Strategy for 25 year old with £1m...

[Chrysalis]

This might take a bit of imagination given the average age and investment objectives of most posters....
What would you do, or how would you advise, a young person coming into a large sum of money? What should their investment objective be? How should they plan to set themselves up for a lifetime? What balance between human and investment capital, is the aim to grow or preserve their wealth? Would a lazy portfolio strategy suffice or should they be looking for more productive or hands on investments?

I'm not too interested in details like tax minimisation as that is a moving target, more the high level philosophy and to get an idea of people's immediate reactions. This isn't a situation I'm facing tomorrow, but in the medium term I will need to guide my children through this scenario.

[Dod1010]

My immediate reaction would be 'Lucky him!' but it is a two edged sword because I believe a young person has got to learn to stand on his own two feet.

Assuming he is getting the lump sum unencumbered and in his own name (not held in a trust say) as you say all you can do is advise him. I would advise him not to think that it is his passport to an easy life because so many seem to be able to get through even £1 million very quickly and besides £1 million is not that much these days.

I would also advise him to put it into a selection of investment trusts and reinvest the dividends back into the same trusts (assuming that is that he is going for long term accumulation of funds). No thought needed. It would be a good idea for him to retain say £50,000, not as 'fun money', it is too much for that, but as a fund with which he could buy a selection of individual shares. From that portfolio he will eventually learn how to handle investments, losing money along the way no doubt. However what he loses there (cost of investment education if you like) he will make up fairly quickly via his investment trust portfolio if he leaves it untouched (No need to tell him that!) He will need a strategy for that and that needs to be thought through.

This is lazy in the main, but he will most likely build up the IT portfolio and he will be learning at the same time.

Dod

[saechunu]

Speaking from experience with parallels to the situation you're describing, I would say the issue to focus on is not what specific investments or asset allocations they should make but the more fundamental one of the mindset you should seek to imbue in them that will allow them to handle the situation well.

A million quid is both a huge sum of money but also not very much at all, depending on how you look at it, and I would aim to teach them how to hold both those simultaneous thoughts in their minds. If handled wisely, a million could bring a lifetime leg-up, but if not it could also be squandered quickly as can often occur with windfall beneficiaries like big prize winners.

Seeing it as a very large sum can encourage a thoughtful, considered, custodian's responsible mindset, to ensure an ongoing benefit ensues. Realising it's a relatively modest sum should help guard against recklessness that may occur, particularly in the early days, when a recipient believes they've a bottomless well to draw upon, not realizing how rapidly it may be depleted or squandered.

As to the specifics, it will depend on your children's life plans. The inheritances/gifts should be supportive of that, not controlling them, providing them with options and possibilities they may not otherwise have had, whether in career or interests to pursue, where or how to live, or lifestyles to lead.

Nice problems.

[BusyBumbleBee]

This isn't a situation I'm facing tomorrow, but in the medium term I will need to guide my children through this scenario.

A lot of of us are in that situation some of us with children and grandchildren

There is some preparatory work you can do and while you say you are not interested in the tax situation there are some advantages in actually thinking of this at the beginning. And making your children aware

First look at pensions (SIPPS) : you can pay £2,880 into a pension every year for all of them and the gov't will kindly add another £720 to each pot. The power of compounding will mean that their pension pot will have a good headstart. I am doing this for all my grandchildren. With judicious use of the IHT gift exceptions, these gifts mean that there will be no IHT to pay if I pop it early

Involve them in the management of this - and they might learn how to invest and manage money when they get it.

[Plutus]

I'd initially aim for something like a 'Permanent Portfolio' using ISAs and pensions wherever possible.

25% each in a house, cash/fixed interest, gold and equities.

[SalvorHardin]

I have some experience of this, having made a similar amount in my mid-thirties to the point where I retired (at 30 I did not see myself being retired by 40 but there I was). As saechunu has said earlier in the thread, it’s their mindset when they receive the money which is most important.

Start to prepare the ground now by discussing investment with them, so they become a bit more familiar with the subject. A lot of people are utterly clueless when it comes to money, apart from spending it, whilst for some ignorance is a badge of honour (a bit like the people who are proud to say that they are clueless about maths). For example, I know someone in their late twenties who believes that the unspent part of their credit card limit is an asset equivalent to cash in the bank. Then there are the people who are totally unconcerned about the interest rate paid on borrowings as long as they can afford the monthly payments.

These are the sort of people who if given £1 million would probably blow it within a couple of years and end up in the bankruptcy court (like many lottery winners). They take on a lifestyle which then cannot support indefinitely and eventually the money runs out. A good example of this is professional American Football where something like 80% of American footballers are declared bankrupt within three years of retiring from the NFL despite earning salaries that most people can only dream about.

https://www.forbes.com/sites/leighstein ... aa10ae78cc

Pay off debts. If you have assets and debts then effectively you are investing using some borrowed money. Consider buying a house or flat and live mortgage-free (or paying off the existing mortgage). For young adults the inability to get on the property ladder is a major concern. The peace of mind may be worth far more than what they could get investing the money that’s now tied up in real estate.

Only then look at investing. Don’t put all the money into the markets at once. Always keep at least one year’s living expenses on deposit. For most people their level of happiness is strongly influenced by how much money they have in their current and savings accounts.

http://time.com/4290861/checking-account-money-mood/

For younger children / grandchildren what about Disney shares? In America it is quite common for parents who want their young children to get interested in investing to buy them some Disney shares. The children almost certainly watch Disney shows and films so it’s giving them a financial interest in something in which they are already interested. It’s a great way to kickstart the savings/investment habit.

A book to give them when the money turns up. "The Millionaire Next Door" by Thomas Stanley. It isn't a book about investment, it's a book about lifestyles of American millionaires (written in 1996). It basically says that the vast majority of millionaires don't have flashy lifestyles, they don't buy status goods and they are often surprisingly frugal (if they had flashy lifestyles and spent lots on bling and other status goods they wouldn't be millionaires).

https://en.wikipedia.org/wiki/The_Millionaire_Next_Door

[mc2fool]

This might take a bit of imagination given the average age and investment objectives of most posters....
What would you do, or how would you advise, a young person coming into a large sum of money?

One approach would be to tell them not that they will be getting £1m but that they will be getting a life-long index-linked income stream of £30kpa, and ask them, ok you'll be getting £30k a year, so what are you going to do with your life? ... Yes, yes, after spending a year on a Thai beach, what are you going to do with your life?

[Lootman]

Does he currently rent, as the vast majority of 25 year olds do? If so, the best investment might be to buy his own home for cash. That will produce a cashflow return equal to the rent he is currently paying. And if it is a decent-sized place, he can rent out a room tax-free under the rent-a-room scheme for up to the limit.

So if he is paying £7.500 a year currently in rent, and will now collect another £7.500 in rent, that's £15,000 a year effective return. And as long as he lives there, there will be no CGT if and when he sells.

The rest I'd probably invest in major index ETF's and then ignore them. Given that his retirement age will be 68 under the latest proposed rules, that gives those funds 43 years to grow and, given that long time, I'd over-weight growthier markets like the US, emerging markets, tech and biotech.

As long as he can support himself through work until he retires, then he will have two nesteggs to draw upon then. So whilst a million osn't enough at age 25 to put your feet up and do nothing, it is enough to fund a secure retirement without worrying about it too much.

Of course, such a goal might sound boring to the average 25 year old, who may see it more as a passport to early retirement. Or wine, women and song.

[Alaric]

Given that his retirement age will be 68 under the latest proposed rules

That's State pension Age. Surely the existing practice that "private" funds can be drawn up to 10 years earlier will continue, or even remain fixed at the current age?

Another plan would be to use part to buy a property and the rest to finance a business, hopefully a profitable one!

[Wuffle]

People are different, the advise should be different.
25, living and working in London in financial services and happy, yeah, buy London property. They'd be paying the rent anyway.
This persons version of success will be a narrow band measured against their peers who's life bears no resemblance to most. In this world they aren't rich and basically have to tow the line.
25, arty, wants to make pottery in South West France, maybe a lazy IT portfolio spitting out 20 grand a year hassle free.
A million quid is a sh*t load of money and they can be financially bomb proof but happily sat in the sun making pottery. London - no ta, pass the wine.
Success is different things to different people.
If you haven't weighed your kids up in 25 years - well - need I go on?

[mc2fool]

Given that his retirement age will be 68 under the latest proposed rules

That's State pension Age. Surely the existing practice that "private" funds can be drawn up to 10 years earlier will continue, or even remain fixed at the current age?

That only applies to formal pension schemes (DC, SIPPS, etc). There are no restrictions on drawing on your own money outside of one of those.

[Chrysalis]

Thanks for the thoughts. Yes, clearly individuals will differ in their aspirations and reactions, and I have some idea how things may go and how to prepare.
I guess I was really thinking that the way that I view my investments, as assets to live on in later life and at the end of a career already established, is quite different from how a long person might think about it, who still needs to invest in education, experience, housing etc etc, and make some key decisions about the kind of lif they might lead. I agree there's not enough not to have to develop human capital and earnings power (although if you aspired to a very modest life it might almost stretch to that, with a fair wind in the markets).

[saechunu]

I guess I was really thinking that the way that I view my investments, as assets to live on in later life and at the end of a career already established, is quite different from how a young person might think about it, who still needs to invest in education, experience, housing etc etc, and make some key decisions about the kind of life they might lead.

I would view the money as an enabler.

For an older person with a well established path through life, the main motivation may be to move away from something whose appeal is now waning - usually work - enabling more leisure time or for other interests to be pursued instead of work. The familiar goal for many people of partial or early retirement.

In comparison, a younger person would normally have much more of a blank slate, and different motivations and constraints. The life options the money could enable for them may be very diverse in comparison to the older person with decades of career under their belts.

When it comes to handling money sensibly - or wisely - "know thyself" may be a prerequisite, but this gets easier with age and so may be harder for a young person, increasing the likelihood for big (unrecoverable) mistakes. Trying to avoid these, without stifling all imagination and creativity in their plans, should perhaps be a key goal.

[gryffron]

Yes I accept there is different advice for different mindsets, but for me it would be: "Don't spend the capital - EVER!".

First objective is to maintain your £1M (ideally plus inflation) and let it work for you. Sure you can buy a house - that should hold its value. Invest the rest. Whatever you invest in, spend the profit/interest/rent/dividends. That's yours, enjoy it. Don't spend the capital - ever - and you'll always have the income it provides.

Gryff

[Wuffle]

After further consideration......

All this crap about how to invest it for the long term is a sideshow to a young person really.
Partner choice and breeding will dictate the really long term more than anything.

Alternative advice.

i) If you must marry, marry well (but richer than you is statistically unlikely).
ii) Deffo don't get divorced (any amount of times).
iii) Every child you have after one sinks all of them all back down towards 'normal' not rich.

These are the mathematical certainties of real life.
The proliferation of ex industry on here tends to skew the advice to a theoretically perfect scenario appropriate only for a fund or IT.
There is probably quite a bit of survivor bias with the oldies who haven't been divorced and have some dollars left.

[DiamondEcho]

This might take a bit of imagination given the average age and investment objectives of most posters....
What would you do, or how would you advise, a young person coming into a large sum of money? What should their investment objective be? How should they plan to set themselves up for a lifetime? What balance between human and investment capital, is the aim to grow or preserve their wealth? Would a lazy portfolio strategy suffice or should they be looking for more productive or hands on investments?
I'm not too interested in details like tax minimisation as that is a moving target, more the high level philosophy and to get an idea of people's immediate reactions. This isn't a situation I'm facing tomorrow, but in the medium term I will need to guide my children through this scenario.

Don't let them near the capital, and perhaps income when too young; encourage or enforce them to forge their own careers before they receive 'trust income' or similar. Nothing before at least 25? But realistically maybe 30 might be appropriate these days. I've had friends rudder-less in life, or completely bugger the 'rich-kid' scenario in the knowledge their annual inheritance income is there to salvage the day. IME waaay better a person finds their niche, into their 30s+ say, told they have to find their own way, then later finds they are being thrown a safety belt for their future.
So age 30'ish. Corral it off from easy accessibility. At that age whilst they're still employed and going up the ladder aim for growth. Use something like a HYP to take the work out of it. Get him/her involved in growing it, give them responsibility and buy-in over the outcome.

[saechunu]

I've had friends rudder-less in life, or completely bugger the 'rich-kid' scenario in the knowledge their annual inheritance income is there to salvage the day. IME waaay better a person finds their niche, into their 30s+ say, told they have to find their own way, then later finds they are being thrown a safety belt for their future.

I can understand this.

I'm from a pretty poor background which, although I can sometimes be lazy, instilled in me the urge as a young adult to crack on and make money until I'd amassed sufficient to make me feel "safe" - job done.

If I'd known I was to be gifted a seven figure sum within a few years there'd have been no real imperative to progress and could've made me a real waster - lazy, entitled, Trustafarian material - safe in the knowledge that I was already, well, "safe".

If so, I'd have missed out on the journey that made me the money: an interesting path that led me to meet some exceptionally smart people and experience some fascinating situations, downs as well as ups, helping instill some smarts and humility in me that I may not otherwise have gained and which are as valuable to me today as the money earned along the way.

A nice problem to have, Jabd2001, but also a tricky one.

[mc2fool]

If I'd known I was to be gifted a seven figure sum within a few years there'd have been no real imperative to progress and could've made me a real waster - lazy, entitled, Trustafarian material - safe in the knowledge that I was already, well, "safe".

OTOH you could've seen it as an opportunity to be able to enrich yourself and others and "pay back" your luck by following a path beneficial to the world, without having the "earnings" need along the way. E.g. by doing (serious) voluntary work or getting into international development or into research on subjects beneficial to humanity (endless list!), etc, etc, etc.

As has been said, everyone is different

[DiamondEcho]

If I'd known I was to be gifted a seven figure sum within a few years there'd have been no real imperative to progress and could've made me a real waster - lazy, entitled, Trustafarian material - safe in the knowledge that I was already, well, "safe".

OTOH you could've seen it as an opportunity to be able to enrich yourself and others and "pay back" your luck by following a path beneficial to the world, without having the "earnings" need along the way. E.g. by doing (serious) voluntary work or getting into international development or into research on subjects beneficial to humanity (endless list!), etc, etc, etc. As has been said, everyone is different

I agree with Saechunu, what ever your age you have to have a reason to get out of bed each day or the effects, unless you have a rare cast-iron self-discipline, can be unexpectedly very corrosive. It's a parallel of the challenges of retiring young, but a much earlier and hence more extreme version of it IMO/E. And if you go and blow it young without having set yourself up before-hand (education, some form of career or productive skills) then you've got a problem. Setting yourself up first teaches you your value, plus the value of a later inheritance, hence you're more likely to see the one-off opportunity you've been handed and take good care of it.
Try say going to a party, meeting new people and when asked 'And what do you do?' reply 'Oh, nothing'. I did that once just because I could and I won't do it again as to say it's a conversation killer is an understatement. That was in year-1 of my early retirement and I soon realised the lack of something to get up and strive for was ironically perhaps going to be my undoing. Oh and you're not going to make new (genuine) friends if you voluntarily frame your circumstances as a gulf apart from almost all other people.

Apart from a couple of trustafarians I've seen a few others who've come into money young and gone off the rails. One 'my best friend' at school, a talented musician who went on to great success in the 'Madchester music scene'. I know at one point the parallel class-A drugs scene almost killed him and regrettably I don't know whether or not he's still with us, he just went permanently off the radar.
A number of bond traders I did daily financial reporting for in my career back in the 80s. The ones who blew it were the ones who lived right up to their income. Porsche+trophy-wife+mansion etc etc. If they lost their job it all fell apart, income/divorce/repo'd home. The two guys I got on with best happened to be the more normal/humble ones of the lot. One had started out as an engineering graduate intern at Ford, and the other was a PhD in astrophysics. No 'I'm the biggest swinging dick on the trading floor' from them, despite the fact that they probably jointly were. Neither of them made any effort to display wealth ('the gold Rolex' thing and all the rest) and it wouldn't surprise me if those two ended their careers comfortable and with their lives/families intact.

[DiamondEcho]

E.g. by doing (serious) voluntary work or getting into international development or into research on subjects beneficial to humanity (endless list!), etc, etc, etc. As has been said, everyone is different

The former might work but you need useful skills beyond wealth to be an asset even in voluntary work, well at least if it's more than helping run the annual village fair cake stall or some-such.
International development requires substantial specific skills too, otherwise you're no added-value over hiring locals where ever the projects are taking place. Research [etc], similarly I doubt any research would be taken particularly seriously unless you had accumulated the quals/credentials to have your findings recognised. But, agreed everyone is different, identifying what will bring you fulfilment is a personal thing and not straight-forward to divine.