million dollarsAs I held my Powerball ticket between my fingers I pondered what I would do with so much money. Of course, I didn’t win the most recent mega jackpot of $590 million, so the plans in my head haven’t exactly come to fruition.

Fortunes don’t have to be in the hundreds of millions of dollars. What about a cool million bucks? What would I do with that kind of money? This promises to be a fun thought exercise.

Saving safely

I’m not exactly sure where I would start with a million bucks in hand, but I do know I’d keep a few things in mind. First, I’d want real diversification, since the gain or loss of $1 million is certainly a life changing event. Secondly, I’d want to remain conservative, but leverage when possible.

Here’s how I’d shape a million-dollar portfolio:

  • Levered real estate – Real estate rounds out the income portion of my $1 million portfolio. I’d aim for a particular neighborhood of my town with a private university and grade school just a mile away. These well-maintained but older homes with established trees and beautiful boulevards will attract just the kind of people you’d want in a rental property: families who can afford to make monthly rental payments and who won’t call at 4am because the toilet is clogged. On the fringes of the neighborhood are $100,00-$130,000 houses (I live in the midwest). I’ll take four, for a total cash investment of $104,000 assuming they’re financed with 20% down with 30-year fixed mortgages. Leverage is important. The after tax cost of debt is very cheap, and it insulates me from the risk that home prices drop 50% overnight. In the event that happens, I’ll walk away down 20%, leaving the bank to eat the loss. $896,000 remains.
  • Stocks for the long haul – Equities would make up a very large portion of the portfolio. At least $500,000 would go to the stock market, but I’d invest slowly. More than half would be dedicated to stocks that I believe are undervalued relative to the market. I’d venture in to micro and small caps, businesses that appear to be risky but are still small enough to be understood. (Can you really know everything there is to know about Exxon Mobil, anyway? It’s just too big!) To hedge my ability (or lack thereof) to pick my own stocks, I’d put a substantial part in Vanguard’s Dividend Appreciation ETF (VIG) which would balance out my portfolio with large cap stock exposure. $396,000 remaining.
  • Cash – No one appreciates liquidity until they don’t have it. I’d keep $150,000 in cash (probably CDs) as a buffer for equity exposure and to leave me with some extra cash in case my rental properties need a new costly sewer line. I’m down to $246,000 to put elsewhere.
  • Peer to peer lending – I’d dedicate another $100,000 to peer to peer lending sites like Lending Club and Prosper. Interest rates are attractive, and 36-month amortization on personal loans means that I have a stream of cash flow coming in every month to reinvest. I’d stick with the B to C-rated borrowers, specifically those that are using a personal loan to refinance high interest credit card debt. Those seem like the least risky borrowers because they’re now trying to be responsible with their existing debts. I’m running out of money quickly! I have $146,000 left over.
  • Country club membership – No, really. A few thousand dollars ups your networking potential. If at any point it costs thousands of dollars to join a group, any group, the members inside are likely more successful than your average Joe. Besides, I need to work on my short game. There’s only $136,000 left to invest.
  • Family – A happy family is a rewarding investment. Having no kids of my own (and hopefully staying that way for quite some time) I’d throw some money into a 529 for my niece and my nephew. A 529 can be an excellent investment in states that allow you to lock in the current cost of a credit hour for future use. Let’s just hope I can be a proud uncle of rocket scientist and brain surgeon. The last remaining dollars would go to my parents. I’d purchase an annuity on their behalf to provide safe future retirement income to smooth the ups and downs of the stock market. Responsibility for aging parents and new family members rests on the whole family. If you’re exceptional enough to have a million dollars in your early 20s, an investment in your family goes a long way. Scratch that. It’s a good investment at any age.

Other to-dos

You’ve got to be safe with a million bucks. Ambulance-chasing lawyers and profiteers won’t pass up the chance to steal your net worth. Add an umbrella insurance policy for $1 million to keep most risks off your radar. Sleeping well at night is worth the monthly expense.

I think that’s it; this is exactly how I would manage a $1 million portfolio for the long-term. How about you? What would you do with a $1 million portfolio in your 20s or 30s?