Mom is trying to hold more "cash" ...

[Steelart99]

So my 74 year old Mom has been reading a variety of financial reports and has become very concerned that she does not hold much in cash. Her investment portfolio is very, very heavy in stocks with little in bonds and only about 2% in her cash account. She is concerned about the Chinese yuan taking over as the world currency and her investments becoming 'worthless'.

I've tried to talk with her about it and her need to discuss her financial holdings with an independent adviser (she will do this). I've also cautioned her about doom and gloom reports especially when associated with some sales pitch. I certainly don't know what to tell her about what the near-term future might hold (broke my darn crystal ball) nor what the outcome of the yuan taking over might be. Any thoughts?

All that said, are 'cash' holdings limited to paper money and PMs? Or, are there other equivalents?

 

[racy]

Cash options that readily come to mind: CDs, online checking & savings that pay some interest (i.e. Ally Bank), Money Market funds.
Personally, I use Vanguard Short Term Corporate Bond fund, VFSUX. It seems to keep up with inflation but you have to be OK with a little price volatility.

P.S. I heard about a good book on behavioral finance by Richard Thayler, Misbehaving:The Making of Behavioral Finance. I looks like a good read.

 

[RockyMtn]

I would think that a 74 year old woman, or man for that matter, should not be anywhere near 100% invested in stocks.


Get her into some cd's, short term bonds, muni's depending on her tax situation but slimming back the stock allocation does make a lot of sense.

 

[LOL!]

My mom was invested 100% in stocks into her 80's when she passed away. Bond funds and cash were "just too boring". It was OK because she had SS, a SPIA, and a small pension.

So whether a 74-year-old woman needs "cash" or bond funds depends on the circumstances.

 

[ERD50]

Is the stock portfolio diversified? That might be a bigger worry than the % of stocks overall.

Like others said, it depends. But to diversify, she might sell some losers against winners (to net out any gains) and buy an index fund to get diversification w/o the tax hit. Or sell losers against winners to get into a short-ish term bond fund if she really should get out of stocks.

The markets at are high valuations, and while I'm not sure how to use that for real market timing going forward, I think it's fair to say it's certainly not the worst time to lighten up on stocks, esp for a 74 YO.

As far as 'independent advisor', proceed with much caution. Most are sales-people. Google 'fiduciary' - if you want to go that route, they must be acting in fiduciary role for your Mother.



-ERD50

 

[RunningBum]

I wouldn't dissuade a 74 yr old woman from holding more cash or equivalents if she's mostly stocks and 2% cash. Not reacting to gloom and doom reports is a good idea. Instead IMO she should have an asset allocation target or range and keep to it. Everybody has their own comfort level, but at 74 I will probably be at or under 50% stocks. If she'd rather be a market timer that's her business too, and it sounds like she is thinking this is a time to sell, which I tend to agree with, with the caveat that I'm not a market timer and don't spend much time trying to identify buy and sell signals.

 

[pb4uski]

.....All that said, are 'cash' holdings limited to paper money and PMs? Or, are there other equivalents?

Cash would include things that are liquid and have no or little interest rate risk. Right now, I think FDIC insured online savings accounts are probably the best thing out there... they typically pay more than short/medium term CDs and money-market accounts and are totally liquid and have no interest rate risk. I keep about 3-6% of my portfolio in cash and that represents 3-4 years of spending after considering the cash dividends that we receive.

I guess a key question is how much cash does she need? Do her living expenses exceed any pensions and social security that she receives?

If she has sources of income that exceed her living expenses, then she can relax. Besides, it doesn't seem that low cash has hurt her so far!

Nonetheless, if she would be more comfortable, have her sell 5% of her portfolio, pay the taxes as necessary and put the proceeds into an FDIC insured online savings account that will pay 0.9 to 1% or so if it makes her happy.

Also, tell her to stop watching CNBC or Fox Business or whatever she is watching. Gloom and doom comes and goes.

 

[Steelart99]

Mom and Dad were very loyal to Apple ... and it did extremely well for them. That said, they did diversify, but nothing came close to their APPL holding. Dad passed, but Mom has stayed the course and not sold any APPL despite many recommendations to the contrary (i.e. changing her asset allocation).

She has enough other income from SS, pensions, etc. that she has never touched her investments. I did recommend an independent fiduciary for advice. I also suggested selling some of her 'losers' and using that to roll into a cash allocatioin.

I appreciate the suggestions ... gives me something to research for her.

 

[rayinpenn]

Mom is trying to hold more "cash" ...

100% in stocks in itself isn't a bad thing - It depends on a number of things. ( the size of the portfolio, her needs, her life expectancy) An older woman with minimal expenses who lives on social security and some of the dividends of a diverse portfolio of stocks might be better in the long run then a blended portfolio. The steady eddies of the world have had pretty consistent dividends even during the worst of times... The trick is don't worry about valuations worry about the income stream.

Look up the the dividend history of DVY (a diversified dividend ETFS) and Vz (Verizon) for example.
That old advice "your age % in bonds" maybe a bit dated with life expectancies and doesn't really apply if the portfolio is large enough.

Google dividend mantra and learn how to do it..."


Sent from my iPad using Early Retirement Forum.

 

[Davis65]

Would she be willing to have you sit in on the meeting with the financial adviser? My brother and I have been meeting with our mother's guy for about five years now to keep him on his toes, and make sure Mom feels comfortable that her money is being watched carefully. In the last year, the dementia has advanced, so she doesn't attend, but now the adviser knows us, and is comfortable dealing with us.

 

[Steelart99]

I have sat with Mom's financial adviser (Merrill Lynch) several times. He has been Mom (and Dad's) adviser for 15-20 years and has always recommended a more diverse portfolio ... which they both ignored. They stayed with Apple. Yep ... they paid this guy 0.5% yearly on a large portfolio and never gained anything from the relationship.

The VP of the division actually sat with my Dad one year and told him that he had wished he'd done what Dad did, given the huge rise in value of Apple.

So there she is with a large portfolio (about 85% AAPL) and is now starting to worry about what the future might hold given the doom and gloom she is reading about. I may have to fly out to sit with her and talk to a fiduciary.

Dividend Mantra .... sounds interesting ... something else to research (thanks)

 

[RockyMtn]

So she is nearly 100% equities at 74 and 85% of that is Apple? Sorry, but if that was my mom I would get her way more diversified. For sure on the Apple holdings and also on the overall equity %'s.

 

[ERD50]

I have sat with Mom's financial adviser (Merrill Lynch) several times. He has been Mom (and Dad's) adviser for 15-20 years and has always recommended a more diverse portfolio ... which they both ignored. They stayed with Apple. Yep ... they paid this guy 0.5% yearly on a large portfolio and never gained anything from the relationship.

That's crazy - I don't know how big of a portfolio we are talking about, but I'm assuming 0.5% is not a small $ figure.

Sure, they probably 'won' big time by buying Apple, but you can say that about lottery winners (not lottery players) too. It still isn't a good idea to not be diversified.

And now she is probably facing big tax hits to sell - but I'd look into it. Or maybe buy puts?

One consideration against selling (and for holding and buying puts), is that if this is likely to become inherited money, they stock will be stepped up in basis, with no taxes due.

The VP of the division actually sat with my Dad one year and told him that he had wished he'd done what Dad did, given the huge rise in value of Apple.

Hah! Who wouldn't be a multi-millionaire if we could invest with hindsight?

So there she is with a large portfolio (about 85% AAPL) and is now starting to worry about what the future might hold given the doom and gloom she is reading about. I may have to fly out to sit with her and talk to a fiduciary.

Dividend Mantra .... sounds interesting ... something else to research (thanks)

If she never listened before, what is going to change with a new fiduciary? None of this is rocket science, diversification is good, consider taxes.

I honestly think you'd get as good/better advice here than you will from a pro (but people will need a more complete view to tell you much - SS, pensions, expenses, etc - %'s are fine), but at a minimum the advice here will educate you so you can better understand what the pro might have to offer.

-ERD50

 

[redduck]

... I certainly don't know what to tell her about what the near-term future might hold (broke my darn crystal ball) nor what the outcome of the yuan taking over might be. Any thoughts?
...

Sure, first thought is, take your crystal ball to a crystal ball repair shop.

 

[haha]

Puts are cheap now. Not sure about Apple puts, but you could look. The difficulty here is that you have a long time to protect this portfolio, which I assume is an important part of her living or at least her security and self image.

I assume that taxes are the big issue with selling. If OTOH this is a tax deferred or tax free account, get rid of at least half of the apple. It is hard to part with what has made them wealthy. Apple has been a huge success, and it may continue. But it may not, and she has her whole future staked on this one horse.

Ha

 

[ERD50]

...

She has enough other income from SS, pensions, etc. that she has never touched her investments. ...

I missed this before. So it does sound like this will likely become an inheritance and be stepped up in cost basis. I'd still try to diversify, a little at a time might be a minor tax hit, you'd need to run it through a tax program to see. But off hand, LTCG should be no more than 15%, right?

-ERD50

 

[Texas Proud]

I have sat with Mom's financial adviser (Merrill Lynch) several times. He has been Mom (and Dad's) adviser for 15-20 years and has always recommended a more diverse portfolio ... which they both ignored. They stayed with Apple. Yep ... they paid this guy 0.5% yearly on a large portfolio and never gained anything from the relationship.

The VP of the division actually sat with my Dad one year and told him that he had wished he'd done what Dad did, given the huge rise in value of Apple.

So there she is with a large portfolio (about 85% AAPL) and is now starting to worry about what the future might hold given the doom and gloom she is reading about. I may have to fly out to sit with her and talk to a fiduciary.

Dividend Mantra .... sounds interesting ... something else to research (thanks)

And they should have been giving that advice.... nobody should have 85% of their investments in a single company (unless of course they started up that company and it grew like Facebook)....

The problem with your parents 'style' is that it kinda is an all or nothing bet... I worked at a company that went under... there were many people who lost everything in their 401(k) as it was all invested in company stock... look at all the people who worked at Enron who lost everything....

So I do not think luck is a good investment style.... as your mom shows, betting it all and winning sure does make you look good though....

 

[Texas Proud]

You said your dad passed.... who owned the shares Did they get a step up in basis

IF so, then your tax hit might not be as much as you think...


Also, just because she can live on SS etc. today, that does not mean she can in the future.... I keep a good amount of 'cash' (really ST bond fund along with HY) in my mom's portfolio in case we need it for any kind of emergency.... if she needs to get into a home, that cost alone would require big cash outlays every month going forward... I am ready for 6 to 12 months of these payments if they should happen...

 

[imoldernu]

No advice... not qualified.

As DW and I are somewhat older, just to reference our thinking... Earlier times, mid 1990's to about 2004... We were beginning the realize that we would not have to go back to w*rk, but would likely have to live on what we had. Since it looked like we were fairly safe, we converted to CD's and kept our IRA's in IRA CD's. Other monies went into IBonds, and into paying outright for for our retirement home.

Doubtless some part of our worth should have gone into some risk, and we would have been better off today, but the sense of relative safety was very important.

Different times, different situation, but no regrets. At this point, we feel that we are reasonably safe with fewer future years to worry about. With a 20 or 30 year planning horizon, I'm sure we would have a different outlook.

 

[clifp]

A couple of thoughts. If your mom is in position where pension, SS, are enough to meet her current needs than she is in slightly better than my mom was. Odds are that she will be leaving you a nice inheritance, so in that respect having high stock allocation is fine.

What isn't fine is not having enough cash in case things could bad with her health, it could be yuan displacing the dollar (or far more likely in your mom's case Apple having a couple of bad years.)

I've been managing my 89 mom money passively for 20 years and actively for 5 years. When she first moved into her retirement home a few years ago her income from SS, a small pension, and mortgage payment from her granddaughter were sufficient to pay for her expenses. So she only needed to tap a small portion of the income just under $1 million portfolio. A couple of years ago we hired a terrific home care worker to help her with various things (shower, remember meds etc.) to the tune of 15-20K/year additional. So now she needs all the income from her portfolio to support.

Looking down the line is certainly possible that she'll need to move into a nursing home in the future. In her area nursing homes run about $90K a year, when I subtracted the her current income of 50K that lead to a shortfall of 40K/year. I figured there was no way she is going to last more than 2-3 year in nursing home. (She lives in Oregon has made it really clear she rather die sooner than later). I ended up sticking 100K in cash which is sufficient for 2.5 years. I continue to manage the rest of the portfolio with the assumption that much of it will be an inheritance for myself and my sisters. Of course stuff happens and she may need to spend all of it.

So my advice is to sit down with her and do a bit of crystal ball, and figure out what her future cash needs might be and then sell enough Apple stock to make that is secure. Then work on further reducing the Apple position.

 

[Sunset]

A couple of thoughts. If your mom is in position where pension, SS, are enough to meet her current needs than she is in slightly better than my mom was. Odds are that she will be leaving you a nice inheritance, so in that respect having high stock allocation is fine.

What isn't fine is not having enough cash in case things could bad with her health, it could be yuan displacing the dollar (or far more likely in your mom's case Apple having a couple of bad years.)

I've been managing my 89 mom money passively for 20 years and actively for 5 years. When she first moved into her retirement home a few years ago her income from SS, a small pension, and mortgage payment from her granddaughter were sufficient to pay for her expenses. So she only needed to tap a small portion of the income just under $1 million portfolio. A couple of years ago we hired a terrific home care worker to help her with various things (shower, remember meds etc.) to the tune of 15-20K/year additional. So now she needs all the income from her portfolio to support.

Looking down the line is certainly possible that she'll need to move into a nursing home in the future. In her area nursing homes run about $90K a year, when I subtracted the her current income of 50K that lead to a shortfall of 40K/year. I figured there was no way she is going to last more than 2-3 year in nursing home. (She lives in Oregon has made it really clear she rather die sooner than later). I ended up sticking 100K in cash which is sufficient for 2.5 years. I continue to manage the rest of the portfolio with the assumption that much of it will be an inheritance for myself and my sisters. Of course stuff happens and she may need to spend all of it.

So my advice is to sit down with her and do a bit of crystal ball, and figure out what her future cash needs might be and then sell enough Apple stock to make that is secure. Then work on further reducing the Apple position.

+1

I'll only add, that by viewing which shares were owned by Dad , the basis may be higher so less tax implication to your Mom.
Plus you can spread the selling over the calendar years, it doesn't have to be all in this year. Again to minimize the tax hit.

 

[pb4uski]

The tax bite might not be too bad as a result of the partial or whole step up in basis from when you Dad died.

If you own stock or other assets with a spouse as joint tenants or tenants by the entirety—forms of ownership often used by married couples that ensure that on the death of one co-owner the survivor becomes the sole owner—the basis is adjusted upward on the death of the co-owner. Basically, the survivor is treated as though he or she inherited half of each share of stock, with its basis increased to current market value.

In certain so-called community property states, the entire basis of community property—not just half—may be increased to date-of-death value upon the death of one spouse. Since that could have a major impact on the taxes due when the stock is sold, check this point carefully if you live in one of these states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin.

 

[Steelart99]

pb4uski,
yes ... there was a step up in basis for half of all the stock they had, but it was when Apple was quite a bit lower (mid 2012). Since then the stock has done "well" so there is still a fairly significant tax consequence for selling.

Mom doesn't really want to touch it since it is what Mom & Dad wanted to pass down to us kids. We all feel that she just needs to do with it as she pleases ... spend it, donate it, whatever. They earned it and she should feel free to move it about at her pleasure.

Mom has decided to go visit a fiduciary next week and is taking along her accountant. I should be able to discuss things further with her after that. Thanks again to everyone who piped in here!

 

[ERD50]

pb4uski,
yes ... there was a step up in basis for half of all the stock they had, but it was when Apple was quite a bit lower (mid 2012). Since then the stock has done "well" so there is still a fairly significant tax consequence for selling.

Mom doesn't really want to touch it since it is what Mom & Dad wanted to pass down to us kids. We all feel that she just needs to do with it as she pleases ... spend it, donate it, whatever. They earned it and she should feel free to move it about at her pleasure.

Mom has decided to go visit a fiduciary next week and is taking along her accountant. I should be able to discuss things further with her after that. Thanks again to everyone who piped in here!

What do expect to get from the fiduciary? If your Mom doesn't want to sell anything, what's the point? I guess you could discuss hedging strategies (buying puts), but that could get expensive over time.

Unless you think the fiduciary can explain to her that these specific stocks may have no sentimental value to the kids, and should be looked at simply as their $ value? I sort of doubt she will be swayed, it's an emotional thing.

At any rate, I think it is helpful to have some kind of game plan when going in to see any professional. I'd suggest you have some idea what you are looking for, as well as being open to ideas you might not have thought of.

-ERD50

 

[RunningBum]

I'm confused because in your first post you say she's concerned about not holding enough cash, but in your last post you say she doesn't want to part with any of the AAPL. I know those two things don't have to be in conflict since she probably has enough in other investments to convert to cash, but that would make her even less diversified. Sounds like she's got a sentimental attachment to a stock, which isn't a good thing. Somehow you need her to understand that what you all appreciate is that she and your dad are passing down anything, not a specific stock. Maybe you can show her some full history stock charts of some similar type tech stocks like INTC and CSCO, which went way up but fell back and are still worth less than half their peak value.