I'm lucky enough to be dealing with a somewhat large inheritance and have been doing a lot of thinking about where to put the funds. Everything I've found to read on the subject deals with risk tolerance based on age and estimated retirement date, but I haven't really found anything that deals with portfolios where you don't really need all the money in the near future. I am still working and already have enough saved up to last at least 20 years (worst case scenario). Not sure if I should invest the inheritance in a more risk tolerant portfolio, but I'm leaning that direction. Anyone have any thoughts on the matter?

If you want to DIY I would suggest Boggleheads and go from there.

I have been consuming a good bit of materials on risk management lately while struggling with a similar situation, although maybe I am not quite in as good of a position as you.

I have decided that I am going to think of some of the money as a perpetual fund that will outlast my wife and me. This enables me to consider longer time frames for the money and have less sensitivity to draw downs in equities. This in turn suggests that in a perfect world where my wife and I are not spooked, we should be significantly more in equities.

Most of the money that we received was in bonds, to a lesser extent higher fee equity funds and even some higher fee alternative investments. We are still working to get the basis on some of the assets resolved, but where I can, I have been transitioning into lower fee equity etfs / mutual funds and bond funds.

I have read a good bit on market timing / tactical allocation (e.g., Link) when it comes to lump sum investing vs. dollar cost averaging. Most of the literature suggests that you should jump into your target mix of equities as you will be better off 2/3rds of the time. Still at our approximately 30 CAPE Shiller, the evidence is less conclusive.

I don't really have a good solution for an inflationary risk which is likely the biggest risk that this "perpetual fund" will have. One thought was adding reasonably priced fixed mortgages as a sort of "dollar short".

If you consider the mortgages on our two houses (we rent out our old house) our loan to value is around 5% of our total assets. I am considering buying additional real estate which would enable us to add more leverage, and maybe increase debt to 10% or 15% of our total assets. That way if inflation hits, it will reduce the
real value of our mortgages that we have to pay off. I am still thinking this through, and it seems a little anti-Nassim Taleb (i.e,. increases fragility). Besides, owning bonds that yield 4% before taxes and financing something at 5% seems like a negative arbitrage.

Let me know if you figure out something that I am missing.

I am 57. My non-401K portfolio is still leaning toward more aggressive side. My 401K portfolio had the fund option aimed at retirement date. Those returns were low because of less risk. I opted to use a more aggressive fund there as well.

The one thing I did when I received my inheritance was keep it seperate from the other funds in my portfolio. The inheritance investment is in my name but I also put my has my parents initials on the title. This tells me & family members it is my inheritance. For personal reasons, I did not want to commingle my inheritance with the rest of my pre-inheritance funds.

I think it's always important to be taking risk but you want to be doing it smartly. The key to that is portfolio construction / diversification... you want to be taking bets but that are not highly correlated.

I like to have a mix across the major asset classes: equities (public and private), fixed income, real estate, commodities... and have short term/medium/long term investment time horizons mixed in as well.

Again, it all comes down to risk/reward and your tolerance for volatility. If you want maximum returns you could go w/ and market index fund but you have to be prepared to have meaningful draw downs. Emotionally - it's a lot easier to manage that way for me.

Once qualified purchaser status is obtained one should be in private capital markets to the extent illiquidity is palatable. Public equity/fixed income/real estate have lower relative return expectations no matter how you allocate.

You can use more leverage on the real estate side to get returns a bit more competitive

Agree. The risk parameters are much higher and less clear.

AgBank said:

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Stagecoach said:

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Once qualified purchaser status is obtained one should be in private capital markets to the extent illiquidity is palatable. Public equity/fixed income/real estate have lower relative return expectations no matter how you allocate.

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Gosh I hate what you imply here. There is significantly more risk on the private side. True you can sometimes mitigate some of those risks, but the benefits to being a "Sophisticated Investor" are significantly over stated by those who are not sophisticated.

I prefer to invest in private situations where I can impact the outcome, or I trust the management.

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The data and my professional experience both say you're wrong. Across all asset classes, private capital outperforms public capital markets consistently. Perhaps we aren't talking about the same thing? I'm not talking about vetting your own deals around town or within your network; I'm talking about engaging the most sophisticated and experienced asset managers in the world to do it for you. The risk is liquidity (time and cash flow). No one person should tie up all or even a majority of their capital in private markets. QPs and Super-QPs generally will be limited to 25% or so of investable net worth at most reputable firms. Institutions on the other hand routinely exceed 50%, but they exist on an infinite vs mortal timeline and that's a different world. And I've worked on both sides so I guess I know a little bit about it.

Good luck with your private situations and I mean that sincerely. But if so you're looking at very small deals that exist in the tails of the bell curve (highly unpredictable outcomes). I've seen by far more money lost in that arena than ever has been made. Probably at least 5x and I'm not talking about mom and pop deals - I'm talking about former C-level execs, large business owners and Family Offices. After they've been burned for the third or fourth time, almost without exception they hire-out that decision making and funding strategy. Those investors stay rich for a reason.

Thank your luck wishes. I certainly need them.

I agree that there is a good bit of money to be made with private capital, but it has its risks. Some people have a "grass is greener" view of private capital. I think you would agree, it certainly isn't something I would rush into as soon as I became a qualified person.

There is a good bit of noise in the data. Hedge funds were certainly more popular when I was in business school. I am sure if you looked at historical data at that time, the average hedge could justify its fees. I understand that LBO private equity still can justify their fees and venture capital has crushed it recently, but both have just enjoyed a decade of valuation multiple expansion. Unless you are David Swensen, it is tough for even endowments to pick fund managers these days.

I don't have that much money, and the funds that private wealth managers have pitched me were very unappealing. It seems "I don't want to be a member of any club that would have me".

I will concede, if you can get Seth Klarman to take my money, I am ready to write the check.

TL;DR Seth stubbed his toe, Hedge Funds 101, private capital is the t!ts, hug your advisor


Slow morning so I put some further thought into this. I enjoy sharing what I've learned and listening to differing points of view. There is a time and a place for hedge funds, and there is a time and a place for private capital for suitable investors. It doesn't make one an undesirable or less sophisticated if neither are their cup of tea. But a strong case can be made for both when used properly and in moderation.

First, Baupost Group/Seth Klarman

I've been familiar with Baupost for some time now, but don't have any money invested with them. There's not a great deal of public information on Baupost, but I did find this to share to support my commentary below:

Music ends for Oracle of Boston (I authored this title - don't hate the player)

I'm not really that smart, but at a recent hedge fund conference I had the opportunity to listen to and speak with many of the industry's major players such as Jonathan Grey, Larry Fink and David Rubenstein along with countless insiders. From that, word is Baupost got pummeled in 4Q on Equity correction (duh) and a particularly large position in PG&E. For 2018 they are expected to report the worst annual return since Seth's inception in 2008 (almost certainly negative) depending upon how aggressively they mark-to-market their subrogation claims related to the PG&E position. What is known is that PG&E assets, including all its reinsurance protection, will come nowhere near the potential liabilities. Thus, the value of those claims, admittedly bought at a steep discount to hedge the equity position, are expected to continue to fall as the bankruptcy takes shape. My educated guess is that you will likely see some degree of underperformance in 2019, which, arguably, they are due. In 2017 they were returning money to investors, which is not uncommon for a $30B hedge fund's opportunity set, but likely will be waiting with open arms for more money by next year. So, I'm saying there's a chance (that they reopen to new investors like AgBank).

Second, Hedge Funds

The thing is, Hedge Funds (like Baupost) are not Private Capital; they're completely different animals. Further, the hedge fund space is quite large and diverse. Just as you see sector rotation in equity leadership through economic cycles, the same is true of hedge fund strategies (Relative Value, Credit, Macro and Equity are the 4 broad categories). Presently, there are some 15-20 identifiable hedge fund strategies depending upon with whom you talk. Of those, there are probably 3 or 4 that you want to be in today or soon. But since they all are private placements which requires time for investors to position capital, one must anticipate the sweet spot and that determines success far greater than whether you have a top decile vs second quartile manager in your lineup. For those reasons, most investors, particularly recently anointed Accredited Investors ("AIs") and Qualified Purchasers ("QPs"), choose to stick a toe in the water with a Fund of Funds ("FOFs") manager who gets paid to make those decisions and allocate capital across the spectrum. The one I always start investors with, which is available to AIs, returned almost 4% net in 2018 and likely will generate a double digit return in 2019. What you give up with FOFs is the homerun ball like Baupost swings for, but what you gain is a high batting average in a turnkey solution. If you work with an advisor at a major firm, you should have this FOFs available to you on their platform. Just ask him/her for Series G and they should know.

Third, The Sophisticated Investor & Private Capital's role

The evolution of a sophisticated investor, in my opinion, typically follows this stage pattern:

• Public Securities (stocks, bonds, mutual funds, REITs, MLPs, etc.) = anyone can do this
• Private Situations (usually seek higher returns than public securities markets: business co-investment, angels, direct loans, sole or consortium real estate) = anyone with extra cash flow/savings and an appetite for idiosyncratic risk
• Initial Public Offerings ("IPOs") = only available to "good customers" of syndicate firms
• Hedge Fund of Funds = (usually have bad experience at stage 2, seek to reduce risk through greater diversification and opportunity to participate in inefficient markets) AIs $1M+ liquid
• Single Strategy Hedge Funds = (usually surrendered stage 2 investing but not mutually exclusive, seek to raise performance of a diversified portfolio) sometimes AIs, usually QPs $5M+ liquid
• Private Capital = (usually committed in tranches and always to equity, sometimes credit and real estate and seek to improve total portfolio return) always QPs $5M+ liquid
• Pre-IPOs = (investing throughout the capital structure alongside investment banks, desire for outsized gains) always Super-QPs $25M+ liquid
• Family Office = (seek to take majority or full control of investment policy and due diligence but generally at greater expense) Multi-generational wealth generally $250M+ minimum

Allocating to private capital takes 5-7 years to do it correctly. Just like wine, some vintages are better than others. Allocate a portion each year over time. For example, if you allocate a new position now you likely are buying near-high valuations. However, in the next two years you may be buying near-low valuations. Using a little common sense, there are algorithmic programs to aid an investor in making capital commitments over time to match capital calls with anticipated distributions to achieve the target portfolio allocation. However, generally speaking, the returns are consistently greater than public markets over any reasonable rolling time period and usually by a wide margin.

Here's an article on the topic from last week by Dr. Richard Marston, professor of finance, Wharton School at the University of Pennsylvania:

How to cope in a world of lower returns

I'll conclude by acknowledging that I don't have all the answers and I don't pretend to be the smartest guy in the room. I'm constantly learning and re-learning and understanding investor psyche and handling objections is central to my role. There is no "one size fits all." As financial markets and financial services evolve, so, too must we. I've spent this entire post talking about investing, but really that is just about 1/2 the job of a Private Wealth Advisor who serves the affluent. Perhaps that's why I am easily annoyed by those who would shame the financial advisor's role or desire to be compensated for professional services. To that crowd I offer, you probably don't need an advisor because you likely have little to no complexity. You probably don't need an attorney or a CPA either. But that doesn't mean that you never will. As wealth grows, complexity multiplies at a rapid pace. There are plenty of people who eagerly pay to have a quality advisor in their corner.


**This is neither an investment recommendation nor financial advice. The comments are educational in nature and the sole opinion of the anonymous - if not entirely suspect - poster and not that of any past, present or future employers. This is not a solicitation for advisory services.**

Thank you for the long post, the Hedge fund 101 etc. Hedge funds aren't private capital and I appreciate the correction. I also didn't know that Klarman has only been running Baupost since 2008, I figured it was much longer. He is sometimes credited with their results prior to 2008.

One area that I am interested in learning more about is managed futures. I understand that it has been a rough several years for that strategy. What is your advice on that subject? While not correlated with the market, it doesn't necessarily act as crisis alpha. How would you evaluate such funds?

Avoid managed futures that employ quantitative trend following in this environment. If you must, go with discretionary strategies.

If it's not funds that you need in the near term, why not just a low cost S&P 500 index? It's boring but low cost and odds are you'll beat active funds in the long haul.

I agree with above poster. A good idea if a large sum of money is to dump it into a Vanguard Money Market Fund and setup a monthly draw into a low cost etf or basket of etfs.

Wife and I are in a similar scenario, although the cash infusion isn't from inheritance. Coming from a business sale.

I've had a few months to process this. Couple things that were helpful:

https://www.bogleheads.org/wiki/Managing_a_windfall

And if it's your style:

https://www.bogleheads.org/wiki/Bogleheads_investment_philosophy

Our situation is somewhat unique in that we are out of tax deferred space, have no high interest debt, and already have our kids 529s taken care of. All to say I've settled on dumping it all, lump sum, into a taxable brokerage account with low cost index funds and letting it ride.

See Red Pear's flow chart too:

https://texags.com/forums/57/topics/3022207

Cyp0111, I don't think you can do "periodic" investing from Vanguard money market to ETF. You can to a mutual fund and I am not sure why that is different. Am I wrong?

Vanguard offers brokerage services that use a MM as a sweep account.

You would have to monthly sell the MM fund and buy ETFs.