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What would you do with a half million?
Old 06-17-2009, 09:02 AM   #1
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What would you do with a half million?

My younger brother was fortunate to be a high draft pick in the MLB Draft last week. He is 21 and in addition to receiving a signing bonus of around $500k (pretax), he will be getting his senior year of college paid for when he has time to go back to school. I believe they will pay him half now ($250k) and will pay him the other half within a year.

Just would like your thoughts as to how you would handle this much money at this age and during these economic times.

Thanks in advance for you input.
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Old 06-17-2009, 09:09 AM   #2
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I'd dollar-cost average it into stocks, bonds, and alternative investments per my AA model. But I'm a 40 year old family man.

If I were him I'd spend it on cars and women.
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Old 06-17-2009, 09:11 AM   #3
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Good for him!

Get him to put enough aside for taxes first, then pay off any debt. Next, max out an IRA. Put some aside for savings, spend a little, but remember the draft is the first step..... this just might be a one time opportunity.

I'd put half of the remaining in a targeted intestment fund- 25% in laddered CD's, and 25% in a savings account.

At 21, the urge to splurge is going to most likely be there. Protect what you have now, and see what the next months bring....
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Old 06-17-2009, 09:11 AM   #4
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Ah, the old "windfall" question. This should be good, especially with the professional athlete factor involved.

What's he like?
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Old 06-17-2009, 09:22 AM   #5
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I once worked with a young man who was drafted out of college by the NBA. He admitted that, despite all the good advice he was given, he bought not one, not two, but SIX new cars with a big chunk of his signing bonus. He said that he realized that he made a big mistake the day that he had to move several of the cars in order for his brother to get HIS car out to go to work...as my colleague was still living at home at the time!

Shortly afterward, he sold all but one of the cars (netting pretty close to what he paid as now the cars were considered "celebrity-owned"), and started to invest his money. After his six year career in the NBA, he was able to return to school for his graduate degree and then worked with young people at a non-profit organization (at very low pay).

The average career of a professional athlete is quite short; something like 5 years is typical if I recall correctly. So, while I agree that it's ok to spend a bit of the bonus just to celebrate, remember that the funding stream might be brief.
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Old 06-17-2009, 10:12 AM   #6
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Old 06-17-2009, 10:31 AM   #7
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This is so personality driven, that what I would do probably has no bearing on what you brother would do. But, none the less, I would, in the same situation, do the following.

1) Set aside 10% as mad money. Spend as you see fit.
2) Find an investment adviser who charges by the hour and places all clients money in Vanguard no-load mutual funds. Ensure that adviser understand that your goal is simply to match the broad market (that does not mean just the S&P 500). Finding the right adviser in the hardest part of the plan. Do not put any money in any investment outside of a Vanguard mutual fund. This is key, as it avoids all the stupid "cachet" investments that snag many professional athletes.
4) Understand that the market goes up, the market goes down. Accept that in 20-30 years it will most likely be up.
3) Invest $450k with 20-30 year time horizon, say 60-70% in diversified equity index funds, 30-40% in diversified short and intermediate term bond funds.
4) Learn to smile and say no the friends with "investment" ideas.
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Old 06-17-2009, 10:35 AM   #8
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Unfortunately, I doubt the standard advice is gonna work for a young athlete.

I would spend money to read some books: "The Four Pillars of Investing" and others on asset allocation. He's a college student so reading should be easy.

Next I would start with a standard AA of 60% equities, 40% bonds. For these investments I would choose WellsFargo for my bank and broker to get everything free. I would use exchanged-traded ETF for the equities and perhaps Vanguard index funds for the fixed income. For example (%'s of total):

15% VTI (Vanguard total stock market index fund)
15% VBR (Vanguard small cap value index fund)
15% VEU (Vanguard FTSE all-world ex-US fund)
15% VSS (Vanguard small-cap FTSE all-world ex-US fund)
20% VFIIX (Vanguard GNMA fund)
20% some intermediate term tax-exempt bond fund.

Full disclosure: I own shares of all ticker symbols listed above.

I personally would not spend any of the signing bonus, but just try to use salary to cover expenses. I would keep my clunker Lexus and not get a new one.

It has been suggested that athletes use annuities with severe penalties for early withdrawal. This is to prevent them for wasting their money on cars and women and deals that their "friends" try to get them into.
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Old 06-17-2009, 10:40 AM   #9
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If this person isn't inclined to learn a lot about investing, I'd probably park most of it into a good, low-fee balanced fund. At 21, there are likely to be many more savings and investment goals in the future than just retirement, and most of them have a shorter time horizon -- so it might make sense to be somewhat conservative with the money.

If they are more willing and able to learn about money management, then maybe I'd use something like a 50/50 or 60/40 allocation with rebalancing.
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Old 06-17-2009, 10:52 AM   #10
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I don't know anybody who works for MLB, but I have former co-workers and colleagues who work for the NFL and NBA who have told me how those sports work with the rookies on how to handle the piles of money that are thrown at them. The NFL has a mandatory school for its rookies that covers money, women, not getting into legal troubles, etc. If the MLB offers something similar, your brother may want to consider taking advantage of that advice.

No bad mojo intended toward your brother, but if I were him I would definitely be cautious with that money. I don't know if it was just where I worked, but we had tons of former pros from all the sports who came to work here after their sports career ended for one reason or another. Lots of former Olympians and enough minor league baseball players to form our own league. My academy class of 75 had one guy who had played for the Knicks for 5 years and another who had been a one-season rookie from the Seahawks. Too many rookies start out promising but, something, often injuries, takes them out of the game. Like this guy we hired last year who was with three NFL teams before coming to work here. Houston Police Department Recruiting: "Bookin Bookman"

Anybody who has money will always be found by someone who wants to "help" them spend it. Some of them will come in the guise of investment advisers who are all-too-often just salesmen for a product that may or many not fit the person's needs. He really needs to self-educate a little or else he is in danger of being easy pickings. Buy him "The Millionaire Next Door" and the "Four Pillars of Investing". Lots of data in there, but he's a college student he ought to be able to handle it.

No specific advice on investments, but if it were me, I would live as cheaply as possible going into his career. Sure, splurge a little, but just a little. After a little splurge he has to play defense and live cheaply so he has money to live on in case he has a career change forced on him.
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Old 06-17-2009, 11:21 AM   #11
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Two words: titty bar gentlemen's club...
I have a neighbor who has been managing a large very profitable club in Dallas for years now. He recently began opening latina clubs, one in Dallas, one in Las Vegas. Coming soon to Austin, then Phoenix. Unlike regular clubs, these latina clubs have been in the black within a year. If you buy a point of investment in one of these clubs you start getting monthly payments equal to 1% of the profit. The Vegas club is currently paying $800/mo. per point on a club that opened in 2008. Yes, during a recession.

So how about kill two birds with one stone? Invest in a club, get paid back, plus you probably get VIP room treatment. I hope to do this within two years myself. But if I had a half-mil, oh yeah, I'd make this part of my portfolio in a heartbeat.
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Old 06-17-2009, 11:46 AM   #12
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How large is the salary (and for how many years) relative to the signing bonus? I know very little about MLB contracts and how they structure compensation, so not even sure if he would have a contract yet??

If he's clever and good with money, he can maybe handle it on his own. But if he needs someone other than his older brother to give him advice, I'd second the comments on paying a fee only adviser (and maybe a tax accountant) for some professional advice on where to put the money, what his goals are, how to structure things for tax efficiency, etc. Just make sure he doesn't end up with a "buddy from college" or "family friend" advising him and selling him a $1,000,000 whole life policy from Northwestern Mutual or 5% load funds from Edward Jones. Although both of those would make better long term investments than spending it on women, cars and booze, or worse, wasting it.
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Old 06-17-2009, 11:48 AM   #13
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He is youny enough. Do something stupid. It is always good to do it at young age. I know many people try to catch up when older, but they could not afford anymore.
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Old 06-17-2009, 12:29 PM   #14
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Research insurance policies that would pay him $ if he gets hurt and can not play in the NBA.
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Old 06-17-2009, 12:49 PM   #15
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It's $500,000, but that is pre-tax. From what I can tell, Federal Taxes would be around $150,000 for a single person. I don't even know if this would be paid as a W2, or what. But after tax, you're looking at more like $300,000. That's great, but not enough to go too wild.

If I were him, I'd try to treat it like a non-renewable source of income. That is, there's no guarantee that he won't blow out an arm or a knee and this will be his last baseball paycheck. Be cautious with most of it. Try to avoid getting sucked into expensive things that his teammates might be doing.

Here's hoping he does well, has a great career, and this money is just the tip of the iceberg.
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Old 06-17-2009, 01:19 PM   #16
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I have a neighbor who has been managing a large very profitable club in Dallas for years now. He recently began opening latina clubs, one in Dallas, one in Las Vegas. Coming soon to Austin, then Phoenix. Unlike regular clubs, these latina clubs have been in the black within a year. If you buy a point of investment in one of these clubs you start getting monthly payments equal to 1% of the profit. The Vegas club is currently paying $800/mo. per point on a club that opened in 2008. Yes, during a recession.

So how about kill two birds with one stone? Invest in a club, get paid back, plus you probably get VIP room treatment. I hope to do this within two years myself. But if I had a half-mil, oh yeah, I'd make this part of my portfolio in a heartbeat.
Forgot to mention, a point will set you back $20,000
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Old 06-17-2009, 01:58 PM   #17
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My younger brother was fortunate to be a high draft pick in the MLB Draft last week. He is 21 and in addition to receiving a signing bonus of around $500k (pretax), he will be getting his senior year of college paid for when he has time to go back to school. I believe they will pay him half now ($250k) and will pay him the other half within a year.

Just would like your thoughts as to how you would handle this much money at this age and during these economic times.

Thanks in advance for you input.
Tell him NOT to listen to his agent or any of his buddies about "neat investing ideas"...........
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Old 06-17-2009, 02:42 PM   #18
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At age 21 I'd buy a small house, an airplane, a speedboat, a motorcycle, and a Corvette. Then spend the rest on alcohol and women. One day in a drunken stupor I might think that maybe I should save a little bit.

At age 30+ I'd do what the others said.
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Old 06-17-2009, 02:47 PM   #19
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At age 21 I'd buy a small house, an airplane, a speedboat, a motorcycle, and a Corvette. Then spend the rest on alcohol and women. One day in a drunken stupor I might think that maybe I should save a little bit.
There wouldn't be much left for women and booze.
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Old 06-17-2009, 02:51 PM   #20
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Spend 90% on sex, drugs, and rock-n-roll, then waste the rest...
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