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Financial windfall - investment advice
Old 02-06-2013, 07:28 PM   #1
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Financial windfall - investment advice

Hello everyone...I am new to these forums (have been lurking somewhat) and would like to solicit your advice. Thanks in advance for your advice!

I inherited about $225,000 which is currently invested with a financial advisor. I also have about $35,000 in retirement accounts. I am in my mid 20s and currently save about $10,000 a year into a roth 401K.

I have recently decided to "get rid of" my financial advisor, primarily for 4 reasons 1) I consider myself financially intelligent (primarily due to my job) 2) He is just investing in mutual funds which I can do on my own 3) he charges about $300-400 a quarter which eats away at my returns 4) the expense ratios on the funds he chooses aren't exactly cheap, at about 0.60-0.80%.

I think if I manage the money on my own, I can save on lower expense ratios and asset management fees ($1200/year), while also having more control over my money.

The current allocation of my funds is as follows (which I think is too conservative):

Bonds 25%
Cash 8%
Equity 14%
Non US Stocks 16%
Other 1%
Real Estate 4%
US Stocks 32%

My plan is to diversify using Vanguard ETFs (most funds are under 0.20% expense ratio), as follows:

Large Cap US Equity 50%
Mid Cap US Equity 10%
Small Cap US Equity 10%
Foreign Equity (devl & emerg) 30%

My main concern is how and when I should invest these funds when I receive them.

1) Do you recommend just buying in all in one day? Or do you recommend dollar cost averaging over 6 months to a year time span? If the asset manager would have the same allocations as I plan to have (compare above), then I would essentially just be selling and buying in at the same price. Since there is a small difference in our allocations, this is not the case. Do you have any comments on this?
2) What are your thoughts on my plan
3) What are your thoughts on my allocations and intentions to use ETFs? I hear they are more tax efficient and also (generally) have lowest expense ratios.

I am primarily looking to hold long term, except for money for a house downpayment which I may use in 1-3 years.
Early retirement would be nice - all depends on my career trajectory, savings, and investment performance.

Thanks in advance and sorry for the long post!

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Old 02-06-2013, 07:46 PM   #2
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I think the dollar cost averaging question is a matter of personal preference. Me, I'd probably just jump in with both feet, all at once.

Welcome to the board, and congrats on your good, early savings habits. You'll be very well off in no time.

And good on you for firing the advisor. I have one, but their business model is an hourly rate, and I just plan to use her every other year or so for an AA tweak.

Again, welcome, and stick around - you'll like it here!

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Old 02-06-2013, 07:46 PM   #3
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Congrats on your windfall, and for taking control of your own financial destiny. IMHO your plan depends a lot on whether you think US or emerging markets will outperform over next few decades. I have no quibble with your allocation, but no one knows what the future holds. Whatever asset allocation (AA) you choose to pursue, the safest course is prob to dollar cost ave your purchases rather than buying all in one day. I have no info on relative tax "efficiency" in your specific situation.

Good luck & welcome aboard!
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Old 02-06-2013, 07:46 PM   #4
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I don't think there's a lot to be gained by slowly drifting into the different asset allocation you have chosen. I'd just go all at once. Are you sure you want to be 100% equities? How's your taste for risk if we see a significant correction?
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Old 02-06-2013, 07:54 PM   #5
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@ERHoosier - a close friend of mine works in the retirement planning industry and said that my planned allocation pretty much covers all the bases and that by maintaining that diversification, over the long term, I should expect about 7-9% returns.

I am comfortable with 100% equities because I do maintain a moderate emergency cash fund and also have a stable job. I have no plans to stop working anytime soon.

I will admit - it is tempting to possibly sell and hold in cash until June to see if the market corrects itself. With it being so high right now, if I sell now and hold I can buy in cheaper later. This is a risky move but 3-4 months out of the market won't do much damage.
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Old 02-06-2013, 11:08 PM   #6
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When you are young, your investment horizon is long , so 100% equity is not outlandish, you will have time to ride out some down markets. Your choice of ETFs from different sectors are reasonable.

I wish someone will be smart enough to dependably tell you when is the right time to get into the market. I missed a lot of the big bull run in 1990's because the market was going up pretty consistently without much of a correction , and I kept waiting for another Black Friday like the one in 1987 or the other dip in 1989.

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Old 02-07-2013, 07:00 AM   #7
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If I were you I would consider two things:

1) Given that equity markets are currently close to all-time highs, I would plunk the $225k in an online savings account and value average in over 12-24 months. Value averaging is a bit different from DCA and forces you to invest more when the market is relatively cheap and less when the market is relatively expensive.

Let's say you want to invest the $225k over 18 months. You would initially invest $12.5k. Then the next month invest whatever is necessary to increase your balance to $25.0k. Then the next month invest whatever is necessary to increase your balance to $37.5k. Repeat until the $225k is fully invested.

2) Rather than invest the entire $225k increase your Roth 401k to the max and fill the hole that creates in your living cash flow with part of the $225k so when you are done your Roth 401k will bigger. Essentially you would be taking better advantage of the tax-free aspects of the Roth 401k and have more tax-free money and less taxable money.
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Old 02-07-2013, 07:14 AM   #8
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I think pb4uski provided good advice. It seems like a good opportunity to max out your 401K.

I would probably dollar cost average my way in, just because your move is so heavily into stocks.

I would hold out something for a house down payment in a bond fund. That's a pretty short-term goal to fund out of equities.

It's good to see you handling this windfall with such sense -- although your BMW dealer might not agree :-)

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Old 02-09-2013, 06:34 PM   #9
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Thanks for your suggestions. I like the "value averaging" approach.

I have thought about maxing out my 401K and living off some of my investments (essentially shifting my money from taxable equities to non-taxable equities over time).

However, early retirement is something I am pursuing. I didn't mention this earlier (and I'm only mentioning it now to undermine my goals for early retirement), but, I will likely inherit around $2m (in today's dollars) between 30-45 years of age. I know that you shouldn't plan on inheritances. However, now that I have a much clearer picture of my family's financial situation, I am pretty confident this is the case, unless they go on a massive spending spree.

So I don't want to lock away too much money into retirement accounts and then pay penalties or only touch the principal (as is the case with roth vs traditional 401ks). My plan is to sock away money into my roth 401k for now, until my income (hopefully) increases where I can still do that and save taxable money on the side.

If ER becomes an opportunity for me, I would likely pull out the principal on my roth money and leave the gains in for long, long term money so as to avoid penalties.


I think my plan is so hold off on re-investing the money. I may wait up to 3 months for a market correction, but if things don't change, then I may just slowly average in. I certainly don't want to miss the gains I could be getting, but am ok missing some if it's only for 3 months.
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Old 02-11-2013, 06:16 PM   #10
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I am a fan of the PB4USki's approach as well. I ran an analysis of value cost averaging vs. dollar cost averaging, and, for the admittedly small sample size of my survey (lack of time/desire to simulate every freakin' mutual fund out there), value cost averaging won out every time. It's what we do as well, as we get a fairly uneven stream of payments from the sale of my company, and it keeps me from trying to fool myself into thinking that I can time the market.

Have you thought about buying a small little rental property with some of that cash? It might be a reasonable alternative investment to explore.
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Old 02-11-2013, 06:56 PM   #11
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value cost averaging it is!

@rackingguy - yes, I have. As a matter of fact, I've thought about buying my own place first. The problem is that real estate is (more) expensive, living in Chicago. My income is about $55k a year, so I would prefer not to spend over $200k. This would only get me a condo - nothing extravagant (in good parts of the city). So right now, I am debating whether or not to lease for a couple more years until my income goes up, or buy a stretch place now so I own. Additionally, I am not originally from Chicago, and could very well end up moving in the future. I've considered buying regardless, and if I moved, I would rent out my property. It would be difficult to rent a condo out from out of town, let alone turn a positive cash flow. Many of the large condo associations charge hefty move in-out fees, and also restrict a maximum % of units that can be rented out at any given time.

Thoughts now that you've heard my responses? I'm very interested to hear some feedback, as these aren't types of questions aren't things I probe my social circle with.

I was very close to buying but persuaded not to by family members. I am still considering it when my lease is up this spring. Throwing away $1,000 a month in rent is killing me. I think I can justify, both financially and personally, buying a condo as long as I can make a commitment for 5 years.
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Old 02-11-2013, 07:02 PM   #12
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Young and thinking about moving in the future? I'd rent. Buying *for yourself* really dries up your real options.

One advantage of having a little rental property (don't let the tax tail wag the smart investment dog) is that you could do a trip once a year to Chicago to inspect your property and write the trip off. It'd be like a 2x% discount on your trip. We have a property in the place where we used to live and go see friends once a year, and we also go check out the condo we still have.

Is there some place you might want to move? Worth looking into buying a rental there for a couple of years and then moving into it? That's what we did - had the rental for 3 years before moving in.

You could do a lot worse, though, than putting it into low cost index funds, regardless of what you do. Benders in Vegas come to mind.

Keep in mind, I don't know your full situation, so this shouldn't be construed as investment advice. (<--mandatory SEC imposed CYA for me)
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Old 02-11-2013, 07:11 PM   #13
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I didn't consider the tax write off of returning to visit a property.

If I did move, it'd be back home to where my family is in another midwestern state. I like where I am progressing professionally, though, but do frequently miss being by the family. I have a decent social circle out here in Chicago but could see myself moving home in the future. I believe it is more so a matter of "when" - as in 2-5 years down the road, or 10-15 years down the road.

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