Sold company, need help to invest proceeds

[westcoast1]

Hello all -

I have lurked on this forum for awhile but never had any assets to invest until now. I was fortunate to be a very early employee at a software company that was just acquired. I will receive cash for my shares some time next week. Despite my lurking, I am really not sure how to invest this money and would appreciate any advice out there.

Here's what I receive...

Up front - $1.2m post-tax
After 12 months - $500k post-tax
After 24 months - $250k post-tax
After 36 months - $500k post-tax

I earn the $500k and $250k payments as long as I remain employed with the company, which I plan to.

Right now my best guess is some % allocation into equities (domestic, emerging market, etc...) and bonds. What is an appropriate allocation? What is the best way to actually buy the securities?

Also, given the instability in the market, would you invest the initial $1.2m all at once or would you DCA in over some time period (3/6/12 months maybe)?

I don't need to touch any of this cash or have it available for emergencies. My salary covers all my expenses and I have a suitable e-fund. My goal is to leave this cash where it is and grow it to the point where I can reach financial independence in my 40s. I am 27 right now.

Thanks,
Adam

 

[quietman]

With 2.4 million in your portfolio, you should be FI by age 30.

A good source for investment advice is Bogleheads Investing Advice and Info

 

[cardude]

Wow, that is a nice payout at 27-30 years old. You should be set to quit working for "the man", depending on what your expenses are of course.

I just closed my business and I am also working on trying to come up with some kind of AA plan for my mish mash of investments, and I second the advice to check out the www.boglehead.org forum. Many of them over there are very helpful offering up possible portfolio ideas, as are the folks here.

Are you going to keep working after the 3 years or take ER? What are you going to do in ER at the young age of 30?

 

[target2019]

Hello all -

I have lurked on this forum for awhile but never had any assets to invest until now. I was fortunate to be a very early employee at a software company that was just acquired. I will receive cash for my shares some time next week. Despite my lurking, I am really not sure how to invest this money and would appreciate any advice out there.

Here's what I receive...

Up front - $1.2m post-tax
After 12 months - $500k post-tax
After 24 months - $250k post-tax
After 36 months - $500k post-tax

I earn the $500k and $250k payments as long as I remain employed with the company, which I plan to.

Right now my best guess is some % allocation into equities (domestic, emerging market, etc...) and bonds. What is an appropriate allocation? What is the best way to actually buy the securities?

Also, given the instability in the market, would you invest the initial $1.2m all at once or would you DCA in over some time period (3/6/12 months maybe)?

I don't need to touch any of this cash or have it available for emergencies. My salary covers all my expenses and I have a suitable e-fund. My goal is to leave this cash where it is and grow it to the point where I can reach financial independence in my 40s. I am 27 right now.

Thanks,
Adam

Congratulations. Looking for some advice on this forum and others might help. The problem with other forums is that you get a lot of advice, and of course the advice conflicts in some respects.

One thing I've noticed during the few years I've been tracking investing advice, is that everyone who posts is an expert. (LOL, that includes me.)

One thing you have is a very large tax challenge. I wouldn't begin to offer advice on that, as my experience is small potatoes. So, my advice to you is to make sure that you closely examine the tax consequences. The income you generate will be substantial, so be sure you consider your tax bracket and all of the other complexities of our tax system.

I'd be in frequent contact with tax preparer and a trusted advisor. Morningstar has several forums you might look at, such as Portfolio Design.

Best wishes for the future.

 

[LOL!]

What books were you thinking of reading to help you solve this problem?

 

[Bestwifeever]

Congratulations. That is a fortunate yet daunting position that you are in (and you no doubt have worked hard for the company!). No one will care as much about your $$ than you, but perhaps consult a fee-only financial planner as one way to educate yourself?

Also, there is a "Links" option at the top of this page--reading through the info posted there may be helpful too.

 

[clifp]

Hello all -


Right now my best guess is some % allocation into equities (domestic, emerging market, etc...) and bonds. What is an appropriate allocation? What is the best way to actually buy the securities?



Thanks,
Adam

Sweet, your windfall came roughly a decade earlier than mine, so you'll have even more time to enjoy it. The good news is you don't have to worry about where you will be working for the next three years.

The asset allocation is certainly the toughest question. Personally, at your age and considering the horrible yields on CD and most bonds I'd suggest I high equity allocation 60-80%. But this really a question that only you can answer. You probably should look at municipal bonds while you are in a high tax bracket. Is the company paying the tax on the bonuses?

Probably the most important investment you can make over the next couple years is in your financial education. One of the ah ha moments I had in my mid 30s was that on $2 million portfolio figuring out how to save 1% in expenses or earning another 1% in higher returns was $20K each, this amount dwarfed the differences between 5% good raise and 10% great raise even if stock options are include. It requires a lot of more effort to be a superstar performer than learning about investments. The good news is that compared to software engineering financial engineering is pretty simple. The bad news is it attracts lots of idiots, and crooks. Ultimately, unless you find that you absolute hate making investment decisions,you'll want to manage your own investment.

Still in order to jump start your education I'd suggest you do get some advice.

1. You can't go too wrong putting 1/2 the money at Vanguard and getting their "free" financial plan
2. A fee only financial planner. There are people on the forum who do this and than can help give you suggestions on where to find these people. The key is you want to avoid paying a ~1% fee each year for their advice. On the other hand given the assets involved and the potential tax situation, I certainly would hesitate to spend several thousand to get customized advice, for several years while you are learning.
3. Sanity check the advice on the forum. In my experience because there is such a large number of people, and many of us (including myself) consider themselves "experts", you'll get such a wide variety of opinions that will be impossible to act on it. (For instance the AA question would probably lead to a range between 0-100% equities .). On the other the board gives very good advice on what NOT TO DO. If you say I am thinking about doing X, Y,Z and 80% of the board say X,Y are really horrible investments. Then I would listen to the wisdom of the crowd. (Think of us as Wiki community)

Also, given the instability in the market, would you invest the initial $1.2m all at once or would you DCA in over some time period (3/6/12 months maybe)?

An excellent question and perfect illustration of the problems. The financial literature is clear the sooner you get the money invested the faster it will start working for you. The psychological answers is it depends. In generally people will feel more comfortable DCAing over a period of say 6 months. This because people worse about losing money than not gaining money. If you invest 1.2 and the market goes down 20% the first month you'll have lost 240,000. If on the other hand you invest 100K a month and the market goes up 20% the first month and then remains flat for the next 11 months, you'll have missed out on $220K in gains. Most people hate A far more than B even though differences in money are very similar.

 

[LOL!]

An excellent question and perfect illustration of the problems. The financial literature is clear the sooner you get the money invested the faster it will start working for you. The psychological answers is it depends....

One study that I am aware of says that lump-summing (LS) results in a higher portfolio value 65% of the time, but that the difference is only a few percent. Usually when someone (i.e. a newspaper article, your advisor, your mother) says LS is better, they do not point out how much better nor the probabilities. To me, it ain't that significant.

So as clifp notes, it depends. If you take a Bayesian approach, you might LS 65% of a payment and DCA the other 35% over a few months to a year. You can LS anywhere from 0% to 100% and then DCA the rest (100% to 0%). In the end, the long-term outcome probably won't make much of a difference since you are getting your money over a 3-year period anyways.

 

[Spanky]

I don't need to touch any of this cash or have it available for emergencies. My salary covers all my expenses and I have a suitable e-fund. My goal is to leave this cash where it is and grow it to the point where I can reach financial independence in my 40s. I am 27 right now.

You are already financial independent! Hire an adviser to determine your asset allocation since you can afford it.

P.S. Please share your secrets behind your success at such a young age! Your advice is definitely appreciated.

 

[LOL!]

You are already financial independent. Hire an adviser to determine your asset allocation since you can afford it.

I'm sorry to say, that I don't think westcoast1 is financially independent. $1.2M allows one an aggressive 4% standard withdrawal rate or just $48K a year before taxes and investment fees. Maybe he needs to buy a house or pay off a mortgage or student loans.

If he gets an advisor that wants 1% of his assets every year, then he has turned himself into a whale. That would be like a 25% tax on his 4% SWR.

He might become FI with his future payments, but he ain't there yet.

 

[Spanky]

I'm sorry to say, that I don't think westcoast1 is financially independent. $1.2M allows one an aggressive 4% standard withdrawal rate or just $48K a year before taxes and investment fees. Maybe he needs to buy a house or pay off a mortgage or student loans.

If he gets an advisor that wants 1% of his assets every year, then he has turned himself into a whale. That would be like a 25% tax on his 4% SWR.

He might become FI with his future payments, but he ain't there yet.

Remember that he will receive another $1.25 millions in 3 years. Anyway, FI is subjective. To me, it is having sufficient money to fund your lifestyle without assistance from others (or working for an employer). I can live on $48K per year (from your example) without making any sacrifices. However, it may not be adequate for a person who have accustomed spending millions on luxurious lifestyle. He/she may need a few hundred millions to be financial independent.

 

[LOL!]

He may not live a luxurious lifestyle. He may simply live on the West Coast.

 

[westcoast1]

Hi guys, thanks for the advice so far. I spent a lot of time reading the Bogleheads forum. It seems like - since I will be investing > $100k - ETFs may be the way to go. So some kind of diversified ETF portfolio, with a bit larger % in equities since I'm younger and don't need the money for awhile.

I read somewhere that if someone had held an index fund for the past 10 years, they would essentially be back at the originally invested amount with no gains. Does this apply to ETFs too? If so, how could this be true? Does rebalancing help prevent this stagnation from happening?

I'm not sure how taxes should impact my plans. My AGI (excluding LTCG from shares) is about $200k - $220k per year between my main job and a little side work I do. I am going to start maxing out my 401k. I am responsible for all taxes on my bonuses. So there may be some smart tax planning I can do.

This definitely doesn't seem like a lot of $$$ to me since I live on the west coast and am surrounded by wealth. A nice SFH where I want to live is $3 million. I am less concerned with retirement and more excited about financial independence, meaning I can work where I want and take more professional risks, and minimize the stress on my family. But I enjoy my field and enjoy working and don't see that changing for awhile (no feelings of burn out).

 

[LOL!]

I own many ETFs. For all practical purposes, they are just like mutual funds. An "index fund" is just a mutual fund or ETF that tracks a specific index. The index can be a stock index or a bond index or a commodity index or any other index. You should want a mix of different asset classes and index funds that track those particular asset classes.

So not all ETFs and index funds have led a life of 0% return for the past 10 years. Most people would not have called it stagnation. Rebalancing does help regardless.

You would be well served by reading some books on investing. There is a reading list published on the bogleheads site.

 

[Brat]

The payout promised in the future is just a promise, not a guarantee.

First I recommend that the OP consult a CPA in the Valley who knows the tax implications of his situation. My DD is in the thick of these issues and has shared with me the fact that many end up with stock that is, essentially, a hot potato tax wise. Set aside enough CASH to pay out your worst case tax liability.

My advise is worth the fee charged: nothing. That said I would invest it in a no load balanced mutual fund that has weathered the current financial storm the best. Your future pay-outs are all equities so you should not chase capital gains right now. I am not a fan of certain investment performer but I do agree with the advise to not be a pig, take your profits and invest them conservatively.

DD, again, is wary of bonds because she said that rating agencies have lost credibility. She likes equities because she said that you can evaluate the business. That assumes that you (or I) are in a position to do that. She and her employer do that routinely but damned if she can share their assessment with me. So, the likes of you and I fly blind. If you know your industry players very well then you can buy what you can aford to loose based on that knowledge... but DON'T FALL IN LOVE WITH A STOCK. Otherwise, buy index funds or a fund as mentioned above.

My $0.02.

 

[target2019]

Hi guys, thanks for the advice so far. I spent a lot of time reading the Bogleheads forum. It seems like - since I will be investing > $100k - ETFs may be the way to go. So some kind of diversified ETF portfolio, with a bit larger % in equities since I'm younger and don't need the money for awhile.

I read somewhere that if someone had held an index fund for the past 10 years, they would essentially be back at the originally invested amount with no gains. Does this apply to ETFs too? If so, how could this be true? Does rebalancing help prevent this stagnation from happening?

I'm not sure how taxes should impact my plans. My AGI (excluding LTCG from shares) is about $200k - $220k per year between my main job and a little side work I do. I am going to start maxing out my 401k. I am responsible for all taxes on my bonuses. So there may be some smart tax planning I can do.

This definitely doesn't seem like a lot of $$$ to me since I live on the west coast and am surrounded by wealth. A nice SFH where I want to live is $3 million. I am less concerned with retirement and more excited about financial independence, meaning I can work where I want and take more professional risks, and minimize the stress on my family. But I enjoy my field and enjoy working and don't see that changing for awhile (no feelings of burn out).

If you ask a Vanguard forum what to do, the answer will be index funds or ETFs. If you ask a stock forum what to do...

You have pointed out one problem with index funds, i.e. you are back ten years now after a great recession. So, rebalancing at regular intervals is allegedly what will force you to sell winners and buy losers. However, some produce data that shows more growth if you hold all the positions in the "right" funds.

The problem is the vast amount of data that can be used by anyone who advises you. Your particular experience may not fit the data. When you start and how long you are in the game is something not mentioned often. You are starting when prices are still relatively low, and so on. Keep that in mind.

Maxing the 401 is a great idea. That will lower your taxable income. Also, look into a self-employed plan for other income from sideline business. You can probably exclude some of this profit from taxes.

I'd be tempted to put the $1M into a tax-free CA money market at Vanguard, and get the highest level of advice (Flagship status) right now from them. Since this is not a retirement account, you really are not tied into Vanguard, if you find a better company to invest with.

It sounds like you are ready to take charge of this, and can avoid paying 1% or more to a financial advisor. Remember that every dollar paid to you on this investment in the future is taxed.

 

[JOHNNIE36]

Maybe I overlooked this in the other posts, but to ease the tax burden, have you considered a "Starker Exchange", whereby you exchange one business for another business? I personally don't know much about this and don't even know if your situation would qualify; however, if another business (apartment complex for example) would interest you, check it out.

 

[Brat]

Reading between the lines I think the OP received stock options which in part have been exercised, or has sold intellectual property that he owns. These types of deals are not unusual in high tech. It is also possible that he owned part of a company which has been acquired.

 

[westcoast1]

Reading between the lines I think the OP received stock options which in part have been exercised, or has sold intellectual property that he owns. These types of deals are not unusual in high tech. It is also possible that he owned part of a company which has been acquired.

Yes I own shares (not options) in the business that was acquired. We had the option of taking shares in the new company or cash, and cash seemed like the best bet. Since I owned the shares for more than a year, I only pay 15% in long term capital gains, which is nice. I'm not sure I would want to exchange for another business. I am looking to preserve the capital and have some growth over the next 20 years.

 

[Brat]

I like Oakmark Balanced, a no load mutual fund. A great mutual fund resource is a website called Fund Alarm. Also read the most recent Forbes Mutual Fund Report which rates funds in both up and down markets. There is no reason to pay a load for a mutual fund.

 

[LOL!]

Oakmark Balanced is a good fund, but it would not be tax efficient in the OP's case.

 

[Brat]

I don't disagree but I expect the OP will do his own assessment of how that impacts his situation. It is really hard to preserve capital without having some interest and dividends in a portfolio.

Maybe his wisest move would be to move to a state that doesn't have an income tax so he won't need to concern himself with that quite so much.

 

[audreyh1]

I'm 95% in taxable accounts and I don't worry about the tax efficiency of the mutual funds I own. Of course, I also live in a state that has no state income tax.....

Audrey

 

[Brat]

Eh, me too.

 

[westcoast1]

There's no state income tax on the shares or future gains from that money. I wasn't sure if that would make a big difference or not - sounds like it may.