Thanks all for the reassurance and encouragement.
...
So I suppose my next step would be to hire a financial advisor, correct? I confess to being somewhat ignorant in this area. How does that work. Would I just turn over all liquid assets to the advisor, and then they essentially handle all of the investing and cut me a check back each month? And I also let them handle my 401k? But then I assume no money will be coming back my way on that until after I turn 59 to avoid penalties.
There are some one-time-fee planners that can help you, but almost all "advisors" are just sales leeches, what they are selling is that you pay them around 1% of your assets every year (AUM advisors), so they can make a complex mess out of your portfolio, put you in things with even more costs that they also get a piece of.
Meanwhile they have no more idea about the future than you do. They are just taught to project confidence and show you backtests as "evidence" that their scheme will work in the future. They all have a spiel promising you better than market returns, plus lower than market risks - which is all nonsense, no such thing exists. Remember, you will only be able to draw about 4% of your initial (inflation adjusted) value of the portfolio each year, hiring an "advisor" that takes 1%, means you have to live on 3%. I had one for a few years, he drove a Maserati, I drove a 15 year old Camry.
I suggest you go to bogleheads.org (named for the late CEO of Vanguard Jack Bogle) and read the wiki entry under "getting started". You will find that it is absurdly easy to set up a portfolio that has a high chance of beating anything an advisor does, because doing it yourself cuts out nearly all costs.
The basics are that you are not going to stock pick or guess at hot sectors or market time. Instead, you are going to buy everything, the seemingly great and seemingly terrible, in a Total Market fund, like Vanguard Total Market ETF (VTI, expense ratio 0.03%). You can buy that from your favorite brokerage, generally without fees. You can add a Total International (I use Vanguard's VXUS, expense ratio 0.07) or Developed Markets fund to get exposure to companies around the world.
Your fixed income portion will have no shortage of opinions. Many of the offerings were only invented fairly recently, so there's no robust theory of what to do. The things that seem right:
- Market timing bonds or selecting what to buy is just as hard as stocks, since real people looking for bargains are pricing both.
- In bonds issued by companies, the Pros really do know more than you do about credit risk, call risk, etc., so those should only be held in a fund.
-Keep your costs low, (as Jack bogle said, "you only get to keep what you don't pay for")
-Match the duration of the investment to your need for the money
-Use some inflation protection
Here, with kids' college expenses coming up, I would start with a larger slice of fixed income as a set-aside for that in short term investments and then spend that down while they are in school. So let's say you have an average risk tolerance, so maybe you want to be a 60%stock/40% bond investor. I would start at maybe 55/45 and use the extra bonds while the kids are in school, so that when they are done, you are at your target allocation. Since these expenses are nearly upon you use things like CDs, short term bond funds, short term Treasuries, short term TIPS.
The remainder of you bonds may not have a specific identified time it will be needed. Some should be inflation protected, using TIPS or TIPS funds, the rest can be Treasuries, a Treasury fund or an Intermediate bond fund. There is a school of thought that a portion should be long term bonds, but after the recent bout of inflation which reminded us of the deadliness of inflation to nominal bonds, buying anything long term other than TIPS seems like a bad idea.
For my own portfolio, I don't want to fool with individual Treasuries or TIPs or try to duration match to our life expectancy, so I have used Vanguard Total Bond (BND). I would also agree with something like VAIPX (intermediate TIPS).
