If you’re ever lucky enough to get a 10 million dollars windfall and feel like blowing it all in just a decade so that you end up with nothing, here’s what you should do:
1. Watch others, who have much more than you have, and emulate their lifestyles, trying to prove that you’re “just as good as they are.
2. Do not, under any circumstances, invest the money in a conservative mix of stocks, bonds, real estate, commodities and cash. Instead:
3. Go ahead and buy a huge house. Renovate it to the highest standards.
4. Buy a few vacation properties. Renovate them too.
5. Start a collection of expensive cars. Each car should cost at least $300,000.
6. Buy a few horses. Focus on expensive horses that cost around $200,000.
7. Indulge in $10,000 fur coats.
8. Go on frequent vacations. Stay at $1000-a-night hotels.
Fast forward ten years. Mission accomplished!
But I won’t take credit for these tips! I have learned them from this story about a family who had lost 10 million dollars over the course of ten years.
Humor aside, this is a fascinating example of bad money management. It has all the right ingredients – greed, naivete, lack of planning, a strong desire to keep up, and – above all – a profound misunderstanding of what money is worth these days and what is the best way to handle a large lump sum.
A few weeks ago, we asked, “What Would You Do with a Million Dollars?” People tend to imagine the amazing things being a millionaire would enable them to do, but being a millionaire, as in having a few million dollars, does NOT enable you to lead a very lavish lifestyle.
The family in the story got 10 million dollars. It’s a nice amount of money – VERY nice – but their problem was that they had completely changed their lifestyle, and began to live as if they had not 10 million, but 100 million.
Ten million dollars can evaporate pretty quickly. The right way to handle this type of money is to invest it conservatively and enjoy the income it can produce. With this kind of money, the right thing to do is probably to spend a small percentage on yourself, on helping family members and on donating to worthy causes. But the rest should be invested – conservatively and carefully, keeping in mind the importance of diversification – apart from reckless spending, one of the biggest mistakes the Martin family had done was tying their entire fortune in real estate.
Suppose you spend 10 percent and are left with 9 million dollars. Assuming a conservative asset mix and 5% annual yield, this type of money can generate a very nice pre-tax annual income of around half a million dollars! If you’re still fairly young, it does make sense to keep working – find something you love to do, but don’t quit working altogether. If you spend just part of the income your investments generate, your money will have a chance to keep growing and will not erode too much with inflation.
I’m not saying that the couple in the story should not have made any changes to their previous lifestyle. Life is not all about being careful and prudent – it is also about having fun and seizing the moment. But the kind of money they had should enable them to have fun AND keep most of the money. Yes, the Great Recession would have lowered the value of their investments, but with a conservative mix, they would have recovered by now.
The story of the Martin family is a painful one to read because it’s a story of a missed opportunity – and the opportunity here was huge. With ten million dollars, the Martin couple should have been financially secure. They should have been able to lead a comfortable lifestyle, put their kids through college and leave them a nice inheritance. Instead, they are now back to square one – and at age 59, that’s not a good place to be.