New capital, positioning for ER

[Exit50s]

Mid 40s - recently sold company, generated significant payout and still working under contract at 250K ending 6/30/18. Planning to semi-retire, not actively search for work, but consider different opportunities related to my skill-set, while pursuing personal interests, more time w/family. Ballpark estimates of aggregated accounts:

7M (cash)
400K (IRAs)
250K (US stocks)
1.5M (home)
No mortgage, no debt

Married, 2 young kids, decent monthly overhead, think northeast upper middle class suburb - high taxes, etc. Looking to generate safe, tax efficient return and not turn this over to a financial advisor if possible. Have attorney for wills and estates, medical coverage through next June 30, and have COBRA option for 1.5 yr after as needed. Lastly, I realize this is a very fortunate position, and am very thankful to be in this position which was self-made. Any serious input you have would be much appreciated if you were in this position. Thank you very much!

 

[Sunset]

Index funds/ETF's and BRK.B

Or you could become a landlord, but it's a bit like work.

I'm glad you didn't ask if you could afford to retire

 

[Meadbh]

Congratulations! You are in a very fortunate position financially, assuming that your expenses are not out of line.

We’re I in your shoes, I would determine my desired asset allocation, and invest the cash it it. We could argue all day about what the optimal asset allocation is, but IMHO it should include a healthy percentage of indexed equities (40-70%), some fixed income (bonds and or CD ladders) and some real estate (perhaps a REIT) as an inflation hedge and a steady damper on market crashes. (2008: ask me how I know).

Also, I would consider moving somewhere with a lower cost of living but good quality of life.

 

[flintnational]

Congratulations! You are in a very fortunate position financially, assuming that your expenses are not out of line.

We’re I in your shoes, I would determine my desired asset allocation, and invest the cash it it. We could argue all day about what the optimal asset allocation is, but IMHO it should include a healthy percentage of indexed equities (40-70%), some fixed income (bonds and or CD ladders) and some real estate (perhaps a REIT) as an inflation hedge and a steady damper on market crashes. (2008: ask me how I know).

Also, I would consider moving somewhere with a lower cost of living but good quality of life.

+1 Congratulations.

Here is a link to books that cover DIY investment principles.

FN

 

[travelover]

Congratulations. If you have not found the Bogleheads, I think you'd benefit from their advice. Like any forum, they will argue over the fine points, but their thrust is simple and straightforward.

 

[OldShooter]

Congratulations.

I'd say that @Meadbh has made a pretty good suggestion. Since you will be holding most of your assets in a taxable account, a slight spin I might suggest would be to look for broad index funds (total world, or total us plus some total international to your taste in home country bias) that are specifically tax-managed. You should probably get the DFA pitch from one or two of the advisors that offer those funds. It is pretty compelling and with the size of your assets you should be able to haggle a pretty low advisor fee if you decide you like the story. IIRC DFA has a number of tax-managed passive funds. You can find advisors from their site https://us.dimensional.com/

While you are still working and have earned income, I'd max out every tax-sheltered option available to you including 529s. If you can somehow manage to kick some of your earned income into 2019 in order to take advantage of sheltered options I would try to do that. Granted it is not huge bucks in the overall scheme of things but it's still good economics.

 

[Exit50s]

Thank you!

For the initial suggestions and feedback. Also thinking and asking about any specific funds, or investment vehicles anyone would suggest given my situation putting yourself in my shoes. Have heard of high-performing, lower fee vehicles/funds with high minimums ($100K, $1M) that may be potential options to consider. Just started reading some of the past posts and for example, it seems there are several that speak very favorably of PIMIX as a lower-risk income generating fund option. Thanks again, appreciate all the suggestions and advice!

 

[OldShooter]

... Have heard of high-performing, lower fee vehicles/funds with high minimums ($100K, $1M) that may be potential options to consider. ...

Run, don't walk away. Hucksters lurking!!!

There are two important things for you to read, both are published every six months by Standard & Poors and every report reads roughly the same. Go here to read them: https://us.spindices.com/resource-center/thought-leadership/spiva/

SPIVA Report Card: Shows the performance of mutual funds relative to their benchmarks with careful attention to factors like survivorship bias. The result is always the same: Over any period it is only a minority of funds that outperform their benchmarks and over longer periods (5,10,15 years) almost none outperform their benchmarks.

"Fine," you say. "I will only invest in outperforming funds."

Manager Persistence Report Card: Again, its always the same. Outperforming managers identified in the rear view mirror are no more likely to outperform in the future than what would happen with random luck. In fact, often the data shows fewer outperforming manager than simple random luck would predict. The bottom line is this: There is no way to predict from history how a manager will do in the future. This is very counterintuitive and hard to accept, but it has been statistically proven over and over.

Just this week the WSJ published a survey of Morningstar funds and found that the "Star" ratings of past performance were not at all predictive. This is confirmation of the S&P results. From the article: "Of funds awarded a coveted five-star overall rating, only 12% did well enough over the next five years to earn a top rating for that period; 10% performed so poorly they were branded with a rock-bottom one-star rating." Sorry to say the full article is behind the WSJ paywall. Its title is "The Morningstar mirage: What those fund ratings really mean" Maybe you can find a copy via Google.

The theoretical underpinnings for stock-pickers' underperformance are in this very simple paper by Nobel prize winner William Sharpe: https://web.stanford.edu/~wfsharpe/art/active/active.htm

Finally, here are a couple of videos with investment guru Kenneth French:
https://famafrench.dimensional.com/videos/is-this-a-good-time-for-active-investing.aspx
https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx

Bottom Line: Most people here will recommend passive investing for the reasons above. Statistically speaking, it is the winning strategy.

(Passive investing is slightly distinguished from index investing as follows: Passive investing seeks to buy the whole market and accepts that, unpredictably, there will always be market sectors that outperform and sectors that underperform. Many people confuse investing in sector index funds, like S&P 500 funds, with passive investing. Buying an S&P fund is making a bet on large cap US stocks, which are only about 40% of the world's market cap. IMO investing in sectors is really not much different than stock picking and is subject to the same likelihood of long term underperformance.)

 

[pb4uski]

If I was in OP's situation I would go with domestic and international equity ETFs or mutual funds like VTI and VXUS or possibly even VT since I would expect that the OP would pay 15% on qualified dividends and LTCG. I would put the fixed income allocation in good quality muni bond ETF like VTEB to add stability. A well selected portfolio should provide good returns in the long run and minimize taxes.

And put the $400k IRA all in a portfolio of target maturity bond ETFs until interest rates normalize.... then shift to bond funds or ETFs.

 

[OldShooter]

@Exit50s, here is another thought: I get it that you do not want to pay for an advisor to run your money. Neither do I. We are running serious seven figures ourselves and have never hired anyone.

At your portfolio level, both Fidelity and Schwab will jump at the chance to serve you with a financial consultant who is a fiduciary and who comes at no charge. Other firms will also jump, but many IMO cannot be trusted and many will try to talk you into a wrap fee account. So I would recommend starting with those two. If you already have a relationship with one of them, just consider it to be an account reset due to new circumstances.

Call a branch manager at each firm, roughly explain your situation to him/her and ask each to set up appointments with at least two brokers who would be suitable, experience-wise, age-wise, philosophy-wise, etc. to help you with your account. That will make for four interviews, probably a couple of hours each. With luck, at least one of these people will 'click" for you. SGOTI is always amusing, and I'm sure he will give you plenty here in this thread, but I think that interviewing a few professionals will be of greater benefit. Check with your attorney for recommendations, too. Add his/her ideas to your interview plan as long as you can make sure that those people are fiduciaries too.

Always check broker names at https://brokercheck.finra.org/ prior to a meeting. Look for Series 65 or Series 66 licenses (Registered Investment Advisor) or an Investment Advisor Representative designation. Also be aware that a Certified Financial Planner designation (CFP) is A Nice Thing, but despite some advertising to the contrary the CFP designation does not make the person legally a fiduciary.

 

[Exit50s]

Thanks, Would you average into these examples over time, or dive in and get “invested”. At my levels, the amount per month is denatesble, but just curious on thoughts with my type of balances currently in mm yielding so little.

 

[Exit50s]

Thanks for suggestion. Have relationships and could always interview people but it will take time with the proper due diligence.

 

[OldShooter]

Thanks for suggestion. Have relationships and could always interview people but it will take time with the proper due diligence.

The rest of your life is, hopefully, a long, long time. Taking a few thoughtful months now is something that you won't even remember in five years. Making a big investment mistake, though, is something that you will remember with painful clarity.

 

[pb4uski]

Thanks, Would you average into these examples over time, or dive in and get “invested”. At my levels, the amount per month is denatesble, but just curious on thoughts with my type of balances currently in mm yielding so little.

We've had a number of threads on this... studies suggest the best approach is to just dive in but that is scary so close to record highs. I think I would dive in with half and value average in the rest over 12-18 months.

Rather than pathetic MM accounts, you might consider online savings accounts that yield 1.0 - 1.2%, keeping in mind the FDIC limits... but a married couple could have as much as $1 million in individual and joint accounts in a single bank and still be fully insured.

 

[OldShooter]

As is quite normal, I agree with @pb4uski. Some supplemental thoughts:

Simulations looking at dollar cost averaging are going to say that it doesn't matter. On average, the investors are going to get the market average. That's entirely predictable simply from the math. What they don't talk about so often is best-case and worst-case. IMO that's where our high beams should be shining. Dollar cost averaging is a method for reducing risk by accepting reduced potential upside. And, IMO for individuals it makes sense. I might be less aggressive that @pb4uski, though, and invest the same fixed amount monthly until I was all in. Recently I've been quoting Buffet to people: "The market is a device for transferring money from the impatient to the patient."

Re MM, CDs, etc. The money destined for the market can be managed according to the investment schedule. If some will not be invested for three years, buy some treasury notes or bonds that will mature in three years. Ditto for shorter and longer periods. If you want CDs, you can buy them through your broker's bond desk. They are quite used to splitting up money across various banks to stay within FDIC limits and will take care of that for you.

If you want treasury bills and notes, your broker will buy them for you. I usually buy via the government auctions and Schwab routinely waives their fee for the transaction. With your assets I'd expect fee waivers as well.

 

[Abe Frohman]

I know this goes against the wisdom of the board, but here goes.
I'm a big fan of professional money management. Especially when you have it all in cash now.

I use to be a staunch opposer of using financial professionals, but as my NW has come close to yours, I've changed my mind. My main reason for being a fan of a FA is that the opportunity cost is huge and you might never see it as a cost. If you make a 1% mistake with 70K it costs you $700. If you make a 1% mistake with 7MM it costs you $70K. This was the main reason I chose to use an FA. It's not that they make me more money (they don't), but they don't screw up which saves me money. They don't make Tax mistakes or estate planning mistakes, etc.

So, all that being said, I would talk to a high quality financial planner. You can find someone that charges you an AUM fee. Probably about .6% or you could go with a fee only planner who would just charge you by the hour. Don't go with anyone who is selling you anything.

Also, you are at a crossroads right now. You have 7MM in cash. You want to strategically put that money to use, with regards to Taxes, estate planning, asset allocation, college education etc. You have the UNIQUE opportunity to start at NOTHING given that it's all in cash. If you make the wrong asset allocation now, it could be 'expensive' to fix it down the road (paying taxes).

Just my .02 cents from a converted opposer of financial advice.

 

[bloom2708]

+1 for a DIY approach. There is NO reason to give a financial advisor $70k per year with an AUM plan. Nobody knows you like you.

Bogleheads + a 3/4 fund portfolio at a 50/50 asset allocation works in ALL situations. $70k, $700k or $7 million.

Total US, Total International (25% of stock allocation), Total US Bond (Or Int-Term Tax-Exempt bonds in taxable), REIT (Optional)

Asking a "Portfolio question" at Bogleheads will get you some great advice. Don't buy anything you don't understand. You can't do a wrong asset allocation from 40/60 to 60/40.

 

[Exit50s]

Thank you everyone for the advice, tips, and opinions. While it feels like I’m missing out by not being fully invested, I don’t want to rush in with 7 figures all at a time, I know myself and have lived through 2000, 2008. I’m kind of taking both sides of DIY and advisor help, by starting to average in to simple Fidelity and Vanguard allocations as a growing base. As I’m still working full-time, tending to young kids, just bought a new home, etc., I plan to look into advisors at my own pace, with no decision on whether I will definitely go that route. Could always talk to people. One of the big issues for me is do I pursue more income-generating vehicles after I retire (no job income) or do that now while still working. Or with such high liquidity, pursue a blended approach. As long as I stay conservative, average in at a comfortable pace, stay fairly concentrated with low cost index funds as a base that cover the markets, I don’t feel like any “huge” mistakes will be made in the short-term. There is a wealth of information here, at bogleheads and other places. I’ll also consult my accountant for tax planning advice in regards to investing. Lots of work to do, people to talk to, reading, etc., but I think building a conservative, income-generating portfolio with decent returns should be feasible over time, if not I’ll definitely get more help in time.

 

[Doc0]

What are your goals?

 

[pb4uski]

.....One of the big issues for me is do I pursue more income-generating vehicles after I retire (no job income) or do that now while still working. ....

My DSister and BIL sold their business a couple years ago and had to stay on 6 months - 1 year to assist with the transition. I remember BIL fretting over what would be next... whether he would buy or build another business, etc.

I told him that since he had been working very hard for the last 25+ years that he should take 12-18 months to R&R before jumping into anything new.... he's done that and I think enjoyed his new found freedom and leisure and seems unlikely to now go out and buy or build another business.

 

[Doc0]

You don't say what your budget is.

I would go with a professional advisor. I did it myself, and I did with a professional advisor, and the advisor has made me more money. I have a portfolio smaller than yours but not that much smaller and I pay about $4K per quarter. I get sick and tired of people giving off spurious costs like $70,000 per year. My guy manages about 250 million so he's small but also connected. He has lunch with Warren Buffett twice a year, and access to DFA funds ARQ funds and others which give a better diversity and choice and return than the Bogelhead 3. The Bogelhead 3 is a good portfolio NOT an optimum portfolio in terms of reward v risk. My funds are housed at Fido. He has trading rights but I own my money and nothing gets done without my approval. He tax plans my investments so I pay least taxes. That alone makes him worth the price. He wrote a book on investment tax efficiency so he knows what he is doing. He also is there in case I kick the bucket so my wife will have recourse to his further management in my absence. That is also worth the cost of admission. You get what you pay for. Personally I wouldn't risk a 10M portfolio with advice from an internet forum, but YMMV.

You don't say if you intend to use the money to start another business, so that makes a difference how you invest. One thing I would do is consider is setting up a UGTM for each kid. You and your wife can donate a total of 28K gift tax free to each kid per year. It does not need to be used only for school. 10 years with a double would be $500K per kid for college car etc. I did this and it worked out great. I did not tell them about the money I just used it for their benefit. I may just let it ride and tell them when they are 50.

Best

 

[ace8]

What is your annual budget?

 

[Exit50s]

Thanks Doc0 - sounds like great advice, and would love to follow in your footsteps. While still working full-time at least until next year, and w/life as it is (tending to young kids, new house planning, family, personal commitments), I will realistically need months to find someone great as you have and thinking not to stay so heavy cash until then.

Also not planning to re-invest the capital in a new business. Just want to retire early on it, let's say in next 1-5 years - by 50, so safely well-positioned it for income, tax efficiency and perhaps some growth. My overhead will be high comparatively to rest of US in an upper middle class suburb in northeast, but my family is not extravagant by any means. We will own new house outright, no debt, and using public schools. Assuming medical, education, home maintenance and taxes are biggest expense categories. After my kids are out of the school system - 10-15 yrs, we would likely exit to a lower cost area, but not on the radar w/our life well-entrenched.

 

[BeachOrCity]

I would invest conservatively. Keep stocks under 50 percent of NW and solar cost average into them. For your cash I would use one of the larger banks cd service where they take care of spreading your cds to multiple banks so you are fully insured.

You won, stop playing. If you feel the urge to play create a separate account just for that with an amount of money you don’t mind losing

 

[Doc0]

If you are interested in my advisor pm me. What I did was start at 1m saw how things worked and slowly moved the rest once I was satisfied. The advantage you have now is you are free of cap gains which may not be true later and will act as an impediment