How should I allocate and invest $450,000?

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lovelife
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How should I allocate and invest $450,000?

Post by lovelife » Wed May 01, 2013 10:19 am

Hi there. I am new on these forums. I just opened a Vanguard account and hope to fund it very soon. I have a UTMA account with about $250,000 which is managed by an independent FA of my dads. I hate the fees which costs the portfolio over $2k a year just for the adviser and all the funds are actively managed. Additionally, I have another account with that FA which is a trust with about $200,000 (and another $2k in fees per year although not much I can do about this since it is a trust and I will not ever be able to manage the money myself. That being said I may be able to determine how the trust money is invested. I am extremely fortunate to have had parents and grandparents put all this away for me. In any case, I mention the trust because it is currently invested almost identically to the UTMA account. I took the initiative to manage this money on my own through Vanguard employing a 90% passively managed investment strategy, however, I have to justify my investment change to my dad and his FA first. For the purposes of this please assume I am only investing $250,000 because I do not know how much I will be able to impact the way the trust is invested.

Some information about myself:

Age: 23
Marital Status: Single
Education: BA in Economics from a top 50 school
Employment: Unemployed
Debt ?: None
Unrealized Gains: up to $30,000 taxable in the UTMA and $10,000 in the Trust at my parents marginal tax rate...
No state tax in my state but I have to pay my parent's marginal tax rate for federal tax until I am 24 or making 50% of the cost of my living expenses.

I live at home and my parents cover my food, gas, insurance and all other necessary expenses. I hope to be employed in the next 2 months. I plan to be married soon and my fiance has an account with about $120,000 liquid net worth. Obviously we both have huge head starts. Her money is managed by an FA and I do not plan on managing her money or asset allocation anytime soon.

Given my age, my father would only consider my request to directly manage the UTMA account if I send him an email detailing the investments I would make and the allocations to each. He plans to then forward it to his adviser and get his opinion on whether these would be optimal compared to the current funds they are invested in. He also plans to let them know that I am interested in managing the UTMA money myself and getting their opinion about whether that would be a good idea or not. I know what your probably thinking....of course they will say the current funds are better. Also they will probably say negative things about the idea of me managing the money due to my age and lack of "experience" despite the fact that it is my money. This is what I said but my dad believes his advisers will be honest about it and would recommend that I manage the portfolio on my own if they truly believe passive investment strategy is superior. Passive investment strategy is their competition so I doubt they will admit to my dad that they are inferior to the competition. The problem with his logic is that he has an even bigger account with them that would be jeopardized if the adviser were to reveal that a passive investment strategy is superior to the active management strategy they currently employ.

If I am successful, I will be able to manage the UTMA account in Vanguard and the adviser will continue to manage my trust since it would be a conflict if I managed it myself. The trust will ideally be a copy of the UTMA but perhaps with a longer term outlook since the money as a whole is tied up for longer. It is set to distribute the entire trust 3 times in my lifetime every five to ten years starting at age 25 or 30. The asset allocation would be slightly more aggressive on the trust. In the worst case scenario where my dad does not agree to let me manage my money on my own (even though I probably could legally take control of my account), I will have a very big impact on the asset allocation and funds being held in the account. I was raised to live well within my means and I have great investment discipline.

Here is my current Asset Allocation set up by the advisers:

59% Domestic Equities
16% International Equities
13% Cash & Equivalents
8% Alternative Investments
4% International Fixed Income
Ignore the unusually high cash levels. There was a recent deposit into the account which distorted the asset allocation.

I would like to have something like this:
50% Domestic Equities: VIGAX
25% International Equities: VTIAX
5% Alternatives: BREFX
10% Small Cap/Foreign Small Cap Active funds: (5%) WAFMX + (5%) POAGX
5% Fixed Income: VWITX
5% Money Market/Discretionary between Alternatives and Fixed Income

Does this plan seem reasonable? I understand some of you do not believe active management has any place in a portfolio but I strongly disagree when it comes to the small cap funds. I would like the 10% allocation to actively managed small caps for the long term portfolio growth. The funds I selected above seem to be run by the best managers out there despite their high fees - at least there is no load. Also I increased my fixed income allocation %. I left 5% in Money Market because my portfolio also helps pay for a life insurance premium on a product my parents set up for me which is $5,000 per year which builds up value over time (and currently is worth $40,000) among other investment expenses that the portfolio incurs (including family partnerships). I do not plan on withdrawing money from this portfolio anytime soon. Any down payment on a house or condo I plan to make either from several years of work savings or from my soon to be wife's account which she has saved particularly for the purpose of a future down payment. In the event that I need to help out from my savings, I am sure I will manage one way or another.

The financial adviser will eventually need to respect how I want the money invested and MY asset allocation preference in the event that he convinces my dad not to hand me the account to manage directly.

Thank you in advance and let me know if I left any details out. I know it is very wordy but I wanted to make sure all the facts are here. I really appreciate it!!

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BolderBoy
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Re: How should I allocate and invest $450,000?

Post by BolderBoy » Wed May 01, 2013 2:07 pm

May I summarize a bit?

You are the beneficiary of two accounts, neither of which you can control but might get some say as to the investments therein, IF your father and his FA agree with your desires. You are living at home, but will soon marry and be living with your spouse apart from your parents. You have some keen ideas about passive vs active fund investing. Your soon-to-be-spouse has some financial assets but you won't be meddling in those.

Do I have that summed about right?

Can you propose a contest to your father? That you want XYZ portfolio strategy used for your two accounts and in 30 years you can see who came out ahead? Documentation for the superiority of a long-term passive approach is in the wiki. In the alternative, can you use the wiki documentation to build your case for how you would like to see the accounts invested?

Have I missed anything?

Grt2bOutdoors
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Re: How should I allocate and invest $450,000?

Post by Grt2bOutdoors » Wed May 01, 2013 2:33 pm

BolderBoy wrote:May I summarize a bit?

You are the beneficiary of two accounts, neither of which you can control but might get some say as to the investments therein, IF your father and his FA agree with your desires. You are living at home, but will soon marry and be living with your spouse apart from your parents. You have some keen ideas about passive vs active fund investing. Your soon-to-be-spouse has some financial assets but you won't be meddling in those.

Do I have that summed about right?

Can you propose a contest to your father? That you want XYZ portfolio strategy used for your two accounts and in 30 years you can see who came out ahead? Documentation for the superiority of a long-term passive approach is in the wiki. In the alternative, can you use the wiki documentation to build your case for how you would like to see the accounts invested?

Have I missed anything?
Yes - he's graduating from a Top 50 school. :o

Is this post legit? Who posts about graduating from a school that is not in the Top 10 for their major? :confused
If it is legit - sounds like the parents have "control" issues. Must pass the muster of an "independent FA" - not very independent if their salary is dependent on keeping your $450K "in-house" for his vacation fund, car fund, kids college fund, mortgage payments, etc.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

dbr
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Re: How should I allocate and invest $450,000?

Post by dbr » Wed May 01, 2013 2:47 pm

Doesn't the UTMA become your money outright at age 21 or at age x?

lovelife
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Re: How should I allocate and invest $450,000?

Post by lovelife » Wed May 01, 2013 3:13 pm

You all have it right. And I probably do have control legally over the UTMA. I don't want to go behind my dads back and take it without him feeling comfortable with it. It's not worth it to me to upset him. I think his main hesitation is pulling the account because of his relationship with the FA and his fear of giving me control of such a large amount of money. However I do believe I can convince him that I am responsible and mature enough to make my own investment decisions. He hasn't made the best investments himself as he has poured tons of money into private partnerships and it goes no where.

Do you agree it's mostly about trust issues or is my investment strategy fundamentally flawed? Thanks for the replies this far!

nodenuff2
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Re: How should I allocate and invest $450,000?

Post by nodenuff2 » Wed May 01, 2013 3:35 pm

What a great life you and your soon to be can have! Your dad knows how hard it was to accumalate this wealth for you. Proof to him you are ready 1. Get a job. 2. Get to be self supporting 3. Establish your marriage. 4, Come back in a year with a detailed plan. Dad wants the best for you. Just doesn't want you to blow it. Dad's struggle with these kind of things. Be patient after all he has clothed feed and cared for you these first 23 years. Your money will be ok for another year or so. What a great problem to have. best of luck as your life is changing rapidly.
2014 No. 42 2015 No.342 2016 No. 6 2017 238 what do I know? "Good bless America land that I love..."

Userdc
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Re: How should I allocate and invest $450,000?

Post by Userdc » Wed May 01, 2013 3:45 pm

Grt2bOutdoors wrote:
Yes - he's graduating from a Top 50 school. :o

Is this post legit? Who posts about graduating from a school that is not in the Top 10 for their major?
I think that's shorthand for saying he graduated from a school ranked in the top 50 of the US News National University Rankings. And since he didn't say top 25, it's probably ranked in the 26-50 range.

Most schools ranked in that range are selective universities with relatively rigorous academics. They are mostly household names that have large alumni and recruiting networks. An economics graduate from any of those schools would have better-than-average career and job prospects than your typical unemployed 23-year old, so I think its somewhat relevant.

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BL
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Re: How should I allocate and invest $450,000?

Post by BL » Wed May 01, 2013 5:27 pm

nodenuff2 wrote:What a great life you and your soon to be can have! Your dad knows how hard it was to accumalate this wealth for you. Proof to him you are ready 1. Get a job. 2. Get to be self supporting 3. Establish your marriage. 4, Come back in a year with a detailed plan. Dad wants the best for you. Just doesn't want you to blow it. Dad's struggle with these kind of things. Be patient after all he has clothed feed and cared for you these first 23 years. Your money will be ok for another year or so. What a great problem to have. best of luck as your life is changing rapidly.
+1
You are clever to realize it is not smart to confront your Dad about this until you have proved yourself by supporting yourself, managing your own money well both in savings and lifestyle, and living on your own without depending on your parents. Perhaps he would agree to transferring enough per year to convert into tax-advantaged 401k and Roth IRA. On your own, you could then be saving a similar amount in a taxable account at Vanguard. Meanwhile, study the Wiki here and read some of the recommended books. But mainly get your career on track and prove yourself.

HurdyGurdy
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Re: How should I allocate and invest $450,000?

Post by HurdyGurdy » Wed May 01, 2013 5:53 pm

What would you father think about "age in bonds"?

Bacchus01
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Re: How should I allocate and invest $450,000?

Post by Bacchus01 » Wed May 01, 2013 9:52 pm

a) get a job
b) don't get married until you can support yourself
c) leave the money alone and make your own

22twain
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Re: How should I allocate and invest $450,000?

Post by 22twain » Wed May 01, 2013 10:51 pm

Maybe your father would agree to letting you manage part of the UTMA, say $60K, a bit less than 1/4, on a trial basis. After a couple of years, you can compare performance and fees with the FA and decide where to go from there.
My investing princiPLEs do not include absolutely preserving princiPAL.

lovelife
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Re: How should I allocate and invest $450,000?

Post by lovelife » Thu May 02, 2013 1:24 am

There is definitely some great advice here. I suppose that I care less about possession or control of the money in the account than I do about how the money is invested since I do not plan to use it anytime soon anyways. The high adviser fees are likely unavoidable for me. I would just prefer a fee only adviser. Wouldn't you guys agree that a passive investment strategy is superior? My dad's main argument for active management for the entire portfolio is that active managers are better at avoiding downside risk and can avoid or lessen the negative impacts on compounding when the market drops. According to his theory, they are professional and the best managers and they understand market timing. Therefore, they can prepare for negative swings by going into higher cash or less risky stocks.

If I could just convince him out of this, I think my whole family would be better off. Are there any articles out there that debunk this theory? What kind of search could I run through Google to find this type of information? This would be the first part of my "investment proposal" that I would submit to my dad to update my investment strategy and funds. Next would be the allocations and funds I outlined in my initial posting.

I am planning on being married in a year and will likely have a job at least 6 months before then. In the meantime, my fiance has a full time position and I will take a bank teller job or something similar while I look for full time work in finance. I don't believe that marriage is dependent on money. I am productive and will continue my job search constantly until I either get an entry level position or go back to school for a one year masters program in real estate finance.

Just to clarify further, this money is my insurance to a generous retirement. I am not planning on blowing it as some might fear of someone my age. I understand the growth potential this money has to grow into over several decades. I have been blessed and humbled by my position.

Elbowman
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Re: How should I allocate and invest $450,000?

Post by Elbowman » Thu May 02, 2013 2:06 am

Read several of the books on the Bogleheads reading list http://www.bogleheads.org/readbooks.htm . After you've done that you will be much better prepared to convince your father. You will also look back in horror at a time when you were preparing to invest even 10% of your trust in high fee active funds with hot short term performance. :D

YDNAL
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Re: How should I allocate and invest $450,000?

Post by YDNAL » Thu May 02, 2013 4:54 am

lovelife wrote:Hi there. I am new on these forums. I just opened a Vanguard account and hope to fund it very soon. I have a UTMA account with about $250,000 which is managed by an independent FA of my dads. I hate the fees which costs the portfolio over $2k a year just for the adviser and all the funds are actively managed..... I took the initiative to manage this money on my own through Vanguard employing a 90% passively managed investment strategy, however, I have to justify my investment change to my dad and his FA first.
Lovelife, welcome!

A Uniform Transfers to Minors Account (UTMA) is always owned by the child, despite the lack of control until a specified age depending on State law - but typically the age of 18 (California, for instance) and often up to 21. You are 23 but unemployed and living at home, so in your dad's eyes - at least financially speaking - you remain that minor for whom he established this account. Unless you want to damage this relationship by further flexing your muscles - you already "opened a Vanguard account" - I believe it becomes your move to prove fiscal responsibility to your parent. It is up to YOU to figure what that means; and there is no rush considering your young age.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

Ed 2
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Re: How should I allocate and invest $450,000?

Post by Ed 2 » Thu May 02, 2013 7:30 am

silver spoon? Just kidding. get job first,imo, marriage should be last on your list. :happy
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel

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InvestorNewb
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Re: How should I allocate and invest $450,000?

Post by InvestorNewb » Thu May 02, 2013 8:02 am

lovelife wrote:My dad's main argument for active management for the entire portfolio is that active managers are better at avoiding downside risk and can avoid or lessen the negative impacts on compounding when the market drops. According to his theory, they are professional and the best managers and they understand market timing. Therefore, they can prepare for negative swings by going into higher cash or less risky stocks.
Everybody lost money in 2008 - that theory is ludicrous. You would be hard pressed to find active managers that were able to successfully avoid the big downturn. With all do respect, your father needs to read a book or two about investing. Better yet, have him read the forums. I'm a n00b myself and even I know a false statement when I see one.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)

22twain
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Re: How should I allocate and invest $450,000?

Post by 22twain » Thu May 02, 2013 8:41 am

lovelife wrote:My dad's main argument for active management for the entire portfolio is that active managers are better at avoiding downside risk and can avoid or lessen the negative impacts on compounding when the market drops. According to his theory, they are professional and the best managers and they understand market timing. Therefore, they can prepare for negative swings by going into higher cash or less risky stocks.
This leads to an obvious question (at least to me): what did this portfolio actually do during the big plunge in 2008-09 and afterwards, and how does this compare to a hypothetical basket of index funds, rebalanced periodically?
My investing princiPLEs do not include absolutely preserving princiPAL.

bayview
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Re: How should I allocate and invest $450,000?

Post by bayview » Thu May 02, 2013 2:23 pm

Isn't it possible to set up a virtual portfolio, plug in the figures, and see what happens?

If you've decided that you're OK with waiting a while on this, run your virtual portfolio and after one year, compare it to the real one, and see who wins. Don't forget to have all the relevant fees in the real one accounted for when you compare totals.

Congratulations on the upcoming new job and the marriage, in that order! :wink:
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

lovelife
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Re: How should I allocate and invest $450,000?

Post by lovelife » Thu May 02, 2013 4:29 pm

Thank you. I just need to show him better evidence that active management can not market time with reasonable odds of making money in the long run. He thinks his managers are smart enough to figure it out. I may just take the advice of someone who replied earlier and request a dollar amount or percentage to manage on my own over time. Like I said, I care more about how it's invested than who has direct control of it. Technically I have control over it anyways, just not the strategy. If I can't make any headway with him I will request to meet with the FA and implement portfolio changes that way.

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Tortoise
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Re: How should I allocate and invest $450,000?

Post by Tortoise » Thu May 02, 2013 4:58 pm

Is the FA charging 1%? That, added to actively managed fund costs eats away a good portion of your returns over time. Take a look at "Stopping the silent killer of returns" on the Vanguard blog. Your father may be interested in how much money he has, and you will be, giving up over the course of 20 or 30 years.
"Always do right. This will gratify some people, and astonish the rest." --Mark Twain

lovelife
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Re: How should I allocate and invest $450,000?

Post by lovelife » Thu May 02, 2013 9:19 pm

Yes, the fee is about 1%. Supposedly my dad pays .75%. I have seen account statements and the UTMA pays out $575 or so per quarter in fees to the FA. This doesn't include any hidden costs associated with the fund choices. I believe it is a wrap account. The trust also has about $500 per quarter in fees. All in all I am losing $4 -5k a year in advising fees. Some would argue that it doesn't matter because of the amount of money invested but I would say I could get the same services from a fee only adviser for $500 - $1500 a year total. Not to mention, a fee only adviser removes all conflicts of interest. The fees hurt but I don't want to piss my dad off so I will see about transferring the UTMA only for now. It's interesting to me that my dad did not realize that the fees for my account management were coming out of my account. He only realized it when I told him about 6 months ago. He seemed to be willing to pay my management fees - in fact, maybe this is my best option if he decides he doesn't want me to pull the account from his advisers. I would be ok with this as long as I can choose the investments and asset allocation.

Eventually in the next few years (or once I have been working for a while and am self sustaining financially) I will have a fee only adviser help me oversee the trust. I definitely want a fee only adviser for their expertise on taxes and as a help with financial planning. My dad has a background in accounting so he does my taxes. Yet, he is far from an expert on investment tax efficiency or anything related to investing in public equities. He just delegates those tasks to his advisers.

Does my asset allocation seem appropriate given the amount of money being invested? Should both accounts be invested the same if I end up having full control of how they are invested?

Thank you!

Elbowman
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Re: How should I allocate and invest $450,000?

Post by Elbowman » Fri May 03, 2013 10:57 pm

lovelife wrote:Does my asset allocation seem appropriate given the amount of money being invested?
No, not really :( Seriously, don't jump the gun with this. Behavioural mistakes like being impulsive are what lose the most money for the average investor. Anyway, you have the right general idea, but 5% bonds and including WAFMX, POAGX, and BREFX shows that you may not be ready to take control of the trust. :(

But you could be. Just start by investing 50 hours in three of the books from the recommended reading. I know for me, All About Asset Allocation taught me the mechanics, and A Random Walk Down Wall-street taught me the history.

Think of it as being payed $5000/hour to read :)

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jupiter_man
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Re: How should I allocate and invest $450,000?

Post by jupiter_man » Sat May 04, 2013 8:57 am

You quote that "The problem with his logic is that he has an even bigger account with them that would be jeopardized if the adviser were to reveal that a passive investment strategy is superior to the active management strategy they currently employ"

The UTMA account with about $250,000, so I am guessing your Dad's portfolio with this FA could be very well in the high 7 figures ??. You can not control the investment philosophy of your Dad, as he has done well in the last 10-15 years getting to such wealth (in the UTMA, Trust and his own portfolio), and its hard to argue against something that your Dad thinks has worked out well with this FA. I guess your Dad is probably paying 10x more for his portfolio, so you are probably splitting hairs with him for $1,500/Year in fees if you invest the UTMA in Vangaurd vs. what the FA is charging now.

Like Bacchus01 and other posters have said -

a) get a job
b) don't get married until you can support yourself
c) leave the money alone and make your own
d) if you do the above 3 , your Dad will eventually "transfer" the UTMA assets to you - of course your Dad may suggest that you keep the UTMA and your money (once you get a job) with this FA.

You also mentioned that you opened a Vangaurd account and will fund it soon. if you don't have a job yet how do you plan to fund it?

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