First, decide on your desired lifestyle and personal financial needs, and also how much time you want to devote to this. Most of us are concerned with financial security for ourselves and for our children. Beyond a house that's paid for, our real needs are actually quite modest. Once that safety net is established, we want to make sure the money is invested wisely, and put to good use while we are still alive and after we're gone. You might be challenged in your thinking about how to allocate your assets because some of us came up through poverty, while others have heard horror stories about the Depression. Many more economic controls are now in place to avoid a major financial calamity. One universal truth, however, is we can't take it with us when we die. so you may also want to give some to a charitable cause and do some income-tax and estate-tax planning at the same time. Invest the portion for personal financial security in extremely safe financial instruments. Beyond that, you can afford to take risks, and in my opinion, you should.
Each kind of investment carries its own risks, but usually higher return goes with higher risks. For example, municipal bonds are safe, and the yield is usually 4% to 5% tax free, whereas the stock market is risky, but the return over a long period of time averages 10% to 12%. Remember, these are averages: it is hard to beat the averages, but it is easy to do a lot worse. The secret of high financial return is to beat the average by investing in an area where one can arbitrate the risks better than other investors can.
Let's look at a few investments you may want to consider:
- Government bonds are safe, but have inflation risk. Bond interests are usually a few percentage points higher than the rate of inflation at any given time. You lose out when the inflation rate is higher at the time of sale than it was at the time of purchase. The recently introduced "I" series bond you can buy directly from the federal government addresses this issue by indexing its rate with the rate of inflation. (What a deal!) However, the amount you are allowed to purchase each year is limited.
- You can lose your shirt investing in the stock market if you do not spend the time and effort to work at it. Can one consistently beat the averages? Not really! Never mind about all the bragging you hear. Over time, even exceptional professionals only beat the average by a couple of percentage points. Investing in several top-tier mutual funds to spread the risk is the way to go.
- Any kind of investment in physical assets, such as real estate, has liquidity problems. That is, it can be hard to sell it quickly when you need cash. Remember, it is always easier to buy than to sell anything. If you must, be reminded that the exceptional and the unusual always appreciate more than the average.
- With your "several million dollars," you may want to invest in venture capital funds. Top-tier VCs are not taking as big a risk as what is perceived with their exposure to good startup companies and their clout in the IPO food chain. These funds cater mostly to big foundations or pension funds, and are only recently becoming accessible to individual investors through funds that invest in VC funds. Most Wall Street brokerage firms and some banks are offering this "product," charging a fee of around 1% per year for the privilege. Minimum investment is generally around $1 million and you have to qualify as a "sophisticated investor." However, because the financial community is very interested in our field, some funds allow successful engineers to invest directly with the promise to help bring in deals and evaluate potential investment opportunities.
You may want to consider using a financial advisor or money manager if you don't want to spend the time yourself. Do not expect miracles, however, because you are not likely to have access to one of the superstars—they probably don't need additional clients. On the other hand, most of them are professionals who make a living doing it. Ask reputable people in the community, who are also savvy about financial matters, to recommend an advisor who is honest and trustworthy. Ask your advisor to make a legal representation that there is no conflict of interest in what he or she recommends as an investment.
