Explaining Investing to Your Parents

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nick22
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Explaining Investing to Your Parents

Post by nick22 »

I had the fabulous experience of going over my parents' retirement planning with them this weekend. Like most Americans, they are fairly trusting and naive. They are in their mid 70s with enough resources to live ok and probably not outlive their money if they have a well designed portfolio that accounts for their minimal ability to take risk at this age. But, alas this is not the case...

Running their portfolio through an X-ray tool nearly made me want to vomit. They have 70% equity and 15% of their equity is EM while another 10% is precious metal stocks. The bond side isn't much better with a healthy dose of high yield and foreign bonds.

So, how do you explain the basic Diehard concepts to your parents? Asking my dad some basic risk tolerance questions, it was clear he does not want more than 40% equities. But when I pointed out that his portfolio was not matched to his needs, he jsut said he would "talk to his guy at Merrill Lynch." This is the same guy who designed this portfolio for a 75 year old man. What to do?

Nick22
Nick22
Gregory
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Nick

Post by Gregory »

First, good luck.
I'd figure the loads and ER's first, and let them know how much their "advisor" has cost them.
Second, how about starting with the Coffeehouse book?
I'd also show them the pie charts of TR funds.

Greg
Pecuniae imperare oportet, non servire. | Fortuna vitrea est; tum cum splendit frangitur. -Syrus
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jeff mc
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Post by jeff mc »

i'd tread lightly... to me, at least, you seem to come off somewhat as a 'know it all whipper snapper' in your tone and explanation of your parents' situation. i hope you didn't take the same tone w/ your parents or be in any way condescending, belittling or 'flabberghasted'.

if they're not do-it-yourselfers like most of us on this board, there's more than one road to dublin. they could do a lot worse than a life long relationship w/ merrill lynch. what are they investing their money for? themselves? you? if it's for you, maybe an 80% equity position would be appropriate.

my advice? back off. they've got a lot more years on the road than you, and have seen way more ups and downs in stock market, etc.

disclosure: i handle my mom's finances. got everything of hers moved over to vanguard (via 1035 exchanges out out of some ridiculous VAs). talked about the different types of risk and how she could think about investing in equities. she'll have none of it, and the thought of her 'losing money' in untenable to her. so, we've happily invested in 'cannot lose money' vehicles (except for a small portion) and she's comfortable with that, and therefore, i am. when i was younger (more naive) i tried showing her fancy 20 year charts of S&P 500 compared to cash and bonds. it always came back to risk tolerance, and i never pushed her into anything she can't easily understand or have the stomach for.

the last thing your parents want to think is that they've been making terrible mistakes for the last 20 years financially. i sincerely hope that isn't the impression you left them with, w/ your 'fancy' jargon, data, statements, 'look at me' ideas.
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White Coat Investor
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Be careful

Post by White Coat Investor »

Be very careful. If anything goes wrong (and it will) with your recommended investments, they will blame you if they do not understand the underlying rationale.

My parents were 59 on the eve of retirement when I found the Bogleheads. My parents were shelling out 1.5-2% per year in fees and transaction costs. I simply showed them what 2% of their portfolio was equal to. They taught me how to be cheap, so it didn't take long before they were converted. The only book my dad could get through was coffeehouse, but my mother read a bit of Common Sense on Mutual Funds.

The interesting thing about my analysis of their situation was that part of their money was in a "special situations" account where the "special situations" guy was making about 1.5% per year off of them. Of course, this guy was adding alpha like mad! He was only holding 10-15 separate stocks and maintaining a significant chunk in cash. It makes up about 1/3 of their retirement money, but it is hard to argue with success. I told them this guy has a good track record for them so far (7 years) and so far he could justify his costs with his performance record. They thought initially they would withdraw their money from his control after a year of Boglehead style investing, but he had another banner year this year, so we've decided to give him another year and see what happens.

I'm just happy to see them with a reasonable asset allocation plan (the previous non-special situations guy had them 90% equities) and not bleeding money left and right out of the account while underperforming inflation.

I spend A LOT of time explaining and re-explaining the basics to them, (How do the TIPS work again? Is a REIT a stock too?) But they are gradually catching on. If nothing else, in 10-30 years when they can no longer make their own financial decisions it will be very easy for their children to slide into the control role. I make it kind of fun too; I send them quarterly updates and take them out to dinner just like their broker used to do...for $9000 per year. The funniest part was the end of year summary I sent them. It wasn't until my mother got to the last paragraph that she realized I had written it, not Vanguard!
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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bob90245
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Re: Explaining Investing to Your Parents

Post by bob90245 »

nick22 wrote:So, how do you explain the basic Diehard concepts to your parents? Asking my dad some basic risk tolerance questions, it was clear he does not want more than 40% equities. But when I pointed out that his portfolio was not matched to his needs, he jsut said he would "talk to his guy at Merrill Lynch." This is the same guy who designed this portfolio for a 75 year old man. What to do?
If it were me, I would have said, "Sounds great, Dad! How about the two of us talk to your Merrill Lynch guy together?". And then arrange a meeting so that the three of you can sit down together.

Sounds like you have a late start with financial conversations with your dad. I've been having financial conversations with my parents ever since around 5 years ago. That was shortly before my parents retired in their mid-60's.
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Dangerous advisor

Post by pkcrafter »

Nick said:
They have 70% equity and 15% of their equity is EM while another 10% is precious metal stocks. The bond side isn't much better with a healthy dose of high yield and foreign bonds.
Wow, that will churn your stomach. Another case of an irresponsible advisor. The real threat of such advisors isn't high fees, it's bad advice. Now he may realize that his AA is much to high. Make sure he does talk to "his guy" at ML. Of course, it would be much better if you could get him out of there.

Brokers like "his guy" at ML do not have fiduciary responsibility to investors. These salespeople are very smooth and it's going to be difficult to convince your dad that "his guy" is only interested in his own income. If you dad is withdrawing 4%/year, he is probably paying an additional 50% of that amount (convert this to real dollars for dad) to the ML. For instance, on a 1M portfolio, dad gets 40k and ML gets 20k, each and every year.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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squirl
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Parents

Post by squirl »

I can sympathize, nick22. When my husband's elderly parents asked him to manage their portfolio, he found that more than one-third of the equity in their equity-heavy portfolio was invested in one stock. We'd never heard of the company.
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Sheepdog
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Oh my.

Post by Sheepdog »

Let's talk.
I am in my mid 70s. Squirl, I don't consider that elderly. In today's world I still have 15 years or so before I am elderly.....I hope. Enough of my old age opinion. I refuse to become elderly.
Okay, back to the subject at hand. Nick, you didn't say why you looked at their portfolio. Did they ask you for your advice or did you ask them what they were doing? That makes a big difference in my opinion.
I would ask my sons if I thought I needed advice, but I would be p.o.ed if they wanted to get involved if I did not ask them......especially if I "had enough resources to live ok". I would not give my sons investment advice either if they did not ask me for it. I do talk with them about my philosophy, but I would never suggest that they should do what I do.
Perhaps that is what you should consider. How do you explain? Just talk in generalities. IF they want to hear, just talk with them, if they don't, forget it. If they hear something they would like to know more about, they will ask you. If they don't want information, fuggetaboutit. Beyond that, in my opinion, you should not give them advice. I give my sons some insight on how I handle my finances, but I give no advice on what they should do. Occasionally they ask questions, and I give them answers, but no lectures from either side. I would never meddle into their finances. I do not know what they earn. My parents never knew how much I earned. Okay, we were and are different than many of you, especially Bob90245.
As far as my sons are concerned I feel that all they need to know is that we are doing just fine. They know what our final wishes are. They know where the trust and wills and investment accounts are. (They have copies of them.) They just don't know how much is in them. Besides, we may want to spend it all at the last minute. That is our perogative.
Yes, 70% equity is too much, in my opinion. If he is happy with it, then I would leave it alone. I can tell you that I could not sleep at night with that. My 33% is more than enough for my gut. You made your point well with him about how much he had, but he did say he would talk with his broker. Beyond that, if he does not come back to ask you more stuff, leave it alone. Occasionally you may wish to talk how you are doing and why, but if he isn't interested, he isn't interested. You've done your good deed.
I know you and others may disagree with me. But I have always been an independent Virgo.
I just don't want my sons to give me advice........ I will ask for it if I want it, but that is doubtful.
Jim
Time is the school in which we learn, time is the fire in which we burn.~ Delmore Schwartz
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nick22
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Parents

Post by nick22 »

A lot of defensive posters out there. I didn't hit them with any fancy jargon or ideas. But thanks Chuck D for continuing to be Public enemy #1.

Well, the convesation was initiated by my parents to go over basic estate stuff. I did not provide any unwanted advice and mostly listened. The main generational gap is that my dad is from the generation where you have an investment "guy" that adds value and he has missed the MPT Nobel prize winning tenets. I am doing my best to stay on the sidelines, but I do feel some responsibility. i simply bought him the Boggleheads Guide and Four Pillars so far.

Oh, yeah I forgot. About 2/3 of their accounts were load funds and the average ER was 1.08%. And my dad is not comfortable with the 70% equity. When we talked about his equity:fixed ratio he said he thought he was 40% equity:60% bond, but when we did the Xray it was 70:30.
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SteveB3005
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This worked for me.

Post by SteveB3005 »

First it is tough for a father who has been the in-charge protector figure all his adult life to admit to any chinks in the amour. Second a good Broker/Planner has spent years being a patient hand-holder even if not putting the clients best interests first. A frontal attack has a slim chance of success and probably only causes Dad to dig his heels in further, this was exactly my experience.

What you need is a villain, a common enemy for you and Dad. Better yet a villain that the Broker/Planner has overlooked and most often there is a perfect one already there, The Taxman.

If your parents have both taxable and tax-advantaged accounts, dollars to donuts they have the location wrong somewhere on bonds or equities. If you can show them where they are paying ordinary income tax on holdings that could be taxed at reduced long term capital gains or as dividends you build instant credibility. Then you can show them the advantages if they want to pass equities along of the stepped-up cost basis advantage you don't get in a sheltered account.

Just an idea Nick, it got my foot in the door and led to other things and now Dad thanks me every time we sit down and talk money.
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Good Thought Steve

Post by nick22 »

The accounts are all tax-advantaged, but that is a good thought. Another thought is to analyze expense ratios and load charges and discuss expenses.

I understand that my are adults and in charge of their own affairs, but I think prior suggestions by other posters that I mind my own business and stay out of their planning issues are somewhat misguided. They have asked to discuss these issues. Also, if they mismanage their accounts, who will be supporting the rest of their retirement years? Probably not Merrill Lynch, but more likely my wife and I. I think there will be some delicate stepping, but we may need to fight through some of the defensiveness and control issues to optimize their long-term planning.
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squirl
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Generations

Post by squirl »

Interesting discussion.

Sheepdog:
I am in my mid 70s. Squirl, I don't consider that elderly. In today's world I still have 15 years or so before I am elderly.....
Agreed. In my post, I was talking about parents two decades older than you and a specific request to manage their finances. Prior to this, there was no knowledge of their finances. In my experience, some of that age don't consider themselves elderly, either.

My children, who are four or five decades younger than you, do come to me frequently for financial advice. I am happy to give it because I don't want them to make the same mistakes I did.
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Post by Random Musings »

Nick 22,

With parents, the key is to win the major battle and not worry about the small wars lost.

I was able to convince my parents to go with Vanguard due to their low costs - that's a key win. Lucky for me, their risk tolerance is around where it should be (50/50)

Also, I was able to convince them (around 1996) to:

- utilize mostly passive funds
- increase domestic small cap/mid-cap exposure so that it more closely reflects the market
- increase int'l equity exposure to around 23% of all equities
- have some value tilt - not much, but some
- add TIPS in 2001 to augment their ST Treasuries and TBM
- rebalance annually.

However, since they are my parents, there are a few investments that I can't touch (except for tax-deferred rebalancing) and I won't, because frankly, it's not worth ruining a good relationship:

- two active equity funds in their taxable accounts. They are "happy" with them.

- Wellington is "hands off" in the tax-deferred - except for rebalancing.

- 10% is in Healthcare (about one-fifth of that in taxable, and the have owned it since the early 90's).

However, your situation is more dicey, perhaps you can buy them a book (or two) to help "educate" them that this person from ML is (perhaps, I don't know your parents situation) not doing what is their best interest and perhaps making basic mistakes (as mentioned in a prior post with respect to taxes). You need some support to back your claim - the ML advisor appears to have your Dad's complete trust.

And, if the market goes down (even if you have them exposed less to equities) - they still may blame you unless you educate them. The question is, do they want to be educated?

Good Luck.

RM
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Just my opinion, Nick

Post by mephistophles »

Unless your Dad asks you for your advice or help to rearrange his financial affairs I would recommend that you leave the issue alone. Unless he is "legally incompetent" you have no right to be involved. If you proceed, the most likely outcome will be to alienate your parents and help destroy your relationship.

Regards,

ole meph
tibbitts
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do not get involved

Post by tibbitts »

Their finances are none of your business. If they are absolutely desperate for your advice, send them a list of several fee only planners, or if they're internet-savvy tell them how to locate one on their own. Do this in writing and keep a copy. Do not even look at their current investments; do not make suggestions; do not get involved in any other way.

Paul
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Who is on the hook if they "fail"?

Post by leonard »

These are tough issues for everyone involved.

In think you need to ask yourself the question "Who is on the hook if they outlive their money?". Is it you? Or - just as importantly - do you feel that it is you? If you believe you are really financially on the hook if they run out of money, I think you should pursue it further, because your financial future is on the line. So, in some sense, you are just as dependent on their assets as they are. So, I would take one more pass at pursuing helping them do the right thing, without going to far and alienating them.

Now, let's assume you did that but they did not listen. You now need to do the hardest thing and take yourself off the hook for them financially, no matter what happens. Basically, if you do the best to provide a better path and they will not follow, I think you need to take yourself off the hook for bailing them out, if it goes bad. It does not seem fair or just to be responsible for someone who is not managing their assets optimally, whether they are parents or not. it's tough, but it may be the only way to preserve your own and your family's future.
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nick22
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Fun topic

Post by nick22 »

This has elicited all sorts of opinions. For those who say that it is not my business, it sure is, at least at some point in the near future. My dad is 76 and my mom 72. In a decade or so I will likely be in charge of their financial affairs and if they go broke in the meantime, I will be their means of support. So I can't completely avoid the issue, and unless they are willing to pass up financial support from me in the future, they can't completely blow me off.

Family is never easy, but I don't think ignoring the issue will help. For now I have simply bought my dad 2 books that outline some basic concepts of investing. Hoepfully he will enjoy them, and if he doesn't come back and ask questions or for advice, I will let the issue go for now. But why is staying out of it now beneficial, when this issue is not going away,a nd I will clearly be directly involved in the future. They both have a life expectancy in the 90's and I don't think it does any good to ignore the topic.

Should I wait until they go broke or are no longer competent to even broach the subject?
Nick22
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bob90245
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Post by bob90245 »

Nick,

If it'll help by my saying something, I completely support your actions and the reasoning behind it.

Best wishes,

Bob
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Random Musings
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Post by Random Musings »

That's what makes it tough - sounds like their need to take risk is far less than what risk they are taking. Then, if they run out of money - the "guy" at ML isn't going to anything - except move on to his next customer.

Basically, it sounds like you want to tell your parents this:

- If you allow me to manage your finances, I will assure that you will be taken care of the rest of your life.

- If you allow your advisor at ML to manage your finances, and your overexposure to equites at your age leads to a negative outcome, not only will that affect the both of you, it will also affect me financially.

However, you have to judge whether or not you want to risk your relationship with your parents - sounds like your Dad just wants to do it his way. I just hope the ML advice doesn't end up financially hurting you.

Perhaps getting him to read a few books will at least open his eyes with regards to investing and the investment community - and, at the very minimum question the approach his "advisor" has used.

Good Luck.

RM
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Jazztonight
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parents

Post by Jazztonight »

This discussion has been truly interesting and informative. I can't wait to share it with my father.
Last edited by Jazztonight on Tue Apr 03, 2007 11:28 pm, edited 1 time in total.
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Post by mptfan »

I am facing the same issue right now with my MIL who is 76. My FIL passed away about 5 years ago, and she has been using a guy from Edward Jones since then. She has made comments about how "nice" he is and how she takes care of her. I have tried a few times to talk to her about how he is charging her several percent a year of her money and she doesn't need to pay it because I can do it for free, but she won't listen, she just says "but he only charges me $30 per quarter". Then I found out that he talked her into a variable annuity with loads and surrender charges. She just doesn't understand that she is paying much more than the $30 fee in loads, expense ratios, surrender charges, etc., and I have given up trying to convince her otherwise. It is very frustrating, but I have come to the conclusion that I have made a reasonable effort to help and she doesn't want me to help, so I stay out of it. I think she sees it as an attack on her independence.
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Post by jar2574 »

Nick22:

The financial industry is screwing over people like your parents. I think you made a great choice in trying to help them. Financial freedom is one of the greatest gifts you can give someone, and by switching them to lower fees you may help accomplish that.

My background: With help from this forum, I helped my mom move her IRA from American Funds to Vanguard. The process involved a brief conversation with her "investment guy" at Edward Jones (who'd been skimming 0.25% every year and gotten a kickback on the initial front load fee from American Funds.) After she called him to tell him she was thinking about switching, he admitted that maybe a 100% equity allocation wasn't the best idea when her risk tolerance and available assets indicated that 50% was enough. He was a smooth talker, and at 60 years of age he's had practice convincing people that investing is brain surgery. He probably would have convinced her to stay with his 100% equity allocation and continued fees if I hadn't helped give her some backbone. In the end, she handed the phone to me and I told him that she could always come back if she didn't like Vanguard's performance.

I understand that some posters are upset with you. But it seems like you weren't giving unsolicited advice. And you're not being disrespectful at all. It seems like those posters wouldn't need advice from their offspring, because their financial house is already in good order. So maybe they'd have a good reason to get upset if their offspring started to inquire as to their finances.

Your parent's situation is different. For those of us with parents who aren't so well prepared financially, it is important to tackle these problems head on. Like you said, Merrill Lynch won't give its fees back to take care of retirement costs.

To argue that you have no business or right to help your parents is ridiculous. Their problems will become your problems. But even if they were billionnaires, helping them save money by switching to lower fees would be an act of kindness as long as it was done with the proper amount of respect. Again, you know them better than us and seem like a good guy, so I'm sure you're treating them with respect while you help them out. Good job.
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What I did

Post by SoonerSunDevil »

Hi Nick,

I did something similar with my parents less than a year ago. My parents have approximately 10-12 years until retirement, and I was curious as to how they were doing. My Dad replied, "Good, I guess" and gave me a copy of a statement from one of his IRA's that an adviser put together. The portfolio had several funds, and all had high expenses and some had loads. I asked my Dad if he knew that the adviser was really a salesman that charged him a sales charge up front to the tune of 5%. He said he didn't know what the load was and just assumed it was normal because he figured the adviser was doing "what was best for his money." I explained to him that most advisers are brokers and don't know their head from their ass. We got on M* together and I showed him what stocks his funds were holding (100% equity, no bonds), and then I showed him Fidelity Funds (his 401(k) is with Fido and he really likes them) that were holding similar stocks. I told him "All of these fund families have access to the same stocks, same bonds, and some information as each other, why would you pay a charge when you can buy something else for free?" He realized that he had been had (luckily this IRA was small compared to his 401(k)) and immediately wanted out of the relationship with the adviser. I told him that I wanted to show him the impact of .5% each year on his portfolio, compounded for over 10 years. After seeing the numbers, he was disgusted.

I have a very close family and luckily, my parents and I agree on most things. Being such a close family, they know that I wouldn't steer them in the wrong direction, and they know how much I read about finance and investing. I talked to them about asset allocation, the need to hold bonds, equity risks, bond risks, etc. I told them to make a long story short, they needed a globally diversified portfolio of low cost funds suited to their need, ability, and desire to take risk. My parents don't need 10% a year to achieve their financial goals; something in the neighborhood of 7% will do just fine. They now have all of their retirement money with Fidelity (they own some Vanguard ETF’s), have a portfolio that is roughly 50/50, with a slight value tilt, and they sleep much better at night knowing that they aren't paying someone else's mortgage.

The transition to manage their money was easy for me because my parents admitted that they didn't know a lot about investing. However, if I tried to talk to my parents about something else that they felt they knew a lot about, we might have gone in circles until the cows came home. If your parents think that they are knowledgeable about investing, or if they think that their adviser is knowledgeable about investing, it might be very difficult to convince them otherwise. Luckily, my parents weren't so stubborn in this category like they are a few others!

Hope this helps,

John
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fundtalker123
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Post by fundtalker123 »

I'll bet more people have lost money due to relatives giving them financial advice than Merrill Lynch giving them advice.

But I suppose you could leave newspaper articles on the coffee table every week titled "Merrill Lynch broker indicted for fraud" (shouldn't be hard to find them)
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Post by tdhg566 »

My experience, FWIW: My parents have done an exceptional job providing for themselves. I'm deeply grateful that God provided such parents to me. But their investing mistake is that they've been TOO risk averse. Only recently, with them in their 80s, have they realized that their love affair with T-bills didn't deal well with inflation. In spite of all the academic literature that 20% of their portfolio could be in good stocks/funds and they could have less risk than they have today, they simply like the "full faith and credit of the US government" sales line.

SO what I'm now suggesting is TIPS and I-Bonds, which they're considering. If I can't get them a better return, at least I maybe able to help them reduce the cost/risk of inflation.
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Post by ddb »

I haven't really read the responses in this thread, so I apologize in advance if I'm being repetitive.

Why is there this assumption that 70% in equities is too aggressive for a 75-year old person? There are plenty of circumstances that would demand 70% (or even more!) equities for such an investor. I know a lot of 80+ year olds who have amassed a lot of wealth by owning equity investments for 50 years or more. A lot of older investors understand risk even better than those of us who hang around on internet chat boards all day. They've been through bad times, and they've seen recoveries. I find many 80-year olds to be more resilient investors than a lot of 30-year ols.

Or, what about the older person who has no need for their money, and is investing for future generations? That could be a time horizon of 50 years. Why not load up on stocks?

Or, what about the older person who has accumulated lots of capital gains, and doesn't expect to live very long. Might be worth waiting for the step-up in basis at death.

The point is, who knows? None of us should automatically assume to understand someone else's risk tolerance better than they do.

It sounds like you need to know a lot more about your parents' situation and investment history before making recommendations to them (which you probably shouldn't do anyway due to that whole family + money ~ oil + water thing). Maybe the ML broker put them into Emerging Markets in late 2002, and they've performed exceptionally well. At the very least, perform an audit on their last, say, 10 years of investment history, accounting for all cash flows, investment expenses, and portfolio returns. You'll probably confirm that your suspicions are correct, but at least you'll have better data to support your assertions.

- DDB
leonard
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Talk to them again

Post by leonard »

Should I wait until they go broke or are no longer competent to even broach the subject?
The biggest advantage those brokers have is our silence. No one talks about these matters. Misconceptions multiply and everyone is taken in - due to lack of good information. I say talk to them again.

Based on your comments, it sounds like you hold yourself responsible if they run out of money. So, think about all the assets you have at your disposal - theirs and yours - to ultimately get them through the rest of their lives. Be realistic about potential, uninsured costs: LT Care, funeral expenses, etc. Does your own future become in jeopardy, if you have to spend a lot of your own money supporting them?

Now, which is a harder discussion, your parents finances - or a discussion with your spouse about how you two can't retire, because you spent your retirement money on your parents 20 years ago? Who is going to bail you out if you run out of money?

These are hard cold facts to consider, when it comes to family, but they are real - if you make yourself responsible for their retirement.
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one problem with giving advice

Post by tibbitts »

One problem with giving advice is that it's going to work both ways.

Your parents hate your spouse. They want you to loose 70lbs. They feel your job and in fact your whole career is a disaster. They think your house is an overpriced dump. They know you drink too much and probably do drugs. They're completely certain that you're ruining your kids' lives because you don't know how to raise them "right."

They don't say these things because there's an unwritten and unspoken agreement between you not to tread on each other's turf. If you mess with their money, you'll break the agreement, and face the consequences. It's not going to be pretty, because all the things I listed above are as obvious to your parents as their investing shortcomings are to you.

Paul
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