Assuming you had $1 mil in cash to invest...

[mgdsh]

What would you do with it?

I'm 33, wife's 32. Have made some amazing real estate decisions over the last few years and now in a very fortunate place.
Have a mortgage and enjoy the mortgage interest tax deduction.
SEP-IRA's maxed out yearly.
In addition have a pension.
Student loans are $600 a month at 4% but nothing concerning. Could in theory pay off the $80k.
2 cars at $500 a month but 0% interest loans and again nothing concerning.

Still would have a very high 6 figure amount to invest.

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[Cooperd0g]

If I didn't already have a solid financial plan then I would follow this advice: http://www.bogleheads.org/wiki/Managing_a_windfall

Maybe in your case I would pay off all the debt since that is a guaranteed return and what appears to be a small percentage. Then place the rest in FDIC insured accounts until my plan was solid for what I was going to do.

I have no debt and I have a financial plan in place. Since I already max my available tax advantages accounts (Roth TSP and Roth IRA) I would put all of the money in the Vanguard Moderate Growth LifeStrategy Index fund (VSMGX).

 

[sazerac]

^ solid advice here. Also, if you already have a plan, you can just invest it and skip the whole "put it into FDIC insured accounts for a year" thing.

People often wonder if, once the plan is solid, they should invest the money all at once or maybe invest the windfall over the course of a few months / years. What if the market crashes the day after your big move? Every analysis I've seen says just invest it all at once. It does add risk, but you can also lose out on a LOT of investment opportunity the longer you keep the investment (or portion thereof) in cash.

 

[James Martin]

As you have a large influx of cash, why not keep at least 18 to 24 months of monthly expenses in a high-yield Money Market account? Think of it as the Ultimate Emergency Fund. Best places to hold that huge sum? Online banks like Capital One 360and EverBank. Or, you might throw it into a Certificate of Deposit with Discover Bank.

 

[QofQuimica]

What is your goal for the money? My answer would be very different if you're saving it for a short term purchase versus for retirement/bequest to your kids. Agree wholeheartedly that you should read the Bogleheads guide to managing a windfall, and don't rush into anything, especially if you don't understand it.

 

[mgdsh]

Thank you all for the input.

Yes clearly have had a plan this entire time Goal would be to continue to grow the funds at a similar rate in order to accelerate retirement or add to life's luxuries.

Will definitely put it in a "high yield" 1% savings account until the right decision is made.

In general was looking to see if anyone had more specific ideas.

 

[Cooperd0g]

In that case you have to balance out where all of your funds are and what your total asset allocation is. There are some easy ways to do it and some ways that are a bit more complicated, but may save you a tiny bit on taxes. Personally I'm a fan of the easier method. If all of my money was for retirement income goals then I would just try and use the same exact fund (or as close as possible given what was available in my 401(k)) for everything.

As an example you could put all of your 401(k) money in Vanguard Target Retirement 2040, all of your IRA money in the same Vanguard Target Retirement 2040 and then you could put this new money in a taxable account still using the Vanguard Target Retirement 2040. That is the super easy method as long as you like their asset allocations and their glide path. Some people like to tweak it more and say that they want 70/30 stock/bond (or whatever) and then figure that stocks are best performing in their tax advantaged accounts and bonds in their taxable accounts. Clearly if most of your percentage needs to be in stocks, but most of your money is in taxable format it makes it a bit more complicated getting your mix right. It really isn't that hard, but I'm not sure the extra pain an attention is really saving you that much money unless you just really love this kind of thing. That's why I prefer the simple method.

My own person system segregates the retirement income goals from other goals. My retirement income will be based on pension and tax advantaged accounts. All other savings are intended to purchase my property and house and future vehicle needs (and desires ). Since I may buy the property in a few years and then start building the house a few years later so I keep all that money separate in the Vanguard LifeStrategy Moderate Growth so that it doesn't have too much stock exposure, but it does have a chance to grow in the intervening years.

 

[PikminOC]

Thank you all for the input.

Yes clearly have had a plan this entire time Goal would be to continue to grow the funds at a similar rate in order to accelerate retirement or add to life's luxuries.

Will definitely put it in a "high yield" 1% savings account until the right decision is made.

In general was looking to see if anyone had more specific ideas.

Are you guys going to have kids?
Then the money will be gone fast!

Baller, where are you getting this money from?? You are young, and are selling your practice.
You won the powerball!

 

[rl2]

Clearly you understand real estate or are very lucky. Why not consider rental properties and have a property manager?

 

[Gpan]

Wanna see your money grow even further without lifting a finger? Let me borrow it to pay off my high interest student loans at the rate of 3% lol

 

[mgdsh]

Clearly you understand real estate or are very lucky. Why not consider rental properties and have a property manager?

I've considered that. If the right opportunity comes up I'd definitely spring for it. I just doubt I see anything like that here in the Bay Area anytime soon. There's a lot of money out here and people who literally own tons of properties in that space alone.

 

[mgdsh]

Wanna see your money grow even further without lifting a finger? Let me borrow it to pay off my high interest student loans at the rate of 3% lol

I'd want a return of double digits in return At this point I probably wouldn't even consider a return of less than mid teens.

 

[fewaopi]

^ solid advice here. Also, if you already have a plan, you can just invest it and skip the whole "put it into FDIC insured accounts for a year" thing.

People often wonder if, once the plan is solid, they should invest the money all at once or maybe invest the windfall over the course of a few months / years. What if the market crashes the day after your big move? Every analysis I've seen says just invest it all at once. It does add risk, but you can also lose out on a LOT of investment opportunity the longer you keep the investment (or portion thereof) in cash.

I've heard but haven't seen the evidence for this. Of course it's sound but dollar cost averaging and lump sum to my understanding really has no difference long-term. For peace of mind, DCA might be better for some people while getting similar results no?

 

[sazerac]

I've heard but haven't seen the evidence for this. Of course it's sound but dollar cost averaging and lump sum to my understanding really has no difference long-term. For peace of mind, DCA might be better for some people while getting similar results no?

If you google "invest a windfall all at once or dollar cost average" and read the first page of results, the more reliable (and more mathematical) advice all points towards investing the lump sum all at once. There are articles from Vanguard, WSJ, Boggleheads, etc and they all say the same thing. The differences between all-at-once vs DCA (even over a year) are significant and favor the all-at-once strategy. Basically if the fear of a market crash tomorrow is enough to make you considering DCAing the lump sum, then your asset allocation is too aggressive for your needs and you should fix that instead.

Here is an interesting thought experiment from one of the hits on the first page:

Let’s say you inherit a large portfolio, and by the grace of the gods, on the day you inherit it, it happens to match your preferred asset allocation perfectly. Would you:
1) immediately liquidate to cash and start dollar cost averaging back to your asset allocation.
2) sleep well knowing that you have a well diversified portfolio appropriate to your risk tolerance and goals.

 

[chasm-e-baddoor]

let it snowball in a fund until i can reach around 100k in interest per year and just live off of that

 

[mgdsh]

let it snowball in a fund until i can reach around 100k in interest per year and just live off of that

At an interest rate of 1% in most places that would require $10 mil I'm not quite there yet

 

[chasm-e-baddoor]

At an interest rate of 1% in most places that would require $10 mil I'm not quite there yet

Oh I meant in a mutual fund or something. Dont the interest rates there enter 8%-10% for certain ones?

As you can see I dont know much about investing so my post shouldnt be taken with too much weight anyway lol

 

[Plastikos]

I would probably split it up into 10-15 different positions in blue chip stocks (div champs mostly) with a dividend yield higher than your average weighted student loans rate, that were at fair to very modest premium valuations, and let that baby loose. I'd try for something that gave you the likelihood of getting your initial investment back in 10 years in dividends alone. Personally, I'd reinvest for at least the short term (and the cost basis effect) but theres no wrong way to do it, you could also use the divs to purchase the shares most on sale or wholly new investments or just life.

 

[DepressedEngineer]

Talk to a financial advisor

 

[ThoracicGuy]

I would probably split it up into 10-15 different positions in blue chip stocks (div champs mostly) with a dividend yield higher than your average weighted student loans rate, that were at fair to very modest premium valuations, and let that baby loose. I'd try for something that gave you the likelihood of getting your initial investment back in 10 years in dividends alone. Personally, I'd reinvest for at least the short term (and the cost basis effect) but theres no wrong way to do it, you could also use the divs to purchase the shares most on sale or wholly new investments or just life.

I would NOT but it into blue chip stocks. You are betting on those companies not going down and your investments are far from being diversified. I would put it into a low cost index mutual fund where you are invested into ALL of the stocks out there. Far better in the long term than your idea...

 

[mgdsh]

Nothing terribly enticing here so far Have some ideas but will wait to make those investments before speaking of specifics

 

[PL198]

I would NOT but it into blue chip stocks. You are betting on those companies not going down and your investments are far from being diversified. I would put it into a low cost index mutual fund where you are invested into ALL of the stocks out there. Far better in the long term than your idea...

this for sure

 

[Mman]

I would NOT but it into blue chip stocks. You are betting on those companies not going down and your investments are far from being diversified. I would put it into a low cost index mutual fund where you are invested into ALL of the stocks out there. Far better in the long term than your idea...

Interesting point on that by Joshua Kennon.

The most damning part of all of this is the fact that had the new rules been in place throughout the lifetime of the S&P 500 – the removal of some of the highest-returning, super compounders like Shell and Unilever, the underweighting of high growth companies until the owners sold out, often at stock market peaks, the inclusion of de facto fixed income securities through REIT conduits – the historical compounding rate would have been lower.

The old, mathematically-almost-guaranteed-to-be-higher-returning methodology is gone. Yet, not a single one of the major S&P 500 index funds offers an adequate disclaimer on the page showing the charts and figures with historical total return performance explaining that the product the investor is buying today would have resulted in significantly different results had those same rules been used in the past.

Anywhere other than Wall Street, they’d call this type of behavior fraud.

If you judge your index fund on the basis of historic returns of the S&P, you should aim lower in the future. The new rules the S&P plays by essentially guarantees it.

 

[Plastikos]

I would NOT but it into blue chip stocks. You are betting on those companies not going down and your investments are far from being diversified. I would put it into a low cost index mutual fund where you are invested into ALL of the stocks out there. Far better in the long term than your idea...

Except that its not as dividend aristocrats/growers have consistently outperformed the market, there is tons of research on it and I can link you some if you wish. You can diversify away from equities if you wish. It may not be your cup of tea, but that doesnt make your statement true. You should read that linked article, and maybe some others on that site you'll be amazed at how little you know about how indexing works and that its already much more like what I suggested than what you think it is.

However, if you didnt need the money in the next 10+ years equities only is the time tested best return. Dont mistake volatility for risk, they are not the same. Companies like Exxon, Johnson and Johnson, etc (just an example and is not a statement on their current fair value) have been around and paying dividends since the late 1800s, through ww1, 1929, the depression, ww2, vietnam, oil embargo, korea, etc...and so on. There are a large number of companies that are alive and well and will outlive us all. If one was investing this much money it would behoove them to do some serious due diligence before placing any of the money into investments, and would think they could figure out and keep up with it regularly (10q/k's, annual reports, etc..) to know whether to get out if needed. Financial statements are not terribly difficult, you cant fake cash flow.

The other point is, not all companies have to make it. Heck make it 20 companies, a total bust you didnt see coming would be 5%. Over 30 years it would be rounding error. Your winners just have to outrun the one or two losers. The reasoning behind blue chips is safety, their wide competitive moats, dividends and proven shareholder accountability, and enduring nature.

Mman, nice to see another Joshua Kennon reader.

 

[Mman]

Mman, nice to see another Joshua Kennon reader.

I just randomly stumbled upon his blog about 2 or 3 months ago and have spent hours upon hours reading the archives. His financial analysis is brilliant. I was already a long time Benjamin Graham/Warren Buffett fan and have spent more time than I care to measure re-reading things like The Intelligent Investor and Security Analysis by Graham, but Kennon's modern take on the same issues is fun to read. I spend my spare time trying to find new investment ideas and researching companies I'd like to buy but are currently too expensive for my taste. At some point we will have a big market correction and I'll be ready to snap up the bargains. Until then I do the best I can.

 

[Plastikos]

I just randomly stumbled upon his blog about 2 or 3 months ago and have spent hours upon hours reading the archives. His financial analysis is brilliant. I was already a long time Benjamin Graham/Warren Buffett fan and have spent more time than I care to measure re-reading things like The Intelligent Investor and Security Analysis by Graham, but Kennon's modern take on the same issues is fun to read. I spend my spare time trying to find new investment ideas and researching companies I'd like to buy but are currently too expensive for my taste. At some point we will have a big market correction and I'll be ready to snap up the bargains. Until then I do the best I can.

Me as well. When I first found that site I went through the archives and read nonstop for 2 weeks, he really is very brilliant and has a penchant for elucidating complex things very clearly. I pretty much do the same, and after looking at sector/asset class performances (often the best one year is next years worst for obvious reasons and totally scatterbrained overall) over the last several decades, I have some favored sectors and tend toward just picking predetermined companies from my list of "wanted" in the beaten down class and accumulate. This year seems great for energy for example. Rinse, repeat.

I realize everyone is not enamored with finance or the market and that is absolutely fine, but I do dislike what has become almost a knee jerk reaction about those who dare to not index only are idiots or foolish. Its a bit wild. Indexing is great and has its place, but people are forgetting that they are just types of tools, and not always the best ones. This is especially worrisome considering what many metrics, generational issues, population, etc....say for what might happen in the next decade or so. I even had about a third of my retirement in one (holdover from prior to learning more), which I sold mid february as all signs pointed toward low probability of further gains. I'll probably be purchasing several indexes soon due to valuation myself, but those are not likely long term plays just too cheap to pass up.

It seems there is a resurgence in value investing in the finance community after the great recession.