So you suddenly won/received $50,000 through some source (lottery, inheritance, etc.); how would you invest it? You have the following constraints:
You donâ€™t need the money for at least 10 years, youâ€™ve already maxed out 401k and Roth IRAs. Pretend that the windfall (lottery, inheritance, etc.) came under a couple conditions: 1) You can only invest it in one area. 2) If your investment doesnâ€™t make 6% a year you lose it all.
Lazy @ Lazy Man and Money asked this question last week and invited some answers.
I mulled over it for a while - and mulled over it some more - and finally realized the predicament that lottery winners must be facing. Seriously, I had trouble trying to think what I would do with the money. Finally, I provided this answer (with which I am not very happy now):
Option 1: I would love to use that money to start a *good* restaurant on campus (or very near to campus). A few semesters ago, we (me and some of my classmates) did some ground work (for a class) on what would be required to open a restaurant in our town ~ I would like to see some realization of those ideas. With the kind of numbers we played at the time, we estimated that we would break-even (with respect to the initial capital) in about 3 years ~ and the earning rate will increase more with increasing popularity (and increasing enrollment of new students). Plus, itâ€™s a university town - students are busy - they tend to eat out a lot and that works in our favor.
Option 2: Invest it in energy in a sort of â€œhedgingâ€ manner - gasoline, sun, wind, hydrogen, and nuclear. The demand for energy is never going to head down - gasoline may be replaced by hydrogen in the time to come - but you will need something to keep those millions of cars running. I donâ€™t know what kind of a returns this will give meâ€¦but since itâ€™s an unexpected windfall, I would be willing to take risks with it.
Going from 50K to 100K would definitely make me think more - although I donâ€™t think it will affect my choice much (if it were $1 million, that would certainly make me change my choices). The time factor will also matter a lot - technologies become old and new ones attract more attention - accordingly, I wouldnâ€™t want to stay rigid on the energy investment options. I would stay in the broad â€œenergyâ€ field, but my options would depend on whatâ€™s hot at the time. With the restaurant, it doesnâ€™t matter if the time frame is 10 years or 50 years - if itâ€™s a good restaurant, it will be etched on people stomachs for ever.
I noticed two (potentially harmful) tendencies here:
1. My perception of risk changed due to the source of my windfall (even though faced with the consequence of loosing all the money if it doesn’t earn 6%, I was still willing to take chances - which otherwise I would not have dreamed of).
2. The extra money may have made me overly optimistic - I later came to a conclusion that the restaurant idea was too optimistic with no real experience (lack historical performance perspectives - “statistics” for some people).
To make it clearer, let me say that if it was my own hard-earned money, opening a restaurant would have been the last thought on my mind - I would have perceived it as being too risky an endeavor. I might have gone for investing it in stocks - which would have easily earned more than 6% (after-taxes); even S&P 500 would beat that in the long run. Plus, with stocks, you have a historical perspective - so some amount of future prediction can be made [although, estimating future performance (extrapolating) based on past performance involves risks - it's less risky than trying to invest in something which has no past performance numbers (like the restaurant idea)]
Do you think there is a general tendency to take “more risks” with unexpected monetary gain? Would your choices be different about investing $50,000 if it were your own hard-earned money rather than an unexpected windfall?