Recent inheritance - 100% in VFINX right now? (S&P500)

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Recent inheritance - 100% in VFINX right now? (S&P500)

Postby bobbobobbo » Mon Feb 25, 2013 8:47 pm

I have recently inherited a large sum of money from my father in the form of stocks and real estate. Stock-wise, he managed his own portfolio, with around 50 stocks, mainly large cap. No bonds, <5% cash. Very aggressive portfolio. I have left it since last July, in which it has grown a considerable amount.

I have been hesitant to touch them. I am certain I do not want to pay someone for active management. I am mid twenties and would like to invest for the long term, risk is not as much of a concern. I have heard anything and everything from many different sources. The one I like the most is Buffett's advice of investing everything in a low cost index fund, and letting it sit. Then perhaps taking 10% and putting it where I would like.

Is this a sound idea? I plan on selling over time and putting the proceeds into VFINX. Or perhaps all at once. I simply do not know when to sell these current stocks... and when to jump into the index fund...

Any help is GREATLY appreciated.
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby bertie wooster » Mon Feb 25, 2013 8:59 pm

I'm not an expert on inheritances but I believe your cost basis will be the value of the stocks when you inherited the funds. So you'll have significant gains present that you'll have to pay taxes on. I think you should bite the bullet and pay the taxes (as long as they are all long term). Then paydown your debts (if you have any). Consider if you want to set aside any money for future education and/or a house downpayment (or vacation or whatever).

Once you've done that put the funds into a simple portfolio. You could just go with a target retirement fund, but this will put tax inefficient bond funds into your taxable account which could significantly increase your taxes when you get older.

My preferred option is the following allocation (I'd go with 60% stocks/40% bonds - but you should modify to fit your personal needs).
Stock:
50% Total Stock Market
50% Total International
Bond:
100% Total Bond Market (or a municipal bond fund if your income is high)

Direct all distributions to Prime MM and reallocate annually.

This is simple, extremely well diversified, and very easy to manage.

Good luck!
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby BolderBoy » Mon Feb 25, 2013 9:06 pm

Sorry to hear of your father's passing.

We don't know much about you. If you are truly COMPLETELY unafraid of risk, then a 100% stock index fund such as the 500 Index is okay, I guess.

Something to consider: When you inherited those securities you also inherited their new basis which is their prices on the date of your father's death. Your capital gain would be from that date value forward. You'll owe taxes on that gain when you sell.

You can mollify your risk quite a bit by going with a stock/bond portfolio mix. Some of the best gurus have said NOT to go 100% in either direction.
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby bobbobobbo » Mon Feb 25, 2013 9:30 pm

Thank you for your answers and kind words.

The cost basis is the value when I inherited, correct. The taxes paid will only be on the capital gains. I'd rather bite the bullet and do it now rather than down the road. It doesn't seem feasible to keep my father's stocks as my current setup is quite risky with individually picked, unmanaged stocks.

(I will consider the 60/40 portfolio. Seems like a straightforward plan of action, I have been recommended it before.)

I am not completely unafraid of risk... yet at 25 years old I am quite young, fortunate enough to consider more risk. I have set an amount aside for further education/housing etc. My portfolio is purely for long term investment, it will not be touched for some time. Full allocation in an SP500 index fund doesn't seem too outrageous to me. As well seems to correlate with my father's ideals (higher risk) and I will not have to actively manage it. Do note I still gain considerable fixed income from real estate ventures... roughly 50% net worth in apartment complexes. Which may explain my father's choice to avoid bonds.
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby KyleAAA » Mon Feb 25, 2013 9:58 pm

We don't have enough information to give you any meaningful advice. I do not think the S&P 500 index fund idea is a good one - it's far too undiversified, but without more information I can't really say much beyond that. How large was this inheritance relative to your goals? Do you plan to live off the income int he meantime or is your goal to maximize its value some number of years down the road? What is your current income relative to your expenses?
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby BolderBoy » Mon Feb 25, 2013 10:04 pm

KyleAAA wrote:I do not think the S&P 500 index fund idea is a good one - it's far too undiversified,


I was thinking about suggesting Total Stock Index as it is as diversified as you can get in the USA, right? But if you look at the return graphs of the two indexes, they are very close. Personally, I go with TSMI over 500 Index for diversity reasons.

But it sounds like he isn't going to go 100% with anything and that is the best decision at this point (until we know more about him.)
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby Gill » Mon Feb 25, 2013 10:33 pm

bertie wooster wrote:...(as long as they are all long term).

The inherited securities are automatically long term.
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby Scooter57 » Mon Feb 25, 2013 10:42 pm

Take your time. Read the investment classics. Talk to an accountant and become aware of your state's way of taxing various investments. Don't make any moves until you understand what you are doing better than you do now.

Everyone has an opinion, and a lot of people who give investment advice have something to sell you, if only the illusion that they are experts.

If you don't feel competent to handle a large sum, it might be worth paying an advisor who has a track record and charges a reasonable fee while you learn more. Yes, you will give up some earnings, but you won't make huge mistakes, either.

Most people posting here are middle aged with more life experience. So their advice might not fit your situation.

If I were looking for an advisor, I'd pick one who uses the DFA funds. There is a referral service on the DFA site.

I've been dealing with an inheritance in the same time frame and trying to decide the best approach, too. The book, The Four Pillars of Investing, is a great place to start educating yourself.
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby bobbobobbo » Mon Feb 25, 2013 11:12 pm

I will definitely do more research. As well yes it's astonishing how many people have investment advice with ulterior motives. I feel competent in myself with the right direction, I was just looking for something straight forward, that I could leave untouched for an extended period of time.


Further I apologize for the vague responses. My current income exceeds my expenses and I do not plan on living off investment income at this time. I do not have specific goals, yet I would like to maximize the value of the investment, held for the next 10+ years.

I did not speak correctly when I claimed 100%. Total net worth, around 30% in real estate in the form of apartment complexes, as well as 8% in liquid form. (I understand in time I will become less diversified if I don't consider further real estate/bonds/other fixed income)

So with the $$ held at my firm, 100% (~60% of my net worth) fully invested in a low cost SP500 index fund, spread throughout my brokerage/IRA accounts, held for the next 10 years at minimum. Is what I'm looking to do...
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby FinancialDave » Tue Feb 26, 2013 1:25 am

Make sure you get a report from the executor on the value of EACH asset on the date of your father's death. You will need this later when you sell.

Second, don't do anything in a rush. Leave it set for a year and develop a plan --- which I think is what you are doing now, so good job!

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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby Grt2bOutdoors » Tue Feb 26, 2013 9:37 am

KyleAAA wrote:We don't have enough information to give you any meaningful advice. I do not think the S&P 500 index fund idea is a good one - it's far too undiversified, but without more information I can't really say much beyond that. How large was this inheritance relative to your goals? Do you plan to live off the income int he meantime or is your goal to maximize its value some number of years down the road? What is your current income relative to your expenses?


S&P 500 represents 75% of the Total Market - how is that undiversified?

OP - You've been given sound advice, take your time (sounds like you are).
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby KyleAAA » Tue Feb 26, 2013 10:30 am

[quote="Grt2bOutdoors"]
S&P 500 represents 75% of the Total Market - how is that undiversified?/quote]

The total market is also too undiversified. I would never recommend somebody invest without at least a little in foreign stocks and bonds.
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby nydad » Tue Feb 26, 2013 11:46 am

I would just consider this part of your current portfolio. How is the rest of your portfolio allocated? Have you decided on an overall asset allocation?

Since you have significant RE exposure, you may want to skip buying REITS.

You should also think about tax efficiency. Are you maxing out your 401k and your IRAs or other tax deferred space? Do you have any children/plan to save for college savings in the future? I'd first try to get as much of this money into tax deferred space as you can, by maxing out the 401k and filling up your IRA - you can still make contribs to IRA in 2012 I believe.

Suppose you decide on a 10% bond allocation. So, fill up your 401k/IRA with bonds. Then, you have to decide on international/domestic split - suppose you choose 50/50.

Then, you'd fill up the rest of your 401k/IRA with total stock market, and then fill up the rest of your taxable with VG total stock and VG total international at the proper proportions. This is a simple, 3-fund portfolio that should serve you well. I think bogleheads prefer total stock mkt vs s&p 500 because total stock market has broader exposure to small caps at their market weight, and most consider that exposure outside of the US provides useful diversification (hence, total international)

Take your time before selling all of the stocks however - this could increase your tax bracket depending on how much the capital gains are, so you may want to space out sales over a year or so if that is the case. Make sure you keep good records on the tax basis, for a long time, in case the IRS asks questions.

I went through a similar issue 3 years ago - it takes some time and careful planning but I agree it's better to get out of individual stocks as much as possible and you may as well bite the bullet now (however, I do note that a portfolio of 50 stocks will behave somewhat similarly to a S&P 500 index however with a bit more variance, but it's not as risky as 100% in a single stock, so you don't need to rush)
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby Meg77 » Tue Feb 26, 2013 1:10 pm

Well I don't know your current situation but I just want to highlight the basic steps you should be taking first:

1) Keep 6-12 months of expenses in cash in an Emergency Reserve fund. This will give you flexibility to keep your other assets invested without havign to risk selling at a bad time for some purpose that pops up.
2) Max out all retirement plan options available to you (401k and Roth IRA if possible).
3) Also keep in cash any funds needed for large purchases in the next 3 years (car, home, tuition, etc).
4) Then use any excess income/assets to invest in a taxable account consisting of 3-5 index funds (VG Total Stock Market Index, VG Total Internaltional Index, and VG Total Bond Market Index to start).
5) Tap the cash and/or taxable investments as needed to start businesses or buy real estate throughout your life; otherwise keep adding to them and leave them alone except to rebalance annually.

That's pretty much it. Most people don't get through Step 2. Congrats. Your worry seems to be that your father's portfolio is too aggressive, but it doesn't sound much more aggressive than having all the money in the 500 index fund. You'd be going from 50 large cap stocks to 500, but that doesn't change your risk profile or diversity very much at all. It may not even lower your costs if the 50 stocks are in a brokerage account where you only pay to buy and sell. It still is a fine idea to diversify the portfolio by adding itnernational and bond exposure, but in general I wouldn't worry too much about timing on that. Bite the bullet whenever you get comfortable, but rest assured the money seems to be in a good place in the meantime. Taking cap gains while and when your income is at a low point is what I'd consider with regard to timing - not what the market is doing.
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby FinancialDave » Tue Feb 26, 2013 1:38 pm

KyleAAA wrote:
Grt2bOutdoors wrote:S&P 500 represents 75% of the Total Market - how is that undiversified?/quote]

The total market is also too undiversified. I would never recommend somebody invest without at least a little in foreign stocks and bonds.


Have you considered just how much of the SP500 revenues come from overseas -- I believe the number was something like 46% back in 2011 -- I personally think this is more than a "little" foreign exposure!

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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby tadamsmar » Tue Feb 26, 2013 1:45 pm

Meg77 is giving good advice.

Have you fully funded your 2012 Roth for you and your spouse? If not, then you should consider doing that before the deadline in April,
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby ruralavalon » Tue Feb 26, 2013 1:59 pm

Welcome to the forum :) .

This link is a good place to start : Wiki article link: Managing a windfall .

1. Take your time.
2. Beware of anyone trying to sell you anything.
3. Read a bit and learn some basics, please see : http://www.bogleheads.org/readbooks.htm ;
4. Sell off the stocks and start using broadly diversfied, low cost index funds like Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX), and Vanguard Total International Stock Index Fund Admiral Shares (VTIAX), (both are very tax efficient, and good in a taxable account).
5. Make full use of tax sheltering opportunities like a 401k, 403b, 457b, IRAs.
6. Put bond investments in tax sheltered accounts, see : Wiki article link: Principles of Tax-Efficient Fund Placement .
"Everything should be as simple as it is, but not simpler." - Albert Einstein
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby KyleAAA » Tue Feb 26, 2013 2:19 pm

FinancialDave wrote:
KyleAAA wrote:
Grt2bOutdoors wrote:S&P 500 represents 75% of the Total Market - how is that undiversified?/quote]

The total market is also too undiversified. I would never recommend somebody invest without at least a little in foreign stocks and bonds.


Have you considered just how much of the SP500 revenues come from overseas -- I believe the number was something like 46% back in 2011 -- I personally think this is more than a "little" foreign exposure!


Yes, this has been discussed pretty extensively on this forum in the past. My position is that just because half your revenues come from overseas doesn't mean you have foreign exposure, because you don't. You don't have the political or currency diversification you would if you owned companies headquartered abroad.
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The Three Fund Portfoio

Postby Taylor Larimore » Tue Feb 26, 2013 3:14 pm

Bobbo:

Welcome to the Bogleheads Forum!
I was just looking for something straight forward, that I could leave untouched for an extended period of time.

Consider this:

The Three Fund Portfolio

Best wishes.
Taylor
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby Scooter57 » Tue Feb 26, 2013 3:40 pm

If your dad died in 2010 the basis of your inherited stocks may NOT be the value on the day he died.

2010 was a very complicated year for estate taxes because of the way the Bush Tax Cuts worked. So you will need to find out exactly how your dad's estate was handled by the estate attorney.

Our attorney explained we had two options, but to take advantage of not paying any inheritance tax we chose the option where the basis for the inherited stocks and bonds was what my mother had paid for them, not their value on the day of her death.

This is a good example of where you have to be very careful not to take generic advice.

There is a lot of debate about what to do with lump sums, but having lived through the last 13 years of market ups and downs and having invested another much smaller inheritance near the top of the market in 2006 I would NEVER again put all my money into the market at once. The S&P 500 has yielded only about 2% a year since 2000. I did a lot better with the money I put into CDs in 1999 and 2006 than I did with the money I put into the market. Had I put in the money in smaller amounts over a longer period I would have had a much larger gain over time because I would have bought more at much lower prices.

The problem with the advice that Vanguard (and others) give about lump sums is that it comes from analyzing the average impact over many decades. So while yes, in most time periods you would have done better putting a lump sum in all at once, if you put that lump sum in at any of the major market tops like 1929, 1972, 1998, or 2007 you would have to wait main years just to see your capital begin to recover to where it was when you invested.

Since no one else is going to be giving you another big sum like this, it pays to be prudent when investing it. I would rather lose a bit of the gain by investing slowly than a lot of the principal. Especially since like you I don't need this money to live on now, and am mainly interested in preserving it.
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby bobbobobbo » Tue Feb 26, 2013 4:03 pm

Thank you so much for all the responses. They were very thorough and extremely helpful. It looks as if I've come here with the generally the right mindset.

I am willing to continue to be exposed to the market. Currently looking to transfer investments into the Vanguard Total Stock Market vs Vanguard 500 index. I will allocate properly regarding tax options, as well mindful of capital gains. My remaining questions are regarding Total International and Total Bond investment, as I found the 3 fund portfolio very intriguing and simplistic. As many of you have recommended.

Should I invest in the International Index? Many even in this thread claim investing in the International index is not needed. Jack Bogle seems to shy away from it in a way...
Jack Bogle: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- The ideal portfolio would combine Vanguard Total Stock Market Index and Vanguard Total Bond Market Index with a splash of Vanguard Total International Stock Market Index if you must."

Further, Total Bond Market. If I have steady fixed income coming from Real Estate investments, would one still invest in bonds? My father had 0% in bonds. Unfortunately I have no idea of finding out why... other than perhaps he wanted to be more aggressive, or he counted other ventures as fixed income..
I really do not mind being more aggressive, though to a point.
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Answer to questions

Postby Taylor Larimore » Tue Feb 26, 2013 4:33 pm

Bobbo:

I will try to answer your questions:
Should I invest in the International Index?

The best answer may be a Vanguard study which concluded:
• International stocks should be included in a domestic portfolio.
• Empirical and practical issues suggest a starting allocation to international
stocks of 20%, with an upper limit based on the proportion of the global
market they represent.

International Equity: Considerations and Recommendations
If I have steady fixed income coming from Real Estate investments, would one still invest in bonds?

A "steady fixed income coming from Real Estate investments" is somewhat similar to bond income--but they are not the same. For purposes of safety and diversification it is probably advisable to own some bonds.

Best wishes.
Taylor
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby nydad » Tue Feb 26, 2013 6:23 pm

If you've never owned bonds before, take some time, read some threads, learn about the many different kinds of bonds, how the income is taxed (or how income on some bonds isn't taxed), how they respond to different rate environments, etc., relationship between price and yield, yield curve, etc.

I initially thought bonds were simple but they are actually pretty complex - in a way stocks are simpler.

But as Taylor notes, real estate income will not behave like bonds will in different market environments - for example, in some cases RE income may decrease, or you may have a loss/damage that eats away a chunk of your RE, RE may depreciate/require maintenance, etc. RE income may go down exactly when you need it to go up, and you can't easily balance into/out of individual RE holdings. Bonds, on the other hand, especially if held to maturity, just sit there and send money to you - which is why they're called "fixed income" - (unless they default, or are called, or you sell it before maturity, or .......)

Anyway, read a few books, I've read a few and read a million threads on this board and I am still very far from having a solid understanding of these beasts called bonds. After you read more you may come to the conclusion I did, which is, just buy a bond fund and let the pros pick the actual bonds. Others here feel differently and take a very DIY approach to bond selection. I think both sides have good arguments, there is no right answer...
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Let the pros pick bonds.

Postby Taylor Larimore » Tue Feb 26, 2013 6:34 pm

Nydad wrote:
After you read more you may come to the conclusion I did, which is, just buy a bond fund and let the pros pick the actual bonds.

I was a director of an agency that issued municipal bonds. I came to the same conclusion.

In my opinion, any low-cost, good quality, short- or intermediate-term bond fund will provide safety and income for a portfolio.

Best wishes
Taylor
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby Scooter57 » Tue Feb 26, 2013 7:57 pm

Taylor,

Would you really advise putting a lump sum into intermediate bonds at such a low yield and 5 year duration when CDs pay only a percent or so less? To me that is like putting them into an unbreakable 6 year CD. I have spent a lot of time puzzling over this, though I owned owned bond funds for many years.
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Intermediate bonds ?

Postby Taylor Larimore » Tue Feb 26, 2013 9:51 pm

Scooter57 wrote:Taylor,

Would you really advise putting a lump sum into intermediate bonds at such a low yield and 5 year duration when CDs pay only a percent or so less? To me that is like putting them into an unbreakable 6 year CD. I have spent a lot of time puzzling over this, though I owned owned bond funds for many years.


Scooter:

Vanguard's intermediate-term Total Bond Market Index Fund was started by Jack Bogle in December, 1986. It is a very diversified, high-quality, intermediate-term bond index fund that tracks Barclays US Aggregate Bond Index (formerly the Lehman Aggregate Bond Index created in 1976). Jack's invention is now the world's largest bond index fund.

Listed below are the historical U.S. inflation rates (CPI-U) and total returns for the Aggregate Bond Index since its inception:

YEAR--INFLATION--BOND INDEX
1976-------4.9%--------15.6%
1977-------6.7-----------3.0
1978-------9.0-----------1.4
1979------13.3-----------1.9
1980------12.5-----------2.7
1980------12.5-----------2.7
1981-------8.9-----------6.3
1982-------3.8----------32.6
1983-------3.8-----------8.4
1984-------3.9----------15.2
1985-------3.8----------22.1
1986-------1.1----------15.2
1987-------4.4-----------2.8
1988-------4.4-----------7.9
1989-------4.6----------14.5
1990-------6.1-----------8.9
1991-------3.1----------16.0
1992-------2.9-----------7.4
1993-------2.7-----------9.7
1994-------2.7---------(-2.9)
1995-------2.5----------18.5
1996-------3.3-----------3.6
1997-------1.7-----------9.7
1998-------1.6-----------8.7
1999-------2.7---------(-0.8)
2000-------3.4----------11.6
2001-------1.6-----------8.4
2002-------2.4----------10.3
2003-------1.9-----------4.1
2004-------3.3-----------4.3
2005-------3.4-----------2.4
2006-------2.5-----------4.3
2007-------4.1-----------7.0
2008-------0.1-----------5.2
2009-------2.7-----------5.9
2010-------1.5-----------6.5
2011-------3.0-----------7.7
2012-------1.7-----------4.3
Source: U.S. Department of Labor and Barclays

Observations:
* Inflation increased from 4.9% in 1976 to 13.3% in 1979; nevertheless the Index had positive returns during that period of rising inflation.
* The Index had only two negative years (both small) reflecting low risk.

Past performance does not guarantee future performance.

This article from Vanguard Research is worth reading:
Deficits, the Fed, and rising interest rates: Implications and considerations for bond investors

OurTotal Bond Market Index Fund has served us well and I expect it to continue providing safety and income in our portfolio.

Bond investors sleep well. Stock investors eat well. With the right balance, investors can both sleep well and eat well.

I hope that I have answered your question.

Best wishes.
Taylor
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby InvestorNewb » Tue Feb 26, 2013 11:13 pm

I recently put over 200k into VTI. If I can do it, you can do it.
Current Holdings: VTI, VXUS, VNQ, VCE (largest to smallest)
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby bobbobobbo » Tue Feb 26, 2013 11:22 pm

Thank you all so much. This is a great forum and a great group! Had no idea this forum shared the similar notions I've had, just didn't have the knowledge to express.

After determining allocation, it seems my account % values are not far off at all from what I'd be looking to do with the 3 Funds. Obviously they will change over the years as I re-allocate.

Current Account Allocation:
Roth IRA 8% [..Bonds VBMFX]
Traditional IRA 23% [..International VGTSX]
Brokerage 69% [..Total VTSMX]

Would this work? Or would it be advised to proportionally split International/Total stocks within my Traditional IRA and Brokerage respectively.
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby nydad » Tue Feb 26, 2013 11:36 pm

That looks reasonable; however I have seen some argue that it is better to hold international in taxable so you get the foreign tax credit.
Also, since roth is tax free, you may want to hold assets that are likely to grow more there (eg equities vs bonds)

thus:
Roth 8% VTSMX
Traditional: 8% Bonds VBMFX
15% VTSMX
Brokerage: 23% International VGTSX
46% Total VTSMX

You can then balance in trad IRA for stocks/bonds, and use new contribs to balance in taxable domestic/international. also note:you'll probably have enough to buy Admiral versions of these funds, which are the same, just cheaper.
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby grabiner » Wed Feb 27, 2013 12:57 am

bobbobobbo wrote:After determining allocation, it seems my account % values are not far off at all from what I'd be looking to do with the 3 Funds. Obviously they will change over the years as I re-allocate.

Current Account Allocation:
Roth IRA 8% [..Bonds VBMFX]
Traditional IRA 23% [..International VGTSX]
Brokerage 69% [..Total VTSMX]

Would this work? Or would it be advised to proportionally split International/Total stocks within my Traditional IRA and Brokerage respectively.


There is no need to split just to split. However, you can split in order to get your desired allocation; if you want 70% domestic, 20% international, and 10% bonds (normal but aggressive for someone your age), then you can use those numbers.

As other posters have mentioned, it's slightly better to have international in taxable. Thus, if 70/20/10 is your target allocation,

20% Total International in taxable
49% Total Stock Market in taxable
21% Total Stock Market in traditional IRA
2% Total Bond Market in traditional IRA
8% Total Bond Market in Roth IRA
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby bobbobobbo » Wed Feb 27, 2013 3:16 am

70/20/10 would be normal but more aggressive at a younger age? Is that backwards? Limited fixed income I thought was more acceptable at a younger age, as this money will not be needed anytime soon. As well I understand International should be placed in my taxable account. The only conflictual point I see is regarding my Roth. If it grows tax free, should I still keep Bonds within it, or go for equities that may grow as nydad has claimed.
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby tadamsmar » Wed Feb 27, 2013 10:07 am

I don't see how it makes any difference is bonds are held in a tax-free ROTH or tax-deferred IRA. Others can check me on this since nydad said otherwise. They both grow at the same percentage rate. You just have to pay Uncle Sam his cut when you withdraw.
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby nydad » Wed Feb 27, 2013 10:13 am

a few relevant threads:
viewtopic.php?t=66960
viewtopic.php?t=66706&highlight=
viewtopic.php?t=64644&mrr=1292427211

Many different opinions on this matter!
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby tadamsmar » Wed Feb 27, 2013 10:44 am

nydad wrote:a few relevant threads:
viewtopic.php?t=66960
viewtopic.php?t=66706&highlight=
viewtopic.php?t=64644&mrr=1292427211

Many different opinions on this matter!


Here's the math assuming a 25% tax rate

Start with $100
After taxes $75
Put in Roth
Doubles to $150
Withdraw the money
End up with $150 to spend

Start with $100
Put in tax-deferred IRA
Doubles to $200
Withdraw the money
Pay taxes and end up with $150 to spend

QED: The amount you end up with remains the same.

Edit: but putting stocks in Roth tend to reduce RMDs, so that makes it a better choice.
Last edited by tadamsmar on Wed Feb 27, 2013 11:03 am, edited 2 times in total.
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby nydad » Wed Feb 27, 2013 10:49 am

We should probably start another thread if you want to open up this whole discussion... it's starting to get off topic of OP question. Suffice to say, there is debate amongst reasonable people, worthy of many threads...
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby FinancialDave » Thu Feb 28, 2013 1:53 pm

KyleAAA wrote:
FinancialDave wrote:
KyleAAA wrote:The total market is also too undiversified. I would never recommend somebody invest without at least a little in foreign stocks and bonds.


Have you considered just how much of the SP500 revenues come from overseas -- I believe the number was something like 46% back in 2011 -- I personally think this is more than a "little" foreign exposure!


Yes, this has been discussed pretty extensively on this forum in the past. My position is that just because half your revenues come from overseas doesn't mean you have foreign exposure, because you don't. You don't have the political or currency diversification you would if you owned companies headquartered abroad.


Well,
If you don't think these US companies are affected by the overseas political and currency markets, you may have just been asleep over the last 3 years. Where you put your corporate office, while it does affect it somewhat, is not the total deciding factor.

Why do you think foreign companies such as Honda and Toyota or US companies such as GE put their manufacturing in foreign lands? They are doing the diversification for you, and getting closer to their customers - and in turn they are taking on the risk that the foreign economies will turn down and their sales will plummet.

In fact I can't say I have ever seen a PE ratio of a company expressed in terms of geography. However, when foreign markets go up or down for political or other reasons the earnings will certainly be affected, at least on products sold in those areas.

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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby YDNAL » Thu Feb 28, 2013 2:09 pm

FinancialDave wrote:Have you considered just how much of the SP500 revenues come from overseas -- I believe the number was something like 46% back in 2011 -- I personally think this is more than a "little" foreign exposure!

That is a one-side argument (I know, Bogle has said something similar) that holds little water.

Have you considered how much of FTSE (UK), DAX (Germany), CAC (France), MIB (Italy), NIKKEI (Japan), Hang Seng (Honk Kong), Shanghai Comp (China) revenues come from the U.S.? Is it more than "a little" U.S. exposure?

bobbobobbo wrote:I have recently inherited a large sum of money from my father in the form of stocks and real estate. Stock-wise, he managed his own portfolio, with around 50 stocks, mainly large cap. No bonds, <5% cash. Very aggressive portfolio. I have left it since last July, in which it has grown a considerable amount.
bobbobobbo wrote:I am not completely unafraid of risk... yet at 25 years old I am quite young, fortunate enough to consider more risk.

bobbo (OP),

Sorry to hear of your father's passing.

You mentioned "large sum" but didn't mention the split between 50 Stocks / Real Estate. Regardless, you are 25yo and these 50 stocks may seem quite large to you at the moment but in 40 years... likely not. Don't rush to sell anything that your father left for you. What is MOST important going forward is your new contributions and how you diversify the total portfolio.

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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby bobbobobbo » Fri Mar 01, 2013 12:19 am

YDNAL wrote:bobbo (OP),

Sorry to hear of your father's passing.

You mentioned "large sum" but didn't mention the split between 50 Stocks / Real Estate. Regardless, you are 25yo and these 50 stocks may seem quite large to you at the moment but in 40 years... likely not. Don't rush to sell anything that your father left for you. What is MOST important going forward is your new contributions and how you diversify the total portfolio.



Does the split between stocks/real estate have some bearing on account allocation? I'm still quite troubled trying to find the right amounts (also considering my age) etc. My father had 0% bond allocation. All stocks, with 1/3 international. I ordered and just finished reading the Bogleheads book... yet still not certain.

(side note: I haven't exactly been in a rush... it has been 8 months, yet I would like to sell and immediately re-invest the stocks now, before I incur significant capital gains. I do not want to manage these stocks on an individual basis, nor do I see the real overall gain in doing so. (vs low cost index funds) No matter what I contain in my portfolio, in 40 years, invested wisely, it will look small in comparison.)
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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby FinancialDave » Fri Mar 01, 2013 1:03 am


Does the split between stocks/real estate have some bearing on account allocation? I'm still quite troubled trying to find the right amounts (also considering my age) etc. My father had 0% bond allocation. All stocks, with 1/3 international. I ordered and just finished reading the Bogleheads book... yet still not certain.

(side note: I haven't exactly been in a rush... it has been 8 months, yet I would like to sell and immediately re-invest the stocks now, before I incur significant capital gains. I do not want to manage these stocks on an individual basis, nor do I see the real overall gain in doing so. (vs low cost index funds) No matter what I contain in my portfolio, in 40 years, invested wisely, it will look small in comparison.


Bobbo,

Your job is not to do what your Dad did, or what anyone else here thinks you need to do. Whatever choice you make, will be your choice. If it needs to be changed in the future, so be it, but if you embark on an index fund strategy, I see little need to change it much along the way, as opposed to keeping track of 50 stocks - though as mentioned I don't suggest you sell them all at once, just get rid of them over the next 5 years or so.

As far as the equities / real estate question -- think of the question as the fact that each piece of real estate is in part like one stock, for the purpose of diversification -- if it sits empty, or is destroyed you could end up with nothing. My simple rule of thumb is that when you consider your net worth, you never have more in real estate than you have in your retirement accounts. You probably won't find this in any book, its just something to think about based on the principals of diversification and the numbers of times each year I see pieces of real estate go to zero for any number of reasons.

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Re: Recent inheritance - 100% in VFINX right now? (S&P500)

Postby YDNAL » Fri Mar 01, 2013 7:44 am

bobbobobbo wrote:
YDNAL wrote:bobbo (OP),

Sorry to hear of your father's passing.

You mentioned "large sum" but didn't mention the split between 50 Stocks / Real Estate. Regardless, you are 25yo and these 50 stocks may seem quite large to you at the moment but in 40 years... likely not. Don't rush to sell anything that your father left for you. What is MOST important going forward is your new contributions and how you diversify the total portfolio.


Does the split between stocks/real estate have some bearing on account allocation? I'm still quite troubled trying to find the right amounts (also considering my age) etc. My father had 0% bond allocation. All stocks, with 1/3 international. I ordered and just finished reading the Bogleheads book... yet still not certain.

Bobbo,

When you said "large sum," it may be (or not) mostly invested in real estate. With regards to Asset Allocation, if the real estate generates significant operating income (and cash flow), this impacts your Ability and Need for risk (personal circumstances) and impacts how to develop a plan for current/future Assets. That was the reason why I mentioned the split between Stocks/Real Estate - absent any specifics on your part.

bobbobobbo wrote:(side note: I haven't exactly been in a rush... it has been 8 months, yet I would like to sell and immediately re-invest the stocks now, before I incur significant capital gains. I do not want to manage these stocks on an individual basis, nor do I see the real overall gain in doing so. (vs low cost index funds) No matter what I contain in my portfolio, in 40 years, invested wisely, it will look small in comparison.)

Yes, your last sentence is exactly what I said in my response. Thus, you are making too much of "managing" some individual 50 Stocks... there is really not very much to manage. Be certain that I'm not a proponent of owning individual Stocks, just a proponent to look at the BIG picture and to take our time in formulating a plan before making decisions.
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