Skip to main content
No. of Recommendations: 0
Hello Motley Team!
I am anticipating being heir to about $300,000 cash following my Mom’s death back in December. I am pondering what to do with this bucket of money. I am 46 years old, but I want to adopt a capital preservation strategy with this bucket of money (I am more aggressive with my own personal investments)
I can consider bond funds (preferably ones with less than 1% expense ratio), IBonds or any combination of safe investments that will earn more than savings accounts and CD’s. I can afford to leave the money untouched for 5 / 10 year, as I still am employed. Any suggestions?

My scenario is this:
No kids
No grandkids
No mortgage or car payment
Not married yet
Not a lot of credit card debt
No loans

So basically I have this money to invest however I wish. I do anticipate wanting to purchase a time share down the road though
Print the post Back To Top
No. of Recommendations: 0
For 50% - 75% of the money.
High Yield 5 Year Jumbo CD. (not more than FDIC limit)

http://www.bankrate.com/funnel/cd-investments/cd-investment-...

25% in REIT preferred(s) (cumulative, fairly secure, 6%+ dividend)
http://www.dividendyieldhunter.com/preferred-stocks-sorted-a...

Do more research before following any advice.
Print the post Back To Top
No. of Recommendations: 0
NOT the REIT preferreds--and certainly not individual issues. They are very sensitive to rising interest rates, individual preferreds can be difficult to sell, and you could end up losing a lot in principal. You might put a small percentage (say 10 percent) in a REIT-preferred ETF (e.g., PFF) or closed-end fund; but make sure it does not use leverage.

With US equities priced for perfection and bonds overpriced and poised for a drop when interest rates start to rise, there are not a lot of places to make easy money right now.

I would not invest the whole $300K all at once. A TIPS fund is one place to park some cash. Putting some in a muni fund (e.g., MUB) is another possibility.

A basket of so-called dividend growth aristocrats is a decent option -- e.g., VIG or SDY. (Hmmm. I should probably have more in these guys.)
Print the post Back To Top
No. of Recommendations: 3
Also: timeshares are generally money-sucking black holes. Rent other people's timeshares when you want to go someplace. Better yet, travel internationally and broaden yourself.

Hey, you asked for free advice, and so now you have some.
Print the post Back To Top
No. of Recommendations: 9
Sorry about your mom.

I did notice the word "anticipating." Hopefully things will go well in dealing with her estate.

The following 10 things are not set in stone. Probably not even set in sand. Its just thoughts from me. You may want to just ignore them all. But since you asked the question, here's my comments, for you to read or not read. Whatever you do, just make sure you make informed decisions.

1. Some states (I think PA is one) actually have a "death tax." If she died in a state with bad laws like that, or if you live in such a state, you might want to talk to someone to see if there is anything you could do now to reduce taxes and charges and fees.

2. Relatives and debtors have been known to get nasty during this time.

3. I agree that time shares are not things to buy..at least not for me. Can always find a good vacation rental on craigslist, or vbro.com, or just a google search.

4. You didn't mention your tax rate. A municipal bond fund might be a place to park it. I was just reading about an exchange traded fund (ETF) that invests in munis, I think the symbol was XMPT. I think it was yielding 5 1/5%, tax free.

5. To find a bond fund, watch for ratings to come out soon in various financial publications. Ignore the 1-year ratings. Pick a fund that leads the pack over the 5-year or 10-year period. www.aaii.com would be one place to look, or yahoo finance. Vanguard is considered the fund family with lowest fees.

6. If you do go for muni bond fund...even one that implies it is state-specific...find out how much Puerto Rico debt it has. If its a lot, I'd reccommend staying away.

7. I don't like the returns on CD's nowadays. I'd put $$ into a muni fund before putting it into a CD.

8. If I suddenly had 300K to invest...I'd put 10% into Apple shares, and 20% into the SandP 500 ETF symbol SPY..but that's just me. I recently set up Divedend Reinvestment Plans for my kids in Exxon and Conoco Philips.

9. The dollar is strong now, and the world is big. Enjoy. Take in the world figure skating championships in Canada.

10. Take up gin. Martinis are good in the winter (beefeater gin, don't be stingy with the vermouth). Gin and tonics are good in the summer (Taquernay gin, or however you spell it). That's all I got off the top of my head.
Print the post Back To Top
No. of Recommendations: 0
NOT the REIT preferreds--and certainly not individual issues. They are very sensitive to rising interest rates, individual preferreds can be difficult to sell, and you could end up losing a lot in principal. You might put a small percentage (say 10 percent) in a REIT-preferred ETF (e.g., PFF) or closed-end fund; but make sure it does not use leverage.
--------------------

He has a 5 year - 10 year time line. (important part)
Most reit preferreds have a redemption date of 5 years after that issue (so fits the time line).
If the REIT preferreds are purchased at discounts to face value, then after 5 years if they are redeemed, one gets a small capital gain.
If they aren't redeemed, then they still pay out a nice 5% or 6% yield.
Lots of strong REIT companies around that aren't likely to go bust.

Just because they are interest rate sensitive, doesn't mean they are a bad investment. If the face value falls, doesn't mean you have to sell the underlying security, sit back and collect the money, wait for redemption.

50% - 75% in a Jumbo CD offering 2.4% is nothing to sneeze at in this interest rate environment.
25% in REIT preferreds (offering 6%) to goose the return while being fairly safe is also pretty good.
The idea of a Muni Fund (CEF or otherwise) is also good. I recently invested in Vanguard NJ Long Term Muni Fund (VNJTX), these are also sensitive to interest rates.
Print the post Back To Top
No. of Recommendations: 8
First, pay off all credit card debt. No bond fund yield will come close to the interest rate of those cards.

Second, may I ask why you want to be in Bonds in the current low-yield environment combined with your 10-15 year time horizon? Do you have a huge fear-of-loss that will not allow you to survive market ups-and-downs without selling?

If you have the emotional strength to "not sell", the equity market (stocks) has almost universally outperformed the bond market over any historic 15 year period.

You don't have to get fancy, just drop the money into an SP500 ETF and you will beat bonds.

The only reason to not be in equities if you don't have the emotional strength to "hold" (and this is a good reason - my sister sold all her equity holdings in 2009 because she had "lost" a third of her money. If she had held on to them she would be dramatically up today, instead she lost a third of her nest egg by selling at the bottom).
Print the post Back To Top
No. of Recommendations: 4
Before you buy a time share--here comes yet more free financial advice---put in a Google search "time share resales". There are dozens of companies reselling time shares which people don't want--even though at one time they shelled out some serious coin for their dream vacation place.

The catch is the fees, which will kill you.

A far better idea is to just use vrbo and book whatever you want at a much better price.

--s
Print the post Back To Top
No. of Recommendations: 3
Before you buy a time share--here comes yet more free financial advice---put in a Google search "time share resales".

I personally like redweek.com but there are dozens of others. Redweek covers sales and rentals.

I own a timeshare (or two) and my best advice is only buy one if you plan to go back there every year. I own at Myrtle Beach and we take the entire family every year. For us, that makes it worth the purchase since we can book 1 year out and go back the same week (if we want, we can pick another week if we wanted to) and we don't have to worry about anything.

I also own another property that we never visit. We exchange it every year for points that allows us to go other places we want to go. We have exchanged into Aruba, St. Kitts, St. Thomas, Cancun, Cozumel, Puerta Vallarta, Palm Springs, Key West, etc.

If one wants to buy, make sure you get a deeded property (you own it, not some long term lease) that you can sell later if you wish or pass to other family members and make sure you do your research. You can often get them very cheap on the secondary market but the annual fees can eat you up so figure that cost into whether or not you should buy.
Print the post Back To Top
No. of Recommendations: 3
If you have the emotional strength to "not sell", the equity market (stocks) has almost universally outperformed the bond market over any historic 15 year period.

100% stocks vs 100% bonds, yes.

However, neither of such extremist portfolios makes much sense.

70% stocks, 30% bonds, and yearly rebalancing, just as "almost universally" outperforms either of the crazy extremes.

Benjamin Graham (founding father of security analysis, value investing, &c) pointed it out first (80 years ago...!-) though he focused mostly on 50/50 (for portfolios in the distribution phase that's actually pretty optimal, as many modern Montecarlo simulations have confirmed -- however, in the accumulation phase, 70/30 or thereabouts works better... personally I've switched to 65/35 and it's working for me -- again, personally!).

Don't forget the rebalancing bit... that's the secret sauce that makes a mixed portfolio outperform either "pure" (all-stocks or all-bonds) portfolio!-)
Print the post Back To Top
No. of Recommendations: 0
I am still having trouble weaning myself away from stocks into bonds. I also wonder if this is a good timing to go into bonds at a time when there is rumbling for rise in interest rates for 2 years now. Thanks to you, I now have a decent position in NKX (2.5% though) and I wonder how much to bump it up. Its Puerto Rico exposure has gone down and CA economy has clearly firmed up. It should be less risky. Any thoughts?

Secondly, this is my only bond holding other than a pittance in HYLD. I do have solid MLP presence (taking the tax bull by its horns and I am still alive!) along with MFO for income. Do you think I need to diversify away from NKX or I can just up the position 4x?

Thanks!

Anurag
Print the post Back To Top
No. of Recommendations: 14
I am still having trouble weaning myself away from stocks into bonds. I also wonder if this is a good timing to go into bonds at a time when there is rumbling for rise in interest rates for 2 years now.

Timing the market isn't any easier or more productive in bonds, than in stocks (or commodities, etc) -- some few wizards may perhaps be able to do it profitably a majority of the time (but even for them a success rate of 60%-plus is considered astounding, enough to rate them at the top of the league:-). Most of us, I believe, are best advised not to try.

What you say about bonds exemplifies how attempts at market timing tend to work: at the start of 2014 "everybody knew" that "of course" rates could go nowhere but up -- and so, equally as a matter of course, rates instead went down from 3% to 2.1% (on the benchmark 10-year Treasuries) in the course of 2014.

Ken Fisher calls the market "The Great Humiliator", personalizing it into a malign supernatural being delighting in humiliating as many people as possible, big or small, as often as possible.

What "everybody knows" is due to happen, in particular, tends, very often, not to happen in the market (that's why some prefer "contrarian" stances, "greedy when others are fearful, fearful when others are greedy" -- but it's rarely remembered that this Buffett advice is only addressed to investors "if they insist on trying to time their participation in equities" [[works for other asset classes too]], and to avoid the "trying to time" it's better yet:-).

So I don't have a working crystal ball either -- I just keep following the core advice from Ben Graham, Buffett's revered teacher and mentor, to own both equities and debentures and rebalance to desired targets if and when the relative allocation goes way out of whack (I do believe the best target, at least in the accumulation phase of a portfolio, may be around 70% equities to 30% debentures, not 50/50 [[which may work better in the distribution phase of the portfolio]] -- poring over the balance sheet and securities-disclosure filings of Berkshire Hathaway does suggest that's pretty much what they hew too, also:-).


Thanks to you, I now have a decent position in NKX (2.5% though) and I wonder how much to bump it up. Its Puerto Rico exposure has gone down and CA economy has clearly firmed up. It should be less risky. Any thoughts?

It still is my favorite way to get exposure to California munis, with a well-proven management team. And I like Nuveen even more now that TIAA-CREF has smoothly acquired and integrated them.

However NKX's leverage, while reasonable and well-managed, does inevitably increase expense ratio, effective duration (thus interest-rate risk), and volatility (the unavoidable downsides of improving yield and amplifying capital gains in good times, as margin always will:-).

So if you want or need to own plenty of CA munis (I do, both because of the positives you mention, and because my 401k is chock full of other debentures that would be taxed at full income rate if I held them in the taxable account), rather than just increasing the NKX position, you might consider only adding some there, and more to a non-leveraged, otherwise-equivalent fund.

In particular, NXC has no effective leverage, vs NKX's 35%. As a result its yield is "only" 4.38% (vs NKX's 5.78%) but in tax-free terms I'm fine with a mix of such yields:-). In good times, the leverage of course helps NKX: in one year its NAV grew +21%, vs NXC's +13% (it was quite a nice year and I'm glad my suggestion helped you enjoy some of these gains -- NKX unit share price grew less due to rising discount to NAV, see below).

But times aren't always good -- lean times will come (nobody knows exactly when!). At such times, the total expense ratio of 0.38% for NXC will help it a lot, compared with the 1.59% for NKX -- 120 basis points may look piddling in good times, but they're really substantial (the difference is almost all in the cost of NKX's leverage -- that 1%+ or so it pays for margin debt &c, not a bad rate at all but still higher than the 0% NXC pays as it has no leverage:-).

Admittedly I'm not alone in feeling this way -- NKX sells for more than 7% discount to NAV, i.e still pretty attractive!, while NXC these days sells at par or actually a few basis points above (0.30% premium if I recall correctly, when last I checked) -- nothing terrible but no juicy discount either, at this time.

Nevertheless I would consider holding a mix of NKX and NXC rather than just NKX -- e.g, instead of quadrupling your NKX from 2.5% of port to 10%, what about splitting the new money and going, say, 6.5% NKX, 3.5% NXC. That's about the ratio I'm using but of course a different mix might work better for you, as you know I'm not professionally qualified to offer any advice about this:-).

BTW, 10% of total port in any single State's munis is as high as I'd ever go, and in fact my personal exposure is less than that and I'm not looking to increase it at this time; I prefer to hold most debentures in the 401k, where taxable ones are better.

That's definitely where I hold my HYLD, still overweight despite the slide they've suffered in Sep to mid-Dec -- like many others they were blindsided by the market's "sector panic" on energy, with sell-offs not limited to the fly-by-night, undercapitalized, far-too-risky shale E/P minnows (where HYLD never risked our money) but extending to rock solid firms such as Canadian oil sands players with positive FCF. Ah well, I still believe in the management team and strategy, so I beefed the position back up when it clearly found its bottom in Dec, and I'll be patiently waiting, consoled by the nice coupons (but in a taxable account I wouldn't find those all that nice, once Sacramento and DC were done with them:-).

But if you want to use your 401k for other things, then I'm not sure what to suggest. Just don't act under the assumption that rates can go nowhere but up! France's 10-year treasuries now yield less than 0.6%, about 1/3 as much as US and UK ones -- do you really think France's economy and politics are in so-much-better shape than in the US and UK, as to warrant that huge gap?! I personally have my doubts -- so, if sub-1% yields can happen in Paris, why not in NYC or London?-) I know, I know, inconceivable!, but, https://www.youtube.com/watch?v=Z3sLhnDJJn0 ...

As for MLPs, I see I was lucky going all-in into KMI for all of my desired MLP-like exposure -- I was already overweight KMI, and when they announced they'd be purchasing all of their subsidiaries, rolling them all into a C-corp with amazing dividend-growth prospects, I liquidated all similar exposures and poured it all into KMI. Apparently I was lucky since over the last 6 months KMI's +16.5% vs AMLP's -3.5% (I take the latter as a reasonable proxy for "the MLP sector").

Yeah, a C-corp's dividend, while qualified and thus taxed a bit better than ordinary income (at Fed level -- CA doesn't care, sigh:-), isn't anywhere close to being as tax-favored as MLPs. However, the tax pluses don't really go away, they just shift: the reason KMI can credibly promise such wonderful dividend increases is in good part because they'll now be enjoying, at corporate level, all that luscious amortization and depreciation to use against their corporate taxes.

And, MLPs' "return of capital" sapping your cost basis is a Damocles' sword, as long-term owners of KMP found out in the big tax hit they took upon KMI's acquisition thereof. Other MLPs can also be acquired or otherwise wound up -- KMI might do some of the acquiring as bargains present themselves if oil price stays very low for long, private equity is rarin' to go there, etc -- and if/when that happens those "tax advantages" long-term holders enjoyed along the way may also be revealed as not-really-such-bargains... not to mention the political risk that a grand bargain might be reached to put corporate taxes on a more logical basis, including doing away with the "tax advantages" of REITs, MLPs, BDCs, ...

I know, "inconceivable" -- but then, so was the removal of canroys' tax advantages, before the "tax fairness plan" and resulting "halloween massacre". And BTW, Flaherty, the finance minister who made it happen, was a conservative (he was also the guy who later introduced tax-free savings accounts, the Roth-like vehicle available to all Canadians in addition to their IRA-like RRSPs, without most of the constraints that hobble Roths in the USA).
Print the post Back To Top
No. of Recommendations: 0
Thanks much, Alex!

Anurag
Print the post Back To Top