How Would You Invest $1 Million Today?

fibows's picture
Rank: Senior Baboon | 203

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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Comments (56)

Feb 18, 2008

as long as you can back up your claims i think it would be fine.
(for example, i would personally say 90% equity because my investment horizon is 40+ years)

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Feb 18, 2008

i got asked this question and talked about mutual funds in eastern europe and other emerging markets. also talked about (as is-t mentioned) about investing mostly equity because of my young age. i think that's a sufficient answer, they seemed to like it.

Feb 18, 2008

talked about long equity/short t-bills due to the crazy disparity 1 month ago. talked about shorting volatility in several sectors with long-maturity options. talked about emerging market as well.

Feb 18, 2008

anyone care to add to this?

Feb 18, 2008

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.

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Feb 18, 2008

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.

Feb 19, 2008

It actually makes for a great question in consulting interviews.

Feb 19, 2008

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..

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Feb 19, 2008

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.

Feb 19, 2008

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.

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Jan 27, 2018

the first things regardless are: Objective, Risk Tolerance, and Time Horizon. These three things will allow you to answer the question and back up your reasoning.

If the glove don't fit, you must acquit!

Jan 27, 2018

I would probably diversify it all into various ETFs. Ones that track the S&P500, International stocks, Growth Stocks, etc. I'll take the historical 10%ish return on the S&P500 for example over bonds.

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Jan 27, 2018

3 to 5 relatively uncorrelated asset classes. like what i try to do in my pa in general i guess.

Jan 27, 2018

why don't u ask some shitbag financial advisor. that is not what i-bankers do

Jan 27, 2018

no banker would be capable of answering that question, only smart guys at HF's would know the answer

Jan 27, 2018

a whorehouse in bangkok

Jan 27, 2018
  • Invest in diversified ETFs (Lat Am, Europe, Asia-Pac), High Yield funds and REITs (US Domestic and International)
Jan 27, 2018

give my money to a PWM group and relax

Jan 27, 2018
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.

Jan 27, 2018

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....

Jan 27, 2018

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

Jan 27, 2018
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.

Jan 27, 2018

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.

Jan 27, 2018
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?

Jan 27, 2018

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."

Jan 27, 2018

Out of curiosity, do you work at a FoF?

Jan 27, 2018
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.

Jan 27, 2018

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.

Jan 27, 2018
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

Jan 27, 2018

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.

Jan 27, 2018
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.

Jan 27, 2018
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.

Jan 27, 2018

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.

Jan 27, 2018

I appreciate your enthusiasm, but a 6 week timeframe for an investment contest is a terrible way to determine if someone is good. 20 years is better.

in reality, if someone invested $1mm with me today, it'd depend on whether it was already invested or if it's new money, but I'd most likely average into whatever models fit them best.

Jan 27, 2018

What difference does it make if it's already been invested vs. new money?

Jan 27, 2018

Loan shark it to someone at a 50% interest and buy a baseball bat

Jan 27, 2018

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

Jan 27, 2018

Cash and overnight treasuries.

Jan 27, 2018

Build two laundromats. Steady source of revenues, requires 0 day-to-day human capital, and repair costs are generally fairly low.

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Jan 27, 2018

-deleted- my answer was actually kinda damn good and i don't feel like sharing

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Jan 27, 2018

CAT bonds.

Jan 27, 2018

The laundromat idea is excellent! I would purchase a Ferrari F40, it's bound to go up in value right?

Jan 27, 2018

Value investing

Jan 27, 2018

Gold.

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.

Jan 27, 2018
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Jan 27, 2018
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