I made $5M from selling my startup, what’s the best way to invest this money?

This question and answer originally appeared at Quora.

Firstly well done!

I’ve written a little about how suddenly receiving a large sum of money can be a little bit of a shock or overwhelming. You will no doubt suddenly feel like you have all these extra things to think about that perhaps didn’t apply before. The article is called ‘Surprise! You’re Rich. Now What?’. I hope you find it helpful.

I would firstly say that you should take your time. There is no need to rush your financial decisions.

You should then take some time to have a realistic appraisal of your life. Now that you have this wealth, what do you want to do with it? How do you wish to use this money for your life?

As a successful entrepreneur, your first question to ask is whether you wish to continue investing this money in yourself and your own business ventures.

Without knowing more about you, your situation and your views, I can only put myself in your shoes and suggest that I would do the following.

Firstly, I would split up this capital.

I would perhaps use a third for lifestyle and family related assets – this would be a healthy cash reserve (few years expenses), help out family and buy a home etc.

I would then set aside a third to fund future business ventures. The money doesn’t have to burn a hole in your pocket (you don’t have to go into the next business idea you have), but you will probably find in a few months/years time, you will probably have other business start up ideas you wish to pursue. This is how you will continue to create and build wealth.

The final third, I would invest into a diversified portfolio and in a cautious manner. As other funds are set aside for more risky personal business investment, I would simply aim to maintain your wealth.

(I would say 1/3 into each category, but this will change depending on your own personal situation. Perhaps it could be only 10% to future businesses, 30% to lifestyle and family, and 60% to investments. You should take the time to consider what is right for you.)

Maintaining wealth sounds like it’s easy and not a very ambitious goal, but this isn’t true. Truly maintaining your wealth against the impact of inflation, fraud, excessive fees, high taxes, theft, speculative mania, panic, confidence tricks, bankruptcies (I could go on), is no mean feat.

I would suggest there are a few factors to maintaining your wealth:

  1. Effective diversification – across businesses, assets, geographic locations and political environments.
  2. Tax minimisation – don’t go into any complicated tax avoidance type schemes – as they are often later deemed to be evasion – but legitimately and reasonably ensure you don’t pay too much tax.
  3. Fees – Make sure you don’t pay too much money in investment and professional related fees. This means you should take the time to learn about financial matters – but do take the right professional assistance when you feel it is appropriate. Whilst professional advice is costly, it’s far preferable to amateur advice!
  4. Prudence. At all times, try and be prudent about how you calculate your wealth. This will help you to remain prudent. It’s quite easy to be misled into assuming you are richer than you are – with the result being you consume your capital. There is a general rule of thumb that you can take 4% from your investments and use it as income for many years (your own rate is dependant on many factors). Having $5million sounds a lot different to having $200,000 pa, but they are essentially the same thing.

Bob Parker has provided some good investment specific views, so there is not much need to repeat it – I would only add the following.

Investment risk is about volatility and probability.

Successfully building up and selling a start up business is very high risk – the likelihood of you actually being successful is quite remote and therefore you have actually built your own wealth in a very risky way (i.e. if you kept trying this you would statistically fail more often than succeed).

However you have probably not really been exposed to volatility in these endeavours. Volatility is the measure of how the daily traded prices of a company or other asset change. I’m sure you didn’t receive a daily value of your own company; but instead were solely focused on building the fundamentals within your business on a daily basis.

When you become an investor however, these assets are usually very liquid (you can buy and sell them every day if you wish – not advised!). You will see the value of your portfolio at all times. This can make you feel like a genius when your portfolio increases significantly, or pig sick when it declines in value. Imagine how you would feel if you received a sale price for the business you were building each and every day?

When dealing with volatility you can do a few things:

  1. Avoid it. I wouldn’t recommend this because the trade-off is that you basically receive no real return on your money.
  2. Manage your personal timescales. I would refer back to my earlier points made about your personal goals and make sure you set aside the right amounts of money for other purposes. Don’t put yourself in a financial position whereby you need access to funds when markets are experiencing a downturn.
  3. Manage your behaviour. Take some time to find out about what type of investments you would be comfortable with owning. Try and make sure you keep an eye on your portfolio, but don’t look at it too often, or don’t become a data addict (I’ve written about this previously in an article called ‘No Monkey Business’. It is very hard to do this in our modern information age).

Ultimately, you will experience volatility and uncertainty in managing your wealth. As you have created considerable wealth, you should focus on keeping it and therefore prudence and caution would be wise.

I hope this helps you.

This answer first appeared here.

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Mark Underdown

Financial Coach, Small Acorn Money

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