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Author: ckw Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75340  
Subject: Foolish Allocation Date: 1/7/1999 11:56 PM
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Five years ago I inherited $250,000 when my father passed away. His accounts were at Merrill Lynch, and not knowing a thing about investing at the time, I decided to follow in Dad's footsteps and just leave the money there.

WRONG!!

The broker set me up in a Variable Annuity (VA), two IRA's (one for me and one for my wife), and several mutual funds.

After comparing my overall returns for the last five years with the S&P 500's (16.15%), I have discovered that my account lagged behind at about half that rate!! And now, after paying off some debt, the account balance now stands at about $275,000.

I am a Registered Fool as of this week, and things are going to to different BEGINNING NOW!

These are retirement funds, and I would like to retire in 10 years or when the account balance reaches $2,000,000 whichever comes first.

(Let's see....Using the Rule of 72 and a 20% annual compounded interest rate, the money should double every 3.6 years. So, starting with $275,000, if it doubles once--$550,000--twice--$1,100,000--thrice--$2,200,000. And, 3 X 3.6 = 10.8 years. Wow, we're in pretty good shape with the time and money! The only thing that remains is consistently getting the interest rate, and to a Fool that should be no problem, right?)

OK, this is what I need to know now:

1) What to do with the VA? Bite the bullet, pay the tax and penalties ($8000), and make it up with higher returns investing Foolishly? OR, do a 1035 exchange and transfer it to another Annuity with better subaccounts, i.e. mutual funds?

2) How would a Fool allocate this chunk of change among the various ways to Foolishly invest?

Your thoughts would be greatly appreciated.
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Author: IndecisiveFool Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7738 of 75340
Subject: Re: Foolish Allocation Date: 1/8/1999 12:11 AM
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Two observations. Don't assume a 20% return. Set you goals lower and be suprised in the end. Factor in taxes. Unless you invest in a stock that pays no dividends and leave it there for the 10 years, there will be capital gains taxes.

..IF

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7740 of 75340
Subject: Re: Foolish Allocation Date: 1/8/1999 11:15 AM
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Greetings, CKW, and welcome. You wrote:

<<Five years ago I inherited $250,000 when my father passed away. His accounts were at Merrill Lynch, and not knowing a thing about investing at the time, I decided to follow in Dad's footsteps and just leave the money there.

WRONG!!

The broker set me up in a Variable Annuity (VA), two IRA's (one for me and one for my wife), and several mutual funds.

After comparing my overall returns for the last five years with the S&P 500's (16.15%), I have discovered that my account lagged behind at about half that rate!! And now, after paying off some debt, the account balance now stands at about $275,000.

I am a Registered Fool as of this week, and things are going to to different BEGINNING NOW!

These are retirement funds, and I would like to retire in 10 years or when the account balance reaches $2,000,000 whichever comes first.

(Let's see....Using the Rule of 72 and a 20% annual compounded interest rate, the money should double every 3.6 years. So, starting with $275,000, if it doubles once--$550,000--twice--$1,100,000--thrice--$2,200,000. And, 3 X 3.6 = 10.8 years. Wow, we're in pretty good shape with the time and money! The only thing that remains is consistently getting the interest rate, and to a Fool that should be no problem, right?)

OK, this is what I need to know now:

1) What to do with the VA? Bite the bullet, pay the tax and penalties ($8000), and make it up with higher returns investing Foolishly? OR, do a 1035 exchange and transfer it to another Annuity with better subaccounts, i.e. mutual funds?>>


Like IndecisiveFool, I believe you should set your expected return much, much lower than 20%. The long-term annualized average return since 1926 is but 11% for the S&P 500. Even the Foolish Four has only averaged a little over 16% since the 1960's. Of course, you can use what you want, but were it me I'd stick with nothing greater than 12% per year over 10+ years for any of the Foolish strategies. Too much can happen in the marketplace, so I want to make sure I don't under-save. If I earn more than I project, all the better for me.

As to cashing in your variable annuity versus doing a 1035 exchange for some better alternatives, just run the numbers based on your estimated rates of return in the available alternatives and the net proceeds you'll have invested in each. If you want to cash in the annuity, do the same. Just don't forget tax impacts if you use a taxable investment instead of the annuity. Run the numbers, and the choice should be obvious. .

<<2) How would a Fool allocate this chunk of change among the various ways to Foolishly invest?>>

There is no set allocation because it's all a matter of personal preference based on our confidence in our investing skills and the amount of market risk we're willing to absorb. Like most other aspects of investing, this is something you must decide for yourself. IMHO, you should read up on all the Foolish strategies and then decide based on your willingness to take risks and the time you're willing to spend to do the necessary research..

Regards….Pixy


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