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How should I invest my savings?
Old 06-24-2004, 10:09 PM   #1
 
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How should I invest my savings?

How would you suggest I allocate a just barely 7-figure portfolio? I am risk-averse, obsessed with principal preservation and always completely wrong when trying to time the market.

Currently,
- 67% in cash: money market accounts yielding 2.25-2.35%
- 30% in various mutual funds
- 3% in a bond fund

Am 47 yrs, $600K equity in home, mtge balance of $200K, one 8 yr old son, living in a nicer northern suburb of Chicago. Employed in corporate job but would like to retire early. Comments?
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Re: How should I invest my savings?
Old 06-24-2004, 10:26 PM   #2
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Re: How should I invest my savings?

Since I had to count on my fingers to figure out what a 7-figure income might be, I'm probably the last person here to give advice. But look around. Everyone will recommend that you read William Bernstein's "Four Pillars of Investing." Well, not everyone, but lots of folks. Also on the must-read list is Larry Swedroe's "What Wall Street Doesn't Want You to Know."

And somebody will say, put it in Vanguard's Target 2025 Retirement Fund.

Those who believe the market overvalued will possibly suggest real estate. There's a wealth of great ideas here; read all about them and follow the links! And welcome!

Anne
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Re: How should I invest my savings?
Old 06-24-2004, 11:09 PM   #3
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Re: How should I invest my savings?

Before you make any changes to your portfolio, you might want to set some goals. Do you know when you want to retire and what your annual expenses will be?

Multiply your expenses by 25 to get an estimate of the size of nest egg you'd need to retire.

I'm a big fan of preserving principal myself, but you need to watch out for inflation. Inflation was about 3.1% over the last year, and we're on track for over 5% for 2004. That means your 2.35% money market account is losing purchasing power every day.
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Re: How should I invest my savings?
Old 06-24-2004, 11:38 PM   #4
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Re: How should I invest my savings?

Given those characteristics...

Vanguard target income fund
"" Lifestrategy income fund
"" Wellesley fund

All three will throw off roughly $33-$40k a year in dividends presuming a $1M portfolio, subject to 5 and 15% tax levels, and all three should experience capital appreciation in excess of inflation. None have experienced double digit losses in one year or successive losing years. All three have minimal expenses. $1M in wellesley would qualify for <.20% rates.

If you're willing to take on a little more risk, you can get more potential return over long term periods. For less "risk" (ie volatility) and if you live in the right state, you could go 100% with a vanguard intermediate muni fund that would pay you ~3.5% tax free with some interest rate sensitivity to the principal.
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Re: How should I invest my savings?
Old 06-24-2004, 11:45 PM   #5
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Re: How should I invest my savings?

Quote:
How would you suggest I *allocate a just barely 7-figure portfolio? I am risk-averse, obsessed with principal preservation and always completely wrong when trying to time the market. Currently,
- 67% in cash: money market accounts yielding 2.25-2.35%
- 30% in various mutual funds
- 3% in a bond fund
If I understand correctly, at age 47 you have $600,000 equity in an $800,000 home, a $1.x million portfolio, and a good job. You also have one 8 yo child. Single?

I think you are sitting very pretty. You can stay risk averse, which I believe is a good plan at this time.

Your allocation might be tweaked, but not by me. I would keep it as it is, with the possible exception of checking your mutual funds. If you don't have a lot of capital gains tax to pay on sale, you might want to be sure you are broadly diversified there, and that you have low cost funds.

By the way, where are you getting 2.25 to 2.35% on money market funds? I want some of that.

Mikey
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Re: How should I invest my savings?
Old 06-24-2004, 11:55 PM   #6
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Re: How should I invest my savings?

Quote:
All three will throw off roughly $33-$40k a year in dividends presuming a $1M portfolio, subject to 5 and 15% tax levels
Minor nit: interest income does not qualify for the lower tax rates. Lifestyle, for example, get about 80% of its yield from interest.

Quote:
and all three should experience capital appreciation in excess of inflation
Or not.


Quote:
None have experienced double digit losses in one year or successive losing years.
Keep in mind that the last 20 years have been remarkable. Not only have stocks benefited from unprecedented P/E growth, but interest rates have been declining for the last 20 years, which means funds like these benefit from cap gains on the bonds they hold. Neither is likely to happen going forward.
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Re: How should I invest my savings?
Old 06-24-2004, 11:58 PM   #7
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Re: How should I invest my savings?

Quote:
By the way, where are you getting 2.25 to 2.35% on money market funds? I want some of that.
I don't know where the guest puts his cash, but corporate money markets have yields in that range, like Ford for example:

http://fordcredit.com/moneymarket/index.jhtml
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Re: How should I invest my savings?
Old 06-25-2004, 04:22 AM   #8
 
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Re: How should I invest my savings?

I've been getting 3% at the bank consistently for over a year now. You need to find a bank with a new branch or
seeking new customers, sign on for the duration of
the "deal" then move the money to another bank
offering something similar. Usually these deals run at least 90 days and very often there are other bennies
just for opening the account. It's a little work but
well worth it IMHO.

John Galt
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Re: How should I invest my savings?
Old 06-25-2004, 07:26 AM   #9
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Re: How should I invest my savings?

Quote:
By the way, where are you getting 2.25 to 2.35% on money market funds? I want some of that.
Mikey
Although not quite this high I get
2.10% from ING,
http://www.ingdirect.com/osa_work/
2.10% from Union Federal Bank
http://www.ufbbankingcenter.com/household/
2.11% from Bank of Internet
http://www.bankofinternet.com/
All three highly rated

I did see another bank that offered 2,5% but they have a lower rating
2.50% from Charter One Bank
http://www.charterone.com/pf/money_market_gold.asp

MJ
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Re: How should I invest my savings?
Old 06-25-2004, 10:51 AM   #10
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Re: How should I invest my savings?

Well, you've saved a lot at a fairly early age and seem to have a handle on your investing style. My first comment is to keep it up and perhaps reduce expenses until you can live off your 2%+/-taxes interest and dividends. The rest of us may talk about the dangers of inflation on such a portfolio, but you may be able to save enough to cover those worries. I think the trick for you if you keep the same investment attitude will be to save enough or reduce expenses enough to live off your ROI and have a backup plan for high inflation, like cut expenses or eat some principal.

I'm thinking you could ladder 5-year CDs and get a higher return on your cash money; you won't need access to 67% of it instantly, so you can lock a bunch of it up for 5 year stints and get some bigger returns. You might consider municpal or high-grade corporate bonds to boost the returns with little extra risk. Then there's iBonds and TIPS, but I dont' know much about them beyond their name, that they're government-backed and that they're inflation adjusted.

I'm certainly not an investment expert and the low risk side is not where I'm familiar. But there's my 2 cents.
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Re: How should I invest my savings?
Old 06-25-2004, 01:01 PM   #11
 
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Re: How should I invest my savings?

What interest rate are you paying on the mortgage? Since you're risk adverse, it probably makes sense to pay of the mortgage.

Then take the balance and invest as follows:
~ 60% diversified bond mutual fund(s)
~ 40% diversified stock mutual funds (s)

You may consider a balanced index fund if you really want to keep it simple. Take the $ that you were using to pay off the mortgage, and dollar cost average into your portfolio (perhaps increasing the stock weighting).

Good luck!
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Re: How should I invest my savings?
Old 06-25-2004, 02:43 PM   #12
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Re: How should I invest my savings?

Quote:

Minor nit: interest income does not qualify for the lower tax rates. Lifestyle, for example, get about 80% of its yield from interest.
True, but if he's married filing jointly (has a son, doesnt mention a wife?) and this is their only income, all of the interest income would be at 15% at this level, and dividends would be at 5%. Even filing single, most would be at 15%. I should have been more specific, but the point is taxes would be reasonable.

Quote:
Or not.
Or maybe
Quote:
Keep in mind that the last 20 years have been remarkable. Not only have stocks benefited from unprecedented P/E growth, but interest rates have been declining for the last 20 years, which means funds like these benefit from cap gains on the bonds they hold. Neither is likely to happen going forward.
All true, but the guy is looking for the more conservative venues for investment. Aside from cash or ultrashort bond funds earning less than or barely holding with inflation, what would you suggest as more conservative? 100% tips? I'm still not sold on them as a single asset portfolio. Not enough track record and at ~2.5% top return right now, without very high inflation they're not as good a return as other fixed income options.
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Re: How should I invest my savings?
Old 06-25-2004, 03:04 PM   #13
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Re: How should I invest my savings?

50/50 Vanguard Wellesley Income/Dodge and Cox balanced - No down years from 95 to present. Young's Intelligence Report. That's fairly hard core conservative, generally upper left Morningstar box (large cap value ) with selected fixed. Takes advantage of Bernstein's often mentioned Fama and French 'value premium'. I'm in the balanced index camp - but I look here often as a potential back up refuge of last resort
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Re: How should I invest my savings?
Old 06-25-2004, 08:44 PM   #14
 
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Re: How should I invest my savings?


Wabmester said:
I'm a big fan of preserving principal myself, but you need to watch out for inflation. * Inflation was about 3.1% over the last year, and we're on track for over 5% for 2004. * That means your 2.35% money market account is losing purchasing power every day.

Thanks very much for your comments. Any suggestions on how I can stay ahead of inflation without putting the principal at risk will be greatly appreciated. If you have used a technique or know of a strategy, please share if you want to - your experience will be very helpful.

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Re: How should I invest my savings?
Old 06-25-2004, 08:55 PM   #15
 
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Re: How should I invest my savings?

Quote:

If I understand correctly, at age 47 you have $600,000 equity in an $800,000 home, a $1.x million portfolio, and a good job. You also have one 8 yo child. Single?

I think you are sitting very pretty. You can stay risk averse, which I believe is a good plan at this time.

Your allocation might be tweaked, but not by me. I would keep it as it is, with the possible exception of checking your mutual funds. If you don't have a lot of capital gains tax to pay on sale, you might want to be sure you are broadly diversified there, and that you have low cost funds.

By the way, where are you getting 2.25 to 2.35% on money market funds? I want some of that.

Mikey
Mikey,

I appreciate your comments very much. I have been married for 16 years. Our house was recently appraised at $850,000. I have a job but would like to be self-employed - haven't found the right thing to do yet so continue to be a corporate prisoner. Savings are entirely from frugal living - no stock options, no inheritance, not spouse's income. I have 2 moneymarket accounts - one with Ford Credit and the other with GE Interest Plus.
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Re: How should I invest my savings?
Old 06-25-2004, 09:05 PM   #16
 
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Re: How should I invest my savings?

Quote:
What interest rate are you paying on the mortgage? Since you're risk adverse, it probably makes sense to pay of the mortgage.

Then take the balance and invest as follows:
~ 60% diversified bond mutual fund(s)
~ 40% diversified stock mutual funds (s)

You may consider a balanced index fund if you really want to keep it simple. *Take the $ that you were using to pay off the mortgage, and dollar cost average into your portfolio (perhaps increasing the stock weighting).

Good luck!
:P

I have a 15-year 5.375% mortgage with 13 years left. I have not paid it off only because it gives me a bit of a tax break and the rate is pretty decent. What worries me about the bond funds is that with interest rates going up inevitably, their NAVs will come down so I will have a negative hit to my portfolio right away. I have technology, small and medium cap, international stock mutual funds which have shown gains in the last 12 months but I am beginning to get concerned about them now. What kind of return can I expect form the balanced index fund and which one would be a good one to look at?
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Re: How should I invest my savings?
Old 06-25-2004, 09:57 PM   #17
 
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Re: How should I invest my savings?

Quote:
I've been getting 3% at the bank consistently for over a year now. *You need to find a bank with a new branch or
seeking new customers, sign on for the duration of
the "deal" then move the money to another bank
offering something similar. *Usually these deals run at least 90 days and very often there are other bennies
just for opening the account. *It's a little work but
well worth it IMHO.

John,

Do you know of any banks that have an introductory rate of 3%? I have been checking the fatwallet, ibankdesign and moneybb discussion groups which post bank offers but have not found anything better than 2%.

John Galt
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Re: How should I invest my savings?
Old 06-26-2004, 03:53 AM   #18
 
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Re: How should I invest my savings?

I used to surf the web sites looking for high intro
MM rates. I found I could always do better within
100 miles of home (this includes Chicago in my case). I find them by reading the newspaper and watching for "window signs"
in bank branches as I travel around. If that doesn't work, I would start calling banks that I had worked with
in the past. Kept thinking over the past year+ that I
would have to settle for 2% or so. So far I have stayed
well above that.
Oh, BTW, a couple of times I did find banks with
restrictions on where you could live. I assumed this
was to prevent exactly what I was doing, i.e.
opening a new account and then disappearing once
the high rates and perks were gone.

Good luck.

John Galt
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Re: How should I invest my savings?
Old 06-26-2004, 04:57 AM   #19
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Re: How should I invest my savings?

Wow! Nice job with putting that much away. I'm suprized no one has mentioned selling the house and using the equity to pay cash for a smaller one. I would think that you could still get a pretty nice place in the Chicago area for 200k.

With what you have saved you could be investing serious time with that young son of yours.

It just show's that lifestyle is a relative thing. For some a double wide on a couple of acres in the country is their dream. For others it would be a nightmare.

To maintain a 800K dollar house and the lifestyle that goes with it is something you will just have to add up and see how much its going to cost to maintain.

Two years ago I moved from an affluent area in St. Louis to a little town about 15 miles away. I got a larger home with a bigger yard. My taxes were much cheaper and the biggest difference was I didn't feel like I had to have the new Mercedes and bigger boat. I sold the Mercedes and got a Jeep because that was the type of cars that were around here. I know your not supposed to try to keep up with the Jones's but you do want to fit in.
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Re: How should I invest my savings?
Old 06-26-2004, 06:49 AM   #20
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Re: How should I invest my savings?

Quote:
Currently,
- 67% in cash: money market accounts yielding 2.25-2.35%
- 30% in various mutual funds
- 3% in a bond fund

...15-year 5.375% mortgage with 13 years left....balanced index fund and which one would be a good one to look at?
Congrats on a great mortgage rate. Keep the house, you're enjoying it and I don't see any reason to step down. It'll be paid off soon enough. Heck, you can pay it out of your savings if you decide you don't like having a mortgage.

Also balanced & index funds are not the same thing. If it were me, I'd look for a low cost total stock market index fund to anchor the account. Vanguard has low rates. Then a separate balance or equity income fund as a 2nd anchor ... I'm in OAKBX and have been quite happy with its performance. Round out the stock [mutual fund] side with a little growth. Don't buy bond funds ... buy individual bonds. Less down side. Especially if you get into tax-free munis. Finally, I think the mix is off. At your age it should be more like:
  • 25% money market
  • 50% mutual funds and
  • 25% bonds
IMHO
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