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Just thinking about a new investment plan. Please Advise
Old 08-24-2013, 08:53 AM   #1
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Just thinking about a new investment plan. Please Advise

My plan is to keep $400,000 invested in index funds and bonds.

Each quarter I’ll move any amount over $400.000 to cash. Just curious what you think about this plan.

All feedback is appreciated.
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Old 08-24-2013, 09:01 AM   #2
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Well, since your portfolio is $7,210,551.34, it sure seems like keeping $6,810,551.34 in cash that pays less than 1% interest would not be something that I would recommend.
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Old 08-24-2013, 09:16 AM   #3
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Sorry – I must be missing something – my portfolio is $400,000.

Currently my total cash is only $75,000 so I was thinking this would be a good way to build up my cash account.
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Old 08-24-2013, 09:21 AM   #4
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Not a complete plan. So you have $400K invested and $75K in cash. After a good quarter you add some to the cash. Then you have a bad quarter or two and the investments are under $400K, do you rebalance cash back to investments? Suppose you use all the cash in a year or two, do you draw down the investments even though it may be below $400K?
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Old 08-24-2013, 09:27 AM   #5
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I think it was LOL!'s way of saying "not enough information". And I agree.

We can't constructively comment on this as a 'plan', w/o understanding your full situation and your goals.

It's like saying, "I have a plan to drive 50 miles today, what do you think?", when your goal is to get somewhere 100 miles a way.

Quote:
my portfolio is $400,000.

Currently my total cash is only $75,000
? Is the $75,000 p/o of the $400,000? But you want to keep $400,000 in index funds and bonds? And build up your cash? That means getting rid of the $75,000 cash to then build up your cash? Makes no sense.

If you meant you have a $400,000 portfolio of index funds and bonds, and $75,000 cash - well then you have a $475,000 portfolio. That is how you look at asset allocation - everything counts.

-ERD50
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Old 08-24-2013, 09:50 AM   #6
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Sorry for the lack of information. Below is some additional information.

My total portfolio is $475,000. I don’t think I’ll need to draw down the $400.000 investment portfolio or the $75,000 in cash or any additional money added to cash for 5 years. Currently the $75,000 is in a Money Market Account.

If my $400,000 investment portfolio drops below $400.000 I’ll just wait.
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Old 08-24-2013, 09:59 AM   #7
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What is your target AA? Age? How long will you need the money to last? How much do you plan on withdrawing in five years?

What do you hope to accomplish with this plan? In a rising market, it could just drop your Equity AA over time. Then there may not be much to recover through a bull/bear cycle?

What about inflation?

-ERD50
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Old 08-24-2013, 10:24 AM   #8
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If I take my pension now and spread out the severance I received in April I should be fine for 6 years. For my expenses I factored in 2% for inflation. I’m currently 59 and the wife is 58. At 66 my SS will be $27,000 and the wife will get $13,000.

I don’t think I’ll have any need to withdraw any money from the investment portfolio in the future.

I think my cash balance is too low and I would like to increase it by using any gains in my investment portfolio.
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Old 08-24-2013, 10:35 AM   #9
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What is the $400k invested in? all equity funds? all bond funds? If you're happy with what it is in, you could just have dividends/interest go into cash and let it ride.

If you aren't happy with your current AA you could buy a balanced fund that fits your risk tolerance and have dividends go to cash and let it ride. Wellesley or Wellington would be good contenders.
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Old 08-24-2013, 10:48 AM   #10
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Let's face it, the OP's plan is pretty darn poor. It does not take into account what happens when the $400,000 drops to $350,000 or $300,000.

Also it doesn't let the growth in equities compound. And it doesn't protect from inflation. $400,000 in 10 years won't buy what $400,000 buys today because of the effects of inflation.

I'd say go back to the drawing board. Read some books and keep asking questions and keep thinking.
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Old 08-24-2013, 11:09 AM   #11
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I agree I need to keep thinking and do more research.

I believe a lot of people take 2% to 3% each year for expenses. If I don’t need to take any money for expenses does taking 2% to 3% each year and moving it to cash until I have a decent cash balance make sense?
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Old 08-24-2013, 11:22 AM   #12
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If your planned asset allocation specifies a greater percentage of cash than you presently have, one approach might be to direct your dividends to cash.

Some retired members direct their dividends to cash and then use that cash for their living expenses.
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Old 08-24-2013, 11:28 AM   #13
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I think you have a good back-of-the-envelope start going for you, and outside this board, most people would be impressed with your nest egg and your plan. But within this board, most of us sleep a little better with a more detailed financial plan and a strategy with how we would deal with the unexpecteds in the future. Regardless, you seem to be in pretty good shape already
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Old 08-24-2013, 12:46 PM   #14
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Quote:
Originally Posted by gbstack View Post
I agree I need to keep thinking and do more research.

I believe a lot of people take 2% to 3% each year for expenses. If I don’t need to take any money for expenses does taking 2% to 3% each year and moving it to cash until I have a decent cash balance make sense?
Well, if your pension and SS covers expenses, it really doesn't make much difference what you do with this. Heck, I'll take it off your hands, and save you all this worry!

So consider - why do you need a higher cash balance? You've got about two years worth now. Seems like more than enough. Is there a specific cost coming up you are planning for?

If you really do a need a higher cash balance, why not do it now?

If not, I'd just keep the $400K in a balanced fund, reinvest divs, and let it ride. You might need/want it some day. Just sell some when/if that time comes. People get all worried about selling when a fund might be down, but generally, our funds go up. I think too many miss out on the gains holding out for that 'what-if'.

-ERD50
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Old 08-24-2013, 01:01 PM   #15
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Well, if your pension and SS covers expenses, it really doesn't make much difference what you do with this. Heck, I'll take it off your hands, and save you all this worry!

So consider - why do you need a higher cash balance? You've got about two years worth now. Seems like more than enough. Is there a specific cost coming up you are planning for?

If you really do a need a higher cash balance, why not do it now?

If not, I'd just keep the $400K in a balanced fund, reinvest divs, and let it ride. You might need/want it some day. Just sell some when/if that time comes. People get all worried about selling when a fund might be down, but generally, our funds go up. I think too many miss out on the gains holding out for that 'what-if'.

-ERD50
+1

If you don't think you'll need it other than for emergencies, the $75k should cover that (I don't target that much cash on hand with a much larger portfolio), and the rest should stay invested at whatever asset allocation you are comfortable with. With expenses covered, that might be 100% equities since this is long-term money, or something more balanced if you will sleep better.

I'm assuming you are now retired, and have expenses covered between pension, severance, and SS without withdrawing from your portfolio. My 84 year old mom is in that position, fairly closely. I have no idea what she keeps in cash, but her portfolio is all equities since she intends not to spend it and is investing it for her kids.

I'd think whatever you always kept in cash before retirement would be perfect. Things haven't really changed that much.
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Old 08-25-2013, 08:59 AM   #16
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I think I can sorta understand the OP's position and probably relate to it. He will perhaps need art of his portfolio as a bridge until all of his income streams have kicked in. Those are their pensions and SS. At that point those sources will cover his expenses plus. He needs the cash now as a hedge against his pension falling short in the interim. His equity/bond portfolio is a long time if ever needed portfolio. He can see a point in the near future where he will be home free and a FireCalc 99 percent. He just needs to get there.
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Old 08-25-2013, 09:04 AM   #17
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+1

If you don't think you'll need it other than for emergencies, the $75k should cover that (I don't target that much cash on hand with a much larger portfolio), and the rest should stay invested at whatever asset allocation you are comfortable with. With expenses covered, that might be 100% equities since this is long-term money, or something more balanced if you will sleep better.

I'm assuming you are now retired, and have expenses covered between pension, severance, and SS without withdrawing from your portfolio. My 84 year old mom is in that position, fairly closely. I have no idea what she keeps in cash, but her portfolio is all equities since she intends not to spend it and is investing it for her kids.

I'd think whatever you always kept in cash before retirement would be perfect. Things haven't really changed that much.
Your points are good advice for him. However I can tell you from personal experience it can be a year or so before you realize just how strong your three legged stool is.
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Old 08-25-2013, 04:22 PM   #18
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Thank you all for the great information and feedback. I’m sure I’ll be back with more questions soon. Thanks again
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Old 08-25-2013, 05:14 PM   #19
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I think to clarify for the OP - the people on this board are trying to understand better your objective. Since you stated you don't think you will need any of this money, then their natural inclination was to advise you not to take profits off the table (from your portfolio each year) but to leave them and just re-balance and re-invest the dividends, as this is what will eventually help your $400,000 grow and keep up with inflation. Others suggested as a middle ground, leaving any capital appreciation in the portfolio and just take any dividends it throws off.

Depending on what indexes you are holding, it may throw off 1 to 2% in dividends. If you needed more than this than you could draw down the additional % you needed each year, but advisedly not exceed a total of 3% to 3 1/2% (which includes the dividends)

The confusion in advising you properly is knowing what your needs are.
If you don't need additional income now, then most everyone would say this is a good thing, and to let your portfolio grow: Don't take anything out if you don't need it, and reinvest the dividends to buy more shares each year.

If you will be spending down your current $75,000 between now and when you receive your Soc. Sec., and feel you need additional money until you get you to that point, then you are in the withdrawal phase. In that case, what most would advise you to do is, take probably max 3 1/2% each year from your portfolio as long as you have had gains to it and not losses. If you have had losses in the past year, then don't take anything out. Only use the part of your $75,000 that you need for living, and wait it out for your portfolio to recover. That's what the reserve cash is designed for.

I hope all this does not confuse you more.
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