I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me?

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jomama341
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I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me?

Post by jomama341 »

As the title states, my extended family owns a fairly large business. It’s been in the family for 70+ years. Until recently, my stake in the business has been relatively small such that I’ve not been able to rely on it to support me and I’ve built a career for myself independent of all of this.

My financial philosophy has been heavily influenced by this community and I’ve somewhat religiously followed the Boglehead approach, investing in index funds and maintaining an allocation that closely mirrors the Target Date 2045 fund.

Even though I always knew in the back of my mind that I would likely one day inherit a much larger stake in the family business, I wasn’t sure if or when it would happen, so I managed my finances as though it would never happen. It’s an approach that has worked well for me thus far.

However, I learned recently that I will be inheriting a significantly larger stake in the company in the coming months. I can reasonably expect that this stake will yield annual post-tax dividends that amount to ~2x - 5x my annual expenses.

I already have a net worth that is roughly 30x my annual expenses. I’m 34 y/o and single w/o any dependents.

I’ve obviously been extremely lucky w/ regards to money in my life and I can’t overstate how grateful I am for it. For what it’s worth, I’m also proud of how I’ve thus far managed my finances, remaining frugal, charitable and avoiding lifestyle inflation.

My question is somewhat abstract, but I’m wondering if my investment strategy should change as I enter what will truly be a new phase of wealth accumulation? Specifically with regards to bonds. I understand that bonds act as ballast to capture gains and engage in opportunistic rebalancing in the event of a market downturn. However, in the case of someone like myself who, realistically, would have to engage in serious financial mismanagement in order to run out of money before I die, does it still make sense for me to keep ~10% of my portfolio in bonds? I don’t mean to be greedy, but provided I keep my financial house in order, would I just be leaving money on the table in exchange for a reduction in volatility that I don’t really need?

I should also mention that outside of my stock portfolio, I also have ~15% of my net worth in home equity, which I would describe as a very safe/stable investment.

Lastly, none of these allocation figures take into account the $ value of my shares in the family business, which are difficult to accurately valuate and highly illiquid. It’s entirely possible that my family will not sell the business in my lifetime.

Anyways, thank you for reading this admittedly long post. I realize that my question is somewhat open ended and there are probably several different ways of looking at this. I’m slightly embarrassed to be posting about this as I realize how fortunate I am to be in this situation in the first place, but as I mentioned before, it’s important to me that I be a responsible steward for this wealth and I really value the input of this community. Thanks in advance.
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retired@50
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by retired@50 »

To me, the family business interest is like having a bunch of stock in a single company that pays a large dividend.

I would think your portfolio position is now MORE risky, than before, and I'd put a healthy chunk (if not all) of my existing 401k money into bonds to offset this risk.

Do you intend to keep working for a different company, unrelated to the family business?

Regards,
Last edited by retired@50 on Wed Jun 23, 2021 8:29 am, edited 1 time in total.
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Tamalak
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by Tamalak »

Have you at all considered the possibility that the family business could fail?

This seems like a pretty simple situation to me - you have an enormous amount of money in a single stock. That's much like a stock part of your portfolio except far more risky. I would absolutely use part of the dividends to accumulate - at a reasonable pace - a more boglehead portfolio. Maybe half. Obviously, I'd also use quite a bit to treat myself. In your situation, you can afford to be responsible and enjoy yourself too! :sharebeer
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jomama341
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by jomama341 »

retired@50 wrote: Wed Jun 23, 2021 8:25 am To me, the family business interest is like having a bunch of stock in a single company that pays a large dividend.

I would think your portfolio position is now MORE risky, than before, and I'd put a healthy chunk of my existing 401k money into bonds to offset this risk.

Do you intend to keep working for a different company, unrelated to the family business?

Regards,
While, theoretically, my net worth will be more highly concentrated in the family business, my net worth is about to get a really big bump relative to my current net worth, so I'm not sure I would describe the new normal as riskier assuming my spending habits don't change radically from where they currently are.

I don't work for the family business, nor do I intend to. I do have my own career, which I have no intention of abandoning.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by retired@50 »

jomama341 wrote: Wed Jun 23, 2021 8:30 am
retired@50 wrote: Wed Jun 23, 2021 8:25 am To me, the family business interest is like having a bunch of stock in a single company that pays a large dividend.

I would think your portfolio position is now MORE risky, than before, and I'd put a healthy chunk of my existing 401k money into bonds to offset this risk.

Do you intend to keep working for a different company, unrelated to the family business?

Regards,
While, theoretically, my net worth will be more highly concentrated in the family business, my net worth is about to get a really big bump relative to my current net worth, so I'm not sure I would describe the new normal as riskier assuming my spending habits don't change radically from where they currently are.

I don't work for the family business, nor do I intend to. I do have my own career, which I have no intention of abandoning.
Well, you mention two things in your response that will help you out.

1. Not changing spending habits.
2. Continuing with your own career.

If these two things continue to be true, then you might as well get familiar with a Donor Advised Fund (DAF) and charitable giving.

If it were me, I'd probably continue to invest the annual dividends received from the family business in a 60/40 portfolio or something along those lines. In other words, I wouldn't get aggressive in my portfolio.

At this point, you can basically just wipe money off of your list of concerns. It will take some getting used to, but you've been given an incredible gift and you should probably chase whatever you're passionate about in life.

Regards,
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SubPar
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by SubPar »

I personally wouldn't change much if I were in this situation. I would continue to invest the dividend cash flow in accordance with my target allocation and treat it as if I simply received a raise. If there is no reasonable expectation of a liquidity event/exit from the family business, I wouldn't even mentally account for the value of shares held in family business.

Assuming this is a C-Corp and there are is no pass-through taxation or anything of the sort to contend with? Could make sense to start thinking about estate planning (though that assumes there isn't already a plan in place -- with a 70+ year successful family basis, very likely this box is already checked).
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by AlohaJoe »

jomama341 wrote: Wed Jun 23, 2021 8:18 am I already have a net worth that is roughly 30x my annual expenses. I’m 34 y/o and single w/o any dependents.
[...]
does it still make sense for me to keep ~10% of my portfolio in bonds?
Even ignoring your family business, a lot of people would say it doesn't make sense for you have bother with 10% of your portfolio in bonds.

You're 34: don't need bonds at that age.

You have 30x expenses already: don't need bonds with a portfolio that large.

Did you panic last year when markets crashed? If not, don't need bonds.

Obviously not everyone agrees with those statements. But a non-trivial number of Bogleheads think it is perfectly fine not to have bonds in your situation, even ignoring the family business.

Adding the family business: you have 3 years of expenses in bonds. You say you're going to get that much or more from dividends in the family business every single year. So I don't think it matters much what you do. Keep the 10%. Get rid of the 10%. It's not going to move the needle in a meaningful way either way.
Last edited by AlohaJoe on Wed Jun 23, 2021 8:47 am, edited 1 time in total.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by Somethingwitty92912 »

I’d pretend like the family business doesn’t exist. If benefits come from it great. If not oh well.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by Wanderingwheelz »

Not to advise you what to do, but my wife and I owned two businesses up until last year. We kept our investments relatively conservative at 60/40 even through our late 30s and 40s because we had so much risk in our careers. We now own just one business, and our asset allocation is now “riskier” at 70/30 due to our taking less risk on ourselves and transferring it onto the productivity of other workers. Of course, not nearly as productive as us! But hey. We want to have more free time.
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dbr
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by dbr »

In your case everything has changed -- a lot. The problem is nobody here really understands how it has changed because we aren't familiar with the business and we don't know your family and we don't know you.

I'm not sure this forum really addresses this sort of situation even if we had more details.

But you did ask the specific question about 10% in bonds. My answer to that is that 10% in bonds doesn't make any sense for anyone because it is in the never-never land of too little to make any difference.

What your asset allocation could or should be, I have no idea. The answer depends on what you want to do with all that money.
mw1739
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by mw1739 »

Similar age and situation here. My wife was given a stake in her family business at the end of last year. While we could theoretically retire and live off our investments and business distributions, we're treating the distributions as extra money and trying to save the vast majority of it.

Treat it as if it doesn't exist (and could go away at any time), invest the distributions for your future. I wouldn't make a significant investment in bonds at this time - you already are in a great financial position and don't necessarily need to reduce risk.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by bertilak »

Two thoughts:
  1. Risk. How much risk have you taken on with this inheritance? You need to consider not only how much additional income there will be but how much risk comes along with that. This has been touched on by several of the up-thread posts.
  2. Responsibility. How much responsibility for running the business have you taken on. I don't know how this factors into your questions but think it must be a factor, so think about it.
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Mike Scott
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by Mike Scott »

If you are asking about adding more bonds than included in the TD 2045 (which is about 10%), you can if you want to shift to a more conservative stance. It seems appropriate to rethink your financial approach considering such a significant financial impact. In the end, you may or may not make any particular changes but do your due diligence. Keeping your own financial assets separate from the family business is good because you don't know the future of the business. Perhaps talk to one of the often recommended fee only financial advisors. I would also get some tax management advice to see if this changes anything there and do some estate planning if you have not already. Spend some money if you want.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by Krui24 »

This is one of the few situations where I would recommend a sophisticated wealth manager.

I work with private businesses (doing M&A) and frequently see people go from having moderate wealth to having a LOT.

There are lots of pitfalls. A good wealth manager can take it all into account - they have lawyers on staff who can handle trusts & estates work, insurance experts, tax experts, and of course investment recommendations (with this last piece being the lowest value-add IMO).

Good ones will start with a comprehensive review (most will do for free) of your situation and a plan - much like a financial planner would do. They will also take into account a lot of "life stuff" like your philosophy on parenting (if that's the plan), charitable causes, and other things you want to do with your life.

No offense to the BH crowd, but the advice here isn't generally geared to this situation. I know a few good wealth managers who work with high net worth individuals & families, happy to recommend if you'd like. I presume you'd already have access to this type of thing through your family but if you want a fresh perspective, it's pretty easy to get.
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jomama341
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by jomama341 »

SubPar wrote: Wed Jun 23, 2021 8:43 am I personally wouldn't change much if I were in this situation. I would continue to invest the dividend cash flow in accordance with my target allocation and treat it as if I simply received a raise. If there is no reasonable expectation of a liquidity event/exit from the family business, I wouldn't even mentally account for the value of shares held in family business.

Assuming this is a C-Corp and there are is no pass-through taxation or anything of the sort to contend with? Could make sense to start thinking about estate planning (though that assumes there isn't already a plan in place -- with a 70+ year successful family basis, very likely this box is already checked).
Thanks for your response. The company is an S-Corp in case that matters.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by jomama341 »

AlohaJoe wrote: Wed Jun 23, 2021 8:46 am
jomama341 wrote: Wed Jun 23, 2021 8:18 am I already have a net worth that is roughly 30x my annual expenses. I’m 34 y/o and single w/o any dependents.
[...]
does it still make sense for me to keep ~10% of my portfolio in bonds?
Even ignoring your family business, a lot of people would say it doesn't make sense for you have bother with 10% of your portfolio in bonds.

You're 34: don't need bonds at that age.

You have 30x expenses already: don't need bonds with a portfolio that large.

Did you panic last year when markets crashed? If not, don't need bonds.

Obviously not everyone agrees with those statements. But a non-trivial number of Bogleheads think it is perfectly fine not to have bonds in your situation, even ignoring the family business.

Adding the family business: you have 3 years of expenses in bonds. You say you're going to get that much or more from dividends in the family business every single year. So I don't think it matters much what you do. Keep the 10%. Get rid of the 10%. It's not going to move the needle in a meaningful way either way.
Thanks. Indeed, I did not panic when the market dipped in 2020. I just did some tax loss harvesting.

That said, it was the only time in my investing career that really tested me, so maybe I wouldn’t be so confident in a 2008 style scenario, but I’m guessing I’d hold course.

So, you don’t think I should devote additional funds to bonds?
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by jomama341 »

Somethingwitty92912 wrote: Wed Jun 23, 2021 8:46 am I’d pretend like the family business doesn’t exist. If benefits come from it great. If not oh well.
Thanks. That has been my approach thus far. I’m mainly wondering if my investment strategy (specifically allocation) should be re-assessed given the fact that I’m going to be on significantly stronger financial footing moving forward.
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jomama341
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by jomama341 »

dbr wrote: Wed Jun 23, 2021 9:01 am In your case everything has changed -- a lot. The problem is nobody here really understands how it has changed because we aren't familiar with the business and we don't know your family and we don't know you.

I'm not sure this forum really addresses this sort of situation even if we had more details.

But you did ask the specific question about 10% in bonds. My answer to that is that 10% in bonds doesn't make any sense for anyone because it is in the never-never land of too little to make any difference.

What your asset allocation could or should be, I have no idea. The answer depends on what you want to do with all that money.
I understand what you’re saying and appreciate the response.

Without divulging more about myself or the business, all I’m asking is for readers to take me at my word when I say that the business is a very stable, healthy one and I’ve managed my finances about as well as possible thus far. I’m not planning to upgrade my lifestyle meaningfully until I get married and have kids.

Re: bonds, I guess the watered down version of my question is: is there any real benefit to someone in my position, with the sort of financial buffer I already have, to devote any portion of my portfolio to bonds?
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by jomama341 »

mw1739 wrote: Wed Jun 23, 2021 9:22 am Similar age and situation here. My wife was given a stake in her family business at the end of last year. While we could theoretically retire and live off our investments and business distributions, we're treating the distributions as extra money and trying to save the vast majority of it.

Treat it as if it doesn't exist (and could go away at any time), invest the distributions for your future. I wouldn't make a significant investment in bonds at this time - you already are in a great financial position and don't necessarily need to reduce risk.
Thanks for the input. This feels consistent with my current view on the situation, so it’s helpful to hear someone in a similar situation express a similar sentiment.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by bertilak »

jomama341 wrote: Wed Jun 23, 2021 11:01 am
Somethingwitty92912 wrote: Wed Jun 23, 2021 8:46 am I’d pretend like the family business doesn’t exist. If benefits come from it great. If not oh well.
Thanks. That has been my approach thus far. I’m mainly wondering if my investment strategy (specifically allocation) should be re-assessed given the fact that I’m going to be on significantly stronger financial footing moving forward.
I mentioned a couple of things to think about above, but in general, the stronger financial footing you are on the more freedom you have to choose whatever allocation you want (not need). You can go more conservative as you now need less return or you can go more aggressive as you now can afford more risk and perhaps the extra expected return may make for a bigger legacy.

You should also see an estate attorney for advice above and beyond asset allocation. And, yes, there is more to it than that.
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cchrissyy
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by cchrissyy »

Re: bonds, I guess the watered down version of my question is: is there any real benefit to someone in my position, with the sort of financial buffer I already have, to devote any portion of my portfolio to bonds?
i think the argument is not to take unneccesary risk

you are correct that given your age and expected high and steady income, you are well-positioned to be unafraid of 100% stock.

in the "need, ability, and willingness" to take risk, that line is your "ability". and you say you also have "willingness"

so the reason to move to a less-risky portfolio is that you have no "need" for the higher level of risk and your goals are easily met without it. (are they?)
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by dbr »

jomama341 wrote: Wed Jun 23, 2021 11:06 am

Re: bonds, I guess the watered down version of my question is: is there any real benefit to someone in my position, with the sort of financial buffer I already have, to devote any portion of my portfolio to bonds?
The effect of holding some or more in bonds is that your assets will be subject to less random fluctuation in value at any time while also having a lower probability of growth over time. Only you can decide what behavior is desired or acceptable from your portfolio. "Benefit" is not a meaningful term to anyone except you as you contemplate what might happen.

If you want to see what this can look like in real numbers go to www.firecalc.com and enter the model on the not yet retired tab, put in your current asset value and put in the expected annual savings. Run the model for some different selections of stock % allocation for some period of years, maybe up to 30 years out, and in each case look at the chart of trajectories of possible portfolio values a person would have had depending on what actual historical year the plan started. This collection of sample data is taken to represent the range of future probabilities your investments might experience. Once you have seen this you may have a better feel for the effect of asset allocation for you. Note you can go to the explore tab and elect to download those results to a spreadsheet. For some odd reason I think the charted data is in real dollars and the download in nominal dollars, go figure. But either way I think the appreciation is helpful to anyone.

PS One thing the model allows is that at any future date you delete that income so that you would see what happens next.
Last edited by dbr on Wed Jun 23, 2021 11:37 am, edited 1 time in total.
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jomama341
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by jomama341 »

bertilak wrote: Wed Jun 23, 2021 9:45 am Two thoughts:
  1. Risk. How much risk have you taken on with this inheritance? You need to consider not only how much additional income there will be but how much risk comes along with that. This has been touched on by several of the up-thread posts.
  2. Responsibility. How much responsibility for running the business have you taken on. I don't know how this factors into your questions but think it must be a factor, so think about it.
Thanks. Re: #1, I’m not sure I agree with/understand the arguments regarding additional risk. While it’s true that a greater portion of my net worth is now tied up in the family business, this is all additive and doesn’t come at the expense of diversified assets I would otherwise have. To me, the risk argument sounds a bit like saying that by giving $100,000 of AAPL a man who only has $1,000 of VTI to his name, is being put in a riskier situation. Maybe I’m not getting it though?

Re: #2, I don’t work for the business. I am on the board, though, but my responsibilities are pretty limited.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by bertilak »

jomama341 wrote: Wed Jun 23, 2021 11:24 am Thanks. Re: #1, I’m not sure I agree with/understand the arguments regarding additional risk. While it’s true that a greater portion of my net worth is now tied up in the family business, this is all additive and doesn’t come at the expense of diversified assets I would otherwise have. To me, the risk argument sounds a bit like saying that by giving $100,000 of AAPL a man who only has $1,000 of VTI to his name, is being put in a riskier situation. Maybe I’m not getting it though?
I wasn't trying to imply that the inheritance posed a risk to already-held assets, just that the inheritance itself had both risks and rewards. To follow your analogy ... the AAPL stock didn't put VTI at risk but one might want to think about the risk of depending on AAPL's return. Perhaps another company ("Peach?") will come along and steal all (or a significant portion) of AAPL's business! As a new owner of AAPL you would have some interest (or even responsibility?) to think about that.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by ivgrivchuck »

jomama341 wrote: Wed Jun 23, 2021 8:18 am Anyways, thank you for reading this admittedly long post. I realize that my question is somewhat open ended and there are probably several different ways of looking at this. I’m slightly embarrassed to be posting about this as I realize how fortunate I am to be in this situation in the first place, but as I mentioned before, it’s important to me that I be a responsible steward for this wealth and I really value the input of this community. Thanks in advance.
It's important to always look one's portfolio as a whole. The fact you own a big portion of a family business should in my mind impact your asset allocation.

What this means in investing is that now you have a concentrated position in a single stock.

Say that previously your portfolio was 1M (90/10):
900k - stocks
100k - bonds

If you now inherited a 1M family business, your net worth doubled, at the very least you want to count that as part of your stock allocation (90/10), so that your portfolio would look like:
1M - family business
800k - stocks
200k - bonds

But because the risks in family business are much higher than in highly diversified stock portfolio, you might consider compensation by some extra bonds, like:
1M - family business
700k - stocks
300k - bonds

Just food for thought...
40% VTI | 40% VXUS | 13% I-bonds | 7% EE-bonds
vieques
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by vieques »

Krui24 wrote: Wed Jun 23, 2021 10:15 am This is one of the few situations where I would recommend a sophisticated wealth manager.

I work with private businesses (doing M&A) and frequently see people go from having moderate wealth to having a LOT.

There are lots of pitfalls. A good wealth manager can take it all into account - they have lawyers on staff who can handle trusts & estates work, insurance experts, tax experts, and of course investment recommendations (with this last piece being the lowest value-add IMO).

Good ones will start with a comprehensive review (most will do for free) of your situation and a plan - much like a financial planner would do. They will also take into account a lot of "life stuff" like your philosophy on parenting (if that's the plan), charitable causes, and other things you want to do with your life.

No offense to the BH crowd, but the advice here isn't generally geared to this situation. I know a few good wealth managers who work with high net worth individuals & families, happy to recommend if you'd like. I presume you'd already have access to this type of thing through your family but if you want a fresh perspective, it's pretty easy to get.
As someone who is HNW and UHNW when you count illiquid assets, I would disagree. Bogleheads actually has information on all the above topics but it just tends to be spread out and you need to know where to look. You can do it yourself if you are inclined but a good tradeoff would be to find an hourly non-AUM financial advisor who deals with these issues and will point you in the right direction with personal recommendations for estate planning, tax, etc.

On another note, I have surprisingly found Reddit's r/fatFIRE to be a shockingly good source of information for people at this stage in their financial lives. A little bit more noise but that is easy to ignore if you are relatively financially savvy. They are also very respectful of the BH community and often point people our way.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by bogcir »

With a family business that seems so stable (70+ yrs) and presumably isn’t in trouble right now, I’d feel pretty comfortable with that. At 2x-5x your annual spend in annual dividends, as well as 30x in current savings. You are in great shape and in a few years, likely to reach > 50x spend annual spend sooner than later, which means even a 50% drop in assets won’t derail financial independence.

Right now you said you have 10% in bonds, which is presumably 3x your annual spend. You could consider keepibg that bond portion fixed to an absolute number rather than percentage of portfolio. Ie. Always keep 3x annual spend in bonds and as your assets grow, the equity portion continues to rise as a percentage.

That gives you some safe reserves, but also isn’t super conservative. You can adjust that fixed number to one you are most comfortable with (3x vs 5x annual spend).

Also you should start thinking about estate planning.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by AlohaJoe »

jomama341 wrote: Wed Jun 23, 2021 10:59 am
So, you don’t think I should devote additional funds to bonds?
No, I don't, but opinions vary.

You're already close to having the dividend yield alone cover all your expenses. The volatility of the nominal value of your portfolio is no longer an especially useful metric so you don't need "ballast" to keep down that volatility.

A lot of Bogleheads are way more risk averse than me and would use your newfound windfall to buy 50x expenses in a TIPS ladder.

So that's two very different ways to go and there isn't a mathematically "correct" path.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by hand »

jomama341 wrote: Wed Jun 23, 2021 11:06 am I’m not planning to upgrade my lifestyle meaningfully until I get married and have kids.
I would definitely take the time to game out what expenses are likely to look like post marriage and kids to better understand how your newfound wealth compares to your likely future lifestyle. 30x expenses when you're single is great, but depending on how limited your current needs, may only be a drop in the bucket.

In additional to the financial (and I think I'm in the camp of treating the illiquid windfall as a risky income stream and using to invest in your existing asset allocation) I would take some serious time to consider whether you want to actively use or hide your wealth to influence your dating and marriage prospects. Arguably your choice of spouse will have a greater impact on your future life than your windfall.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by Luke Duke »

Do you have any desire to buy out other heirs so that ownership does not continue to get diluted with each generation?
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by MoonOrb »

My take is that you should be guided by your need, ability, and willingness to take on risk. Your ability to take risk is increasing significantly. So even if it is true that your overall portfolio--including your stake in the business--is more risky, you can handle that risk because the stake in the business is not something you need.

You should at least, though, consider that if your expenditures go up significantly because of this infusion of income that you may not have as much ability to tolerate risk as you think, and you should account for this.

Like, if you were planning on having $100k expenses annually in retirement and you have a portfolio that is designed to support that, why should you alter that plan just because you now have an additional income stream of $40k/year? (I'm obviously making these numbers up). You still only need to support $100k of spending each year with your portfolio. On the other hand, if you get that additional $40k/year in income and get used to spending it all, now your portfolio will need to support $140k a year, and you need to make sure you have the right asset allocation to support that.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by jomama341 »

Luke Duke wrote: Wed Jun 23, 2021 12:37 pm Do you have any desire to buy out other heirs so that ownership does not continue to get diluted with each generation?
I don't. The business has grown faster than my extended family and I'd rather stay as diversified as possible.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by Dontridetheindexdown »

You asked "I’m wondering if my investment strategy should change as I enter what will truly be a new phase of wealth accumulation? Specifically with regards to bonds...would I just be leaving money on the table in exchange for a reduction in volatility that I don’t really need?"

With all respect, this new phase of wealth accumulation might be considered an opportunity to increase your stable asset allocation.

Many people find that with sufficient stable assets, they become even more comfortable with equity exposure.

It can be immensely satisfying to take risks in the equity space, and it feels even better when you are fully ballasted by stable assets.

This could be your opportunity, at a relatively young age, to painlessly adopt a much more conservative asset allocation.

Many people are obsessed with the possibility of inflation, when recession is perhaps equally likely.

You can well afford to invest for either possibility by increasing your stable asset holdings even as you continue to invest in equities.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by Jack FFR1846 »

I have a much smaller income from some passive work, so to speak. I give it zero importance with respect to investing. I consider that it could go to zero, starting today. I see no reason why you can't do exactly that. Take the checks, whenever they're coming to you. Save some of them to pay for extra tax accounting. Otherwise, stay the course as you have been up to this point.

I'm sure some people would say that you could consider this income as fun money and I can't disagree. It's money you have not counted on. If you want to buy a new Ferrari and the money covers it, why not? If the money stops tomorrow, ok.
Bogle: Smart Beta is stupid
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by jomama341 »

MoonOrb wrote: Wed Jun 23, 2021 12:51 pm My take is that you should be guided by your need, ability, and willingness to take on risk. Your ability to take risk is increasing significantly. So even if it is true that your overall portfolio--including your stake in the business--is more risky, you can handle that risk because the stake in the business is not something you need.

You should at least, though, consider that if your expenditures go up significantly because of this infusion of income that you may not have as much ability to tolerate risk as you think, and you should account for this.

Like, if you were planning on having $100k expenses annually in retirement and you have a portfolio that is designed to support that, why should you alter that plan just because you now have an additional income stream of $40k/year? (I'm obviously making these numbers up). You still only need to support $100k of spending each year with your portfolio. On the other hand, if you get that additional $40k/year in income and get used to spending it all, now your portfolio will need to support $140k a year, and you need to make sure you have the right asset allocation to support that.
This all makes sense to me. The way I see it, I have four main "buffers": my personal income unrelated to the business, my savings, distributions from the business, and the value of my equity in the business. Right now, my personal income alone covers all my living expenses and then some. I don't anticipate my living expenses increasing dramatically until I start a family, but I'm a ways away from that at the moment and my partner would likely have their own income/savings, so I'm not really worried about being able to provide for a family down the road.

I guess the crux of my question pertains to risk and whether it tracks to take on more risk in my situation given the substantial buffer I have for myself. Thanks for your input.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by jomama341 »

Dontridetheindexdown wrote: Wed Jun 23, 2021 1:57 pm You asked "I’m wondering if my investment strategy should change as I enter what will truly be a new phase of wealth accumulation? Specifically with regards to bonds...would I just be leaving money on the table in exchange for a reduction in volatility that I don’t really need?"

With all respect, this new phase of wealth accumulation might be considered an opportunity to increase your stable asset allocation.

Many people find that with sufficient stable assets, they become even more comfortable with equity exposure.

It can be immensely satisfying to take risks in the equity space, and it feels even better when you are fully ballasted by stable assets.

This could be your opportunity, at a relatively young age, to painlessly adopt a much more conservative asset allocation.

Many people are obsessed with the possibility of inflation, when recession is perhaps equally likely.

You can well afford to invest for either possibility by increasing your stable asset holdings even as you continue to invest in equities.
I like the way you phrased this. Definitely food for thought. Thank you.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by jomama341 »

Jack FFR1846 wrote: Wed Jun 23, 2021 1:59 pm I have a much smaller income from some passive work, so to speak. I give it zero importance with respect to investing. I consider that it could go to zero, starting today. I see no reason why you can't do exactly that. Take the checks, whenever they're coming to you. Save some of them to pay for extra tax accounting. Otherwise, stay the course as you have been up to this point.

I'm sure some people would say that you could consider this income as fun money and I can't disagree. It's money you have not counted on. If you want to buy a new Ferrari and the money covers it, why not? If the money stops tomorrow, ok.
I suppose my question is pertinent to anyone my age, regardless of an unexpected windfall such as this one: does it make any sense for a 34 y/o whose financial house is in order and is living well within their means to hold 10% in bonds? Seems like many would say no... Thus far, I've not been one of those people, but given this recent development in my life, I figured it might be a good time to reassess.

What definitely won't change for me are my spending habits/lifestyle. Not for a while at least...
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by jomama341 »

vieques wrote: Wed Jun 23, 2021 12:12 pm
Krui24 wrote: Wed Jun 23, 2021 10:15 am This is one of the few situations where I would recommend a sophisticated wealth manager.

I work with private businesses (doing M&A) and frequently see people go from having moderate wealth to having a LOT.

There are lots of pitfalls. A good wealth manager can take it all into account - they have lawyers on staff who can handle trusts & estates work, insurance experts, tax experts, and of course investment recommendations (with this last piece being the lowest value-add IMO).

Good ones will start with a comprehensive review (most will do for free) of your situation and a plan - much like a financial planner would do. They will also take into account a lot of "life stuff" like your philosophy on parenting (if that's the plan), charitable causes, and other things you want to do with your life.

No offense to the BH crowd, but the advice here isn't generally geared to this situation. I know a few good wealth managers who work with high net worth individuals & families, happy to recommend if you'd like. I presume you'd already have access to this type of thing through your family but if you want a fresh perspective, it's pretty easy to get.
As someone who is HNW and UHNW when you count illiquid assets, I would disagree. Bogleheads actually has information on all the above topics but it just tends to be spread out and you need to know where to look. You can do it yourself if you are inclined but a good tradeoff would be to find an hourly non-AUM financial advisor who deals with these issues and will point you in the right direction with personal recommendations for estate planning, tax, etc.

On another note, I have surprisingly found Reddit's r/fatFIRE to be a shockingly good source of information for people at this stage in their financial lives. A little bit more noise but that is easy to ignore if you are relatively financially savvy. They are also very respectful of the BH community and often point people our way.
Thanks for these recommendations. I'll check out r/fatFIRE and look into an hourly financial advisor.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by jomama341 »

retired@50 wrote: Wed Jun 23, 2021 8:38 am
jomama341 wrote: Wed Jun 23, 2021 8:30 am
retired@50 wrote: Wed Jun 23, 2021 8:25 am To me, the family business interest is like having a bunch of stock in a single company that pays a large dividend.

I would think your portfolio position is now MORE risky, than before, and I'd put a healthy chunk of my existing 401k money into bonds to offset this risk.

Do you intend to keep working for a different company, unrelated to the family business?

Regards,
While, theoretically, my net worth will be more highly concentrated in the family business, my net worth is about to get a really big bump relative to my current net worth, so I'm not sure I would describe the new normal as riskier assuming my spending habits don't change radically from where they currently are.

I don't work for the family business, nor do I intend to. I do have my own career, which I have no intention of abandoning.
Well, you mention two things in your response that will help you out.

1. Not changing spending habits.
2. Continuing with your own career.

If these two things continue to be true, then you might as well get familiar with a Donor Advised Fund (DAF) and charitable giving.

If it were me, I'd probably continue to invest the annual dividends received from the family business in a 60/40 portfolio or something along those lines. In other words, I wouldn't get aggressive in my portfolio.

At this point, you can basically just wipe money off of your list of concerns. It will take some getting used to, but you've been given an incredible gift and you should probably chase whatever you're passionate about in life.

Regards,
Thanks for your response. This really resonates with me. FWIW, I already have a Donor Advised Fund w/ Schwab. I will absolutely be ramping up my charitable giving with this new windfall.

The hardest part will absolutely be balancing my professional goals with my passions.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by retired@50 »

jomama341 wrote: Wed Jun 23, 2021 10:59 am So, you don’t think I should devote additional funds to bonds?
One thought popped into mind about the potential for bond holdings.

You didn't really specify where your current (30x) nestegg is located, account wise. Taxable, tax-deferred, or Roth (possibly a combination of all 3).

To avoid a "tax-torpedo" when RMDs begin (in a few decades), assuming you have any money in tax-deferred, you might want to slow down the growth of this money by holding bonds, just so you don't have another tax issue later on.

With a high annual income for the foreseeable future, you'll likely need a good quality CPA or tax adviser, or at least get familiar with some of the potential issues you'll be facing now and in the future.

Regards,
This is one person's opinion. Nothing more.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by jomama341 »

retired@50 wrote: Wed Jun 23, 2021 2:32 pm
jomama341 wrote: Wed Jun 23, 2021 10:59 am So, you don’t think I should devote additional funds to bonds?
One thought popped into mind about the potential for bond holdings.

You didn't really specify where your current (30x) nestegg is located, account wise. Taxable, tax-deferred, or Roth (possibly a combination of all 3).

To avoid a "tax-torpedo" when RMDs begin (in a few decades), assuming you have any money in tax-deferred, you might want to slow down the growth of this money by holding bonds, just so you don't have another tax issue later on.

With a high annual income for the foreseeable future, you'll likely need a good quality CPA or tax adviser, or at least get familiar with some of the potential issues you'll be facing now and in the future.

Regards,
Last I checked, I’m about 80% taxable, 20% tax-deferred (tax-deferred is 50/50 trad 401k and Roth IRA).

Can you point me to some info about the tax torpedo you speak of? I’m not familiar with this idea. Thanks.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by KyleAAA »

Your portfolio is already 30x your expenses, so no need to change. You have an extremely large ability to take risk and it seems like enough cash flow to easily double your portfolio within 2-3 years. Since your allocation is diversified and reasonable, what do you gain moving everything to bonds? Nothing, really.

Definitely retain a good CPA since your taxable portfolio is about to dominate.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by retired@50 »

jomama341 wrote: Wed Jun 23, 2021 2:51 pm
retired@50 wrote: Wed Jun 23, 2021 2:32 pm
jomama341 wrote: Wed Jun 23, 2021 10:59 am So, you don’t think I should devote additional funds to bonds?
One thought popped into mind about the potential for bond holdings.

You didn't really specify where your current (30x) nestegg is located, account wise. Taxable, tax-deferred, or Roth (possibly a combination of all 3).

To avoid a "tax-torpedo" when RMDs begin (in a few decades), assuming you have any money in tax-deferred, you might want to slow down the growth of this money by holding bonds, just so you don't have another tax issue later on.

With a high annual income for the foreseeable future, you'll likely need a good quality CPA or tax adviser, or at least get familiar with some of the potential issues you'll be facing now and in the future.

Regards,
Last I checked, I’m about 80% taxable, 20% tax-deferred (tax-deferred is 50/50 trad 401k and Roth IRA).

Can you point me to some info about the tax torpedo you speak of? I’m not familiar with this idea. Thanks.
The tax torpedo can come about from a combination of Social Security income and Required Minimum Distribution (RMD) income when being forced to take money out of a 401k or Traditional IRA. This can often lead to very high marginal tax brackets for retirees. Current start of Social Security can start anywhere from 62 - 70 years old, and RMDs begin on tax-deferred accounts at 72 years old.

The basic idea is that if your tax-deferred account has a huge balance because it was invested in stock funds for 40+ years, then your RMD will be large, which is taxed as ordinary income. RMDs are calculated based on an IRS formula. If you don't do your own taxes this can be confusing.

See link: https://www.cnbc.com/2017/10/29/will-th ... ement.html

Regards,
This is one person's opinion. Nothing more.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by BV3273 »

Somethingwitty92912 wrote: Wed Jun 23, 2021 8:46 am I’d pretend like the family business doesn’t exist. If benefits come from it great. If not oh well.
This is pretty much my life motto. I act as if it’s all on me but if by the grace of God something falls into my lap I accept it.
JustGotScammed
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by JustGotScammed »

Take your profits from the family business and buy British American Tobacco stock. You will be having so much cash coming in you'll be Warren Buffett, Jr.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by jomama341 »

KyleAAA wrote: Wed Jun 23, 2021 2:58 pm Your portfolio is already 30x your expenses, so no need to change. You have an extremely large ability to take risk and it seems like enough cash flow to easily double your portfolio within 2-3 years. Since your allocation is diversified and reasonable, what do you gain moving everything to bonds? Nothing, really.

Definitely retain a good CPA since your taxable portfolio is about to dominate.
Just to be clear, moving everything to bonds was never on the table. In fact, the question I'm really kicking around is whether any bond allocation at all even makes sense.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by NYC_Guy »

Somethingwitty92912 wrote: Wed Jun 23, 2021 8:46 am I’d pretend like the family business doesn’t exist. If benefits come from it great. If not oh well.
I find these sentiments fascinating (not wrong but just so foreign to my thinking that it’s hard for me to compute).

My advice is to find assets that have a low or even negative correlation to my family business. I might even consider perpetually buying puts in a similar public business to offset risk.

I certainly would not ignore the most important and dominant part of my asset mix.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by NYC_Guy »

jomama341 wrote: Wed Jun 23, 2021 4:50 pm
KyleAAA wrote: Wed Jun 23, 2021 2:58 pm Your portfolio is already 30x your expenses, so no need to change. You have an extremely large ability to take risk and it seems like enough cash flow to easily double your portfolio within 2-3 years. Since your allocation is diversified and reasonable, what do you gain moving everything to bonds? Nothing, really.

Definitely retain a good CPA since your taxable portfolio is about to dominate.
Just to be clear, moving everything to bonds was never on the table. In fact, the question I'm really kicking around is whether any bond allocation at all even makes sense.
It almost certainly doesn’t from a financial point of view. But I’s probably have a significant cash/bond portfolio anyway.
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Re: I’m about to inherit a stake in a large family business. Does a traditional asset allocation still make sense for me

Post by bogledogle »

I don't know what you would need to change - is this a business that would require you to work now that you have a larger stake?. If not, it seems you are doing all the right things. I think you should consult a tax advisor and see how you can optimize for the long term - perhaps this business brings you the ability to write off a bunch of $$$.

If anything, I would be more aggressive with investments.
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I’m about to inherit... Is there an EXIT plan?

Post by celia »

I'm not sure this is the correct question, but here it goes:

Does the business have a written exit plan? I've read that one of the first things to think about when starting a business is how it will end... Will the business someday be sold? Go public? Be owned by the last surviving partner? One partner would buy the others out?

It is important to understand this, since it will impact your share, obviously. You also need a personal exit plan. What happens to your share when you die? Can you select what you want to happen with it or can it be divided up, such as if you have multiple children one day?

How many other partners are there and are any of them considering selling or doing something with their share, particularly if others are inheriting as you are? Some people would want to someday do something else with the value of their share. After all, people have children, get sick, become incapacitated, and die. Somehow, these need to be accommodated and all that may impact the value of your share.

I don't expect any answers to these questions to be posted here, but think it is something you should find out, unless you already know all of this. Maybe, one day you will want to sell your share or buy someone else's share. Some people may have a reason to disclaim their share (possibly for the benefit of their kids).

And whatever you find out or decide to do, you should make sure you aren't liable for anything should the company be sued and you should do your own estate planning.
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