Asset Allocation for Windfall

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Topic Author
berg
Posts: 465
Joined: Mon Mar 18, 2013 8:43 pm

Asset Allocation for Windfall

Post by berg »

During the past year I've been selling stock options that have done well. Last year I sold around $200k and I'll probably do the same this year. I'm making sure I have enough to cover the taxes and now trying to figure out asset allocation for the rest.

The only big thing my wife and I are saving for is a home upgrade or renovation. But I'm uncertain of the timeframe and uncertain how much it will cost us in total and how much of it we'd wan to finance so I'm finding myself in a bit of limbo with this cash. I good problem to have!

My current logic is $50k in cash for emergency fund. Then after that I take cash savings and split 50/50 in savings and stocks in a taxable account. Right now I'm not quite at 50/50 as I just sold more, so have about $133k (this is in addition to e fund) and $112k taxable. I guess I figure since we don't know when we might upgrade the house or renovate I'd like to put some in the market. And if the market drops, I could maybe just use a smaller DP on a new home or maybe take a loan out for home renovations if the cash doesn't cover it. Basically, I'm in a position where I'm young and don't expect to see such big stock gains in the future, so trying to be smart with this windfall.

For what it's worth here is our current net worth breakdown:
Retirement $280,000
Stock Options $215,000 (after tax estimate)
House $155,000
Cash Savings $133,000
Taxable Investments $112,000
Emergency Fund $50,000
Savings Bonds $10,000
529 $4,600
EHEngineer
Posts: 1085
Joined: Sat Feb 28, 2015 3:35 pm

Re: Asset Allocation for Windfall

Post by EHEngineer »

Hi Berg, You have listed your assets by account type. How about listing asset by goal? What do you have planned for the stock options, the cash, the taxable investments, the savings bonds?
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius
Topic Author
berg
Posts: 465
Joined: Mon Mar 18, 2013 8:43 pm

Re: Asset Allocation for Windfall

Post by berg »

EHEngineer wrote:Hi Berg, You have listed your assets by account type. How about listing asset by goal? What do you have planned for the stock options, the cash, the taxable investments, the savings bonds?
I guess retirement is set aside for retirement, 529 is for my son's college. Otherwise the cash and taxable are for two big things, a home upgrade or renovation someday and continued building of long term savings. Beyond that we don't have any big goals.
EHEngineer
Posts: 1085
Joined: Sat Feb 28, 2015 3:35 pm

Re: Asset Allocation for Windfall

Post by EHEngineer »

berg wrote:
EHEngineer wrote:Hi Berg, You have listed your assets by account type. How about listing asset by goal? What do you have planned for the stock options, the cash, the taxable investments, the savings bonds?
I guess retirement is set aside for retirement, 529 is for my son's college. Otherwise the cash and taxable are for two big things, a home upgrade or renovation someday and continued building of long term savings. Beyond that we don't have any big goals.
I, for one, think it is a bad idea to invest money without a stated goal or investment time frame. Pick a goal and allocate the money. If you don't have a goal, divvy it up into chunks and commit to not spending each chunk for at least specified number of years. Investing is about taking prudent risks. If you don't know how long you will be invested it is hard to determine what is prudent.

My personal standards are something like this: (Granted, I have only 1 mid-term goal that fall into one of these categories)
0-2 years is savings and CDs
2-6 is CDs and bond index funds with an appropriate duration.
6-10 years is CDs and bond funds and low allocations to stocks. ie up to 30% at 10 years.
10-15 years you can have moderate allocations to stocks, ie 30-75%
15 years plus you can have 100% stocks if you want.

This should be in the ballpark of the allocation of age based 529 portfolios.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius
kaudrey
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Joined: Fri Nov 22, 2013 1:40 pm

Re: Asset Allocation for Windfall

Post by kaudrey »

I think your plan will give you flexibility, so it's probably fine. How does a 50/50 split fit in with your overall IPS and AA?
Grt2bOutdoors
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Location: New York

Re: Asset Allocation for Windfall

Post by Grt2bOutdoors »

berg wrote:
EHEngineer wrote:Hi Berg, You have listed your assets by account type. How about listing asset by goal? What do you have planned for the stock options, the cash, the taxable investments, the savings bonds?
I guess retirement is set aside for retirement, 529 is for my son's college. Otherwise the cash and taxable are for two big things, a home upgrade or renovation someday and continued building of long term savings. Beyond that we don't have any big goals.
The first step is to obtain several cost estimates of how much to upgrade your home including the finishes. I went through a home renovation not too long ago - take those cost estimates and include a buffer of 20-25% more for "unforeseen conditions" (trust me, they will show up!) and include another buffer of 5% for window treatments, upgraded finishes, new furniture if any, tiling, etc. Put that cash in a FDIC insured savings account and leave it until you start construction (after that, it will go quickly).
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Watty
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Re: Asset Allocation for Windfall

Post by Watty »

Do you have a mortgage? Is the renovation or upgrade at least a few years off?

If so then you could pre-pay the mortgage with the money you might use for a renovation or upgrade. If you eventually move then the money would be freed up again. If you do a renovation then you could get a home equity loan.

It would be good to look at doing a "mortgage recast" if you repay the mortgage. This would reduce your monthly payment so that you could then save the difference.
Topic Author
berg
Posts: 465
Joined: Mon Mar 18, 2013 8:43 pm

Re: Asset Allocation for Windfall

Post by berg »

EHEngineer wrote:
berg wrote:
EHEngineer wrote:Hi Berg, You have listed your assets by account type. How about listing asset by goal? What do you have planned for the stock options, the cash, the taxable investments, the savings bonds?
I guess retirement is set aside for retirement, 529 is for my son's college. Otherwise the cash and taxable are for two big things, a home upgrade or renovation someday and continued building of long term savings. Beyond that we don't have any big goals.
I, for one, think it is a bad idea to invest money without a stated goal or investment time frame. Pick a goal and allocate the money. If you don't have a goal, divvy it up into chunks and commit to not spending each chunk for at least specified number of years. Investing is about taking prudent risks. If you don't know how long you will be invested it is hard to determine what is prudent.

My personal standards are something like this: (Granted, I have only 1 mid-term goal that fall into one of these categories)
0-2 years is savings and CDs
2-6 is CDs and bond index funds with an appropriate duration.
6-10 years is CDs and bond funds and low allocations to stocks. ie up to 30% at 10 years.
10-15 years you can have moderate allocations to stocks, ie 30-75%
15 years plus you can have 100% stocks if you want.

This should be in the ballpark of the allocation of age based 529 portfolios.
I don't disagree with this, but essentially we only have two major goals -- long term retirement saving and upgrading our home. I view the other goals as smaller and generally fitting into what we keep in cash vs. breaking out into mini asset allocations for each (such as our next car purchase which will likely be 5+ years off).
Topic Author
berg
Posts: 465
Joined: Mon Mar 18, 2013 8:43 pm

Re: Asset Allocation for Windfall

Post by berg »

kaudrey wrote:I think your plan will give you flexibility, so it's probably fine. How does a 50/50 split fit in with your overall IPS and AA?
For right now the way I have worked it is that my taxable account fits my overall retirement asset allocation (but all stocks in taxable). I did it like this because if we choose not to use these funds for the home, I want to have them allocated for the long term. If I need to sell to use them for a big purchase, I'd rebalance and sell some of my bonds in my retirement fund.
Topic Author
berg
Posts: 465
Joined: Mon Mar 18, 2013 8:43 pm

Re: Asset Allocation for Windfall

Post by berg »

Watty wrote:Do you have a mortgage? Is the renovation or upgrade at least a few years off?

If so then you could pre-pay the mortgage with the money you might use for a renovation or upgrade. If you eventually move then the money would be freed up again. If you do a renovation then you could get a home equity loan.

It would be good to look at doing a "mortgage recast" if you repay the mortgage. This would reduce your monthly payment so that you could then save the difference.
This is an interesting idea for some of the money I suppose. Our rate is 3.75% so I had been avoiding prepaying as I figured if we wanted the cash for a renovation, I didn't like the idea of paying down the mortgage only to pay a higher rate to borrow it back. Of course if we go with the home sale option then this money would be available to me. Perhaps it is worth taking a % and doing this with? I'll get a better return than with a savings account or CD, though be less liquid, but more stable than my investments in taxable. Could be another way to diversify these funds. If we were definitely going to upgrade to a new house, it seems an obvious choice, but the renovation makes it a little more difficult to say. Also our time horizon is a bit undefined. My best guess would be anywhere from 6 months (if the perfect house came along) to three years. I'd put a renovation in more like the 18 month to 3 year range.
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