Today is your lucky day!
You’ve suddenly come into a $10,000 tax-free windfall.
Now, what do you do with the money?
I know most would splurge on a vacation or the down payment on a new car or some other extravagance. But when unexpected extra funds find their way into our lives – whether from a winning lotto ticket, or left to us in a distant relative’s will – it’s crucial that we are able to thoughtfully and purposefully allocate its spending.
The only way to not only save but to potentially grow a $10,000 sum into something even more substantial, is to invest.
But not just invest at random – it’s crucial to know how to properly divide and distribute that sum to obtain a diversified portfolio and widespread market exposure.
Allocating that $10,000 will vary according to one’s age and risk tolerance. Millennials, for example, should put a lot more into stocks than someone nearing or in retirement.
What follows is a rough approximation of where to put this $10,000 windfall.
Step #1: Stocks
For starters, I would place $5,000 into stocks – totaling 50% of the sum.
Take half of that amount, or $2,500, and put it into emerging and frontier markets. After underperforming the S&P 500 Index since 2010 – down 6% on average annually, versus a 10% annual gain – these markets have just begun their rebound.
A look at this year’s winners shows regions like Indonesia, Thailand, and the Philippines leading the way. Since I’m not a fan of index funds for stock investments, I would look to actively managed mutual funds such as those found at the Matthews funds.
Many of these types of funds can be purchased through Schwab’s Mutual Fund Marketplace for a mere $100. The account minimum is $1,000 but this is waived if you deposit $100 a month.
Of the remaining $2,500, I’d put $1,500 into Europe and only $1,000 into the U.S.
European markets have been trashed lately. But following the words of famed investor Sir John Templeton, one should invest where conditions are “miserable” – and Europe is certainly miserable at the moment. Again, I would opt for active management through, for instance, the Henderson Funds – which are also in Schwab’s Marketplace.
However, an ETF focused on the beaten-down U.K. market might be a good idea. With the British pound at levels not seen since 1985, assets there are relatively cheap.
While you may wonder why I’m only giving the U.S. a small allocation, the answer is simple – valuations are close to all-time historic highs. And as someone who has been in the investment business since the 1980s, the TINA trade scares the hell out of me.
TINA is Wall Street’s current mantra, and stands for – There Is No Alternative (TINA) to U.S. stocks.
For me, this sounds too much like “this time it’s different,” and, as John Templeton once explained – those are the four most expensive words in the English language.
These phrases are usually heard near a “top” and represent potential problems in the future.
Step #2: Bonds
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Next, I would allocate 30%, a total of $3,000, into bonds.
My favorite bond fund manager is Jeff Gundlach at DoubleLine Capital. Funds from DoubleLine can also be found at Schwab with a range of choices from the U.S. bond markets, as well as a global fund.
An ETF like the iShares 20+ Year Treasury Bond ETF (TLT) is also a good choice.
And, it will remain so as long as the “mad scientists” who call themselves central bankers, continue with their zero and negative interest rate policies.
These guys will eventually have all the world’s sovereign bonds – including the U.S. – yielding a negative rate.
Hopefully, this changes soon, and central bankers begin to normalize rates.
For investors that want to know when to expect this, keep an eye on Sweden’s Riksbank.
Sweden was one of the first countries to go negative and I believe it will be the first to reverse course. Its Central Bank Chief Stefan Ingves is under growing pressure to stop negative rates, especially since Sweden’s economy is doing fine, with expected growth at about four percent in 2016.
Step #3: Alternatives
The remaining 20% should then be divided evenly into alternative asset classes.
The two areas I suggest are real estate and precious metals.
In precious metals, both gold and silver are currently great options. And they will remain as such, as long as central bankers keep doing what they’re doing – as currency flounders, precious metals become more valuable.
A solid ETF for gold is the VanEck Merk Gold Trust (OUNZ). It allows investors to actually convert their holdings into gold bullion or gold coin, if they so wish.
Then, for a real estate investment option, the FlexShares Global Quality Real Estate Index Fund (GQRE) is a decent choice.
There is also the option of purchasing an eREIT through Fundrise. Their minimum is $1,000, and they actually go out in the real world and invest in properties around the U.S. with the money they get from clients. One caveat, however – their two funds are illiquid investments, and so this must be long-term money.
With stocks, bonds, and alternatives in your portfolio, that $10,000 is sure to grow and become a truly sizable nest egg. Now what’s more luxurious than ensuring that, down the line, you’ll be able to maintain a high quality of life and enjoy those standards for years to come?