Pimp my ride!

[cute fuzzy bunny]

Ok, this is an oddball, and something I dont think we've discussed here before. Maybe if I read an old thread backwards it'll give me the right advice.

I've spent the last four years in ER moving from a growth/accumulation situation in 2000 and before to a conservative, dividend generating, low tax scenario. Was working great...even during the minibear my assets grew while I always had the cash to do whatever I wished, within reason.

Then I screwed it up by getting married to a working woman that doesnt wanna quit Fortunately she's terrific, so that takes away some of the sting.

Since she has no intentions of quitting for at least 5-7 years (but you never know), and her part time income more than pays all the bills, and our combined income in an ordinary year would present us with a higher tax profile than I had become accustomed to, Its my wish to migrate my portfolio in essence back to an accumulation stage until she retires.

Characteristics:

- Low tax situation...I'd like to keep us in the 15% bracket as much as possible
- Strong 5-10 year growth
- I still think dividends will make up a big part of returns in that period
- I'm finding vanguards high yield junk fund pretty appealing for an income component due to its low risk (compared to other junk funds) and high yields. I'm sick of making 3-4% on bonds and MM funds
- I could just stick it in wellington or another balanced fund, but still dont mind slicing and dicing
- Not sure about things like the tax managed balanced fund as it make you pay a fee if you leave within 5 years and the loss of returns to save taxes arent as appealing as the tax savings...my tax situation simply isnt that bad

So here you are, 43 going on 44, new wife, new baby, big lump of money, no need for much of it (may tap a few grand here and there) for 5-7, maybe 10 years, no health care, no debt, bills well paid for by wifes income. Looking to up your portfolio to max it out in that 7-10 year period so the wife can comfortably ER when she wants to and still have dough for college and growing child expenses.

Oh yeah, and do you go to a 529 or other college plan for the kid or just let the portfolio roll and pay for it out of that? I'm not sure he'll go to college (I didnt), I may end up bankrolling a business for him. He wont get big bucks until we pass on. I'd like to leave him enough to pay his debts when he receives his inheritance, maybe have a little ER portfolio of his own.

So what would you do? How would you allocate these funds?

 

[wildcat]

Tough situation TH --- the need for additional growth around the corner but at the same time stay relatively conservative

On the 529 or other college plan, do you get any tax breaks on the contributions or any additional incentives when you put the money in? I believe the money grows tax-def correct? If the tax incentive is there then I wouldn't mind doing the leg work. Paying less taxes is heaven to me. If it is not then screw the extra leg work.

Are you open to separating the "new" money so to speak that comes in from your wife's job? Maybe take a little from the old money + new money kind of thing to speed up her retirement. More work but you could be more aggressive with it (to fund additional expenses until she is retired and the kid is out of the house) and keep the nest egg or old money relatively conservative.

Just some ideas...tough one

 

[cute fuzzy bunny]

The 529 does not offer a current tax deduction, but the grown heap o' dough is tax free to use for education. But you HAVE to use it for college...for some family member. Otherwise (from memory) its 10% penalty+taxed. Ick. I recommended this for my neighbor with 2 kids and other similar age family members (about 9 kids in the 3-5 year old range). Somebody there is going to college. I'm one and out if Gabe doesnt want to go.

No separation of money, we have a joint checking and joint investment account. Her check and our dividends have both been paying into the same checking account. Any leftover dough gets reinvested in whatever my hormones like that quarter.

But yes, you see the dillemma. I can keep things exactly the way they are, and just turn the dividends back inwards for reinvestment and pay taxes on that dividend load (without getting it) as we go. I could amp up on conservative equities and cut my bonds. I could go 80/20 or 90/10 with a straight line set of indexes or managed funds and hope the bull keeps running.

My first leaning inclination is 70% into the equity income fund (which is the stock piece managed by wellington management and used in wellesley and wellington), which pays a solid dividend that would be taxed probbbbbably at the 5% dividend rate for us, reinvesting that dividend. The other 30% split between high yield, muni or gnma which I still havent figured out. I'm tempted to go full high yield, take that 7% dividend and reinvest it back into the HY as well. That should give me 7-8% returns from both my equity and bond components. Fairly tasty. Not horrificially risky on either piece. 8% compound growth over 7-10 years with the big fat piece of it coming from dividends and not depending on nav appreciation.

?

 

[Art]

Th, as someone who's still working at age 49, I don't feel qualified to give you investment advice- but I do want to re-inforce your conservative instincts as much as possible.

You have reached the Promised Land at age 43. To lose it- due to a severe and prolonged  market drop followed by a long term sideways market- would be very sad and painful, to put it very mildly.

Think very carefully about your top priority- desire for faster growth or safety- I'm not aware of how you could have both.

Unless.

You are willing to get into a low-cost Variable Annuity with a good living benefits rider that protects your principal if your sub-accounts tank. Some protect your principal plus the "high-water mark" of your sub-accounts.

Vanguard's VA didn't have living benefit riders last time I checked- but they are widely available.

VAs produce ordinary income taxes on gains, which, no doubt, thrills you.

You don't strike me as a VA kinda guy. But if you want to keep going for big rates of return without risk- I don't know how else you can do it.

Oh yeah. You can become an expert in options- or hire one- and try your luck.

Weiss Research seems to do well with options- you might check that out too.

 

[Nords]

Hey, TH, aren't you the guy that keeps whispering "Psssst... Wellesley..."? Fund it & stop over-nuking this question. Next thing you know you'll be putting all your spouse's earnings into Berskhire Hathaway. (Sure hope she has a prenup!)

If I had to do a college fund all over again:
- I wouldn't buy EE bonds for the tax-free educational benefit (1992-1996).
- I wouldn't put assets in a UTMA (1996-2002).
Although both of those approaches solved some tax problems at the time.

- I'd max out all my IRAs/401s/403s and other retirement arrangements so that they're not counted against financial aid. (That's not the primary reason for maxing out all retirement accounts, but it's not a bad reason.)
- I don't like the lack of 529 account options & flexibility. I'd take a very careful look at low-expense 529 plans and try to figure out if withdrawals will still be tax-free after 2010. I suspect that a taxable investment with a low ER may still beat these out 529s unless there's a huge state-tax deduction in the future. And a 529 is a bad idea if you want the flexibility to abandon the college plan and start a business.
- I'd DCA ~$400/month college money in small-cap or micro-cap value (or make annual ETF purchases). 16 years from now I'd sell off a quarter of it each year to fund short-term CDs. (If it raises everyone's comfort level, then implement the selloff into a bond fund a couple years before the CDs.)
- I'd keep borrowing library editions of Loren Pope's "Colleges That Change Lives" and talking about it with my teenager. College may not be that expensive after all.
- I'd keep an annual eye on the cost surveys and adjust the savings accordingly.
- I'd read Business Week's annual special report on college planning and follow the links.
- I'd investigate Kumon math & reading as soon as the kid turns three. This is not a joke and it could very possibly turn out to be the only college-savings plan you need.
- I'd make sure that the kid has at least three years' experience with a checking account, ATM card, & credit card before graduating from high school. These money mistakes experiences are best learned while still under parental supervision.
- I'd fund the kid's Roth IRA as soon as earned income starts rolling in.

 

[cute fuzzy bunny]

Your thinking is similar to mine on the drawbacks of the 529. Seems like every college plan has something that makes me wrinkle my face up and move on.

Re: keeping with the current strategy...two things...hating the taxability of the bonds in wellesley/wellington and the crappy 3-4% yields i'm getting on cash and bond instruments.

 

[Art]

the crappy 3-4% yields i'm getting on cash and bond instruments.

You and your wife can buy up to $120,000/year of I Bonds (paper and electronic) now at 4.8%, federal tax-deferred, and almost totally liquid after 1 year (3 mos. loss of interest if redeemed in less than 5 years). Not too shabby.

(This crop gets 1.2% fixed, added to the CPI-U, over the next 30 years).

 

[JB]

- I'd investigate Kumon math & reading as soon as the kid turns three. This is not a joke and it could very possibly turn out to be the only college-savings plan you need.

My sister's kids use Kumon. From what I can tell it's an excellent program. They are developing incredible learning skills. I wish I had taken it when I was a kid -- maybe my iq would be as high as TH's

 

[cute fuzzy bunny]

Art - I'm no fan of ibonds. They're 4.8% now, i'm betting cpi goes down, down, down over the next 5 years. But other people think they're good ideas.

JB - wish IQ translated into anything worth more than a cup of spit. The only thing more worthless than having a high IQ is joining a club for people who think they're something cuz they have a high IQ

Oh yeah, I can think of one other thing more worthless than IQ...post count.

But Johnnys coming back from vacation to a little surprise...

 

[Art]

i'm betting cpi goes down, down, down over the next 5 years. 

Interesting. What makes you think so?

 

[unclemick]

Heh, heh, heh

Well - perhaps a Goggle on Efficient Frontier website - 15 Stock Diversification Myth.

And then, and then - on Bogle Financial Markets Research - in the archives 11/12/1997, Mutual Funds: Parallaxes and Taxes. Scroll down to A New Idea: 60 Years Old.

For the frosting on the cake - Mergent's Hand book of Dividend Achievers - hopefully a free library copy.

Recognizing that Bernstein says your chances of beating 'the market' are one in six - but Bogle says you can outcompete a mutual fund - if - well read the article.

Soooo - 36 'durable' dividend paying stocks in equal dollar amounts and a little Vanguard High Yield for excitment?

Hows that for a left handed, INTJ, engineer, Leo

The college thing - you're on your own.

My other advice is bad enough.

P.S. Happy Father's Day. There are two more camps within walking distance I've yet to be neighborly and mooch some boiled seafood (looks like 50-100 people) - plan to avoid any free spins on the Waveriders though

 

[JPatrick]

I started my kids at minus 9 months of age on a diet of 50% EEBonds (later IBonds when they were invented) and 50% growth mutual funds. This 50/50 mix saved our butts when the markets hit the skids during tuition time in that we then turned to the bonds.
This prevented us from cashing in when the market was down.
Most of the remaining bonds they hold are older and still yield 5-6%.
When the market threw craps in 2000 I started actively managing the funds using the Fidelity sector and country funds which two years ago led me to 1/3 in Canada (FICDX), 1/3 in Oil service(FSESX) and 1/3 in energy (FSENX). Needless to say, this mix has worked out OK.
The key point is that the holdings in bonds gave us the flexibility to weather and adjust through the stormy stock markets.

 

[cute fuzzy bunny]

Interesting. What makes you think so?

#1: its in the people who calculate the cpi's interest for it go down, and they have every ability to manipulate it in that manner. Minor concern though.
#2: Rates for cd's and bonds over 3 years are lower than sub 3 year rates, indicating to me that the banks and the bond market believe that rates will probably be lower 3+ years from now than they will be in the next 3 years. If rates are down, that means inflation is tame and that the economy will slow. Or maybe they're wrong. In which case they've screwed up by not offering longer term 5% cd's.

 

[wildcat]

Based on your repsonse I would skip the 529 idea.  Hate tying money up in vehicles that really lack flexibility and if you can take care of it without I say go without.  One less form to fill out.

I like playing a little with ETFs.  If you are going to try add to returns (I know it is forbidden according to Berstein) I say add extra exposure in certain areas with ETFs based on value fundamentals.  Yahoo can give you avg P/E and a lot of good info on valuation and risk when you look up ETF quotes.  I tend to play with ETFs a bit more when I can't find any good individual value stocks which tends to be the case as of now.  You can find ETFs for just about every damn sector/country/style nowadays.

As of today I like the global financial ETF --- IXG.  I know rising int rates blah blah blah but financials have come down a bit and it is one of the most profitable sectors in the world.  To me it is a bullish call on the developing world and it comes with less risk.  Euro and US franchises are setting up shop in developing nations and some are taking stakes in some smaller country specific banks that are poised for solid long-term growth. 

Nords mentioned micro as a possible bet.  I mentioned in another thread that Russell is coming out with a new micro index which will force new micro ETFs and index funds.  Problem with most now is the exp ratios.  Could be another investment that could add to returns.  Plus the lower the market cap the lower the correlation with the overall US market.  So I would wait until that became a reality but it is a good long play.

I don't know what your opinion is of intl' but I have done quite a bit of research and I think we will see the best returns overseas for a while.  I have been putting new money into intl' and other alternative investments.  Shifted old money to dividend (as you mentioned) and value US.  Foreign bonds are also more attrative if you ask me.

Just food for thought but don't listen to this guy.  Just like writing about investment ideas. 

Oh yeah you have officially been pimped

 

[laurence]

Hey, looking for a hot stock tip? I got a great biotech for ya!

 

[Mr._johngalt]

Art - I'm no fan of ibonds.  They're 4.8% now, i'm betting cpi goes down, down, down over the next 5 years.  But other people think they're good ideas.

JB - wish IQ translated into anything worth more than a cup of spit.  The only thing more worthless than having a high IQ is joining a club for people who think they're something cuz they have a high IQ

Oh yeah, I can think of one other thing more worthless than IQ...post count.

But Johnnys coming back from vacation to a little surprise...

I love surprises. What is it?

JG

 

[cute fuzzy bunny]

Do you hear the theme music from "Jaws" playing?

 

[BUM]

Not,

Speaking of that Jaws theme music, all the above advice gears your port towards a reduced tax exposure. You are comfortable with that. Its a nice problem to have. Most replies focus on junior's college funding. What happens if suddenly junior gets a brother?

 

[Martha]

Patience. Didn't we have a discussion a couple of months ago about there being no good place to put new money? If you figure you'll stay in the 15% bracket, I'd change nothing. If you figure you might move into the next bracket, move more into dividend stocks ala UncleMick or Vanguard.

 

[Art]

I apologize in advance for the stupidity of this question- but the curiosity is killing me:

A number of posters have suggested putting new money in dividend-paying stocks.

Is this because:

A) despite today's widely presumed stock overvaluations of about 40%, it is thought that dividend-paying stocks will continue to pump out dividends in a severe and prolonged market crash/ multi-year sideways stumble- so who cares if their stock price drops 40% for 10-20 years?

or

B) strong div-paying stocks won't suffer badly in a major market crash- they will hold their price pretty much, so new money is safe with them?

or

C) something else I'm missing completely.


Thank you for clearing this up for me.

 

[unclemick]

Uh er - I'll leave the nitty gritty for the longer winded/better typing posters.

It depends - dividend stocks can be played a lot of ways - some of them risky and dangerous.

Dividends are back on the hype/media radar IMHO - because of recent lackluster markets/lower project returns AND the recent 15% break on taxation.

Wall Street has been rolling out products left and right in recent years to feed the ducks.

So a reasonible degree of scepticism is warrented.

Two old saws - in the accumulation/savings phase - look at long term(10 -30 + yrs) record of rising dividends. - after/in ER - look for a balance of current div/div growth to help with inflation.

 

[charlie]

TH, take a look at DVY (iShares Dow Jones Select Dividend Index).
This fund pays about 3.0% currently, has a ER = .40% with 2%
turnover. It is classified as a mid-cap value fund with avg cap of 4.5B.
It's P/E is 14.1 and P/B is 1.79.

I am thinking that it might be a good holding for part of your taxable
account because of the low tax rate on dividends and the low turnover.

I have not bought this yet myself but have been thinking about it.
I believe Ben has some and maybe Nords if I remember correctly. It
looks to me as if DVY could give Windsor II a good run for the money.
The only thing I don't like is that it is pretty concentrated in financials
(39%) and utilities (21%) ....... but thats where the dividends are.
It's an ETF that unclemick should love.

I know you don't like I-bonds but they are tax free if used for
education. You need to hold them in your name, however.... not
Gabe's. This would give you the option of using them for his
education or not depending on how the future unfolds.

Cheers,

Charlie

 

[Nords]

I believe Ben has some and maybe Nords if I remember correctly. The only thing I don't like is that it is pretty concentrated in financials (39%) and utilities (21%) ....... but thats where the dividends are. It's an ETF that unclemick should love.

8% of our retirement portfolio. It recently hit a 52-week high.

The demise of the financials, utilities, value stocks, and small-caps has been predicted for about five years now. So I've been looking for a small-cap value fund that invests only in financials & utilities!

 

[cute fuzzy bunny]

Art - a huge chunk of past stock returns have been composed of dividends, believe it or not! In the future, if one feels stocks are ovevalued (as I do) then there is a good chance a lot of future returns will come from dividends. Its also a long running trend that value stocks (which usually pay a high dividend) outperform growth and blend funds during most market conditions.

 

[Art]

Ok, but what do you think of this:

"Plan Ahead" mode should be used in all retirement planning calculations. Why? Because, prior to 1990, the average dividend yield was about 4.5%. Nowadays its around 2%. If you use the "Look Back" mode you would be building-in unrealistic return rates for your retirement planning."

"There are a number of academic studies that use the historic dividends (total return) to come up with estimates of future sustainable withdrawal rates. As prudent advisors and/or investors, you should avoid such traps and ignore those findings. Dividends cannot go back to their historic levels unless markets lose more than half of their value or companies double or triple their dividends in a hurry. In the meantime, be conservative and use the prevailing dividend rates, not historic ones. Remember, you are ultimately responsible and not some academic researcher."

At: www.retirementoptimizer.com go to Program User Guide/Strageic Asset Allocation go to Look Back/Plan Ahead

I'm not trying to pick a fight- I just respect your opinion on this stuff.