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Putting mad money to use
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July 2, 2001: 3:42 p.m. ET
If there's money to spare, indulge your interests. Invest in a winery, horses
By Jeanne Sahadi
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NEW YORK (Money.com) - You know you've made it when you've amassed some serious mad money – the kind you can use any way you want because your future is secure.
You've filled your retirement coffers, conquered your mortgage, set aside enough for your kids' education, and insured yourself from here to heaven. And you're still left with a couple of hundred grand or more to spare.
Getting the most out of that money depends on what you want to achieve and your risk tolerance. Certified financial planner (CFP) Barbara Steinmetz says people with mad money often are looking for some excitement. They want to get involved in something new. And new often involves a high risk-reward ratio. For them, "it's about going out beyond the risk curve because they can," Steinmetz said.
Still, they didn't get where they are by throwing cash bonfires. That's why CFP Rick Applegate, adviser to many high-net-worth, high-income clients, suggests you "identify an amount of money you're totally willing to lose." Then stick to that limit and take your best shot.
Here are five ideas that carry varying levels of risk and offer the potential for big rewards, monetary or otherwise.
Be an angel
Money doesn't make you holy, but it can put you in a position to help a business you believe in get off the ground.
Angel investors are one step above "fools, families and friends" in providing much-needed capital to entrepreneurs, said Jim Pinto, founder of the angel network AngelMoney.com, who became an angel investor himself after selling his electronics business three years ago.
The investors get repaid with interest or receive stock in the company if it goes public. Angel investors may commit anywhere from $25,000 individually, said Pinto, up to $2.5 million dollars as a network, according to the Center for Venture Research at the University of New Hampshire.
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"Identify an amount of money you're totally willing to lose."
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CFP Rick Applegate |
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The rewards aren't always monetary. In fact, Pinto said, half the companies you invest in may crash and burn. But there is payback from your involvement in the business, he noted. You can act as a mentor if you're an expert in the company's industry. Or, if you're not an expert, you still can offer advice about marketing, financing, management or manufacturing.
One of Steinmetz's clients is investing $200,000 in a Lilly Pulitzer dress shop. The planner's only concern, however, is that her client is tying up her money with other investors, which means she doesn't have as much control as she might like. With any kind of joint venture or limited partnership, keep in mind "it's much easier to get in than to get out," Steinmetz said.
Take a ride on a space shuttle
Maybe you don't have a cool $20 million to blow on a joyride, but you do have some cash to indulge your interests. Applegate's wealthiest clients have taken plenty of professional risk to get where they are.
And he finds the kind of financial risk they're most willing to take is on themselves.
"What they long for is an opportunity to do something else," he said.
One client – a doctor – wanted to write a novel. So he did. And then he spent $50,000 to print it. He may get some of his money back, though. He's planning to sell his books at his birthday party.
If you want to combine your business nature with your romantic dreams, you might consider opening a bed & breakfast, starting your own winery, or raising thoroughbred horses. But plan to sink anywhere from several hundred thousand dollars to several million, not to mention lots of passion and sweat equity.
Go out on a limb
Until now, you've been an A+ student of asset allocation or had the good sense to hire someone who is, and your portfolio is so well-diversified it's, well, dull. So now's your chance to take some mad money and go deep with fuel-cell energy stocks or make bets on all things Latin.
Or maybe you want to protect your excess capital in down markets, something hedge funds try to achieve. Hedge funds are largely unregulated pools of money that managers invest using various strategies off-limits to mutual funds, such as shorting stocks. Fees are mostly tied to performance and run as high as 20 percent of returns plus a 1 percent fee on assets under management.
To be an accredited investor in a hedge fund, you must have a net worth of $1 million or make at least $200,000 a year ($300,000 if filing your taxes jointly). What's more, minimum investment requirements for on-shore funds can range from $250,000 to $5 million or more.
Despite some impressive runs, these funds can be volatile. They're also hard to get information on and you will be restricted as to when you can buy or sell. If you're a first-time hedge investor, the Hennessee Hedge Fund Advisory Group recommends you put no more than 20 percent of the equity portion of your portfolio in hedge funds.
If you don't have at least $1 million in investable assets, you might consider a fund of funds, vehicles that invest in several different hedge funds, said Charles Gradante, managing principal of the Hennessee Group in New York.
You'll get greater diversity and lower volatility, but you'll pay more in fees: one to the manager of the fund of funds, then another to the underlying funds.
In choosing where to invest, it may be tempting to take a tip from your golfing buddy, but you'd be better served going to a registered investment adviser that does not sell the products recommended, has good research on the fund of funds universe and can objectively assess the suitability of a fund for your needs, said Hennessee Group Chairman Lee Hennessee.
Buy a second home
If big risk isn't your thing, consider investing in another home. Try an area where you might wish to retire, Steinmetz suggested, noting that now's the time to act before baby boomers start retiring in droves. It could serve as a vacation home for your family if you don't want to move there full-time. And you might recoup some of your costs by renting it out when you're not using it.
Get creative about real estate financing
If you have a special fondness for cash cows, you might consider buying a piece of commercial real estate. Applegate suggested looking for a building that has 80 percent occupancy or better, a consistent track record in getting new tenants and below-market lease rates.
Ideally cash flow from the building should do two things: repay your investment over time and produce income for you as you gradually raise the lease rates to market value.
Of course, this and other real estate ventures come with a high degree of risk and no guarantees. For a closer look at the pros and cons of real estate investments, check out Money.com's feature, Can Real Estate Make You Rich? 
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