Long time lurker looking for advice!

MiamiDave

Dryer sheet wannabe
Joined
Aug 12, 2008
Messages
19
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 This investment is able to be withdrawn at any time.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!
 
Other than there being no such thing as a 12% return thats very secure and safe and close to 0% risk?
 
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.
 
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.
 
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.
 
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.
 
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...
 
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?
 
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.
 
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.
 
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.
 
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.
 
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.
 
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.

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?
 
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.
 
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.
 
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.
 
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.
 
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.
 
To add to what others have said... pay as little as possible to the 0% car payment (why pay extra when the money is being borrowed at 0%?) and put as much as your understanding of the risk allows into the 12% investment. 12% will be an incredible return/reward if it continues to pay at that amount, and, as you mentioned, your AA at your age should be able to tolerate more risk... judging that risk is the hard part.
 
Nd make sure that you have disability insurance. Life insurance is probably unnecessary for you, but disability insurance is an absolute must. Go buy a policy on the open market if you don't have a policy through your employer.
 
Thanks for the advice guys.

The car payment is a non-negotiable, private deal. It's basically working as an interest-free annuity for someone who had cash sitting around their house and didn't want to put it in a public place. Nothing illegal, mind you, more like one spouse hiding it from another as an emergency fund. I got the interest free car loan for the last 20 months and I get to suck up paying $1k a month that I could otherwise invest. Considering my loan, with an 820 beacon, was at nearly 7% APR due to what I purchased (it was a one-time thing for me, I'll never buy new again, much less luxury, not that I regret it or anything), I considered it a no-brain bargain at the time to save $5k in finance charges.

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?

That's what I am, that's what I mentioned in a previous post. Thing is, I'm willing to risk what I've done so far, and more over the next few years, but I don't know if I have the cojones to sell off my car, pull out my 401k and all that other stuff to dump the money into this thing. I think that's where my conservative part steps in. So yeah, I'm willing to take a risk, but I don't think I'm willing to mortgage away everything I have for it.

It's odd though that you guys put it that way. I feel extremely confident in the security of the investment but I guess by not wanting to go crazy with it I acknowledge the inherent risk involved.
 
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).
Thanks again for the advice, and no hard feelings. I enjoy reading your posts, I just think your approach was a bit unfair.
I think 14,000+ posts gives you plenty of room to draw any conclusions you want, as many others have done before. And if you can't tolerate a little [-]criticism[/-] harsh sunlight on your faith in that investment then perhaps you're going to have to think about your objectivity. What were you expecting a bunch of Internet strangers to do-- roll over and cheer for your winning the genetic lottery? But anyway, now that I have your attention...

We have a lot of posters who jump into a discussion of their investments without adequately assessing their tolerance for risk (usually volatility risk but in your case an extremely healthy dose of single-"stock"/investment risk) and without deciding on an asset allocation. You haven't decided what you're going to depend on for your ER and you haven't decided how you're going to get there-- other than making big bets on an investment that, as far as we can tell from the details provided, is extremely speculative. Your ER portfolio lacks an AA plan and by gosh it certainly lacks diversification. You've had no trouble projecting your ER plans at returns of +12% APY. What happens to your ER plans if the returns fall to +1%? What about -100%? Are you willing to live with those consequences, or are you going to continue to explain to a pack of battle-scarred skeptics why that couldn't possibly happen because this time it's really really different?

I speak with some experience. Spouse and I recently let Berkshire Hathaway grow to 36% of our ER portfolio and over half of our kid's college portfolio. It had been that way for three or four years. Finally one of the board's other long-term posters grabbed me by the ears and said "Are you nuts? Do you have enough money yet, and are you willing to risk the loss?" At that point I realized that we might be just a tad overweighted and we spent most of February cutting back. The college fund is now in short-term CDs and our Berkshire allocation is back down to 23%. I owe that guy a [-]set of plane tickets to Hawaii and free surfing lessons[/-] huge debt of gratitude for refocusing my attention.

I've spent the last year learning about angel investing. I've seen dozens of presentations that were screened from hundreds of candidates, and most of the surviving pitches still made the audience want to run away fast. The one or two worth additional research turned out to have significant failure issues. Nationally, one out of every three startups goes bankrupt even after all the smart guys have done their due diligence and put their faith in management. That's why the smart guys diversify among 10 or 15 different companies-- so that they're not wiped out by events beyond the control of management, no matter how trustworthy. You might want to suspend the "Yeah, buts" for a while, set aside your family faith for a few weeks, and do the due diligence. Ask yourself if a steely-eyed angel investor or VC would want to put $100K-$5M in your family's investment plan. And even if you do have the next Berkshire Hathaway, anything over a 15% asset allocation is asking for heartache.

If you've really been paying attention to the board's posters then you'd learn from our mistakes. There are several financial advisors here whose clients start out by saying "Holy $%&^, I have 90% of my net worth in the company stock, help!!" The advisors suggest diversifying and then they have to listen to hours of carefully worded explanations on why that just won't do. Usually in that situation the diversification issue inevitably resolves itself...

At least two other ERs on this board continued to rebalance/diversify their ER portfolios as their company stock (or options or other investments) screamed up in value. They lost millions by selling early. They were widely recognized as pathetic loser idiots-- until those stocks lost up to 80% of their value and wiped out the other paper millionaires. Today those early sellers are rich ER'd pathetic loser idiots.

Some of the ERs on this board, me among them, have been investors for longer than you've been alive. You could learn a lot from them if you suspend the rebuttals and work through the thought process. You went to the trouble of posting it, you had your attention called to some issues, and it's up to you to decide whether you're wasting your time or not. The quality of your assessment is not going to affect our lifestyles one way or the other.

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.
Conventional wisdom is that a 401(k) is worth investing up to the company match, and then only further if the funds have low expenses. After the match you'd max out the IRAs (Roth or conventional, whatever you qualify for). After that, a low-cost 401(k) might be worth additional pre-tax money... or as you've pointed out, savings might be better off in a low-cost index fund.

As for the car loan... eh... we buy 'em used with cash and drive 'em into the ground. Seems to be a lot less hassle. It's hard to grab hold of "positive equity" from a depreciating hunk of metal & plastic.
 
I'll look at opening a Roth IRA then and contribute the max. If I put $5k into the Roth by the end of 2008, and continue contributing the max to my 401k, my 12% investment will still be approximately 60% of my overall portfolio come January (liquid/taxable/non-taxable/private investment). That's at least better than the 75% slice it currently entails.

I'm willing to tolerate a fairly high share of risk at this point, with the means in which me and my SO live, and with the high level of stability the health field ensures (RN, already beginning her masters as well), I've done some very conservative calculations and I'm pretty confident we would be able to overcome a potential disaster involving the investment if it occured in the next 6-8 years even if I'm making half of what I currently am. As it stands right now, I'll concede the advice that I should diversify a bit further and try to at least drop the share on that investment to 40-50% as I'm able to over the next 6 months or so.

I should also probably start looking into a good savings account to keep my liquid assets in, and just transfer funds into my checking account as necessary? I currently use the Visa Chase Freedom CC (1%-3% cash back) for everything except my rent anyhow so it shouldn't be difficult to manage.
 
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