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Money Question: What Would you do with a Windfall?

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Money QuestionsOver the past couple of weeks, I decided to go out and ask a few of prominent bloggers a question that's been on my weighing on my mind lately:

Where is the single best place to invest a $50K after-tax windfall now? Assume the following: you don't need the money for at least 10 years, you've already max out 401k and Roth IRAs. Pretend that the windfall came under a couple conditions (like Brewster's Millions)... 1) You can only invest it in one area. 2) If your investment doesn't make 6% a year you lose it all.

Why would I pick this one question of all the possible questions? Lately I have noticed that the typical places to invest seem "expensive." The Dow is setting new records each day. Recently it was up 22 of 25 days - something that hadn't happened since the 1955. With stocks at an all-time high, I would typically turn my attention to real estate. I like to buy out-of-favor assets at a bargain and real estate doesn't fit the bill - especially in northern California where I am.

Ben from Money Smart Life had this to say:

How someone should invest a $50K windfall depends on their current financial situation. Since we're pretty much squared away on the personal finance basics and have built a solid base of investments, I'd take a risk with the money and start my own company. It would definitely be more work than passively investing in the stock market, but I think the potential returns would be far greater.

How I'd use the money is best introduced with a short story. My dad is an avid jogger and an even more avid pack rat. Almost every day he finds something during the course of his run that someone has left on the curb for the trash man. His back porch is overflowing with "throw-away" items that someone, somewhere, might likely be able to use.

I think this story reveals that our country buys too much stuff which later translates into too much junk. If I had $50K fall in my lap I'd rent a warehouse with a storefront, buy some trucks, hire some drivers, and market our services. I'd charge people and businesses money to come pick up their junk and then I'd sell it off through eBay, craigslist, the storefront, and any other appropriate sales channel I could find. There are already companies that do similar things such as 1-800-GOT-JUNK but their franchise fees are over $50K. If I had $100K I might consider buying a GOT JUNK franchise, there just happens to be one available in my area. So if I happen upon a windfall, I'd likely use it to turn trash into cash!

I think Ben's idea is a terrific one and could set him on the road to freedom. In the process, he would make the world a cleaner place.

Don't miss part 2 of this series.

Let me know in the comments, what would you invest in? Can you guess what I would invest in? I'll let you know in the conclusion of the series.

Last updated on June 3, 2007.

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16 Responses to “Money Question: What Would you do with a Windfall?”

  1. Joseph Sangl says:

    I would invest in real estate – particularly rentals – and hold them for the long term.

    With $50K, I might consider buying a small apartment complex.

  2. Kevin says:

    Currently, I’m pretty bullish on Europe. The market is bigger than the US (around 500 million people in the European Union), the Euro is (I think) a better currency than the dollar due to the high levels of US debt, and European infrastructure makes it more resilient in the face of mounting oil costs. It’s not growing like some Pac Rim areas, but I don’t think it has the potential of a bubble burst either.

    So — I’d go with an EFT tracking the European markets. It gets you out of dollars, but lets you stay in equities.

  3. Foobarista says:

    I’d probably invest in real estate, but in the middle of the country where prices aren’t quite as out of control as they are on the coasts. A good rule-of-thumb: start with cities in the Midwest that have solid immigration, a low average age in the population, and are fairly well built-out so your holding isn’t competing with a lot of new construction. “Bread and Butter” working-class properties tend to be better cash-producers than new construction, although they may require more maintenance and be somewhat harder to sell.

    If not that, I’d put another $50K into a commercial loan fund partnership we’re in that has paid 10-11%/year for the seven years we’ve been in it.

  4. Dare I say Prosper? Over what time frame is the 6% requirement?
    IE is short term capital preservation the main goal? Not if you are allowing the answer “starting a business”.
    So I think Prosper makes 6%.

  5. broknowrchlatr says:

    I’d go boring and put it all in an index fund wiht a low turnover. My T.RowePrice 2040 fund (TRRDX) is great, but the high turnover would hurt my taxes. I don’t know enought about rentals, real estate, or foreign marckets to do those. I would not be a good businessman. Indexes are safe and easy.

  6. If you don’t earn 6% you lose it all… Or you can take the wimp clause.

    The wimp clause pays you 1% annually and you can NEVER have a dime of the principal. (sticking to the movie would mean the investment broker got to keep the rest of the rate of return.)

  7. daniel says:

    In real life, I’d invest the whole 50k in tax efficient, broad market index ETFs.

    Then I would adjust my holdings in my tax deferred accounts to maintain my overall asset allocation targets. However, when you throw in the unreal stipulations 1 and 2, I have to think twice about putting it all in stocks as I am not as confident about the future of equities as most people.

    Given those stipulations, I would go with either the Powershares currency harvest fund (DBV) or the Central Fund of Canada (CEF) gold/silver fund. I believe there is high probability that both those funds, which I currently hold in tax deferred accounts, will do well over the next decade.

  8. Corvidae says:

    Assuming it arrived in US dollars and I don’t need it for 10 years, I’d throw it into Euro bonds. Between interest on the bonds and the currency exchange you should hit about 12-15% interest in the first year, probably slowing down to 7-8% within 3 years. After that the dollar should (hopefully) start returning along with the US real-estate market. Start cleaning up the foreclosed house market.

  9. Wylie says:

    Just because the DOW is hitting new highs does not mean it is expensive. If a thing is worth $100 but costs $50 and then costs $51 the next day and $52 the next, etc, it is not really ‘expensive’ until it costs $100 or more.

  10. Lazy Man says:

    Touche, but I judge it to be worth $45 and now selling at $50 and $51, etc…

    It’s not just the Dow, it’s the S&P 500. With it getting more expensive and the dollar getting less valuable, I’m not sure I’d make the 6% per year gain required for this exercise.

  11. Stock Rake says:

    I would let me trade it.

  12. Lazy Man says:

    Sorry Stock Rake, the Brewster’s Millions’ clause would prevent you from trading it. Just one investment is allowed… buy and hold.

  13. Steve Austin says:

    6% per year, presumably every year. That’s quite a hurdle. Is that a compounding requirement, or if in an investment that throws off cash dividends or payments can the cash be pocketed without being subject itself to the 6% requirement going forward?

    Most of the plays (starting a business, currencies, ETFs, etc.) given would most certainly be losers, i.e. fail to meet the 6% annual ROI, at some point within the next 10 or so years.

    I’d be looking for something with very low volatility, like the rental property play already mentioned. Not sure where I’d look, but probably outside the housing bubble world (UK, US, Australia, et. al.)

    How exactly would the 6% be adjudicated? Once a year, on the year? Presumably the original money is USD 50k. Would the measurement be in USD each year as well, which would affect extra-US investments? How would real estate be measured, just on net rental income, or would assessed or appraised value matter? E.g. if I bought a $50k residential rental property in the non-coastal US and housing values fell (but I didn’t sell), would I lose the windfall even if the property still returned at least net $3000 that year (6% on original money)? I think something stable like residential rent is the way to go with these kinds of conditions on the money. Metals, currencies, stocks, even bonds are too volatile to risk the windfall. Even then, I’d want to build in a margin of safety, probably 8% net rental ROI, to account for rental risk (vacancies, falling neighborhood rents, destructive tenant(s), etc.)

    So anyone have any $50k properties that yield $4k net in rental annually? ;-)

    I’d also like to note that higher inflation would make the 6% a bit easier, lower inflation would make it a lot harder.

  14. sJ says:

    Depends on the level of risk you are willing to take.

    Private equity investment will give you high rewards. Or say being a venture capitalist/angel investor on a smaller scale. There are alot of excellent business ideas that need private funding.

    Real estate is your next bet. International REITs are hot hot !!

    If all of these dont look attractive, buy GOLD. You will be more than happy in 10 yrs for sure.

  15. […] last week Lazy Man at Lazy Man and Money brought it to a group of bloggers as the question for the weekly Money Question series (here are Part II, Part III, and Part IV). The exact question look like this: Where is the single […]

  16. […] What Would You Do With a Windfall? – The Lazy Man asks this question to a number of personal finance bloggers to see what they had to say. […]

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