge).  You don't want to have to pray for a 10% rise in the per-ounce price of gold or silver in order to just break even.

Kitco.com is a good place to watch the daily moves in precious metals.

Art

[280plus]

Why did you buy it in the first place,

Diversity and adherence to that 5 - 10% rule you mention. But it's come up so nicely I'd hate to see a reversal 5 years down the road and I'm thinking lock in the "profits" and move it to a fund. Maybe even toward this years IRA, now that I'm thinking about it.

[Brad Johnson]

Precious metals is a terrible place to put money unless you like a built-in loss up front.

You buy a precious metal at market price. You sell a precious metal at market price less margin. Unless you KNOW that the metal will increas in value by at least the estimated margin you have a built-in investment loss.

Precious metals are only a hedge against a general market downturn. The fact that metals are up (way, WAY up) over the last couple of years is a reason I would NOT buy it. Chasing a return is almost guaranteed to lose money. You buy when it has gone down, not up.

As far as security and potential returns go, the most (relatively) secure investments are bonds and t-bills. However, security comes at a price - low returns. The best bet for a combination of security and returns (long-term) is no-load mutual funds. The diversified nature of a mutual fund is a built-in security net should one stock in the fund go sour. There are many levels of funds from steady growth (low or moderate returns/risk to aggresive growth (moderate or high returns/risk).

Your first question should be one of return period. In other words, how long do you want the money working for you before you pull it out. That will determine your most advantageous investment strategy.

Brad

[middy]

Guns. Buy lots of guns. Well, that's what I would do.

[Felonious Monk/Fignozzle]

I may tell my friend to put a Crimson Trace Lasergrip on his HD .357 Ruger revolver, but that's about the ONLY splurge I'm going to recommend.  

He has expressed his desire for this money to make him secure in his retirement/old age, so I'm going to lean on the side of conservative, long-term investments, tell him to live in the same house, drive the same cars, etc. etc.

[Brad Johnson]

There was talk of metals?

Check out today's market news...

http://news.yahoo.com/s/nm/20060210/bs_nm/markets_metals_dc

Brad

[280plus]

Thanks Brad. I just made a few calls and FWIW the $1,000 face value bag of 40% coins I bought for ~$1,500 in 1999 is worth $2,824 today.

(and that's not counting the ONE 90% coin I found mixed in there when I was rolling them up.)

LOL...

(yes I rolled them all for more compact storage)


And I would LOVE to see copper and aluminum come down a bit. I can't even trust my quotes from day to day because if the stuff takes a jump after I quote a big job it cuts right into prospective profits. I hate that...

[Art Eatman]

The fact that there's a short-term correction doesn't affect the long-term bullish trend in metals.  Buy the dips.

Remember the old-days copper penny?  The intrinsic value equalled the face value at $1.22 per "aardvark"  pound.  That's $2,684 a metric ton, or tonne.  I bring this up to illustrate just how far commodities have gone/are going.

Prices can rise too fast as a result of short-term increases in demand.  (A good example is steel; it has more than doubled in price in the last couple/three years.  China.  China used some 50% of the world's supply of cement and 40% of the world's supply of steel in 2004.)  That often means that the rate of increase in demand will slow, but the overall quantity of demand will continue to increase and prices will continue to rise.

Some guys whose lives are spent in analyzing investment potentials are pretty much in agreement that commodities are in a bull market for the next eight to ten years.  They're putting their money there, anyway.  Bill Bonner, Doug Casey, and others.  They're millionaires, and they didn't get there by being stupid.

Art