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Old 08-12-2008, 11:26 AM   #1
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Long time lurker looking for advice!

Hi everyone. First post here, I've been reading the forum for a few months but never took the dive till now.

I'm a 27-year-old currently working as an underwriter/system admin for an auto finance company. I gross $80-90k per year depending on bonuses. I put 8% into my 401k and get a 100% company match up to 2%.

I save approximately $18k (20% gross, obv a higher % in after-tax) per year. I'm currently investing $10k chunks into a very secure and safe, 12% annual return (my mother is 2nd in command for the company). This investment is able to be withdrawn at any time. I have $30k in it right now, and I'm aiming to put another $10k into it by Jan 1st.

I currently have $20k in positive equity in my vehicle. It will be paid off in Aug '2009 at which point I will have an additional $700 per month to save.

My SO begins working as an RN in January and should start at approximately $55-60k in salary. Approximately 50-60% of her income will be saved between us.

What I'm currently doing is taking the 12% return and, rather than re-investing it, I am using it to decrease my car payment by an extra $100 every time I invest. (it's a $1000 pmt at 0% interest through a personal arrangement)

Assuming my investment is as close to 0% risk as is possible, is there any reason why I shouldn't continue doing things as I am?

Thanks!
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Old 08-12-2008, 11:30 AM   #2
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Other than there being no such thing as a 12% return thats very secure and safe and close to 0% risk?
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Old 08-12-2008, 11:39 AM   #3
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I explained the details above, I have a family member aware of their financial situation at all times. As soon as there's anything even remotely questionable I can withdraw the money.
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Old 08-12-2008, 11:45 AM   #4
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Lots of senior executives at companies lose a lot of money due to unforeseen circumstances and it can happen quite suddenly.

I've sat on the board of a fair number of small companies. Several pretty much exploded because one or more senior managers or principals hid crucial information from the rest of company management until it was too late. Happens all the time.

You and/or your mother may also be in violation of insider trading rules.
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Old 08-12-2008, 11:53 AM   #5
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It's not a public company.

It's also probably much smaller than you realize, and has had the same management intact for over 20 years.

We can argue on about the riskiness, or lack thereof, of the return for days. That's fair. I'm not saying I don't concede any fair points, however knowing my situation personally and not being prone to naievety or rash decisions, I can say that my confidence level in this investment is at an astronomical level.

If you, or anyone else who would like to comment, and can accept the extremely low-risk 12% investment for what I've stated it is, then I'd just like to know if there's anything else I should be doing.

Thanks again.
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Old 08-12-2008, 12:02 PM   #6
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Throw as much money as possible against that 12% investment, if it's how you describe it. You won't find a better deal anywhere.

Another thing to think about - Fund a Roth IRA.
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Old 08-12-2008, 01:17 PM   #7
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My point is that many people lose a lot of money because they make one or more bad assumptions or there's something they're missing. So be careful.

Funding Roth's are a good idea if you qualify. And why would you take money from a super safe 12% source and pay a 0% car loan off?

Even if you had a slightly higher rate, it doesnt make a lot of sense to pull money from an appreciating asset to pump it into a depreciating one.

Past all this, your asset allocation will primarily dictate your long term success. You're young, you should have a fairly aggressive AA in your 401k and presumably the eventual Roth. Especially since you have a fair amount tied up in a high return, low risk asset class...
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Old 08-12-2008, 01:32 PM   #8
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Since I'm not within their typical investor range of $100k+ increments they're giving me a check every month because it's easier for accounting purposes. I don't argue it since it's basically a favor they do for family of the company. I figure the $300 I save on my car loan I end up reinvesting at some point when I get another $10k chunk since it's an extra $3600 per year minus taxes at its current size. Is it worth more for me to diversify with a Roth account than it would be to increase my 401k contribution?
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Old 08-12-2008, 01:36 PM   #9
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Depends on your tax situation. The 401k will grow tax deferred, but you'll pay taxes on the money when you take it out. The Roth also creates no tax implications, and the withdrawals are tax free.

So I'd use the 401k up to at least the match maximum, and if you're in a high tax bracket put more in. Then if you find yourself with excess money I'd put it into the Roth rather than the car loan.
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Old 08-12-2008, 02:11 PM   #10
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I'm in the 28% tax bracket. Thanks for the info, by the way.
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Old 08-12-2008, 03:40 PM   #11
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Certainly max the 401k and do the Roth to the max if you qualify for one. Other than that, watch that you are properly diversified with other asset classes just in case the 12%er has a downturn.
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Old 08-12-2008, 07:52 PM   #12
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Quote:
Originally Posted by MiamiDave View Post
Assuming my investment is as close to 0% risk as is possible, is there any reason why I shouldn't continue doing things as I am?

Thanks!
Hi MiamiDave,

Congratulations on starting to save and invest while you're young. That in itself puts you on the right track.

Don't let anyone rain on your parade. You're doing fine for the time being. When you accumulate more assets, you can diversify a little more taking into account your life circumstances at the time.
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Old 08-12-2008, 08:33 PM   #13
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Originally Posted by MiamiDave View Post
Hi everyone. First post here, I've been reading the forum for a few months but never took the dive till now.
What I'm currently doing is taking the 12% return and, rather than re-investing it, I am using it to decrease my car payment by an extra $100 every time I invest. (it's a $1000 pmt at 0% interest through a personal arrangement)
Assuming my investment is as close to 0% risk as is possible, is there any reason why I shouldn't continue doing things as I am?
Welcome to the board, Dave, I think.

Have you been lurking long enough to learn about the basics of asset allocation and diversification from a book like Bernstein's "Four Pillars" or Malkiel's "A Random Walk"? Are you familiar with the number of legitimate investments that have managed to compound at 12% for any reasonable number of decades without showing up on "60 Minutes" or the front page of the WSJ? Have you read about the Gordon Equation?

If I had your confidence in these 12% returns then I wouldn't pay off a car loan. I'd cash out your 401(k) (and your spouse's) and put them into this investment. In fact I'd probably sell or mortgage all my assets, max out my credit cards, and give it all to my family to invest and compound. Why, just $50K/year compounding at 12% would be $1M in a bit over a decade and $2M in 16 years! Even without further contributions, it'd double every six years!! You could be ER'd before your 43rd birthday!!!

I wouldn't stay at my day job, either. I'd give all my ER friends a chance to join in this investment (of course after paying your very reasonable fees) for the greater good of all the investors. After all with a greater asset base your family could realize significant synergies of scale, grow their margins, and boost their returns even higher.

Or perhaps I'd take a slightly skeptical but more diversified approach. I'd continue maxing out your 401(k)s and IRAs while limiting this 12% opportunity-of-a-lifetime to no more than 10-15% of your investment portfolio. That should be enough to maintain family harmony without risking your retirement finances.

I don't know what kind of cash-cow company you're related to, but you might want to read about Chuck Feeney and Duty Free Shoppers. That story went gangbusters in style for a number of years but didn't end so well.
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Old 08-13-2008, 10:52 AM   #14
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I appreciate the advice and the caution urged on both your parts, although I find the sarcasm unsolicited, and frankly, a bit offensive. It seems a bit out of character based on my observations of your other postings and I'm not sure where it comes from. It's a bit disappointing.

I believe in this case the scenario I'm describing is one of those, "you'd have to be there" type deals. I have to re-iterate: I am not naieve. I'm well aware of the risks inherent in deals which are too good to be true. By no means can I ever call my investment 0 risk, but it's not nearly as fragile as people would like to think it. Yes, we can point out numerous examples of companies which offered investors amazing returns that folded without notice.

I don't plan to put all my eggs in this basket long-term. Right now it comprises more than half of my current assets (yes I realize a vehicle is not normally an asset, however I've considered liquidating the vehicle and downsizing should I look into purchasing property in the next 12 months).

I've calculated the scenario as a risk (if it's even much of one at all) well worth taking, particularly with inside insight into the company's finances. I am 27 years old and live below my means already as does my SO. The reward of jumpstarting my retirement portfolio for 6-8 years in this manner is a huge one. If, heavens forbid, something goes drastically wrong that I don't forsee, I'll still have a fairly substantial sum in my 401k by age 35 and I'll be invested in property by then, and I will have 20+ years to continue working towards retirement. I'm not looking to retire at age 43 or even 45. Mid 50s sounds great to me. I don't mind considering risk vs. reward. I could make a lot of arguments that starting a business is a lot riskier than what I'm currently doing, and I don't see you jumping on top of people here that are considering that attempt.

And no.. the car payment arrangement is not negotiable. Nor is getting other people involved in the deal. (yes, I realize that was part of the sarcasm, even if it was half serious)

Anyhow, now that I've gotten that out of the way - at the 28% tax bracket would I find larger 401k contributions to be more beneficial than a Roth IRA? I'd have to calculate just how much to invest into the 401k to drop down to the 25% bracket, but I think it'd be a pretty considerable amount.

Thanks again for the advice, and no hard feelings. I enjoy reading your posts, I just think your approach was a bit unfair.
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Old 08-13-2008, 11:16 AM   #15
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Dave, I think theres a fine line between sarcasm and humor intended to point out how good your deal really is. I doubt Nords has any expectations of trying to get in on any of your financial arrangements.

If theres any sarcasm, appreciate that there arent a lot of 27 year olds making six figures who get zero percent loans on expensive cars, have access to 12% low-risk family investments and want the opinions of an internet forum on what to do from a financial perspective.

You tell us!

In any case, for what its worth, it pushes the "Hey! Good for you!" and "Hmm, this seems a little odd" buttons simultaneously.

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Don't let anyone rain on your parade.
You mean like telling people that if they dont retire with $8M that they're endangering their families and that most early retirees live in poverty?
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Old 08-13-2008, 11:24 AM   #16
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Fair enough, I'll concede on those points. I just didn't infer that type of feedback based on what I read.

So, let's take this another direction which you might find more interesting, for argument's sake: Let's say the risk level of what I'm doing is indeed a bit higher than what I've observed, but still at a fairly low level. Do you agree the risk vs. reward at a young age is worth the attempt? I don't think I could find a better risk vs. reward scenario right now at my age. New businesses are inherently risky. Without a venture capitalist behind me, I'd no doubt rather take my current approach.
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Old 08-13-2008, 12:00 PM   #17
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Oh I was quite serious when I said that you should look to maximize your 12% investment within reason. I wouldnt put so much money into it that I'd screw my life up or derail my investment plan for ten years if everything went south. Some diversity is good, even at your age.

But you get rich by taking good age appropriate risks that have comparable returns.

I'm just reminded of an investment situation that I was in at around 27. I was a young sales manager pulling in some good money and the VP of sales took me aside and gave me a little "I never said this, but buy some stock...something big is about to happen...dont tell ANYONE!". I'd worked with this guy for years, knew everything about him and trusted him implicitly.

So I scrounged up a nice hunk of cash and bought some stock. My broker was really intrigued as it turns out he handled a couple of other customers who were company managers who had apparently gotten the same tip. He wondered what was going on.

I guess word got around a bit or people noticed the volume going up, because the stock picked up a good bit over the next few weeks and I was feeling good about my savvy investing and risk taking skills.

Then out of nowhere the company declared bankruptcy. Only a few people in upper management were aware of some major screwups and there was a little book cooking, primarily a bunch of sales booked that suddenly evaporated and seems never actually existed. The VP of sales 'secret tip' had been given to many of the field managers, many of them becoming large buyers. When the stock went up, a bunch of family and friends of the VP of sales dumped their stock.

So granted the guy didnt give birth to me, but he was a very well trusted ally and (I thought) good friend, the company kept a pretty good secret from a lot of people, some funny business went on and a lot of people lost a nice chunk of change.

I put all of my ready cash into that deal, and borrowed a bunch. It took me nearly 3 years to recover.
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Old 08-13-2008, 12:31 PM   #18
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I'm sorry to hear about any story like that. I'm sure you can see how vastly different this situation is, though. My mother often puts her childrens' interests in front of her own at times, at the first sign of trouble she'd make sure that money got back to me.
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Old 08-13-2008, 12:42 PM   #19
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Then it seems you know all you need to know.

While I cant say the story is or isnt applicable, the thing is that the company founder wasnt aware of most of these hijinks until it was too late and the company was already sunk. So its not who you trust, its who you trust and who THEY trust that can give you a little trouble.

At 12%, you're among the first in line to get your money back, and theres practically no chance of loss...I'll echo Nords' comment...you should be mortgaged and debted to the gills and be pumping money into this arrangement as fast as you can, and begin enjoying your early retirement by your mid 40's. I wouldnt bother funding the 401k, a roth or paying down a car payment. In fact I'd sell the car, lease something and put all that money into the company investment plan. Within four years you could withdraw it and buy a ferrari for cash. Then I'd take all the money out of the 401k, pay the penalties and taxes, and plunge that in as well.

A 12% low risk compounded return with principal protection beats the whiz out of a one time 28% tax savings and subsequent ~8% annualized returns.

As you've described it, this is a one in a million opportunity to get rich and become financially independent. Take it.
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Old 08-13-2008, 12:48 PM   #20
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Fair enough, I'll concede on those points. I just didn't infer that type of feedback based on what I read.

So, let's take this another direction which you might find more interesting, for argument's sake: Let's say the risk level of what I'm doing is indeed a bit higher than what I've observed, but still at a fairly low level. Do you agree the risk vs. reward at a young age is worth the attempt? I don't think I could find a better risk vs. reward scenario right now at my age. New businesses are inherently risky. Without a venture capitalist behind me, I'd no doubt rather take my current approach.
Depends. Are you a staid conservative investor who cannot bear the thought of ever taking a loss, or are you willing to try to shoot the moon now in the hopes that you make enough to greatly improve your financial situation in the long term?

FWIW, if you have the stomach for risk, I think that at this age it is OK to have a concentrated investment. If it blows up, you have time to recover and in the grand scheme of things it isn't that much money either way. But don't be stupid about it: make sure you have a large enough emergency fund, pay down debt, and in general don't devote so much of your funds to a single investment that you would be ruined if it went south.

At your age, I made fairly concentrated investments in public companies which mostly panned out. Now that I am pushing 35, I have one position that is around 15% of my portfolio and it is too large a position for me to maintain long term. Be aware that making the switch to smaller positions and less risk is one that you will eventually have to make and it takes some time to recalibrate your reflexes.
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