How to Invest $500,000?

Lsator on 02/01/2017 - 15:31
Last edited 08/01/2017 - 20:49

My mate (best man) just won the Tattslotto ($500k). Lucky bastard, he threw in $2 for quick-pick!

Anyway, he has no idea what to do with the money, except that he wants to invest it wisely. He asked me for my opinion, but I've never been in his situation, so I came to the smartest forum for help =D

I did a little research on ozb and have come across:

  1. Property - Worried the market (Melbourne) is in a bubble or at least close to its peak… so hesitant to suggest.

  2. Shares - Know nothing about this. I've personally lost $$$ in the past.

  3. High Interest Saver Account ING DIRECT - There's a limit of $100,000 so not sure. Any alternative that's 3% but w/o cap?

EDIT: Thanks to Dozingquinn for reminding me to give more details re. mate's life status/situation.

He's in his early 30s, married, no kids -but mentioned that he's thinking about having only 1 in the next 2-3 yrs. Household income 200k-ish (secure).
They don't have a extravagant lifestyle. No debts obviously.

Also already owns a house in the outer west of melbourne $400k

FINAL UPDATE:
Just wanted to thank all the useful/productive posters for their help + some of the amusing ones too. The final strategy chosen is to put $400k into the Vanguard Growth Diversified ETF (wholesale), $50k for an emergency fund, and $50k to go with the redraw on their existing property to purchase an IP in Melbourne.

Financial

Comments

  • dono2 on 05/01/2017 - 07:40

    Hookers and blow

    • John Kimble on 05/01/2017 - 11:16

      Those aren't typically classified as investments but expenditure? Unless you mean invest in these two items? They probably do give very high returns I guess?

      • sator on 07/01/2017 - 16:40

        Being a pimp and drug cartel aren't particularly legal

  • cashless on 05/01/2017 - 09:22

    Peer lending

    • sator on 07/01/2017 - 16:40
      +1

      Don't trust the average punter. Most people are not as smart as OZB-ers

  • -.- on 05/01/2017 - 09:51
    +1

    I concur with a few of the other posts. Definitely diversify the investments. Put 200k on a deposit for an investment property borrow the other 80% or so. If you're confident on stock picking (which I don't think is terribly difficult if you know what you're doing, follow the trends and are agile in buying and selling) put 200k on 10-15 different stocks (half of them small cap for capital gains and half blue chip for dividend income), then put the remaining 100k in an offset account on the loan.

    If you're not confident on your stock picking prowess, an index fund/ETF is best. Last year was actually a very good year for stock buying and selling as it was quite tumultuous; plenty of opportunities particularly in the small cap resources sector. If you bought during the lows of Brexit or Trump's ascension to a higher plane of existence you would have made more money in one day than a year of putting that money in a savings account.

    The reason why I also advocate for buying a property is firstly diversification, but secondly leverage, as interest rates are at record lows and the property counts as collateral. Even if a $1,000,000 property rises only 5% in a year, that is equivalent to an exceptional 25% return on the 200k in shares ($50,000). Now, you could go ahead and apply for a margin loan on the stocks OR engage in more levered trading strategies, like options, forwards, CFDs, FRAs but they may be beyond the understanding of the average bloke.

    If you're picking your own stocks you can also hedge your bets through options. I've copied what I wrote on another thread for your reference below:

    Try reducing your downside exposure by buying put options. Blue-chip shares have reasonably liquid option markets (you'll need to open up a separate option trading account). The strategy is called a protective put, and it'll give you the right (but not obligation) to sell X amount of shares (in multiples of 100) at a pre-determined exercise price.

    Example:

    Buy CBA 100 shares today (20/10/2016) @ $75 for total $7,500
    Buy 1 put option expiring 1 year later for $1x100=$100 (premium paid) with exercise price of $70.

    1 year later, CBA shares trade at $65.
    Loss (excluding dividends) without hedging: (65-75)x100=-$1,000.
    Loss (excluding dividends) with hedging: (70-75)x100-100=-$600.

    If, however CBA shares trade at $85, then:

    Profit (excluding dividends) without hedging: (85-75)100=$1,000.
    Profit (excluding dividends) with hedging: (85-75)100-100=$900

    The maximum you lose from holding the option is the premium that you paid ($100).

    With that kind of a strategy, a lot of market risk can be nullified.

    More info here: http://www.asx.com.au/documents/resources/UnderstandingOptio…

    • sator on 07/01/2017 - 16:43

      He's not intelligent nor have enough time for this. New job and all

    • sator on 08/01/2017 - 00:31

      Just reread what you wrote, and it seems too good to be true.

      If that's the case then why doesn't everyone else do it?

      • -.- on 08/01/2017 - 12:25

        Because they're classified as a derivative and should only be used by people who understand the risks and mechanics of such instruments. You'll need to open a separate options trading account. Additionally, only options which have their strike price far away from the current share price (and hence are less likely to be exercised) are cheap to buy. From the perspective of the buyer, put options which are 'in the money' or 'at the money' (as in higher or at the share price), or even mildly 'out of the money' (just below the share price) are expensive and sometimes carry a significant premium. Additionally, options are highly levered products and are only contracted in lots of 100. Many times, just like with car insurance for example, options that one buys will expire worthless without exercising (remember an option is a right to do something and not an obligation like a forward or futures contract) and the seller will pocket the premium you paid.

        In the professional trading world, there are many ways of hedging and options are just one of them, but a lot of firms will actually use options as speculative bets because they are highly levered. But for mum and dad investors, many will not have even heard of options.

        From this, you can see that it's actually a lot riskier to be a seller of options, as your profits will be limited to the premium you received, yet your losses can theoretically be unlimited (in the case of a seller of a call option) or the entire share price multiplied by the number of shares (in the case of a seller of a put option). Contrast this to the option buyer, where for both put and call options, losses are capped to the premium paid.

  • jacross on 05/01/2017 - 11:22
    +1

    While I can see excellent advice here that I would personally follow myself, getting financial advice from the OzBargain forums is not a good principle to follow.

    • sator on 07/01/2017 - 16:44

      It's just a starting point, similar to wikipedia. Everything will be cross-checked.

  • tdth99 on 05/01/2017 - 11:27
    +1

    Investment bonds (also known as Insurance bonds) are handy for long-term growth and as part of diversifying your portfolio. https://www.moneysmart.gov.au/investing/complex-investments/…

    They are essentially tax paid managed funds with some interesting rules around them that allow you to withdraw tax-free after 10 years (or longer), provided you've followed the rules.
    The fund itself pays the corporate tax rate of 30%, so if your own marginal tax rate is >30%, which it sounds like it would be, throwing $100k in there, then contributing no more than another 125% of the previous years contributions each year, they're a good way to have a nice alternative to Superannuation that you can access tax free when you need to.

    Oh - and like the previous comment - I would take everything on this thread as nothing more than a bit of research and still say they should chat to a good financial planner.

  • noise36 on 05/01/2017 - 11:34

    The best advice generally isn't to upgrade your principle residence but for most people it would work out best just doing that.

  • cannedhams on 05/01/2017 - 13:22
    +2

    There is really no such thing as a "bad" investment. If people want to invest their money very defensively in term deposits, etc, thats up to them. I know a lot of people who managed to snag a 5-year term deposit at 7%, money for jam and every night they went to sleep and slept the quiet sleep of the saved.

    I would invest it quite defensively, probably in a very sound basket of infrastructure stocks.

    Re property - sure you can make money on property. But the returns are rubbish, and the transaction and holding costs are far higher than they are for shares. Thats what people miss when they compare shares to property - you can point to properties going up, however, theres rates/sewage/letting fees/maintenance/body corps/insurance to pay for property. Plus you have to hand over 2.5% to the agent going out and something similar in stamp duty when you buy in.

    Objectively, shares outperform property over time.

  • johndemonik on 05/01/2017 - 17:47
    +1

    Interesting reddit topic on what to do about winning lottery, but mainly pertains to massive amounts and the subsequent problems that follow with addictions and family problems.

    https://www.reddit.com/r/AskReddit/comments/24vo34/whats_the…

  • syousef on 05/01/2017 - 18:35

    Ask a stranger on OzB what to do with it. It's the only way.

    • johndemonik on 05/01/2017 - 19:27

      I know what you're saying, but there is a wiser pool of minds and ideas online with a vaster amount of experience, than there would have been if you'd won 30 years back and all you had to consult was a few friends and family.

      • FatBlanket on 05/01/2017 - 21:16

        Judging from the posts in this thread, you'd be better of talking to a pigeon.

      • syousef on 05/01/2017 - 22:53

        You'd ask a trusted friend or relative who you consider to be a wise person, not go out into the street and pull out random people who for all you know are hobbos.

        • johndemonik on 06/01/2017 - 12:46
          +2

          And hope your wise friend was an expert in financial management who's advice was superior to everyone else on earth? There's a reason forums and subreddits like /r/personalfinance exist. This forum relates to getting the most for your money, why wouldn't this place have great advice?

          Why use OzBargain? Just ask your mates and family if there are any bargains out there.

        • syousef on 06/01/2017 - 13:12

          @johndemonik:

          It's easy enough to judge if something is a bargain. You can check right away. If a random person puts up a $100 Subway sandwich as a bargain in 10 minutes you'll have people showing you lower prices. In any case I have had tips from friends and family on bargains that were every bit as good as what I get here.

          It's not easy to decide whether financial planning advice is sound. You're forecasting the future and you also have to understand several branches of the law. Usually the trusted friend or family member you would go for advice in the past had some success. And back then things changed less often. Yet there are still plenty of people who fell afoul of rules and regulations and ended up broke.

          If you choose to listen to some random on a subredit…well it's your money to throw away.

          Me? I'll talk to a couple of accounts and financial planners and even then I'll be careful they aren't just trying to rip me off for a commission and understand under what conditions my funds can be withheld once signed over.

        • johndemonik on 06/01/2017 - 13:43
          +1

          @syousef:

          What you'd do is great advice, glad I came on OzBargain and found it. Thank-you random internet person :p

        • syousef on 06/01/2017 - 16:16

          @johndemonik:

          I'll give you an upvote for ironic humour :)

          But I'm no financial wiz, by any stretch of the imagination.

  • ComfortablyNumb on 05/01/2017 - 21:21

    Diversity is key, bonds, etf's, gold, fixed and put some in super, just 'cos.

    Property with cash not such a good idea, but might be able to borrow against the funds the get a good investment property… Only exception to that rule is if it is a guaranteed on-sell with a high gain to beat the CGT. I would avoid laying any of your hard earned into an investment property.

    Tell them congrats and good luck!

  • juliano on 05/01/2017 - 23:20

    Bank of Ghana Treasury deposit is backed by their government. All politicians got their money hiding there so is quite safe.
    Current giving % 20.5 per year on dollar account which means your money doubled in 5 years.

    • Fexofenadine on 06/01/2017 - 00:33

      And what about the exchange rate risk?

  • JV159 on 06/01/2017 - 02:44

    You're on a site that caters for tight arses, get stuffed with your heavy pockets!

  • lnq on 06/01/2017 - 03:20

    Buy bitcoin, earn 200% last year.

    • May4th on 07/01/2017 - 23:11

      or lose 20% in a day

  • leetguy101 on 06/01/2017 - 06:08
    +1

    Buy an $80,000 car.

    • xoom on 06/01/2017 - 07:04
      +2

      It is a high yielding investment.

      • [Deactivated] on 06/01/2017 - 16:23

        It is if you buy the right one at the right time. Even on new cars. Just supply and demand. Get something that everyone wants, drive it for a year, sell it for a profit. Rinse. Repeat.

  • Kanuck on 06/01/2017 - 10:31

    Invest "wisely"?

    1) Study index stocks like NASDAQ, note the shape of the dot com bubble. basically if you see really rapid growth, take your money and run. Otherwise indexes are low risk, especially long term, and tend to do well (>=6% / year on avg)

    2) Invest in ethical "green field" businesses. These are your Tesla type companies. Tesla is a good choice btw, its current equilibrium point seems to be ~220 so unless your expecting something in the next news release I'd wait for it to oscillate down from its current position. Over the next 2 years you can expect a good return. For the same reasons look at Lithium.

    3) High growth tech companies (amazon), and Service companies (Telstra) which have a relatively stable price while paying a yeild.

    4) above all, stay diversified. Index stocks give you this for free since every share is really one share of every stock in the index.

    5) pay attention to your super's life plan balance and try to mirror it in your personal portfolio's composition.

  • AlienC on 06/01/2017 - 12:04
    +3

    Yagoona Lebanese cheese meat bread (real proper name is labneh with jabneh) and Vietnamese pork roll (real proper name is banh mi) x2 with significant other once a week for the rest of your life

    Total yearly cost $50 a week x 52 = $2600 (drinks added in) happiness guaranteed

    Double if adding kids etc grand kids

  • TightAssDrake on 06/01/2017 - 13:45

    Buy a Ferrari and retire

  • lordezekiel on 06/01/2017 - 19:38

    All in on Bitcoin! Has made me more money than any other investment, It has more than doubled in value in the last year alone…

  • MrFrugalSpend on 07/01/2017 - 23:58

    Two options:
    1- SAFE: Diversify to share the risk. Don't put all the eggs in one basket. Some money in the bank, some in Australian Shares, some in commodities, some in foreign shares, some in property (i.e. via a property trust perhaps given it will only be a small park).

    2- LEVERAGED COMMERCIAL PROPERTY: To make reasonable money and with some risk, buy a commercial property that actually makes decent returns rather than residential and leverage it 33/66 with a bank. I.e. put a $500,000 deposit down on a tenanted commercial investment of $1,500,000. Go for one with safe long term tenants paying a net lease (i.e. they pay rates etc, common for commercial property).

    Its common they could be paying a 7-8% yield (say 7.5% net) on what you buy the property for (i.e. $112,500 p.a.). If your bank loan interest is 6%, bank interest is $60,000 (6% of $1m), meaning you retain $52,500 per annum which is 10.5% return on the investment. Use that to pay down the bank loan for a decade or so and before you know it, the whole $1.5 million property will be a paid up asset to retire on, paying you $112,500 per year!

    • sator on 08/01/2017 - 00:55

      Very interesting!

      However since it's the first nest egg, it'll be better to do it the SAFE way and diversify.
      Next lottery win can go towards leveraging =D

    • sator on 08/01/2017 - 00:56

      Just for future sake, what makes a good tenant?

      • May4th on 08/01/2017 - 12:00
        +1

        bunnings

        • sator on 08/01/2017 - 14:16

          Lol thanks. I don't think they would fit onto any 1.5M commercial property though

      • MrFrugalSpend on 09/01/2017 - 19:20

        Any big safe company that is publically listed or a large long trading private company, or government department (all with a long lease), or a long-standing tenant that is successful and happy in that location. Also a tenant that has provided rental guarantees from a parent company or franchisor (E.g. McDonalds Australia guranteeing the rent of a franchisee), or if they are smaller, personal gurantees of a director (i.e. you can take their house if they move out / don't pay rent).

        The good ones will advertise "public company", or "good strong covenant" etc.

        You don't want something leased to some random guy with a small business and a 1-2 year lease, that isn't making much money and may miss rent payments or leave / go bankrupt.

        • sator on 10/01/2017 - 12:06

          Don't most franchises like McD just buy the properties outright, and rent it back to their franchisees?
          As mentioned above, 1.5M seems insufficient to purchase a C. property that will attract large tenants

  • sav11 on 08/01/2017 - 17:22

    You said he doesn't have time/motivation/smarts to research investment options himself. Therefore the best first option is to at least meet with one or more fee for service financial advisers (no commissions, no % of assets). The first meeting is free, he has nothing to lose other than an hour of his time. Check ASIC's register first https://www.moneysmart.gov.au/investing/financial-advice/fin… Also recommend reading their financial advice toolkit but if he doesn't have time at least look at the 'questions to ask a financial adviser' section. As he's not willing to learn about investing himself, with $500k to invest it is well worth spending a few thousand $ for a fee for service adviser to help identify his needs and risk appetite, and prepare a written statement of advice. This will also take into account his entire wealth and strategy (including his existing house and super etc.)

    If he insists on winging it without advice then he at least needs to first consider what is his investment timeframe? Specifically, what is the minimum amount of time he is willing to leave this money invested without removing/selling any? If the answer is 10+ years then previous posts about investing in passive index funds/ETF's and/or residential property are sound. If the answer is less time than that he needs to consider less volatile investment options or he will be risking loss of capital (negative returns).

    • sator on 08/01/2017 - 20:38

      Thanks! Timeframe will be 10+ years

  • Oz80085 on 14/01/2017 - 17:47

    Definitely diversify.

    If it were me:

    1. Investment properties.. maybe start with 3. Pay for a good buyers advocate to source the properties and avoid Melbourne apartments like the plague. 20% down on each. On the property front, it may be worth waiting to see what happens when interest rates go up (I would guess later this year, they'll start creeping up again). There may be some bargains when people start defaulting on loans. Always good to buy under market value if possible as this allows instant equity and the potential to buy even more properties. Long term buy and hold strategy. Look for positive/neutral cash flow.
    2. Listed investment company (Low risk, reliable returns. Something like ARGO or Australian Foundation Investment Company). Instant diversification. Also very liquid in case extra money is needed to whatever reason.
    • sator on 16/01/2017 - 11:18

      ARGO seems better due to the more even spread of their portfolio. Will also get some VGE and VGA for global shares exposure

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