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.
Congratulations! It's great to be able to cash out on the hard work you've put in over the years. Look for a comprehensive fee-only financial advisor to create a plan for your retirement that maximizes your nest egg and minimizes your taxes. As much as possible, use tax-deferred and tax-free retirement savings accounts over the next few years to save money. A fee-only advisor can create a fixed-income ladder that provides you a 'retirement paycheck' once you've finished working. Using fixed-income instruments (Treasuries, CDs) you have steady income from your portfolio to live on while still growing the portfolio. This provides you security and protection from the vagaries of the markets and economies. Unlike expensive annuities, bond ladders are low cost and flexible. If, like other entrepreneurs, an opportunity comes along, you can readjust the portfolio and ladder funds to put them to work as you see fit.
Interview a few advisors to find one you feel comfortable with and has the breadth and depth of expertise needed to help someone in your situation. Don't rush the decision. Good luck!
It's a complex question and you'd likely benefit from professional advice. But for today, I'll answer by suggesting that safety comes from proper diversification. Don't let someone talk you into a "safe" portfolio of municipal or treasury bonds. Either of those would be a proper holding for your retirement portfolio, but not by themselves. Truthfully, most of the "safe" investments won't keep pace with inflation by themselves, which is why the best portfolio includes other asset classes, too. It's easy to be lulled by a crafty annuity or bond salesperson, but those are just partial answers ... find a reputable advisor near your home and let them help you build a diversified and productive retirement portfolio.