How to Invest $1,000,000 for Financial Independence and Retirement

Jalpan Dave Blog 2 Comments

Joe over at the Give Earn Live blog has a wonderful contest going on right now – How to Invest a Million. It is often debated what is the best way to invest a million dollars so that you can live the rest of your life financially free.

So in the true spirit of this blog, let’s dissect this question intellectually, look at all three sides of every coin and then determine what would be the best way to invest a million dollars given the economic circumstances of today (as I write this, it is 30th September).

Once you’ve read my suggested strategy, do hop over to Joe’s blog to cast your vote as to which once you think is the best portfolio.

Let’s start with the very basic question – why do we need to invest at all? Why not just put money in the bank or a Certificate of Deposit (CD) and live off the interest?

To understand that, we need to go back to the origins of mankind and understand how money came about in the first place. You see, back in the old days when there was no such thing as money, mankind used to barter in order to get something one didn’t have. If you wanted clothes from someone who used to make them, you would need to give them something in return – let’s say you are a fisherman and offer fish in return.

However, this is very inconvenient – what if the other person didn’t want wish but something else in return say fruits? This makes exchange hard. Because you would now have to go find someone who wants the fish and can offer you fruits in return so that you can exchange the fruits for the clothes which is what you are really after.

In order to solve this problem, mankind needed something that everybody would be willing to take so that such problems don’t occur. In other words, mankind needed money. If you want clothes, you give up some money in return. That’s it.

Over the centuries, several different objects have been used as money ranging from livestock, spices and sea shells and various objects in between.

However these objects had problems of their own – spices could vary from one sample to another.  So could sea shells. Livestock couldn’t be divided into smaller pieces for smaller transactions.

Mankind needed something that was valuable, would be accepted by everyone, was divisible into smaller units and was durable enough to be stored for a long time until a person was ready to spend it. For these reasons and more, gold and silver came to be chosen as the best form of money and were used as money for almost 5,000 years until 1971 – more on that in a minute.

However, as more and more goods and services became available for purchase, carrying around these physical gold and silver coins was a bit cumbersome. So mankind came up with a solution – print paper notes for people to carry around. Anytime someone wanted their gold and silver coins, they could take their paper dollars to the bank and exchange them for their coins. This was known as the gold standard.

Under these circumstances, savings were very valuable because you couldn’t just create gold and silver coins out of thin air. Hence, you got really great interest rates at the banks because banks would take your money and loan it out to businesses for an even higher interest rate. And the businesses would pay since savings were very valuable and the businesses could use the money to grow their profits.

As Robert Kiyosaki once said in an interview, in the 1970s, he would get between 14% and 16% interest in a certificate of deposit and a free toaster!

The downside of paper money though is that the banks could print more and more paper dollars without actually having the gold and silver coins to back them up – as long as nobody found out and it didn’t create a problem. It is suspected by historians that the banks actually did this in order to pay for war and when one too many people came to the bank asking for their gold and silver, President Nixon was forced to suspend the convertibility of the US dollar into gold and silver.

Hence, the money we have today can literally be created out of thin air due to President Nixon’s decision back in 1971. Likewise, interest rates can be manipulated as well. Combined, these two factors cause inflation and business cycles.

Let’s see how inflation occurs. Let’s say there is an island consisting of a fisherman, weaver, woodcutter and baker. Their output is as follows:

Person Output Price Per Unit Total
Fisherman 2 fish per day $2 $4
Weaver 1 robe per day $10 $10
Baker 4 loaves of bread per day $2 $8
Woodcutter 2 logs per day $5 $10
Total $32

Let’s assume that they decide to get off the gold standard so that they can create as much money as they want and be “rich”. They create a million dollars and distribute it amongst everyone. Now they each have $250,000.

What an achievement!!

But when they woke up the next day, they realised that they couldn’t really buy anything more with all that money since they were still producing the same amount of goods. They weren’t producing any more fish, robes, bread or wood than the day before. They came to the painful realisation that money is simply a means to exchange goods – more money doesn’t necessarily create more prosperity.

All that can be done with the extra money is buy the same old stuff they always used to – the same 2 fish, 1 robe, 4 loaves of bread and 2 logs. Hence, the prices of all those goods rose to account for all the extra money that had been printed up.

In other words, inflation occured.

On the other hand, banks can also manipulate interest rates. If they want to stimulate the economy, they lower interest rates to make it easy for people and businesses to borrow money to build more products and buy more stuff hence making the economy grow.

We all experienced this between 2000 and 2008. Banks lowered interest rates and encouraged home buying with teaser rates. This encouraged people to buy homes they couldn’t afford.

Then one day, when the banks decided to raise their rates to “avoid overstimulating the economy” the whole housing bubble came crashing down and millions lost their homes, jobs and retirement funds. This is because with the increased interest rates, many people who had borrowed money now couldn’t pay it back. They were therefore forced into bankruptcy and had to stop spending money which also affects the businesses they had been buying stuff from all those years. Those businesses see a drop in customers and also get affected.

Due to this manipulation of the amount of money in circulation and the interest rates, different investments fall in and out of favour. Up until 2008, as the economy was roaring, stocks did great. But when the crash happened and people stopped spending, the profits of companies fell and this led to stocks going out of favour and falling almost 50% from their highs.

In investing, there are 4 main asset classes (i.e.) 4 main categories of investments – stocks, bonds, gold and cash. Yes, there are several others like real estate and other alternative investments but these are the main ones.

All asset classes go up and down in cycles. It’s almost like an election – voters vote for the candidate that promises to solve the most pressing issues of the day. If the economy is coming along great, businesses make more and more profits and their stocks go up causing everybody to pile into stocks.

Eventually though, the party comes to an end as interest rates rise and companies or people start defaulting on their loans causing stocks to drop. As this happens, people look to vote for another candidate that they think can give them a return on their money. Perhaps they seek shelter in bonds causing bonds to go up.

Likewise, if a lot of money is being printed, prices go up and inflation occurs as discussed earlier. Companies may find it hard to pass on these increased costs to customers because the customers may not necessarily be able to pay the higher prices. Hence, the profits of the companies go down causing their stock to go down.

Bonds don’t solve the problem either – what good is a 5% return on a bond when prices all around you are going up 10%!

So “voters” go look for a candidate that may solve this problem and preserve the purchasing power of their money. Historically, a good candidate for this has been gold. So everybody piles into gold causing gold to go up.

Recognising this, banks raise interest rates to rein in the inflation and make it attractive to invest in bonds causing everybody to leave gold (and cause its price to drop) and pile into bonds causing bonds to go up.

This way, all asset classes go up and down in response to the economic conditions of the time.

As a rule of thumb, below are the different economic conditions and the asset classes that typically perform well during those economic conditions:

  1. Economic growth – Stocks
  2. Inflation – Gold
  3. Deflation (the opposite of inflation – prices fall) – Bonds
  4. Depression – Cash

Harry Browne used these principles to devise his famous Permanent Portfolio whereby he advised dividing your money equally into stocks, long term government bonds, gold and cash. An explanation of it can be found here.

As Andrew Hallam writes, implementing this strategy between 1972 to 2012 would have brought you 9.43% average annual returns with only 4 losing years. The worst year would have seen your portfolio go down by 4.9%.

A snippet of this performance can be seen in the table below from


What is quite impressive too is the fact that during the year 2008 when the stock market dropped 36.81% as shown above, this portfolio made money (0.91%) thanks to bonds returning 33.93% to cushion the blow from stocks.

Could it be that under certain circumstances, all the asset classes perform poorly and it is better to simply hold cash in the bank?

Yes – this could happen. As Ray Dalio explains (go to 11:56 in the video), during a depression (i.e.) a severe drop in the economy and the money supply, cash could be a saviour as the other asset classes fall in value.

Which brings me to the next discussion topic – How the Economic Machine Works by Ray Dalio. It was one of the best 30 min videos I have ever watched. In it, Ray Dalio explains how the economy works, why it crashes and explains how debt plays a role in it.

I doubt I can improve his explanation but what I can do is use an analogy to make it easier to understand.

Let’s say you are training to run a marathon in 3 hours or less. Typically, you would train hard and eat right until you achieve your goal.

The alternative is to take performance enhancing drugs.

So you decide to take these drugs and within a few months, you max out your dosage and run a marathon in 5 hours. That’s great for someone who just started!

However, if you take any more drugs, you may die. So in your next marathon 2 months later, you don’t even finish the race because your body simply can’t take it. Especially without drugs to help you.

This is similar to the short term debt cycle that Ray Dalio explains in his video and it happens about every 5 – 8 years as Ray Dalio says. In the economy, banks can loan out a lot of money in a very short period of time. As people borrow this money and spend it (say to buy houses), it makes the economy rise and incomes go up. But when it’s time to pay back these loans and those who can’t pay are forced into bankruptcy, the reverse happens – people spend less and the economy falls.

So how do you improve your marathon time next time round? You undergo genetic treatment to increase your body’s capacity for the performance enhancing drugs.

Thus, in the next marathon, you take even more drugs and blow past your previous all time best of 5 hours by finishing the race in 4 hours . But again, 2 months later, you can’t finish a race because you simply can’t keep on taking these drugs without posing a serious risk to your health.

Once again, you undergo the genetic treatment so that you can take even more drugs before your next race.

You keep doing this over and over and over again until one day you beat the world record for a marathon and finish one in 2 hours!

But then your genetic treatment doctor tells you that undergoing any more treatment could have adverse reactions on your body or even kill you. And if that treatment doesn’t kill you then the drugs themselves will because your drug doses have become obscenely large now.

In the economy, this is known as the long term debt cycle. When this point is reached, interest rates are already at 0 and cannot be lowered any further to stimulate the economy.

You now have to make a painful choice.

  1. Do you keep doing what you have been doing and risk dying?
  2. Or do you decide to undergo drug rehabilitation?

Both choices are ugly and painful but you decide that the right thing to do is give up this charade and stop taking drugs and start all over again.

As a result, in the next race, not only do you not finish the race but you don’t even show up. Your body is showing withdrawal symptoms. You realise that if you had not taken drugs but instead trained hard all this while, you probably could’ve finish a marathon in 3 hours and 30 mins by now.

Instead, you’re lying on a bed in a rehabilitation center.

Ok we’re done – that’s the end of the explanation behind the economics of my portfolio. We’ll now discuss my strategy of how to invest a million dollars.

Where are we now?

We are now in the third longest economic expansion in US history. And we have seen that in the economy we live in, cycles are all too frequent. So nobody should be surprised if there is a stock market drop sometime in the future.

We are also at 0 interest rates. So when the next recession comes, banks might not have the ability to lower interest rates and bring the economy back to life again. This is the later stages of the long term debt cycles as Ray Dalio explains in his video and the process of deleveraging can be painful.

McKinsey has come out with a report showing why investors may need to dial down their expectations when it comes to returns on their investments over the next 20 years.

For both these reasons, if you already have a million dollars, it would be wise to not only be defensive with it but also to NOT rely on its growth to fund your retirement.

Instead, investing it for cashflow and using only that income to fund your lifestyle whilst preserving the million dollar capital would be a smart idea.

With this, let’s begin the process of constructing a portfolio to invest a million dollars.

Step 1: 15% in Gold to protect against inflation

As we discussed earlier, gold tends to hold up well during periods of high inflation. We also saw in the back testing results from that during a stock market drop, it may hold up reasonably well.

For these reasons, I would invest $150,000 in gold using the popular ETF GLD.

Step 2: 15% in long term government bonds

As discussed, bonds do well during times of deflation and during a stock market crash like 2008, it may see a huge return on investment as investors seek refuge in bonds.

Unfortunately, returns on bonds today are really low so one cannot really rely on them alone for retirement. But bonds can cushion a portfolio during a falling stock market and can provide returns during deflation.

Hence, I would invest $150,000 in long term government bonds using the ETF TLT.

Step 3: 15% cash

Well, just in case. As discussed before, there can be periods of time when all asset classes perform poorly except for cold hard cash.

Hence, I’d invest $150,000 in the Barclays Capital U.S 1-3 month Treasury Bill Index ETF – BIL.

Now for the juicy part.

Until now, we’ve been allocating money to assets that either produce none or very little yield.

How are we going to fund retirement then?

Dividends and Cash Flowing investments of course!

With the $550,000 remaining, a 5% yield means a $27,500 annual cashflow for expenses – or just over $2,000 a month. This may not sound like much but in several places in the US, you could rent a decent place and pay for living expenses with that kind of money.

And if you have a house that is fully paid for, it gets even easier.

Moreover, in the current economic conditions, I’d rather conserve cash so I have the money to buy more assets when they’re down and selling for cheap.

Thus, I would invest $300,000 of the remaining $550,000 in the iShares U.S preferred stock ETF which has a yield of 5.63% as of 31st August 2017. Moreover, the dividends are paid monthly and are fairly reliable.

The last $250,000 of my $1,000,000, I would invest in the Global X Superdividend ETF which also pays monthly dividends and invests in 100 of the world’s best dividend paying companies. As of 29th September 2017, it’s dividend yield is an impressive 6.69%.

To summarise, here’s how I would allocate my $1,000,000

$150,000 – Physical Gold ETF (GLD)

$150,000 – Long Term Government Bonds ETF (TLT)

$150,000 – Short Term Treasury Bill ETF (BIL)

$300,000 – U.S. Preferred Stock ETF (PFF)

$250,000 – Global X Superdividend ETF (SDIV)

The Strategy – Spend the interest, never the principal. In other words, live off the dividend yield from PFF and SDIV.

If the economy grows and stocks do great, then SDIV should also enjoy some capital gains and the dividends will keep flowing in.

If there is inflation, Gold may help cushion the blow.

If there is deflation, the long and short term treasury bond ETFs may help cushion the blow.

If there is a major recession or depression, the Short Term Treasury Bill ETF may help cushion the blow to the portfolio while the preferred shares and dividends of the worlds top companies hopefully keep coming in albeit at a much smaller yield percentage.

The portfolio will be rebalanced annually to ensure the same mix is maintained.

Now I’d love for you to tell me in the comments below:

  1. What strengths and weaknesses do you see in the portfolio above?
  2. What would you do differently?

Comments 2

  1. I really enjoyed your explanations and the well thought out portfolio!

    The thing I might differ on is the government bonds and treasuries… I prefer corporate bonds just because the government is partly to blame for the rampant spending and $20 trillion in debt. Buying government securities is like offering drugs to the guy lying on the ground in a coma after the marathon… What do you think?

    1. Post


      Thanks a lot for your comment! Sorry, I’m still new to blogging so just realised you had commented!

      Agreed, the government is deeply in debt. But the US government has the license to print the world’s reserve currency which is the US dollar and it also can tax the world’s largest economy. Hence, it can always come up with the means to repay bond investors. A great piece about that can be found here:

      On the other hand, companies are beholden to the markets and customers for their income. So in a worst case scenario, these companies may not be able to repay bond holders. Hence my choice to invest 15% in government bonds to protect during a deflationary scenario.

      To put it in the form of an analogy, I would say buying government bonds would be like buying the debt of the drug lord. Yes he is largely to blame for the drug overuse but the drug lord also happens to have the right to tax farmers to repay his creditors:)

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