How Would You Invest $1 Million Today?

Occasionally, interviewers will ask a question like this. If you are a young individual going for a summer analyst or full-time analyst position, is there a type of answer they're generally looking for? Is a well-thought out explanation, demonstrating you know the markets and can think logically all that's basically important.

Interview Question: How Would You Invest $1 MM?

This is a common interview question and when answering - what matters is your thought process.

  • A smart way to start answering this question is to ask a follow up question: who am I investing the money for? If you're investing money for yourself (a ~20 year old) you will be more aggressive in your allocation than if you are investing for your grandmother.
  • Once you've established who you are investing for you should break up your asset allocation into stocks vs. bonds. If you are investing for the 20-year-old you might say that you’d invest in 90% stocks and 10% bonds and explain the rationale that you should be more aggressive as a young investor with a long runway to build wealth. For a middle age person you might propose a 50-50 split between stocks and bonds.
  • The next thing to consider would be specific allocations. One way to do this would be to do look at sector investments within the asset class - IE "Within the equity pie, I would look to invest in IT and Healthcare for growth and Utilities for security and dividends.
  • Alternatively, instead of doing sector allocations you could have a few specific names / etfs that you would invest behind if you would like to be more specific or if you would like to highlight you interest in stock picking

Within this method, what really matters is your thought process. Explain everything as you go along. Don't make any unspoken assumptions about the client or the environment.

A user shared another good template for answering this question that is more nuanced and appropriate for a more experienced individual that wanted to show some serious finance acumen.

Krakauer:
"If you were given $1MM to invest, where would you invest it?"

A: I would want to know a few things about the overall expectations, duration, liquidity requirements, etc. Then you should expand on a duration and risk appetite by saying something like "Assuming it is a pension fund looking to invest over a 2-year horizon, I would recommend overweight in ____, underweight in ____, etc. Further, some personal equity preferences of mine include x1,x2,x3 (know the companies you pitch).

Read More About How to Answer This Question on WSO

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Don't suddenly shoot out "if someone gave me $1MM I would short t-bills and invest in Apple." Like most questions, they want to see how your mind works, not what the end result (necessarily) is. In other words,

"If you were given $1MM to invest, where would you invest it?"

A: I would want to know a few things about the overall expectations, duration, liquidity requirements, etc. Then you should expand on a duration and risk appetite by saying something like "Assuming it is a pension fund looking to invest over a 2-year horizon, I would recommend overweight in ____, underweight in ____, etc. Further, some personal equity preferences of mine include x1,x2,x3 (know the companies you pitch).

Don't follow this verbatim, but you get the idea.

 

I'm assuming this is only asked in S&T interviews. What do you S&T guys learn from asking someone this? Is it in any way indicative of their future performance?

If anybody on this board interviews kids for IBD and asks this stuff, can you explain why in the world you'd care if a kid knew how to invest given he's going into corporate finance? Sure it shows a general knowledge of the markets, but seriously why ask? To get him to spout off some BS answer we all know he probably knows nothing about?

Not trying to be a dick, just always wondered why this sort of question was ever asked.

Best Response

i got asked that in IBD. it seems like a relevant question to me. everybody who claims to follow the markets should have a clear idea how to make some basic investment decisions. i ask myself the opposite question: why on earth do I have to take chemistry classes in high school when i'm never going to use chemistry in my entire life, yet I still have to hear of a high school where personal finance is a required class. each and every high school graduate will have to invest some of his money, get that mortgage, or life insurance at some point of time, but this class is never ever offered, not to say required at high schools..

 

Empirical evidence shows that returns are more highly correlated with asset allocation than security selection. I would think it would show more thoughtfulness to give them a top-down process on constructing a portfolio than to take a flier on some hot stock tip or a trendy overbought stock.

 

If I were asked that question right now, I would give a brief discussion of a sector or international index or something that I'd consider. However, I would then say I would probably purchase real estate. There are opportunities to buy real estate at 60% (or more) discounts if you look hard enough. Granted, this is probably 60% off an artificially inflated price, but its still less than the market price.

Additionally, you could make your purchase generate revenue and (in theory) it should increase in value over time. Also, you get tremendous tax advantages.

I know some of the real estate investment topics could become controversial, but no one could argue that you can get a great deal.

 
IBBI:
If you had $1 million dollar, how would you invest it?

-How would you guys answer this question? Experts?

If I had time, small caps and foreign stocks would be my playground. You should return 30-50% per year if you play your cards right. 20% if you're conservative (conservative by my standards lol). Of course, this is assuming you want to quit your job and actively manage your cash.

Realistically, I'd put my money in a few HF's I really respect and let them manage my money until my nest egg is big enough for me to retire and manage my money full time.

 

would be tough to find good funds that will take less than a 1mm investment, ie tough to split that 1mm a few ways.

20% is aggressive by any standard. when i do my retirement calcs, i work off 8%. 7 yrs to go....

 
Rickets:
Seeing as most hedge funds can't hit this number, this is an extremely aggressive target.

Most hedge funds have strategy and scale constraints...or are run by idiots.

Some of the best (and most conservative) funds out there can hit this number. Besides...you're only talking about $1 million here. It be pretty easy to put this money to work and make a very good return. I've worked and associated with people/funds who have averaged 20% for the last 20 years. Trust me when I say that these people are very prudent/conservative in their investment approach.

 
ExGSBanker:
Plenty of hedge funds can hit 20% in one year, they just do it with extremely high vol and the next year they're down 15%.

People always seem to forget that you have to consider risk along with reward.

What is a good rate of return to expect from a hedge fund using the S&P as a benchmark? (+/- X%)

I know a lot of funds are criticized by saying "this fund returned 5% less than the S&P this year", so what is the benchmark that a fund would have to hit to be considered "good" year after year?

 

In really depends on the fund's portfolio characteristics. If the fund has a zero beta, it probably inappropriate to benchmark it to the S&P 500.

Typically, as a very rough statement, I'd try to benchmark a fund by backing out its systematic exposure to publicly available asset classes.

For example, if a fund just buys equities, it will probably have a return above the risk-free rate on average. However, since I can get long equity exposure for free, should I really pay someone 2 and 20 for it? The idea here is to back out the replicable portions of the fund's return, and evaluate the non-replicable portion separately.

As a general statement, a fund able to return 15% per year on a consistent basis would be considered "pretty good," but not "great."

 
Rickets:
Out of curiosity, do you work at a FoF?

Nope. Just another HF/Buyside person wasting time on message boards lol. I learned quite a bit from message boards like this when I was going through school...I suppose I'm just trying to give back.

Too bad vault.com went to sh!t. Hopefully this place can learn from their mistakes.

 
Daniel T Bush:
wow, you guys know shit about trading. 20%/year is extremely easy with 1mm. it is when you've got 500mm-X billion that 20% becomes very very difficult. generally the more money you run the harder it is to make returns.
  1. Wingman and I both work at hedge funds and you're a Yale student, so just relax. I respect wingman's opinion as should you and everyone else on this board.

  2. Everyone has failed to address my point of 20% returns coming at a reasonably high vol. Find me someone who generate those types of returns with low volatility and show you a good investor.

  3. Most multi-billion say 5+bn funds are mutli-strategy which affects returns in several ways: some strategies in the multi-strategy are not as high return/vol as long/short equities and therefore generate lower returns, and then also, the amount of capital dedicated to any one strategy is not immense and so you don't have the concern of being too big.

  4. Relates to point #2 above, but Rickets comments above don't address risk. I think there are plenty of funds capable or returning 15% with a high vol y/y but again, if someone can generate 10-12% risk-free when treasuries yield 5%, then that is truly what a hedge fund should be. People seem to forget what the word hedge in hedge fund means - HEDGE FUNDS WERE ORIGINALLY STARTED TO GENERATE RISK -FREE OR CLOSE TO RISK FREE PROFITS ABOVE THE RISK FREE RATE.

Call me an idiot, ignore me, do what you will, but I'm just trying to throw my opinion out there as someone actually in the industry unlike most of the people on this board.

ExGSB

 

Let's say the purpose of a hedge fund is to generate consistent profits above risk-free (which I agree with). What kind of Sharpe Ratio would you consider "good?" Two? Three?

Daniel, if 20%/year is so easy with a small capital base, I'd advise you to just manage your own money full-time, rather than getting a proper job.

 
Rickets:
Let's say the purpose of a hedge fund is to generate consistent profits above risk-free (which I agree with). What kind of Sharpe Ratio would you consider "good?" Two? Three?

I'm not suggesting that there is some finite answer of what a good sharpe ratio would be - simply just saying that most people are failing to consider an important factor.

 
Rickets:
Let's say the purpose of a hedge fund is to generate consistent profits above risk-free (which I agree with). What kind of Sharpe Ratio would you consider "good?" Two? Three?

Daniel, if 20%/year is so easy with a small capital base, I'd advise you to just manage your own money full-time, rather than getting a proper job.

I think Daniel was talking about "easy to generate 20% with small cap" in a relative sense.

 

It can be fairly easy to generate large returns with small amounts of money if you have some clue as to what you are doing. But even as low as 1MM it would be very unlikely for a single peson to generate consistent returns above 20%. It might not have been that hard over the past 5 years when some asset classes have surpssed that number, but try to return a consistent 20% when the market is down 15% in a year.

Anyone who says they can get a return like that, of course you can, but a consistent one, not unless you are both good and LUCKY. Some hedge funds have come close to 20% consistently, but is that because they are that good, or because they are good and lucky? If 10,000 people play craps for 5 years at last one of them will have "consistent" returns, but that doesnt mean they are in any way good.

My personal portfolio (under 10k) returned over 300% from july to novemeber before I moved my money into safer investments. I did it holding 2-4 positions in long options contracts. I don't brag about my returns, and I never brought them up in interviews. The bottom line is, i might be a decent investor, but I don't expect to be able to mimic those returns, if I had been wrong I could have easily lost all of my money. Higher risk = higher reward and I'd rather be lucky than good. (but would prefer both good and lucky)

The correct answer to your question is either give it to a money manager if you don't know what you are doing, or put it in a diversified portfolio across different asset classes and regions with a risk profile appropriate to your investing time horison.

 

Usury, a fine non-correlated asset with diversification benefits. Shouldn't joke about that, 2 months from now they'll roll out a 33.3% levered 'Enhanced Core Plus Usury' closed-end fund.. and raise $3bln ala PCI

"Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it." - Peter Lynch
 

Gold.

[quote]The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.[/quote]
 

Thank you very much for the information about where you can invest money. But I realized a long time ago that playing on the stock exchange is a lottery if you still haven't figured it out, there goes the cryptocurrency. I have a lot of friends who have made a lot of money on stocks and cryptocurrency, but some people have lost everything. Therefore, I am learning from the mistakes of others, and I would invest my million dollars in real estate, which I am doing at the moment. I hope all my projects in which I have invested money next year will bring a lot of money. Considering rule 72 which I learned about from this site https://www.dividendpower.org/2021/04/22/what-is-the-rule-of-72/, in a few years, my fortune will triple, and I will become even richer.

 

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