Inheritance ~ Low Tolerance for Market Fluctuations on $$$

[imgritz]

I wonder if I have invested poorly. I have an inheritance which I invested in Vanguard’s LifeStrategy Income Fund in a taxable account because I don’t want to lose the life savings of my parents.

Today I received short-term capital gain, a long-term capital gain and dividends. After I looked at the post-value of all of my fund’s contributions I realized I am not wealthier than I was before; I simply have more shares of the fund and an impending tax bill.

So…what is the best way to invest an inheritance for the long-term with fear of losing my parent’s wealth? I’m ok with the 20/80 allocation and I am wondering if I am doing it the correct way.

Any thoughts?

[Grt2bOutdoors]

I wonder if I have invested poorly. I have an inheritance which I invested in Vanguard’s LifeStrategy Income Fund in a taxable account because I don’t want to lose the life savings of my parents.

Today I received short-term capital gain, a long-term capital gain and dividends. After I looked at the post-value of all of my fund’s contributions I realized I am not wealthier than I was before; I simply have more shares of the fund and an impending tax bill.

So…what is the best way to invest an inheritance for the long-term with fear of losing my parent’s wealth? I’m ok with the 20/80 allocation and I am wondering if I am doing it the correct way.

Any thoughts?

Your statements are conflicting - I read it as "I don't want to lose all the money my parents saved during years of hard work", followed by I'm okay with some risk (20/80) and the words "long term".

No principal fluctuation + safety of nominal dollars ---> FDIC insured savings/CD's and/or Series I savings bonds. I think this is what you really want as opposed to below.

Some risk - 20/80 = Lifestrategy Income or a homemade brew of 20% Total Stock Market Index/combination of FDIC insured savings accounts, Total Bond Market Index or Short Term Investment Grade or Short Term Treasuries. In each case you will receive dividends and interest income that are taxable. If you want non-taxable, then you have to look at Municipal bond funds which offer their own special risks.

After accounting for your capital gains and dividend income plus your principal investment, has the value of your investment gone up, stayed flat or declined? I find it hard to believe you have not made any gains. Can you elaborate some more?

[KyleAAA]

Yeah, the price of the fund will go down by the amount of the distribution. That's how it's supposed to work.

[Imperabo]

How does having more shares of the fund not make you wealthier? Seems like a lot of mental accounting going on all around.

[Aptenodytes]

The fund is up for the year circa 7-8%. When did you put the money in?

[imgritz]

Never mind. I'll call the Vanguard CFP's.

I simply thought the the multiple taxable events were against Boglehead theories.

[JDCPAEsq]

Never mind. I'll call the Vanguard CFP's.

I simply thought the the multiple taxable events were against Boglehead theories.

[livesoft]

The best way to not lose it is to spend it all and be done with it.

Whose money is it anyways? From the info in this thread, you name it your "parent's wealth"" and "life savings", it is now your wealth and it doesn't belong to your parent's anymore. You are not your parents and it is not their money. It is your money. It should not be an albatross around your neck. You should not have to worry about losing money. You should not treat it any differently than any other money that you have.

So invest it according to the asset allocation plan that you have or spend it on your goals. Do not invest it according to the asset allocation plan that your parent's had.

And do not be emotional about this. That's a behavioral finance trap. You may wish to read a book about this "Why Smart People Make Big Money Mistakes" by Gilovich and Belsky.

[sscritic]

I simply thought the the multiple taxable events were against Boglehead theories.

Trying to reduce taxes is everyone's theories. So yes, you should think of the tax consequences (among other things) when you invest in a taxable account. It is a taxable account after all. Multiple is irrelevant. Tax on one distributions of $1000 is less than the tax on 10 distributions of $50 in the same tax category (e.g., long-term capital gains).

When a fund pays out gains in a taxable account, you end up paying taxes on the distributions. However, I would prefer paying taxes on gains rather than accumulate losses I don't realize (realizing them has a tax consequence).

[grabiner]

Today I received short-term capital gain, a long-term capital gain and dividends. After I looked at the post-value of all of my fund’s contributions I realized I am not wealthier than I was before; I simply have more shares of the fund and an impending tax bill.

The capital gains are a consequence of what has happened to the bond market, not a problem with the fund. Suppose that a ten-year bond which was bought for $1000 and which pays $40 per year is worth $1100 five years from maturity. If the fund keeps the bond, it will pay $40 every year in income, all taxable, and the bond will be worth $1000 when it matures, for a total taxable income of $200. If the fund sells the bond and buys a new bond worth $1100 paying $20 per year, you will pay tax on the $100 capital gain but only receive $100 in income over the next five years, still for a total taxable income of $200, and you are probably better off because the capital gain is taxed at a lower rate. Either way, you will pay tax on $200 despite only earning $100 from this bond. But this is a temporary effect; over the life of the bond, the total return and total taxable income were both $400.

You do want to avoid capital gains in your stock funds, because stock funds can avoid realizing them; stocks don't mature, and an index fund can hold stocks forever.

So…what is the best way to invest an inheritance for the long-term with fear of losing my parent’s wealth? I’m ok with the 20/80 allocation and I am wondering if I am doing it the correct way.

Are you still working? If you are, then every year, you can max out your 401(k) and IRA, moving money from the taxable investment to make the contributions. This will eliminate the tax consequence, as you don't pay taxes at all if you use a Roth IRA and Roth 401(k), and you pay taxes only corresponding to the tax subsidy you got in contributions if you use a Traditional IRA and Traditional 401(k).

If you are already retired (or already maxing out retirement plans) and you want 20/80 in your taxable account, then LifeStrategy Income is OK if you are in a low tax bracket. In a higher tax bracket, using a municipal-bond fund rather than the Total Bond Market in the LifeStrategy funds will give you a higher after-tax return for the same risk level. (The current yields are 1.56% on Admiral shares of Intermediate-Term Tax-Exempt, and 1.59% on Admiral shares of Total Bond Market Index, but Total Bond Market is slightly less risky because it has a lot of Treasury bonds.)

[pkcrafter]

I wonder if I have invested poorly. I have an inheritance which I invested in Vanguard’s LifeStrategy Income Fund in a taxable account because I don’t want to lose the life savings of my parents.

Today I received short-term capital gain, a long-term capital gain and dividends. After I looked at the post-value of all of my fund’s contributions I realized I am not wealthier than I was before; I simply have more shares of the fund and an impending tax bill.

So…what is the best way to invest an inheritance for the long-term with fear of losing my parent’s wealth? I’m ok with the 20/80 allocation and I am wondering if I am doing it the correct way.

Any thoughts?

More shares are good, taxes aren't so good, especially for long term investing. Livesoft is right, this is now your money that will eventually help pay for your retirement, so you need to invest it in a way that is optimal for your needs and goals.

I simply thought the the multiple taxable events were against Boglehead theories.

It is wise to limit taxes as best you can. LS income is 80% taxable bond and that's where most of your taxes are coming from. I'm not sure 20/80 is your best AA, but it you want to stay with it, then use total market, total international and tax-managed bond funds.

Paul

[Sbashore]

The best way to not lose it is to spend it all and be done with it.

Whose money is it anyways? From the info in this thread, you name it your "parent's wealth"" and "life savings", it is now your wealth and it doesn't belong to your parent's anymore. You are not your parents and it is not their money. It is your money. It should not be an albatross around your neck. You should not have to worry about losing money. You should not treat it any differently than any other money that you have.

So invest it according to the asset allocation plan that you have or spend it on your goals. Do not invest it according to the asset allocation plan that your parent's had.

And do not be emotional about this. That's a behavioral finance trap. You may wish to read a book about this "Why Smart People Make Big Money Mistakes" by Gilovich and Belsky.

This is good advice. I fight the behavioral finance trap all the time regarding an IRA I inherited and a survivor pension I receive. The first step is to integrate the money into "your plan" and hopefully that plan is one with which you can "stay the course".

[retiredjg]

Unless you are in a very low tax bracket, this fund is a poor choice for a taxable account. That's because it contains such a large chunk of taxable bonds. It is not tax-efficient to hold this fund in taxable.

Better choices might be stock index funds combined with tax-exempt bonds or a tax-managed balanced fund. Again, this depends on your situation, particularly your tax bracket.

Your best choice is to stop looking at that money as something separate. Fold it into your own investments and pick the best funds for each account (taxable and tax-advantaged). This usually means holding the bonds in your tax-advantaged accounts, not your taxable accounts.

If you have recently inherited the money, this might be a little difficult. But eventually, you need to do it or the money just becomes a burden. That is not what your parents would have wanted. Consider that it might be time to move on and invest your money according to tax-efficient principles rather than trying to manage some money separately because it seems "special".