How To Invest Your $1.6 Billion Mega Millions Winnings
Mega Millions lottery tickets are printed out of a lottery machine at a convenience store. (AP . [+] Photo/Nam Y. Huh)
One in 300 million. The odds aren’t great, but your chances of winning the massive Mega Millions lottery are as good as the next person. The current jackpot is estimated to be more than $1.6 billion. That is 1,600 million for those who are used to seeing smaller prizes. According to the USA Mega lottery website, the lucky winner will take home approximately $687 million after taxes if he or she opts for the cash option — life-changing wealth by any standard. It’s fun just dreaming how would you spend or invest the money if you won. The opportunities would be endless. Well, almost.
You still couldn’t buy an NFL team or an NBA franchise. Those are reserved for the multi-billionaires, not somebody who has a mere $687 million. Nonetheless, you could still afford most of life’s extravagances. Once you have shared the wealth with family members and your favorite charities, you would eventually have to get down to the business of investing your windfall. Don’t worry; there would be plenty advisors knocking at your door with all sorts of ideas. Help is only a 1% fee away, after all. But if you are more of DIY investor (which most likely would change with $687 million to your name), here are a few suggestions to get you started.
Diversification is going to be the key to preserving your capital. It would include an allocation to private equity, public market stocks, hedge funds, real estate and fixed income — similar to the model many endowments follow. Within each bucket, any single investment in a company, strategy or fund should not be larger than 3%. There is no need to take outsized bets. You would be in the “stay rich” game, not the “get rich” game. It is impossible to predict what your actual returns would be; but in the long run, you might expect to make roughly 5-6% on your investments annually, depending on your asset allocation blend, market conditions and your advisory fees. That would give you an annual allowance of over $30 million (before taxes) without eating into your principal. There are many tools available for forecasting returns by asset class. The projected gross returns in each asset class described below are from JP Morgan Asset Management.
Allocations from Garth Friesen. Expected returns from JP Morgan Asset Management.
Not that you would need “rainy day” money with a net worth of almost $700 million, but having a modest 5% allocation (roughly $35 million) of cash or liquid short-dated investments allows you to be nimble with investment opportunities as they arise. Also, it can come in handy if you find yourself in a situation where you need to quickly buy a yacht, jet or minor league baseball team. All sorts of surprises happen in life. Expected gross return: 2.0%
You can afford to have some illiquid investments when you have hundreds of millions of dollars to put to work. Private equity investments often require a 7-10 year commitment, but the returns have historically outpaced public markets. You can capture the “illiquidity premium” associated with tying up your money for such a long period. Allocations should include a variety of different strategies: traditional buyout funds, timber, private debt, venture capital, etc. Pick roughly ten funds across different market segments and geographies and allocate to them equally. Expected gross return: 7.25%.
Hedge funds have not performed very well in the last few years compared to the US equity market. There are many explanations (or excuses) for the lackluster returns, but one reason is that most hedge funds are actually hedged! Few hedge funds have 100% long exposure to the stock market because their investors want a different/uncorrelated return stream. If investors wanted 100% beta to the S&P 500, they could simply buy a low-cost ETF. Hedge funds investors are waiting for the day when a dynamic, hedged portfolio outperforms the broad public stock market. Given the volatility of late, such a day may come sooner rather than later. Diversify your allocation to hedge funds by not putting more than a 3% weight to any one manager or fund and spread your money across several strategies: long-short equity, fixed income relative value, distressed credit, event-driven, etc. Expected gross return: 4.25%.
The allocation to real estate should not include your recently acquired beach mansion or chateaux in France. The primary purpose for an allocation to real estate is for the tax-efficient income and potentially attractive long-term total return. It also happens to give you an inflation hedge, which is important since inflation can be a primary driver of wealth erosion (look to Venezuela to see the devastating effects of hyperinflation). Investments should include both commercial (office buildings, hotels, warehouses, etc.) and residential properties (multi-family complexes like apartment buildings). These investments should also be diversified across geographies. Some of the best opportunities (and potential returns) are overseas. This is the hardest allocation to do-it-yourself. Hire a firm with expertise in the area and be prepared to spend time for due diligence at your chateaux. Expected gross return: 6%.
Unlike hedge funds, private equity funds or real estate, you can probably invest in public equities so long as you stick to going long on the market and don’t attempt to pick the next Google or Amazon. Boring, low-cost index funds or ETFs can give you exposure to the entire market. It should include an allocation to international and U.S. stocks in addition to emerging markets. The goal should be to try to get the market return rather than trying to beat the market. Leave the stock picking to the high-priced managers in your hedge fund portfolio. Expected gross return: 6%.
Yes, yields are low, but you will need a steady source of income for your new lifestyle. Your house staff and army of accountants and lawyers will need to get paid; you don’t want to be in a situation where you are forced to liquidate one of your office towers to meet payroll. Also, fixed income has tended to zig when your other risk assets zag. That won’t always be the case, but an uncorrelated return stream is the primary goal of investment diversification and explains why many of the largest long-term investors maintain at least some allocation to the bond market. You should spread the money around the different fixed income sectors: corporate bonds, municipal bonds, US Treasuries, agency mortgage bonds as well as some bonds from higher-yielding emerging market countries. Expected gross return: 3.5%.
As mentioned above, the anticipated blended annual gross return for this asset allocation is in the neighborhood of 5-6%. The goal, remember, is to stay rich and not make investments where you run the risk of losing everything. A 5% return on $687 million is $37 million per year — sufficient for anyone to live a rock-star lifestyle. Jackpot fever is consuming the nation, but as the saying goes, “you have to be in it to win it”. Despite the odds, the fantasy of winning may just be worth the $2 ticket price.
The views set forth above are those of the author and not of his employer or any other party. These views should not be construed as investment, legal or tax advice. Once you win the lottery you should consult with your professional financial advisers prior to investing your winnings.If you won the $1.6 billion Mega Millions lottery, how would you invest your instant wealth?
How to Invest Lottery Money
6 Tips to Save Using the Most Popular Food Delivery Apps
From time to time, the news runs stories of lottery winners who blew through their windfalls quickly and ended up with nothing to show for their good fortune. If you are lucky enough to win the lottery, you need to take steps to ensure this sad scenario does not happen to you. Investing your winnings smartly can allow you to live comfortably off the proceeds for the rest of your life, while making the wrong moves could leave you hoping for another lottery miracle.
Calculate the amount of annual income your windfall can provide if invested conservatively. It takes a surprisingly large nest egg to provide a comfortable middle-class lifestyle on interest alone. Even $1 million provides only $40,000 per year, assuming a 4 percent return. Taking 4 percent of the portfolio as income is the best way to ensure the money will last—taking more than that amount could leave you at risk of running out of money.
Take a small portion of your winnings and buy a few things you have always wanted. It is normal to want to splurge after a big windfall, and failing to do so could leave you feeling deprived, which could in turn tempt you later on.
Divide your money into two parts—one part that is invested conservatively, in safe but low-yielding vehicles like bank CDs and government bonds. The other half of the money can be invested in the stock market, where the risk is higher but the potential returns are higher as well.
Contact your bank for information on CD yields and government bonds. Keep in mind that the current limit for FDIC insurance is $250,000, so you might need to use more than one bank if you have a lot of money to invest.
Create a ladder of CDs by dividing your money between one-, two-, three-, four- and five-year CDs. This staggers the maturity dates and increases the likelihood that your CDs will mature at higher rates.
Contact a low-cost mutual fund family and ask for a prospectus on its index funds. An index fund purchases all the stocks in a given index, often the Standard & Poor’s 500. These funds have lower expenses, and they tend to do better over the long run than more costly managed funds.
Review the prospectus carefully for information about risks, fees and expenses. Keep in mind that large investors often have access to a special class of funds with lower expenses, as well as additional perks like investment advice and a personal investment counselor.
Complete the application and send the form, along with your check or wire transfer, to the address listed on the form. Depending on the fund family you might be able to complete the application and the money transfer online.
Decide whether you want the dividends and capital gains reinvested or deposited to your bank account. If you plan to live off the proceeds of your lottery winnings, having the capital gains, interest and dividends sent right to your bank account can be a good idea.
Based in Pennsylvania, Bonnie Conrad has been working as a professional freelance writer since 2003. Her work can be seen on Credit Factor, Constant Content and a number of other websites. Conrad also works full-time as a computer technician and loves to write about a number of technician topics. She studied computer technology and business administration at Harrisburg Area Community College.How to Invest Lottery Money 6 Tips to Save Using the Most Popular Food Delivery Apps From time to time, the news runs stories of lottery winners who blew through their windfalls quickly and ]]>