Here in Indiana I find myself stuck at home due to an ice storm. Figured it would be a great time to post a portfolio update! For the month of January, I simply added on to my stake in JNJ by buying another 17 shares. I also had three people ask me about a very interesting problem. How do I invest a large lump sum of money? For example, what if I sell my house, collect a pension, or benefit from an inheritance? These questions came up in conversations with co-workers, family, and customers. It can be daunting when faced with the challenge of investing a large amount of money. After all, you may not get a second chance. In my case I ran an excel model on what I would do if I won the lottery.
The dumbest thing a person can do is buy lottery tickets. Winning is a one in 300 million chance if you’re playing the Powerball or Mega. However, the lottery does have its benefits. If I end up buying tickets it gets me thinking about what I SHOULD be doing with my life rather than what I actually am. In any case, it’s also a great financial exercise. I recently ran an excel model based on a $1 million cash infusion. After state and federal taxes the payout falls to $630,000. This is a realistic amount if one is selling a house or collecting a pension/inheritance. $630,000 divided by 50 positions equates to a $12,600 investment per company.
So, if I were blessed with this problem I would do exactly what I’m doing now, except on a larger scale. I’d pick 50 globally diversified, financially strong dividend stocks. These companies would cover a broad range of sectors and have solid growth prospects. I’d average into these stocks over the course of 3 years. Any longer would invite too much inflation related risk. Investing it all in one year is also too risky given how late we are into this economic cycle. Three years gets us past the next election and perhaps even through the next recession. At the end of year 3 the completed portfolio is conservatively producing $25k in low-tax passive income. If I picked a bad position, it likely only made up 2% of my portfolio value.
What I found interesting was how the value fluctuated 20 years into the future. For instance, investing everything immediately and earning 8% yielded $3 million. In contrast, if another 2008-like crash happened, the portfolio would drop to $315k in year 2. By year 20 we end up at only $1.4 million. My strategy gets us somewhere in the middle. If we follow a purely pragmatic approach, we’d then assign expected values to each event (recession or not) and make decisions from there. Most analysts believe, however, a recession is more likely than a boom in the next 1-2 years. Therefore, I’d continue to follow what I’m doing today. Buying on a monthly or weekly basis over several years smooths out risk over time. This patience will likely lead to significant wealth.
DISCLAIMER: I am long on JNJ. I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.