Folks,I'm in need of some advice here. My current situation is as follows:45 yrs oldmarried3 young childrenI am the sole breadwinner, wife is home with the kids...not headed to work anytime soon for some very good reasons.Debts $300K on a $500K homeCar Loan: $16K @ 1.9% 3yrs leftAssets: $700K in Retirement Funds (100% equity-based mutual funds) $15K in a Brokerage acct ( I currently put $400/month into Total Stk Mkt Index Fund in this acct) $130K in 529 plan for the kids $90K Emergency fund in MM earning .9%(yep, that's right)I currently have term life insurance on both my wife and myself( w/ adequate coverage)The QUESTION: I'm looking for my next step into investment, but unsure of where to go. The DOW currently sits at an all time high of 17000. I have 90K basically sitting on the sidelines, losing ground to inflation.What should I do with the next $10K that I want to invest? Where? How?I am maxing out the 401k, getting the largest possible match. My earnings don't qualify me to contribute to a Roth IRA.I don't want to buy bonds in a low-interest rate marketWhere do I go with some measured risk and get a decent return on my money?
Other than that $90K, I don't see much of anything wrong.This guy http://www.controlyourcash.com/blog/ makes a good point about E-funds. He says don't have one (other than a couple thousand for a cash buffer), that you should keep your money invested. What kind of emergency is going to require $90K? You are very heavily weighted in retirement accounts, I assume that is 401K & IRAs. This will become a P.I.T.A. in retirement, since all withdrawals will be taxed as ordinary income. I would not add any more money to the 401k than it takes to get the maximum employer's match. Do *not* add more than that, and do not add any more to IRAs.Put your money into taxable stocks where the profits will be capital gains instead of ordinary income.-------------How much work do you want to put into it? If basically none: FundAdvice.com: "The ultimate buy-and-hold strategy"http://www.fundadvice.com/articles/buy-hold/the-ultimate-buy...http://www.merriman.com/bestofmerriman/ultimatebuyandholdstr...If a modest amount of work: Gary Antonacci: Risk Premia Harvesting through Dual Momentumhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2042750That paper is *very* heavy reading.A much simpler explanation is at http://www.scottsinvestments.com/2012/12/21/dual-momentum-in...orFaber's Paperhttp://ssrn.com/abstract=962461=====================I set all my (grown) kids to do the dual-momentum thing. It's easy and makes sense. And best of all it automatically shifts you out of stocks in a bear market. Once you get it figured out, it only takes 1/2 hour of work once a month.
Thanks for the reply.90K Emergency would be me without a job, supporting a family of 5 for a year.Yes, the Retirement is all in 401K and IRA. Currently, I add nothing to the IRA, and hte 401K is maxed out and the company match is maximized, as well...but nothing is invested in the 401K beyond the annual limit.
90K Emergency would be me without a job, supporting a family of 5 for a year.Exactly. And for that reason, I would leave it where it is earning that piddly little amount.I don't agree that you don't need much of an efund because things do happen, and things like extended unemployment tends to happen when other bad things are also happening such as the market tanking.I'd leave that $90k there for your efund and concentrate on putting other funds into other investments to reach your financial goals.BTW, I've been unemployed twice for extended periods of time with the last one being just one week shy of a year, and because we had a hefty efund, we didn't worry about things like how we were going to pay the mortgage or the kids' college, although I will admit that I told them that their college money would be used if we ran out of efund before I got another job, and they would have had to pay more for their education. Thankfully, that wasn't needed, but the last thing I needed while I was job-hunting was to be worrying about if we were going to run out of money before I landed the next job.
The DOW currently sits at an all time high of 17000.Personally I do not put much faith in projections based on the Dow. You imply that the stock market is cyclical and from a high it must crash.I don't see much value in this argument. This is a standard newspaper columnist subject that they use every time the Dow hits a new high or even if it goes up. We have been hearing this story for months.What matters is: do you believe the US economy will continue to recover and grow or not? If yes, continue buying good quality stocks and hold on to them. If the market turns against you, $8 discount broker commissions make it inexpensive to get out. If you are up after a few months, you have a buffer to decide before new investments turn to losses. Since the "OMG stocks are too expensive and we much have a major correction" stories started the S&P is up over 20%.As to emergency funds, I think you have many options if you have assets. Most short term emergencies can be covered with credit cards and you have at least a billing cycle to work out which of your assets is best able to fund the need at the moment. When you have assets, it is not necessary to have your emergency fund in money markets.
90K Emergency would be me without a job, supporting a family of 5 for a year.That's not an emergency. That's just an unpleasant situation.Let's look at the definition. "A sudden unforeseen crisis (usually involving danger) that requires immediate action." A runaway truck on your bumper is an emergency -- a runaway truck two blocks away isn't.A grocery bill 12 months in the future isn't an emergency.What pauleckler said about Efunds is right on, and is pretty much what the guy at controlyourcash says.Something that happened to us this weekend was right on this point. Saturday about 6PM the outside AC compressor stopping running and just made a loud (LOUD!) hum and that's all. (Try calling an AC place on Sunday morning -- he shouts at his wife to get on the other line and call the Mercedes dealer.) When our furnace went out on our first house, 1 month after we bought it, we had to go to the bank to get a 2nd mortgage to buy a new furnace. This time we could just write a check. If it had cost more we would have just called our broker to sell some stock and send us the money.With $105,000 in liquid non-retirement funds, all you need is cash is a few thou -- 1 or 2 months of mortgage payments, car(s) payment(s), utility bills, groceries. The rest in liquid stocks -- properly diversified, of course. If you lose your job, start selling the stocks.
As a parent with, as of this fall, 2 kids in college (one out-of-state, one out-of-country), you probably need to beef up your 529 plans. Non-need-based scholarships are largely (not entirely) a thing of the past, and I would hazard a guess that you are not going to meet any need-based criteria unless something drastic happens.Might look into some flavor of health savings account. Some states have plans that you can contribute to and get state tax deductions/credits.For investments, we, too, have considerable amounts in the stock market and have decided that some real estate would provide suitable diversity. We are in the process of acquiring (over several years) 2-4 rentals, as well as some bare land. This is not for everyone, but it suits us.Kathleen
I'd look for more of a middle ground here. I agree with Ray that most true emergencies are not going to require all of what you have set aside in an e-fund all at once. Some portion of it, sure. On the other hand, I'm not comfortable putting your entire e-fund into the markets until you have enough set aside to actually consider retiring. The most likely need for that much money is unemployment, and unemployment is MOST likely when the economy is bad and stocks are down. If you put the whole 90k in the markets, then the economy stumbles, the markets are down 33%, and you lose your job, your 90k unemployment fund is down to a 60k unemployment fund. I would set aside perhaps 10k of your e-fund and keep that in money markets. The rest I'd stick in 5 year CDs. A quick check of Bankrate.com shows 5 year rates just over 2%. That's twice the 0.9% you're getting right now in MM accounts (which is a darn good rate for a MM account, BTW).If you really have a need for the money, the early withdrawal penalty for breaking into the CD is a small price to pay for access to your money. You'll more than make up for any potential penalty in the first year of holding a CD instead of a MM fund. (The early withdrawal penalty is typically 3 months of interest, but check with the bank to get the correct info for the CD you're considering.)If you don't like putting it all into a 5 year CD at today's rates, perhaps a CD ladder would work for you. Put 1/4 of your money into each of a 2, 3, 4, and 5 year CD. Then when the shorter term CDs roll over, move them to 5 year terms. Once set up, you'll have penalty free access to 1/4 of your money on a regular basis.--PeterOh - the next $10k to invest? I'd toss that in your brokerage account.
You are very heavily weighted in retirement accounts, I assume that is 401K & IRAs. This will become a P.I.T.A. in retirement, since all withdrawals will be taxed as ordinary income. I would not add any more money to the 401k than it takes to get the maximum employer's match. Do *not* add more than that, and do not add any more to IRAs.Put your money into taxable stocks where the profits will be capital gains instead of ordinary income.You could avoid all tax by using a Roth 401k. Yes, contributions are after-tax but they are also after-tax to a brokerage account. PSU
As a parent with, as of this fall, 2 kids in college (one out-of-state, one out-of-country), you probably need to beef up your 529 plans. Non-need-based scholarships are largely (not entirely) a thing of the past, and I would hazard a guess that you are not going to meet any need-based criteria unless something drastic happens.I would be cautious putting too much in 529 plans. College education doesn't need to be totally financed with a 529. There is no guarantee all three of his kids will attend college.PSUalso has two kids in college
As a parent with, as of this fall, 2 kids in college (one out-of-state, one out-of-country), you probably need to beef up your 529 plans. Non-need-based scholarships are largely (not entirely) a thing of the past, and I would hazard a guess that you are not going to meet any need-based criteria unless something drastic happens.I would caution on doing this. Personally, I did not find 529's all that helpful, but I also don't have any tax advantages in my state, and I realize that makes a difference to folks. I would be more inclined to save that additional college money in taxable accounts. That provides maximum flexibility in that the money can be used for college or for anything else, including long term unemployment, and I did find that having that flexibility was very much appreciated when I was unemployed for a year while my kids were in college. As a side note, even with minimal income coming into my house during that time, my kids did not get one cent more of financial aid beyond the student loan offerings to which they were already entitled.
90K Emergency would be me without a job, supporting a family of 5 for a year.We put most of our emergency fund in Ibonds. Has to be converted gradually as they funds are not accessible for 12 months. If you cash them in within the first 2-5 years, then you lose 3 months interest. These days with the limits on amount of Ibonds you can purchase within a year, it would automatically have to be gradual investment for you.The rate at this time is only 1.94%, but can go up with rising inflation. And if you cash them in for higher education, you may be exempt from paying income tax on the earnings, though that is no doubt income dependent. Pay close attention to how the bond is recorded too. There are minimum age requirements at purchase for the education benefits to kick in.Our thought was the bonds made more money than the money market, and was very flexible to cash in after the first year. The hope is that you won't need the emergency funds, and by the time the kids are in college, you can cash them in tax free for tuition costs. There is no state tax on Ibond interest, regardless of what you cash them in for.It is a tougher sell today with the lower rate, than it was when we bought them. We got them at around 9% and they are still earning about 6%. Yes, lower inflation can mean lower rates as well, as the rate is composed of a base rate and an inflation rate, with the base remaining stable. We also keep a line of credit on our home for "emergencies," really a cash flow insurance policy that allows us to keep our funds fully invested while dealing with unexpected cash outlays. Just be aware that banks can pull the line of credit if your economics change. IP
Annual limits on ibond purchases -https://www.treasurydirect.gov/indiv/research/articles/res_i...
I wouldn't worry too much about "the market" being at an all time high. You are investing incrementally, and I assume you have a long time horizon. Keep putting money into that index fund, add a small percentage of bonds if it makes you feel better, and forget about it for 20 years.What happens in the next year or two isn't your concern. In fact, a market crash right now would be the best thing that could happen to you.I've made more money since March 2009 than I have in any other period of my investing career. I kept on buying through the crash of '08 and am sitting pretty now.
Oh, and the 50% haircut I took at the time wasn't pleasant, but it's recovered and oh so much more.
Keeping working, keep earning, keep saving, and keep investing as you have been. There is no magic dust, just working at it is what does the trick. Good luck.
I'm in agreement with using taxable accounts. We are retired and drawing most of our income from dividends. Speaking with my retired BIL who is taking their income from TIRAs, which like you is where they have saved most of their retirement money, his tax bill on a similar household gross income as ours is over twice my tax bill. Much of our dividends are qualified, which means these dividends that are within the 15% Fed tax bracket are tax free...at least under current rules. Who knows what the tax rules will be in 20 years.If you do use taxable accounts, I'd recommend holding growth oriented ETFs that invest in consumer staples or non-cyclicals, as these tend to be the most recession resistant. Running prospective ETFs prices through the 2008-2010 recession should give you an idea of how it will hold up. But keep in mind that if your modified AGI exceeds $250K, you may be subject to the 3.8% surtax on realized investment income over this amount.You don't mention your auto and homeowner's insurance coverages...but if one holds significant taxable investments, you really need to add an umbrella policy to your HO/Auto liability coverage. For most, they are relatively cheap for another $1 to $2MM of coverage over the HO/auto coverages.And keep in mind that the amount of emergency liquidity you maintain is there to meet unexpected emergency costs your regular household cash flow and insurance won't cover. The lightning bolts here can be a car that dies (or is killed), a death in the family (I hate mentioning such things...but they are a risk) and unemployment due to extended illness/injury (a disability policy to cover fixed costs can provide some relief). Any emergency savings held in addition to these is really a sleep well at night factor, which is more important to some than others.You don't mention medical insurance, but if you're over the RIRA contribution limit income, my guess is you have comprehensive coverage through your employer.BruceM
Curious, why are you carrying a car loan? It's 1% above your stated return on your E Fund, why not take 16K and pay it off? You mentioned you're not interested in bonds - so I guess that rules out TIPS. Would that apply to laddering CD's?
Bruce; good info and suggestions. <If you do use taxable accounts, I'd recommend holding growth oriented ETFs that invest in consumer staples or non-cyclicals, as these tend to be the most recession resistant. Running prospective ETFs prices through the 2008-2010 recession should give you an idea of how it will hold up. But keep in mind that if your modified AGI exceeds $250K, you may be subject to the 3.8% surtax on realized investment income over this amount.>I'd like to do more homework on this because I think good quality etfs will hold their own in the short and long term. Where to go to get this kind of info? thanks in advance if anyone could comment about this.soy
SoyI use the ETF database, that has a listing of all available ETFs by category. So in the case of growth ETFs, which are very tax efficient, simply go down their category lists and look at ETFs with 'growth' in their names. Yes, you'll likely still get some dividend distribution, but they should be small..relatively.I didn't mention it earlier, but its best to hold the most tax efficient investments in taxable accounts (such as growth, small cap, emerging markets and muni bonds) while holding the higher income securities in your tax deferred 401(k) or IRA, such as REITs, taxable bonds, high dividend companies, preferred stock and so forth.http://etfdb.com/etfs/BruceM
I think good quality etfs will hold their own in the short and long term. No they won't.An ETF won't "hold it's own" any better than the stocks that it contains.
<An ETF won't "hold it's own" any better than the stocks that it contains.> Not sure that came out right what I mean is that since if an etf can contain stocks from different sectors, countries, etc. it would be less volatile than an individual stock. I am interested in making a portfolio of 5-8 different etf's. and putting it more or less on auto pilot. Rebalance every quarter.
Not sure that came out right what I mean is that since if an etf can contain stocks from different sectors, countries, etc. it would be less volatile than an individual stock.Ah. Yes, that part's true. Except that most ETFs are not like that at all. Most ETFs are focussed on some particular sector, asset class, country, etc. I am interested in making a portfolio of 5-8 different etf's. and putting it more or less on auto pilot. Rebalance every quarter. Auto pilot and frequent rebalancing are in contradiction. Also, when I retired I did researching on rebalancing, and ran across a number of papers that said the optimal rebalance interval was 5-7 years. Anyway, if you are periodically adding ot withdrawing money, you can keep it rebalanced automatically by chosing which ETF to hit.If you really want a diversified, no-hands-on, autopilot approach, take a strong look at this:FundAdvice.com: "The ultimate buy-and-hold strategy"http://www.merriman.com/bestofmerriman/ultimatebuyandholdstr...
<I did researching on rebalancing, and ran across a number of papers that said the optimal rebalance interval was 5-7 years>I did not know this, I am going to have to retrain myself but that is what I want to spend less time messing with screening and watching stocks so much. I'm at the point if you don't enjoy it then time for another plan. I'm not beating what a diversified etf portfolio would deliver. Maybe I keep out 10% to play with. I have seen those sites before but need to check them again. thanks, soy
I'm in agreement with using taxable accounts. We are retired and drawing most of our income from dividends. Speaking with my retired BIL who is taking their income from TIRAs, which like you is where they have saved most of their retirement money, his tax bill on a similar household gross income as ours is over twice my tax bill. Much of our dividends are qualified, which means these dividends that are within the 15% Fed tax bracket are tax free...at least under current rules. Who knows what the tax rules will be in 20 years.A low tax bill in retirement is a huge wasted opportunity for those of us with a high marginal tax rate. For example, I could pay 30% plus tax rates to covert my TIRAs to Roths and have next to zero taxes in retirement. Personally, I think the far better alternative is to max out our tax deferred accounts and withdraw our living expenses at an effective rate below 15%. YMMV of course.-murray
Get enough ETFs from enough sectors and you have recreated the market.IMHO, if you're going to invest in several ETFs that are mainly US stocks, it's easier to just by a broad market fund. An S&P 500 ETF plus something like a Russell 3000 or 5000 ETF would give you close to the same exposure as a large cap ETF and a mid cap ETF and a small cap ETF. Ditto for buying a bunch of sector ETFs - once you get more than 5 or 6 sectors, you've probably effectively got the whole market.--Peter
"The ultimate buy-and-hold strategy"http://www.merriman.com/bestofmerriman/ultimatebuyandholdstr...Both the article and link have been updated to:http://paulmerriman.com/the-ultimate-buy-hold-strategy-2014/...Jim
Not sure that came out right what I mean is that since if an etf can contain stocks from different sectors, countries, etc. it would be less volatile than an individual stock. I am interested in making a portfolio of 5-8 different etf'sI'm not sure what the advantage is to having that many ETF's. At some point they're all just going to recreate the same portfolio of stocks in some modestly different amounts.I have three ETF's. Two are general, broad, and exist simply because I didn't have better ideas for specific stocks (of which I have about 20.) The third is strictly foreign/emerging markets, where I don't have the expertise - nor the interest - nor the ability, given the disparate foreign lands in which their companies exist - to follow them. But I do want some of "that" in my bag, so a low cost "foreign" etf seems to fit the bill.As I discover individual companies with reliable dividend payouts and good future prospects, I will withdraw some monies from one of the general market etfs and apply it specifically. Otherwise I view them mostly as a parking spot.
Some good ideas about how different people use etfs for investing. I've been mostly in individual stocks for years but am realizing now that I would probably be better off in etfs because I don't really enjoy nor have the expertise to do the homework required to own 45 different stocks like I do.
As I discover individual companies with reliable dividend payouts and good future prospects, I will withdraw some monies from one of the general market etfs and apply it specifically. Otherwise I view them mostly as a parking spot.FWIW, there are a quite number of ETFs that invest in dividend paying stocks.
FWIW, there are a quite number of ETFs that invest in dividend paying stocks. Yes. The two that I have are VIG and SDY, both dividend oriented etf's. The overall payout is a bit less than I get on my own (and there are expenses, although they are quite minimal) but they give me broad spray (with some overlap, obviously) while keeping true to the "dividend" meme that I've been on for the past six years or so.
"The two that I have are VIG and SDY, both dividend oriented etf's"You know it seems there are many diversified etf portfolios out there of the "set it and forget it" type or passive investing more or less.I'm looking for a similar diversified portfolio but leaning heavily towards income. Has anyone seen something like this? Perhaps that type of portfolio would not be diversified enough to be reasonably stable?I realize the type of stocks they would likely hold would be mostly large cap companies. Perhaps an REIT etf, a MLP etf, a BDC etf, etc. comments..........thanks in advance.......
I have some sdy and vpu. The vpu is still yielding about 3.3% and may hold up well if and when we have the next big crash. Is that too conservative for you?
I'm looking for a similar diversified portfolio but leaning heavily towards income. Has anyone seen something like this? I see it every time I look at my brokerage statement ;)http://boards.fool.com/here-is-our-list-its-not-screened-for...I started with the Dividend Champions spreadsheet that dfish uploads onto the Dividend Growth Investing page here at the Fool. Then I took a short term subscription (again) to Valueline and picked a bunch of stocks and printed them out.Then arbitrarily I knocked out a couple of companies I don't want to have anything to do with (tobacco, for instance, which helped me wreck my lungs). Then I looked at P/E's and all that falderall, and then I bought a healthy slug of those that were left.At the time the payout was well over 4%, although since prices have risen the "percent" will probably be a little less now. I don't care, I'm not after "yield to get rich", I'm after "reliable dividend stream to live on" which is what I have.I avoided MLPs because I had two a decade ago and it was a nightmare at income tax time. I have Reits only in the healthcare field, which I think will hold up even in recession, and the rest are corporate stalwarts, good reliable dividend payors across many many years.We also have a few non-dividend payers left over from previous investing strategies and which I do not want to cash out because of tax implications (BRK is one that comes to mind quickly) and I have a couple of non-dividend payers that are just there for fun (Facebook, which I got at $17.) But yeah, you can avoid all the muss and fuss with a couple of ETF's; there are many which are oriented towards income and which give you tremendous diversity, although in any market swoon - as we have seen - they all seem to swoon at once, eh?
jgc, goofy:Thanks much for your suggestions I'll look into them and do some other looking around also.
But yeah, you can avoid all the muss and fuss with a couple of ETF's; there are many which are oriented towards income and which give you tremendous diversity, although in any market swoon - as we have seen - they all seem to swoon at once, eh?The only thing that goes up in a panic is correlation.
I would pay off the car an house an get completely out of debt, why pay the bank all that interest, look around town most of the big. nice buildings are banks. I an 46 have no debt with 2 houses no car payment lots of college fund. "live like no one else, so later you can live like no one else"
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