As you have no doubt seen or read by now, last week David and Carol Martin from the Scottish borders were lucky enough to win £33m on the national lottery…
There has never been a better time in history to win £33m.
Financial products and services are the best they’ve ever been, particularly in the UK, which gives the lucky lottery winner a better chance of preserving and growing their money than they would have had in any previous era.
Sadly, very few people know how to take advantage of this reality, particularly lottery winners by all accounts. The National Endowment for Financial Education has found that no less than 70% of lottery winners end up bankrupt within seven years of their win.
To make the point a different way, there are no less than 147 ex-professional footballers in the UK currently in prison. The lion’s share of them are there because they turned to drug dealing after retiring from the game in a bid to maintain their five-figure a week standard of living. This isn’t a problem of wealth, it is a problem of financial literacy and how poorly distributed real financial literacy is in contemporary society.
It needn’t be this way
At the very basic level, £33m invested with a half-decent private bank, should yield at least 3% - generating an income of just under £1m a year. Sadly, many, if not most, lottery winners have never heard of a thing called a private bank. For a lottery winner willing to do a little work on understanding financial products, they could almost certainly do a great deal better than 3% too.
The first and simplest thing for them to do is realise that the best approach is for them to make use of all of the main asset classes that exist, specifically:
- Cash,
- bonds,
- shares,
- property and
- commodities.
In the early 80s, investment expert Harry Browne introduced the world to his ‘permanent portfolio’ – very simply splitting your investments into 25% each of cash, bonds, shares and gold.
This simple method has returned high single digits over several decades and any lottery winner would be well served putting this in place given it is extremely simple and inexpensive to do and has a multi-decade track record of decent returns and minimal draw down – seeing as the basic idea is that you have an asset that performs well in each phase of the economic cycle.
Browne’s insight was that the outperforming assets do so well when they outperform that they more than make up for the underperformance of the others and over forty years of history have proven him right.
In a nut-shell then, I would suggest last week's lucky winner allocate perhaps ¼ of their £33m (£8.25m) to property.
This should include their primary residence and additional real-estate investment. Some people might want to buy a second home or holiday home (e.g. in the Alps or by the Med) although in an era of top-quality villa-rental websites and AirBNB, I personally don’t understand why people endure the negative tax implications and administrative headache of doing this myself. Variety is the spice of life after all.
With the remaining £24.75m, they should implement an ‘own the world’ or permanent portfolio strategy – i.e. of having all assets in most geographies.
They should do this with a top quality private bank. There are actually still plenty of these about and they all have offices in the UK. They should read at least one book on the subject before signing anything with that bank (How to Own the World would be a good start :) ) and having done so, should feel comfortable negotiating the right sort of price for that private bank’s service (I would say certainly no more than 1% a year of their money, ideally less).
They should also avoid anything complicated sounding that the bank tries to sell them like the plague (structured products for example) and also anything that any of their friends or family suggest, unless those friends are properly qualified and / or can demonstrate a long track record of investment success. Most importantly, having set their affairs up to make a good couple of million a year or so, they should then concentrate on the business of making the world a better place…
Easy.