Now that a lot of you are newly crowned Facebook(股票代號: FB) Millionaires, what should you do?
According to Forbes magazine, one wealth manager estimates that the IPO has minted about 1000 millionaires, most will make something in the $2 million to $5 million range; my guess is many of them reside in the San Francisco Bay Area. The question would then be, what should I do with my new found riches? Your journey on the financial management road has just begun.
1. Don’t quit your day job! Maintain your attitude as a worker as if before the money. You have come so far, but consider this luck of the draw. If you have passion for your work, there is so much more you can continue to excel at and contribute to humanity by doing what you have always done best.
2. Be happy, and live a little! It’s okay to splurge a little, get it out of your system. However, limit it to a small portion of your after tax windfall. You will need most of your new money to set yourself up for a comfortable live. Be mindful of the lottery winner’s curse!
3. You will need trustworthy professional help with your finances, but be suspicious when the adviser come pushing all kind of esoteric financial products on to you. The truth is most “pros” are sales, and we all got quotas to fill, jobs to do.
4. Educate yourself financially. You don’t have to be an expert, but you must learn how to evaluate basic investment, and be realistic about your assumptions with regards to life expectancy, return generated, inflation expectation, unforeseen circumstances, health care costs, and the life style that your income can afford you.
5. Your primary goal is sustainable cashflow for the rest of your live. Liquidity generated from investment is crucial if you largely want to be net consuming, and not have your spending eat into a large chunk of your principal.
6. Should I diversify? Diversification’s main purpose is, capital preservation through diverse asset allocation due to non transparent information risk. In my opinion, it is a game most suitable for the passive yet already rich, and you have now earned an invitation to join this circle.
Consider the scenario below:
S&P broadmarket historic total compounded annual return is about 9.6%
Your Age: 30 years old
Newly acquired after tax nest egg: $2 Million
Life expectancy: another 60 years
The annuity formula dictates that the monthly cashflow received is $16000/month, that means if you are 30 years old today, and content to live off your investment (invested in the S&P 500 index fund) for the next 60 years, you cannot withdraw more than $16,000 a month if you don’t want to run out of money before reaching 90 years of age.
Obviously, the cashflow generated is not an obscene amount of money if you are a programmer in the silicon valley, or a family with duel incomes. Hack, it doesn’t even qualify under Obama’s definition of being wealthy. I have not taken income tax into account. On top of that, if the “lost decade” were to repeat again like the one we just had between year 2000-2010 where the S&P ended where it started, even asset allocation through diversification touted by the financial industry will have trouble living up to the lofty goal of S&P 500(currently just under 1,300 points) reaching 105,361 points in 60 years time(excluding about 2 percent in dividend). Inflation and health care costs will be eating into your mere $16000 eventually, but they are not considered here either for simplicity. If for some reasons, you have decided your children will be entitled to some inheritances, the financial planning and projection will need further tweaking to reflect such fact.
My point is every so often the market experiences a crash or a correction in epic proportion, nobody knows when it is coming, but we all know it will come again, doesn’t matter how many thousands of pages of rules the Dodd-Frank legislation entails, human emotion, business cycle, bubbles and bursts are as natural as the daily sunrise and sunset. Do educate yourself and consider using options strategy to enhance your cashflow and nestegg size in the mean time. Don’t let the money burn a hole in your pocket and run out and buy the next hottest issue without clearly understanding what you are getting yourself into.
You have made yourself millions, now the challenge is, can you hang on to it?