Ask HN: How would you invest $500K? | Hacker News Reader

Ask HN: How would you invest $500K?

45 pointsbsvalley64 comments

If you had $500K to invest, which would be your entire equity, cash money, how would you invest it?

It's your equity so a low risk would definitely be considered. Looking for creative advices, not boring banking stuff...

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1. Pay off any debts I had.

2. Keep 6 months reserves in cash (maybe 12 depending on my view of the current political outlook)

2. If I had plans to staying put for at least 3-5 years, a down payment for a modest home in a good neighborhood, possibly a fixer, something I could rent out in a few years if I moved. I am young(ish) and have good earning potential so am confident that taking out a mortgage at current historically low rates and investing the rest in the stock market will provide higher returns in the long run than paying a house off immediately.

4. Put the rest in low-fee index funds.

If you don't already have a burning passion to pursue something that this money enables you to do and you have other sources of income already, don't go looking for a hole to throw your money down.

Unless it's money you can afford to lose, your investments should be "boring banking stuff".

I hate to be dismissive but if it's your entire equity and you want low-risk just settle for the "boring" stuff. And get on with your life. You don't want to keep thinking about that money. You won't beat the market. If you can beat the market then go do that professionally (and still invest in the boring stuff personally!!).

Honestly, you should probably ask what you want to accomplish with the invested money before deciding how to invest it. Are you planning on mitigating variance in income/employment? Then you're much more adverse to variance and illiquidity. Are you planning on setting yourself up for financial independence? Then you can probably handle risk much better and something like an equity index fund would work well. Want to make sure your child can go to college? Something like https://en.wikipedia.org/wiki/Guaranteed_Education_Tuition_P... would be an excellent choice. Want to generally make the world a better place? Investing may have superior alternatives, such as donating to an anti-malaria charity.

I'd start with 10k inflation adjusted personal Series I savings bonds from the US treasury, which pay quote a bit more then any available CD in terms of APY, and have a 3 months interest penalty for 5 years after purchase. I'd probably wait until after april 30th, since the fixed rate interest rate on them is currently zero but will hopefully go up. You don't pay state or local taxes but you do pay federal taxes.

That leaves 490k. I'd put 100k into wealthfront, so they will use individual stocks instead of etfs for tax loss harvesting.

I'd take 90k and invest it in AA or A rated municipal bonds, if you are in a state where gains are tax free, creating the beginnings of a bond ladder. We expect the fed to raise interests rates 3 times next year so I'd probably split this 15k for the first raise, 25k for the second raise and 50k for the third raise.

if I have a 401k I'd invest the maximum 18k in 2016 and contribute the 18k in 2016, making purchases immediately after interest rates go up in dividend stock etfs, reit etfs, broad market etfs, and a small cap etf. Likewise 5500 each ear for an ira, or possibly a roth IRA, depending on current income levels.

I'd save 153k in a savings account like synchrony bank with 1.04 apy interest. Part of that should be a year's expenses, the rest used to purchase stock in solid companies if the market crashes. I'd want to adjust this after a market crash year.

Then I'd split 300k into 100k for a broad based index etf, 50k in a small cap etf, 25k in a midcap etf, 75k in a large cap etf, 25 k in a bond etf. I'd spend 5k on individual stocks using a robinhood account, so I could get a feel for the market. The remaining 20k would be for taxes on any dividends, idly playing the market so I wouldn't touch the bigger investments, and an emergency fund, again placed in a synchrony or equivalent savings account.

What's the theory behind these investment choices? They sound reasonable, and I'm curious to learn how you arrived at them.

Be careful with investments that conflict with Wealthfront's tax loss harvesting. This could make a lot of work sorting out at tax time and minimize the benefit.

Honestly, I'd leverage it to purchase real estate split between some rentals and rehabs when the right opportunity came up. For me the passive income of rentals and being able to leverage the $500k into far more is just to attractive. If you just put $500k into the market or business ideas, your level of risk varies more and the payoff is far into the future if ever. People are scared of real estate still some because of the last bust, but the reality is it is the single greatest generator of sustained wealth. Even people that make their money in other places like a startup, eventually find out that leveraging liquidity to enter the real estate market pays back in huge ways.

Real estate isn't risk free, but even in down cycles you don't lose all your value, e.g. a $200k house doesn't become worth $0. The key wealth generator (not get rich quick scheme) in the history of the US and most Countries is real estate (land/property etc). This means finding and buying in the right areas and not being afraid to cross state lines etc. Leveraging the $500k in California won't get you really far, but doing it most other places will let you really do quite well and you can have passive income coming in within a few months.

Also, done right, you'll still have a significant amount of the money to invest into other things like the stock market to diversify yourself.

That's the closest answer to where I'm at now... real estate is the best candidate at the moment, rental properties or flipping houses.

Besides California, where would you be looking to buy?

I would recommend the Seattle area. The market is very competitive, but it's hard to imagine it weakening with Amazon's eating up all the office space it can, Google and Facebook's doubling down with new offices, and Microsoft's apparently continuing renaissance.

Rental properties in suburbs of Austin. They're growing fast but in the right spots you can pick up three or four properties by leveraging 500k. And Texas is very slanted towards landlord rights (not that I personally feel good about that, it's just how it is.)

There are a lot of places to look outside of California. Pick some of the states near you that went through the bust badly. If you are in CA, then look to AZ, NV, TX. If you don't mind the cold, MN, MI, IL. And if you like the southeast, throw a dart there is tons of stuff down this way.

Personally, I am in Florida and it is quickly recovering now and you have to look harder to find the right rehab if that is what you want to do, but good rentals are easier to find. And frankly, I am loving that the younger generation is renting far longer then in the past, this is helping to keep rental rates good and driving demand for now.

Just anecdotally, I have friends who have been very successful with buying and renting condos/apartments in a college town. Demand for rental units stays high (well-known, reputable public university).

Oddly enough, they have generally negative experiences renting to parents of students instead of directly to students.

I will say that my friend works full time as the property manager for their units. It's not a passive investment.

Several years ago, I talked with an accountant who had clients who owned rental property about the ROI. The feedback was that if you had to hire a property manager and outsource all repairs/maintenance, the value proposition of rental property was greatly reduced and closer to neutral than many owners initially assumed.

It looks like it is working out well for my friends though - they were able to leverage their financing as they acquired new units because interest rates have been so low. They have been cash-flow positive for many years. But they also capped themselves at about 20 units under management.

If you're not willing to unclog toilets at 3 AM, you should consider investing in a REIT. Considering this is HN, take a look at data center REITs specifically.

I wonder how returns of real estate compare to REITs when you factor in the extra time and hassle of managing property (or paying somebody to do it)

I've been invested in REITs for a while, but I've more seriously been looking at direct investments because I've realized that REITs actually behave quite a bit differently from owning real estate.

(Traditional) REITs are priced more or less like a bond by the markets and will be largely evaluated based on their yield. As a result, you're missing out on the appreciation component of real estate. You also don't get the tax benefits of the interest deduction. With a direct investment, you can look at things like which areas will disproportionately appreciate in the future. It's more like an active investment in a value stock with a nice dividend to boot.

This is just peoples way of scaring others away from property investment, which personally is good for those of us that know the truth. The reality of getting a late call is not all that common, but I can't say it never happens. The clogged toilet, does happen, but guess what, that is why you hire a local handy man and get to know him/her. Cause for $15-20 they take care of this little stuff and you never deal with it. This is also why you background screen your tenants and how you choose your investment properties. There is a science and an art to picking the types of properties that attract the right people.

As for a REIT over direct property, REIT's are not bad but they don't compare to direct investments and as @aliston point out you miss out on appreciation. Overall from what I have seen a decent REIT might get you 10-13% annually, which isn't bad. However, it is quite a different type of investment that is also subject to the stock market turns, interest rate changes and other financial market forces which have negative changes more often then does the raw property investment. Hence, unless you have substantial amount to invest, getting much out of a REIT will take a while.

As for rentals, they are not a get rich quick scheme, but over relatively short times they make you comfortable and give you security in passive income. Over the longer term the property values along with some rehab projects can make you "rich" and then if you keep at it, mixing in some commercial property is always good, you have the possibility of becoming wealthy.

How you invest depends on what your goals are. You need to define the "why" before you can move on to the "how".

The goal is to double equity in max 5 years. Long term vision is to retire in my 40's

In finance, there is a rule-of-thumb called the rule of 72. Basically, 72/X = # of years to double, where X is the compounded rate of return.

Solving for your request, 72/X = 5, X = 14.4%.

So to double your investment in 5 years, you need to find something that will give you 14.4% return for 5 years in a row. That high of rate (in this climate) would require a fairly risky investment.

A 14% return on properly selected and executed rehabs is very easy to do, in fact I'd be really disappointed if that is all that came back. Do this 2-3 times a year and it is easy to grow the money. But to get 14% consistently annually out of the stock market IMO is tougher without some high risk, which depending on age may not be a big deal.

But you have to study the local market some and talk to realtors about what is selling where, and why it is selling over other properties. Then ideally team up with another investor/rehab person for 1-2 and get a feel for how to be successful. I say that cause doing it wrong can be a recipe to losing money quickly too.

It's easy to do if you don't take into account risk. For example, are you sure that it's ok for the author to get 14% with 90% probability but to lose 40% with 10% probability?

We likely disagree on which is riskier if I read your statement correct. Much like anything though, going into it with an educated mind is the critical part, which is why I pointed out the need to study the market and team up with someone that has prior experience, as the potential to lose money is real in either case.

The simple reason I find the real estate market less risky, and hence the probability of loss less, is that factors which change valuation do so at a much slower rate and are, with some measure, easier to predict. With the stock market you can lose significant money in a single day because of the words that come out of someones mouth, regardless of the truth or veracity in those words. The housing market is a bit more resilient then that which I think mitigates some of the risk, at least the risk of others affecting your asset and money. It doesn't stop you from making bad choices and losing money though, as nothing fixes stupid choices.

There are a lot of other details and I can see the arguments either way, and truly for balance you should be involved with more then one investment vehicle. But for pure rates of return annually, I still stand by the fact I feel the real estate market is less risky overall then the stock market if you want some larger returns.

> A 14% return on properly selected and executed rehabs is very easy to do.

This is unrealistic in the SF bay area. First time home buyers are paying top dollar for "fixer uppers" and in many cases just tearing down the existing home and replacing them with a new ones.

Good contractors have several month lead times and are being paid in excess of $300 per square foot for doing renovations.

Real estate agent commissions are three to six percent of sales price.

My suggestion to the OP is to look outside of CA in general, not because it isn't possible to make these returns but because in CA the rehab & rental market are a lot tougher in many ways, taxes, fees, a heap full of regulations (good and bad) etc. And it isn't that you can't make these returns in the SF Bay area, it is just that the cost to enter the market is significantly higher both in terms of dollars and knowledge, plus the proper type of inventory is constrained. The risk right now with the Bay area market is also far from ideal, and should stop any small investor from entering. Hence why you have to find markets, and neighborhoods within markets that are better to work in.

Real estate commissions are basically the same across the US, and 6% is common, 3% to buyers agent, 3% to sellers, with lower fees in some markets or if you negotiate them down (careful what you negotiate here though it can backfire fast). These are always a factor you add to your deals to see if they are good or not, e.g. taxes (both while holding and at sale), costs of materials & labor, interest costs, loan fees (if any) etc.

As for the contractor availability, 60-90 days of lead time is not uncommon right now for decent contractors most places. But here is the key, if you do things legally, i.e. with permits, it takes 30-60 days to get all the permits in line usually and most contractors will come aboard if you hire them, get all the paperwork started through the system and be ready to go the minute they can. At the same time not all rehabs require a GC or permits, so you can hire day labor or handy people to knock a ton of stuff out.

There's really only two dominant choices here; "boring banking stuff," e.g. a well-diversified hedge fund, or cutting-edge financial engineering that you'll have to earn (or hire) a specialized PhD to implement. Anything in between and you're just playing out of your league; your cleverness won't win against the army of brilliant quants that have devoted their lives to this sort of junk.

I've never tried it, but take a look at the investment strategy called the trident portfolio. It claims a consistent 11% CAGR (compound annual growth rate) for the last 40 years. Trident consists of the following:

    1/3 VBR
    1/3 GLD
    1/3 TLT

You'll have to rebalance to keep the ratios all 1/3 approximately once a year. There is a great response on Quora by Milos Baljozovic that I highly recommend related to the trident strategy.

https://www.quora.com/I-won-the-lottery-and-have-5-million-i...

Honestly, you'll probably be ok just buying a standard ETF such as SPY or QQQ (more volatile), waiting 5 to 10 years without doing anything and cash it in.

Forty years is such a small window. I'm not convinced at all.

Forty years is actually a decent timeframe in terms of capturing the market's cyclical nature.

Do you have investing experience?

Not for the larger cycle IMO. Last forty years almost perfectly covers the working (productive and consumptive) lives of the baby boomers and all that went with that. It also is the first and only 40 year period after Bretton Woods, so we can't conclude much about how gold will behave in the next forty year period. And then there's the very unique 8 years and counting of ZIRP and QE which affects Treasuries. Not just ZIRP but rates generally have declined immensely since the 70s, 80s and 90s overall which favors Treasures as well as the rest of the portfolio. I'm not sure US small caps will be as competitive going forward either -- are we getting the high growth companies on the stock exchange as small caps anymore? Maybe they're all being bought by large caps, staying private until they're large caps themselves, or just not competitive in a US economy that seems to be dominated by large multinationals with all sorts of advantages. There was also a tremendous amount of deficit spending throughout this period which has contributed much of the growth and it's arguable whether that can continue in kind.

Also, maybe I missed this but I didn't see any mention of dividends in that post. Is the 11% CAGR including dividends paid out and reinvested?

Unfortunately due to the lack of floating gold price before this 40-year period (conveniently) we can't compare to the prior forty years before that.

I don't want to be too critical; it's interesting. I do believe small caps are better for a young person to invest in as they have higher risk tolerance, but I'm concerned about the quality of small caps we're seeing on US public markets these days.

I'd buy as much property as I could in the middle of nowhere and build a cabin.

Take my aviato money and start my own incubator.

Making the world a better place through constructing elegant hierarchies for maximum code reuse and extensibility

I would start by investing in myself. I would put 100K away so I could do whatever I wanted for a year if things go south (aka invest in my free time), I'd pay off my debt (around 100k) and I'd get a top of the line computer system (desktop/laptop,etc) so that I would be able to be the most productive I could be when writing code. I'd invest in the community by taking time off to contribute to the open source community. With the extra money I have stowed away I could live off that and not have to worry about any income, which would free me to focus solely on learning the larger OSS projects and contributing to them. I would probably put 100K to 200K in a REIT that I'm invested in that gives 13% dividends. After that, I would try some P2P lending since I would have extra income that I could afford to lose since the 500K wouldn't get me to accredited investor status.

The answer depends on whether this is "play money" or "my entire life's savings"....

I have my 401k in a "cash option" right now. pretty worried trump gets us into a trade war and huge global market crash. just not sure on timing. of course if he gets a tax decrease through congress it could back fire on me.

I'm borrowing most of my 401k to finance a home purchase. I trust me paying it back at 4.5% then the market over the next 2 years.

Another option to consider is something like Betterment.com or Wealthfront. These are automated investment services and allow you to tune your investments based on your goals. I use one of them and it has worked out well for me.

I would probably buy a house in the outskirts of seattle or denver for maybe 250K - tons of houses around 3beds, minimum 1500 square feet, if you expand the search. Then, start a private repo doing an MVP based on my open source project, then try to find a product manager type to bootstrap a startup, somebody hungry who would live in the 3rd bedroom and go full throttle for half a year or so, then if that fails when I'm down to say 100-150K, I put that money into TBills and get a job if I can't find revenue or funding.

You're talking serious "outskirts" of Denver for that price.

653 on Zillow all throughout the metro area, for 3 bedroom houses over 1500 sq feet. SF really distorts our perception of reasonable prices.

I think you'd rather want an answer that you'd be able to follow. If someone told you about their experience with stocks or with business and you didn't have that experience how much useful would that be to you ?

I'd invest it by buying some books about investing first.

I would write a crawler that crawls amazon and stores number of reviews for major consumer brands like Fitbit and GoPro. then go long on those that have a spike in reviews before earnings. and go short on those that have declined

I would invest in my business. Quit consulting (which pays bills day to day) and focus on expanding our training catalog (I love training and we are really good at it). Expand Sales and Marketing activities.

Some depends on age and planned retirement age. 55 or greater. I'd pay off house. pull out 25-50k each year I got closer to retirement and let the rest ride in stock market.

under 55, I'd keep 400k in stock market.

here's a neat article on playing a stock market dip with options.

https://www.thefelderreport.com/2016/08/15/worried-about-a-s...

I would buy myself a lot of time and then give some serious thought as to how to spend that time productively.

Or Domain Names

Index funds

Pay off my house, and put the remaining ~200K into buying a rental

that gives you a sense of security but you are losing the most important reason of owning your own house, Tax Deduction!

My mortgage payment would be redirected into other investments. I would take an additional ~1900/mo going into that than a tax deduction any day

you can invest your whole money and easily get an %5 return ( more than your interest rate) on that. and invest that money instead and you will get the tax benefit of the deduction as well. double dipping ;)

With much more risk. Don't forget to take that into account

if the end goal is investing anyway the risk should be the same, your house is not completely risk free investments considering the crashes. and getting %5 out of rental is not that risky! not much more than your home.

I think we just have different opinions on risk and investing

Probably chuck it at real estate.

Maybe bet a bit on raising interest rates as a hedge.

1- Find a 3rd world paradise beach

2- Buy a place there

3- Spend it for the rest of your life

Some in cash , then a Vanguard LifeStrategy fund matched to your age

Gold and silver.

Dividend paying stocks.

Buy Bitcoin and HODL.

Google

I would personally invest a small portion of the money(about 5k) in Bitcoin. Bitcoin value has been rising recently. If the trend continues,the value will double mid next year, and triple by the end of next year, so you would have made 10K with your initial investment. But keep in mind that Bitcoin is volatile and such investment is considered high risk investment.

When will it quadruple? Quintuple?

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