What to do with X dollars?

Question

Occasionally I see questions that are basically "I have X money. What do I do with it". A list could be compiled, but I feel it to not be necessary.

There are several ways to interpret these questions:

I want to outsource my investment decisions to Money@SE.

There are several issues with this version. First, it's basically "give me the codez". Second, it is a useless question - how could you possibly trust strangers on the internet, with no stake, to manage your money, rep or not? Lastly, it is unlikely that a pro-bono roving investment adviser will take up residence at Money@SE and tirelessly provide every asker with efficient strategies tailored to their status.

More likely (and what I typically see happening) is that they elicit very vague and general answers, like "look into index funds and bonds". Because of space constraints, even basic advice ends up being too general to really work with, and OP would have to read up on it anyway before they can safely go and act on it.

Of course investment can be complicated, and while relevant to many, is rarely taught by schools or other mainstream information channels. For most people, it is neither interesting nor comprehensible, and they just want to get it over with and move on with their lives. I actually sympathize with this interpretation, but nevertheless it is not possible to provide what the asker is seeking on this site.

I bet there's one asset that performs way better than 99% of the others. I don't want to spend time and effort finding which one it is, so can you guys just tell me and I'll put all my money in it?

Of course there is no "best" asset, it all depends. The only real answer to this question is it depends, it depends, it depends. Was it necessary for the question to be asked, to learn that it depends? Of course it does.

Again, I sympathize with this interpretation. There are now countless varieties of investment instruments, it's all quite confusing, and with most of them you seem to end up losing money. Surely there's one where you don't lose, and surely somebody knows which one? But of course the question is predicated on a false premise, so cannot be answered.

The amount of money at my disposal is unusual, such that typical investment advice (index, bonds, 5% in individual stocks, etc) doesn't apply. How should I invest?

Trivially, very small sums such as $10 indeed cannot be invested according to standard investment strategies. Likewise, if we're talking hundreds of millions, this is also true, but in that case, you wouldn't be asking here.

Besides that, I feel like say from 10k to 10m, there isn't really all that much that varies in strategy. 30k? Buy the index. 300k? Buy the index. 3 million? Buy the index. Do we really need multiple questions, with only the number changing, and the answer is the same advice on index ETFs, bonds, CDs and so on?

As I said above, in some cases the amount is indeed unusual. However, it seems that most people who ask these questions have very normal capitals, and apparently overestimate how unusual their situation is.

Teach me basic investment principles.

This is the only interpretation where the most likely kind of answer is actually what the asker wants. However, even so, it is impossible to give a good answer. Volumes have been written on this subject, indeed the asker would be far better served by reading those volumes. What can fit into an answer will gloss over so much that claims cannot be adequately explained and justified with evidence.

This is essentially a question that is too broad. However, it is also a very important question and deserves to be addressed on this site. The correct way of addressing it is to give OP a list of books to read on this topic, so they can come back and ask more specific questions.

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I feel that whenever this kind of question ("I have X money, where do I put it?") comes up, what the person really means to ask is certainly one of the four possibilities I've listed above. Is this a correct assessment? What is to be done about such questions?

Answer 1

I've been looking at the flow of "I have X money. What do I do with it," and had some of the same thoughts you offered. The Venn diagraming (in effect) that you offered is very good.

If there were just 4 questions, we'd be done, the rest are easily closed as duplicates. But, somehow, most of these of come with some kind of twist. "I am brand new" is common, but "this is my background" varies it enough to qualify as a different question.

The recent Making $100,000 USD per month, no idea what to do with it struck me as a question that was sure to be closed as too broad. Instead, it's gotten 13 answers, with the top answer +110 scored. The answer, "don't waste your time here" explained why the OP should consult with a pro. Voting doesn't make a question on topic or even good, but, unfortunately, it's an indication of what members like.

What is to be done? More of the same. We close the clear duplicates. We close those that are truly too broad. We answer as best we can to set the OP on a path that should improve success.

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My remark on 'seek a pro' - This advice is fraught with its own risks. There are too many advisors who are dishonest. The good ones suffer for this. The fee-only is a fine idea, but the 1%+ advisors are not going to exceed the returns the low cost indexes will by enough to pay their own costs. Study after study shows fees being correlated (negatively, of course) with returns. The same inclination "this is so much money, you can afford to hire a pro," I'd counter with "this is so much money, you should make the time to learn to manage it yourself."

My wife and are retired, and nearly all the stock portion of our retirement account is in VIIIX. The expense is .02% or $200/$1M per year. Tough to understand why anyone would happily pay $10K/$1M per year to manage their money. And it turns the 4% rule on its head, of the $40K you wish to withdraw, $10K is lost to fees?

Answer 2

I think there is one more option to the real meaning of the question. Granted it is subtly different but we have to understand financial literacy and the advertising surrounding personal finance. Think about this:

• Credit card companies suggest consumer spending is an investment.
• Payday lenders suggest it is responsible to use their lending services
• The latest investment strategy implores people to "beat the market"
• Movies, books, and TV shows portray investing like it is a James Bond mission

And there are a lot more companies, that have a vested interest, in spreading false financial information. The information space for investing and personal finance is packed full of noisy, flashy false information. In comparison good information is relatively scarce and boring.

Just compare a FOREX trading advert with a term life insurance policy. The former is pure speculation, the later very valuable to most people.

So to me the question could be asking:

I've gathered a lot of information, and I feel like some of it is false. Can you please help me wade through the truth and the shysters?

In this case, the question has merit and the members of our community can provide good guidance.

Answer 3

Besides that, I feel like say from 10k to 10m, there isn't really all that much that varies in strategy. 30k? Buy the index. 300k? Buy the index. 3 million? Buy the index

By "the index" I assume you mean the S&P500. While I'm a huge believer in index funds generally, I can't agree that one should put all their money in a single index. That would be a 100% allocation US stocks, a very risky portfolio for someone near retirement, for example. Generally a higher percentage of your money should be shifting from stocks to bonds as you near retirement. Also, "buy the index" puts one overweight in US large-cap. The Vanguard Mid-Cap ETF (VO) for example has risen an annual 10.4% over 10 years. There are index funds for US bonds, US mid-cap and small-cap, and international bonds, large-, mid- and small-cap too, as well as alternatives like commodities, energy, and utilities. 100% US stocks lacks healthy diversification.

I think there is a huge range of options between the two extremes of "seek professional help" and "this is the best stock".

Additionally, tools like Personal Capital are invaluable in helping one better understand the implications of their current allocations and what changes one should make to match one's individual investment profile (age, retirement plan, risk tolerance, etc.). I can't recommend this free software enough! Here is a Personal Capital generated report which shows my current allocations and a target allocation for me, a 43-year-old single male seeking to retire at 65 with a Growth minded risk tolerance. It's a long term growth strategy with moderately lower volatility than your recommended "all stock" portfolio. The allocation is globally diversified and features all six major liquid asset classes.

There's nothing wrong with the opinions of a stranger. It's not a matter of trust. You either find their ideas valuable or you don't. Even a stranger would be doing you a great service by making the case for index funds over managed mutual funds or individual stocks, which I'll breakdown below.

The Tyranny of Compounding Costs This table breaks down an example of the impact of compounding -- and compounding costs -- over the long term. On the left it shows the growth on $1,000 invested by an individual at age 20 until her death at age 85, assuming 8 percent annual growth.

On the right, it shows what happens to that same $1,000 over the same period assuming a 2.5 percent annual cost, such as a mutual fund management fee. Over the 65 years, these annual fees eat up a staggering 79 percent of what the investor would have earned with no management costs.

Surely this is valuable information for someone who doesn't know what to do with their money and is considering paying a management fee to have a pro sort it out for them.

source http://www.pbs.org/wgbh/pages/frontline/retirement/interviews/bogle.html#2

Answer 4

I agree that many times this site receives poorly constructed questions. I think a lot of times questions come up when someone is looking to check a box without really understanding why they want to check the box. A good example of this is the person the other day asking how to find an investment adviser. That person really just needs a budget and probably to understand how his future paycheck will be taxed.

When someone actually asks specifically for investment advice the question is generally closed as too opinion based. To your point, "you should have X% this or that" is really never the right answer for the purposes of this site. However, explaining aspects of a transaction like commissions, loads, expense ratios, mutual fund vs index fund vs etf, stock, etc are, I think, valid responses to questions relating to choosing an investment. Showing the math of the way commissions, expense ratios, and loads vacuum up your gains does a lot to reinforce the idea that investment decisions should be scrutinized from a cost standpoint. Holding on to your money does a lot to help it grow, and the focus of this site is your personal money.

This site isn't meant for CFA level allocation advice and analysis. This site is meant for, this is how interest works, this is what an expense ratio is, this is how tax brackets work, this is why you want your emergency fund in a liquid account not an investment account, this is what liquid means, etc.