What to do with a big chunk of change

[justin]

I have a problem that many of you would like to have as well. I just sold my condo that I used to live in, then rented out for a while. I had no mortgage on it, so the entire sale amount was given to me in one big fat check for $93,000. I have a few more days till the bank lifts the hold on my money, but then I'm going to spend it some where. By "spend it" I mean invest it or pay down debt.

I need help on something.

I'll probably end up paying down part of the highest rate debt I have with part of it. I'll probably put what is left into investments, some in 401k, some in taxable accounts, and some in Roth IRAs for wife and me next year. The issue I'm concerned about is whether I should buy into the market in one lump sum as soon as possible with whatever I'm going to put into my taxable account? Or, should I dollar cost average into the market over the next 6 months (or year or two, etc). I don't believe in market timing, so I don't know if the market is going to go up or down over the near future.

What would you do? Invest $50k-75k up front, or put 1/6 of the amount in each month till the end of the year? This amount is a substantial portion of my net worth.

 

[dex]

I would suggest the following:
1. Add up all you currently pay in debt (pricipal and interest)
2. Use the 93K to pay off ALL your debt
3. Remainder of 93K into an investment
4. The amount you computed in 1 above continue to pay "To yourself" into your investments

 

[Niko]

What would you do? Invest $50k-75k up front, or put 1/6 of the amount in each month till the end of the year? This amount is a substantial portion of my net worth.

1/2 in baseball cards, the other half in lotto tickets!

 

[BigMoneyJim]

I don't claim to be the smartest investor around here--in fact most of my investing decisions are made because I think I'm prone to stupidity--but while DCA makes sense to me if you're investing an income stream I don't see why one would DCA a lump some distribution. Does anyone DCA their periodic rebalancing?

Anyway, if it were me I'd probably stick it all in my chosen mix of assets. (After debts are paid off, of course.) But I'm admitedly a pretty hard-core anti-market-timer--because I think I'm too stupid to time it correctly.

 

[justin]

dex,

I should have explained my "debt" situation a lot better. The highest rate on my debt is 3.75% on my ARM mortgage.

Here's what I owe:

mine+wife's student loans: $125k @ ~1% APR. Interest is tax deductible, in the event of death, the principal balance is waived (free life insurance). 30 year term.

credit card: $17k @ 2.99% fixed for life of balance.

mortgage: $131k @ 3.75% fixed till 8/06 when it will go up to 4.75%, then adjust up to 1% every 2 years thereafter (11% max rate I think) Indexed rate is 1 year constant maturity treasury plus 2.5% margin. We have 29 years left on this mortgage.

As you can see, we have significant debts totaling $273k.

The mortgage carries the highest interest rate. It isn't that high though. I'm planning on paying it off early if rates rise much. I'm able to invest a sizeable portion of my income each month already (~20% of gross income, plus a large chunk from the company into ESOP). If the wife gets a job, that will be mostly gravy. We can "spend" her income as we see fit (spend=invest).

 

[jerryo]

I have the same problem coming up.  Just put my house on the market and expect to realize between $650,000 and $700,000 in net equity.

I'm a 55 year old widower living in the DC area with one son in law school, one son in college, and a girlfriend in NY most (likely temporarily), where I'm commuting weekends and sharing rent.  Expect to ER in 0-4 years, will probably be relocating, and thought this was a good time to sell my large house and rent something smaller.

Anyway, I was thinking of putting all the proceeds in money markets (at a little over 3%) and then averaging into stocks and bonds with about $50,000 per quarter over the next 2 or 3 years (split between bond funds and S&P index funds perhaps).  Probaby want to keep $200,000 or so in cash towards buying a new house or condo in 1-3 years.

Waddya think?    

 

[laurence]

Those are fantastic terms, justin.

I agree with BMJ, no need to DCA, my thinking is if you open a Vanguard account, plunk it all in Wellesly, and use that ~4% dividend to make your debt payments outside the house, you might be happy with the long term results.

Let's see, I'm getting $402 for the monthly on the student loands and around $80 (depending on the payout point) for the CC totalling:

$482 a month

Wellesly would give you about $310 a month on all $93,000 (if you could scrape up another 7k you'd qualify for Admiral shares, lower expenses!).

Now I haven't even begun to address tax implications, nor am I qualified, but that Wellesly will grow in value while throwing off dividends and over the long haul, you could pay off your debt and preserve your capital. Plenty of tax deductions in your world, I like it.

 

[justin]

Laurence,

That's the idea. I plan on paying the debts out of my day job's income, and probably sticking with a 80/20 or 90/10 stock/bond portfolio in some sort of index and/or mutual fund. The debt payments on the loans plus credit card are a little higher, but it really isn't that much. The credit card requires a 2% payment of the principal balance each month, so it is $300+/mo right now, but the principal balance goes down quick.

 

[cute fuzzy bunny]

1/2 in baseball cards, the other half in lotto tickets!

But what do you do with the other half?

 

[charlie]

jerryo,

I think you have the right idea. DCA is all about not plunging in
just before the market craters. Experts say that "plunging" will
win over DCA about 60% of the time, but the extra return is
is modest and not worth the risk, IMHO. Everybody's situation
is different ..... for example, a young investor with a windfall has
a long time to recover. At age 55 .......... ?

Cheers,

Charlie