Hi Bogleheads! I'm seeking some sound advice and insights.

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Hi Bogleheads! I'm seeking some sound advice and insights.

Postby futurewealth » Wed May 22, 2013 10:37 pm

:sharebeer

I've been tasked with investing $33,000 of a relative's retirement money.

Her goals are twofold:

- Earn a return that she can enjoy within the next 3-5 years. (For example, $5,000 to spend on a trip, house repairs, etc.)
- Appreciate capital that so she can pass on a nice nest-egg once she slips these mortal coils (She's in her 80's).

My questions:

- How would you allocate this portfolio between stocks and bonds?
- Which bond ETF(s) would you invest in, and why?
- Would higher interest rates (which I think is likely in the coming years) help a diversified bond fund like BND outperform?
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Re: Hi Bogleheads! I'm seeking some sound advice and insight

Postby Default User BR » Thu May 23, 2013 1:47 am

Those seem to be unrealistic expectations. $5000 for a trip is over 15% alone. How much in home repair money are we talking? She wants that AND to grow the money for heirs? You need to have an honest discussion about that with her. The better idea would be invest it conservatively, use it as she needs, and pass whatever remains along.


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Re: Hi Bogleheads! I'm seeking some sound advice and insight

Postby futurewealth » Thu May 23, 2013 3:42 am

OK, let's forget that $5,000 altogether.

My questions:

- How would you allocate this portfolio between stocks and bonds?
- Which bond ETF(s) would you invest in, and why?
- Would higher interest rates (which I think is likely in the coming years) help a diversified bond fund like BND outperform?
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Re: Hi Bogleheads! I'm seeking some sound advice and insight

Postby mnvalue » Thu May 23, 2013 4:17 am

How much risk can she afford with this? If it suddenly drops by $5,000, is that too much? What about $3,300? Or $1,650?
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Re: Hi Bogleheads! I'm seeking some sound advice and insight

Postby Cunobelinus » Thu May 23, 2013 4:30 am

I, personally, would opt for a lazy portfolio: 33% TSM, 33% TISM, 33% TBM, 1% madness. If she is looking to enjoy the profits of this in the next few years, just leave the gains in a brokerage account uninvested.

It doesn't sound like she needs the money, so having a higher risk (66% equities, 33% bonds) may be appropriate.

I am biased towards a lazy portfolio.

There is no perfect answer. There is only the answer that you think is most appropriate based on your present understanding. That may change next week if some health issue befalls her. It is extremely difficult to have short-term gains AND long-term gains guaranteed in a portfolio, especially over some finite time period. The amount of risk is generally proportional to the returns you should expect.
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Re: Hi Bogleheads! I'm seeking some sound advice and insight

Postby futurewealth » Thu May 23, 2013 5:20 am

Thank you this is already helpful.

It's a great point that something that offers a clear path to both short and long-term gains is well...harder to come by.

I was assuming this was just long-term, but then today she was asking about how soon she'll realize a gain.

Cuno, I like your reasoning for a heftier tilt toward stocks; she has social security and a pension, so we're definitely not gambling with her retirement paycheck.

As for bonds, I think we'll see outperformance in specific funds/ETF's that stand to benefit the most from rising interest rates in the not-too-distant future. At some point inflation will kick in and the Fed will have to start mopping up all that excess liquidity. So I wonder...which type of bond stands to benefit the most from this dynamic?
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Re: Hi Bogleheads! I'm seeking some sound advice and insight

Postby TomatoTomahto » Thu May 23, 2013 7:35 am

futurewealth wrote:I was assuming this was just long-term, but then today she was asking about how soon she'll realize a gain.


And this, my friend, is the signal flare that tells you to get out of this task. Nothing good will come of it. It will reduce the quality of your relationship.

In addition to your relative's impossible expectations, your questions indicate that you are not the person to be doing this. Recommend a target date fund and be done with it.
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Re: Hi Bogleheads! I'm seeking some sound advice and insight

Postby donall » Thu May 23, 2013 7:46 am

TomatoTomahto wrote:
futurewealth wrote:I was assuming this was just long-term, but then today she was asking about how soon she'll realize a gain.


And this, my friend, is the signal flare that tells you to get out of this task. Nothing good will come of it. It will reduce the quality of your relationship.

In addition to your relative's impossible expectations, your questions indicate that you are not the person to be doing this. Recommend a target date fund and be done with it.


I would agree that the relationship is more important here than the investment income, and eighty year olds can be rather headstrong. Why not just spend the money or perhaps just buy Ibonds for three years. Then inflation will be much less of a worry factor.
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Re: Hi Bogleheads! I'm seeking some sound advice and insight

Postby bearwolf » Thu May 23, 2013 7:55 am

futurewealth wrote:Thank you this is already helpful.

As for bonds, I think we'll see outperformance in specific funds/ETF's that stand to benefit the most from rising interest rates in the not-too-distant future. At some point inflation will kick in and the Fed will have to start mopping up all that excess liquidity. So I wonder...which type of bond stands to benefit the most from this dynamic?


The rising interest rates will cause a decline in the Net Asset Value (NAV) of the bond fund/ETF though. As soon as rates start to rise the bonds the fund is currently holding will be worth less. So you need to look at the duration of the fund. A longer duration bond fund will fall more in value, a shorter duration fund will fall less. Bond funds are probably not the place to be if you want to see an increase in value in the next 5 years or so. However everyones crystal ball is cloudy and no one really knows.

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Re: Hi Bogleheads! I'm seeking some sound advice and insight

Postby livesoft » Thu May 23, 2013 7:59 am

Normally folks would ask what other investments does this person have, what other income, tax bracket, etc You know, the standard stuff: viewtopic.php?f=1&t=6212

If she wants to spend $5,000 of it, then that means maybe invest $25,000 and spend $5,000.

(And lose the other $3,000.)
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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