What is a prudent investment strategy after I sell my business?
I have recently sold my business. After earn out, the release of escrow funds, and net working capital adjustment, I expect to receive $5M+. The initial payment will be around $4.25M, all of this is pre-tax. I am 58 years of age, married, and currently live in New Jersey. I have a contract to work for the next five years, which I'm happy to do. We also have a property in Colorado and one in the U.K. As with a lot of entrepreneurs, your business is your retirement fund, so this is is for us. I'd like to receive some unbiased advice/opinions as to where the best place is to park my principal earnings. Broadly speaking, I will have around $3M post-tax, and I want to invest it safely. I now have numerous people approaching me with a range of advice. I have to get this right, it's a one time deal! What do you recommend I do?
Sounds like you need to do some research. In full disclosure, I am a fee based only advisor free of conflicts so am biased towards that business model. That said, I do not believe you should "park" your money anywhere and just leave it. Things will change and you need to be flexible and change with the changing environment. Sometimes a large portion of your portfolio should be in equities (like now) and sometimes it should be defensive - either short term bonds, cash, or possibly even gold (not now). Just like you managed your business on an ongoing basis, you should manage or have your portfolio managed on an ongoing basis. Whether you like it or not, this is now your new business and you can either do it yourself or outsource it to someone you believe is qualified to do so.
In this current environment & valuations, I believe a sell discipline to avoid large drawdowns is crucial. And with interest rates as low as they are and likely to rise, the risk profile of bonds has increased significantly just in the last year - yields are low and prices are high. This is because the Central Banks have pushed interest rates to historically low levels that there is truly no safe investment that also pays enough to keep up with inflation - CDs, money markets, etc.. This will likely be the case until rates normalize and we have a long way to go. This is one reason I do not put too much weight into Modern Portfolio Theory (MPT) as it has a lot a mathematical "issues" and fuzzy math.
With stocks, there are well documented, significant drawdowns (bear markets) approximately 8 years going back to the early 1900s. Before that the data gets a little sketchy. In fact, Ned Davis Research, Inc. did a study from 1900 through July of 2015 and found that investors spent 74% of their investment time recouping drawdowns from the previous bear market and only 24% of the time getting ahead. So it really depends upon when this happens in relation to your time horizon. It is as much about how much risk is in the market or sector as it is your risk profile. Therefore you need to match and be in sync with the markets/sectors as much as possible. You do need some diversification in bull markets, but this is such a thing as over-diversification.
However, when the markets go down, they go down 2 1/2 times faster than they go up. And when the markets do have a strong correction, correlations come together. What this means in plain English is that just when you need diversification, it is not there and most asset classes all go down together albeit at different rates. There will be only a few "safe haven" asset classes. This is another reason I don't like MPT. Sometimes cash is King. Now, currently I am bullish and we are fully invested. That could change and we do have a sell discipline and strategy for every position in the portfolios.
I believe you need strategy not products. You do have enough to retire, but with your probable lifestyle, you do not have time for a do-over. This is why a stated at the beginning you need a way to be invested but with a sell discipline. I would rather get stuck out of the market wishing I was in, than in wishing I was out. I can always get back into the markets with relatively few transactions. And I could, at certain times, pay a few percent to hedge the portfolio when I perceived the risks were high but a strong selloff hadn't commenced. You want a plan in place in advance for various scenarios so you aren't making decisions under fire, but have predetermined your strategies, particularly your exit strategy. While we use indexing for a portion of the portfolio, indexing will go out the window quickly triggering stop losses along the way during the next big correction. Again, right now I am bullish but this subject to change.
I didn't mean to be long winded but you asked a complicated question and I wanted to give you a complete answer. This is insight from one active manager's perspective, not a passive "pie chart," and is meant to stimulate your thinking. Risk management is the primary goal and the returns will follow.
Hope this helps and best of luck, Dan Stewart CFA®
First, congratulations on the sale of your business! I am sure you are going through a variety of emotions as this business probably was like one of your children! The transition you are going through is both an identity and financial one. My firm, Intrepid Wealth Partners, specializes in working with people like you, Entrepreneurs.
You are correct that you need to have objective advice while being educated on what your options are. You don't need to rush on anything right now, but make sure to interview a couple advisors to see if you like them and they have your best interests in mind, and ask if they are acting as a fiduciary on your behalf. Here is a link to a recent article I wrote that I think you will find of value.
Please consider me a resource should you have any questions.
You need unbiased advice from a fiduciary. Go to www.letsmakeaplan.org and find a Certified Financial Planning Professional™. Seek a “fee only” planner who is with a Registered Investment Advisory (RIA) firm. Get a formal financial plan written and then invest with the RIA firm. Most firms will charge you a percentage of the Assets Under Management (AUM) and that will be deducted from your investments. Get the written plan first before moving the money to the firm. Ask for the adviser’s ADV part 2A and part 2B disclosure brochures and read them before making the decision to meet with them.
Congratulations and good luck.
I think that you should take the time to properly assemble your team of professionals with a focus on finding those who will work with you in a fiduciary capacity. You should then consider holistic planning that incorporates tax, estate, investment issues, and also weighs the emotional toll that such a transition brings.
I realize that you're asking for financial guidance but sometimes that is best provided when clients have also considered their new goals for themselves and their families . You've worked hard for a long time to build a business which has been integral to your identity. Soon you'll be in a different role. That has an emotional impact and the best laid financial plans are crushed by emotions run amok.
Business exit strategists talk about this all the time. So I encourage my business owner clients to do parallel planning on identifying their next purpose while also planning for all the money issues that attend such a transition. An effective transition plan should include a wealth plan that addresses financial issues including strategies to defer taxes effectively so that sellers keep more in their pocket, AND a life-planning component to determine what's next to live a purposeful life.
When it comes to the money side of things, I think that by working with a fiduciary financial planner you'll be better able to identify the action plan you'll need to cover the estate, tax, insurance and investment bases. You don't necessarily need fancy and exotic (i.e. expensive) investments for instance. You may just want to follow the strategies implemented by high net worth families to maintain and preserve wealth over generations: one-third stocks, one-third real estate and one-third in alternatives like gold, cash and fixed income.
You may find that a traditional core-satellite approach will work fine for the stock, real estate and bond portions of this strategy.
You may build core positions of index mutual funds and Exchange Traded Funds which will work nicely to provide you and your family with ongoing inflation-adjusted income from dividend stocks and bonds. You can then add to this core satellite positions in passive real estate through publicly-traded Real Estate Investment Trusts (REITs) or stocks like Realty Income (symbol O) and ETFs like Vanguard REIT ETF (symbol VNQ). The exact mix of funds will depend on your goals and Risk Number.
To robustly protect your wealth from federal and state estate taxes as well as creditors, and provide liquidity upon future transfer to your heirs, you'll need to consider a coordinated estate plan that may include contemporary trust tools as well as life insurance.
The most important thing that you can do right now before the earn-out is inked is to evaluate alternatives that may help you defer income taxes so that you may have more to invest now. A proper tax plan can show you how to monetize your earn-out in such a way that you receive more cash in today's dollars to invest while effectively lowering your tax cost of the sale because of tax-deferral. Proactive tax planning is the key to you keeping more of what you make so that you can invest more for the long-term. In your case, it's the difference between investing $3M post-tax or $5M now.
This is an interesting question because it speaks to more than simply where to invest the funds. At 58 years of age and a five-year contract to fulfill, you would be best advised to work with a competent financial adviser to develop a financial plan for the rest of your life. The key question to be answered is whether you will have enough income to maintain your preferred lifestyle. Such a plan would include an analysis of your income, expenses, assets, and liabilities as well as the opportunities for advantageous tax planning, retirement planning, and estate planning.
To find an advisor, go to https://www.napfa.org/find-an-advisor#tab=filters. The advisors listed are all part of the National Assocation of Personal Financial Advisors, which is the premier organization for financial advisors. I suggest you contact and meet with several before making your selection. You wlll want to work only with a fiduciary, someone who is required to put your interest first.