Military: Investing a Windfall in Expensive Market?

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TheCav14
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Military: Investing a Windfall in Expensive Market?

Post by TheCav14 » Mon Sep 18, 2017 1:53 am

All,

I'm a 27 y/o Army officer currently deployed to South Korea. My expenses are very low and my pay is a little higher, so in addition to my normal monthly dollar cost averaging which goes directly into my Vanguard Roth IRA and my Govt Roth TSP C/S funds, I've built up a smallish pile of cash, about $8000 in the past few months. I have an extremely low interest USAA loan (0.75%) that I utilized to buy my used Honda when I was a Firstie (senior) at West Point in 2014. I've paid that loan down to about $8000 over the past few years. I'm feeling very torn between finishing off this loan and investing in taxable VTSMX/VTSAX. I'm torn because the interest rate on the loan is so low that it doesn't make much sense to pay off, but at the same time the stock market is very expensive now with PE ratios near historic highs. Thoughts?

Note: My goal is to earn the greatest possible return in the long term which will allow me to retire early at 50. I've never sold an investment and I don't plan on doing so until I start withdrawing in retirement. I'm a huge believer in http://jlcollinsnh.com/manifesto/

Your time is much appreciated.

EDIT: I've come to the decision to just pay off the loan and be done with it. I'll be happy to DCA the $350 a month into my taxable account instead of paying it to USAA. I think I can live with not pumping the $8k into the market right now. Thanks for all of your time and responses!
Last edited by TheCav14 on Wed Sep 20, 2017 12:57 am, edited 2 times in total.

ThrustVectoring
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Re: Military: Investing a Windfall in Expensive Market?

Post by ThrustVectoring » Mon Sep 18, 2017 1:58 am

23 years to go, 0.75% interest rate, secure military job.

Trying to time the market generally doesn't work. The risk of hitting a correction is generally less than the risk of having money on the sidelines while the market gets the returns you need to achieve the goals you have.

Plus you sound like you have the intestinal fortitude to not beat yourself up too much if the initial investment timing isn't great. IMO, throw it all in VTSAX and wait. Alternatively, leave the maximum Roth IRA contribution in a high-yield savings account until January of next year, and start throwing the money into your Roth IRA as early as the room opens up.

Speaking of high-yield savings, those have a better rate than you're paying on your loan. You should pretty much never be paying more than the minimum on it.
Current portfolio: 60% VTI / 40% VXUS

Slacker
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Re: Military: Investing a Windfall in Expensive Market?

Post by Slacker » Mon Sep 18, 2017 2:04 am

Someone recently posted this on a different personal finance forum. You might find it an enlightening read with regards to "inveting a windfall in expensive market"

Bob the world's worst market timer

(moral of the story - time in the market and diligent saving, not timing the market)

BTW - with your Military pension, would you be able to reasonably retire at 42 (unless you have high expenses)?
O-5 with 20yrs makes around $9000/month. Pension at 20 yrs of service would be $4500/month. $54,000/yr pension and very low cost medical (tricare). You can even fly to Europe and Asia on space-A and pay $20 (unless that has changed since I ETSd almost 2 decades ago) for airfare!

TheCav14
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Re: Military: Investing a Windfall in Expensive Market?

Post by TheCav14 » Mon Sep 18, 2017 2:20 am

All,

Thanks for the responses so far. I'm not 100% set on staying in the Army long-term, though the retirement incentives are pretty great. I could retire as a full Colonel with 26 years of service at age 50 after spending most of my career teaching at West Point, and that provides about $100k in yearly income without even touching my investments.

In fact, I turn 28 in May 2018 and I'm on track to hit $100k net worth by this December. Bogleheads got me started a little over 2 years ago, starting with $28k in net worth. My next goal is to hit $500k by age 35. I'm saving aggressively for a lavish early retirement. My new goal is to save $40k per year.

Thanks again to everyone for your time and interest. I'd never sell investments based on market timing, but I'm not a huge fan of the idea that I'm buying high. Perhaps I just need to be more faithful to Boglehead doctrine.

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in_reality
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Re: Military: Investing a Windfall in Expensive Market?

Post by in_reality » Mon Sep 18, 2017 2:43 am

TheCav14 wrote:
Mon Sep 18, 2017 2:20 am
I'd never sell investments based on market timing, but I'm not a huge fan of the idea that I'm buying high. Perhaps I just need to be more faithful to Boglehead doctrine.
Most forecasts have positive real returns for US equities despite their valuations.

An option would be to invest internationally too. There is debate if international developed stocks are really all that much cheaper once you take out the FAANG stocks and also debate about what exactly we should be expecting for valuations levels anyway with accounting changes and sector differences.

Anyway, thanks for your service. Now we can invest in places like South Korea which offers better valuations in many cases. Some people say US only but man do they study crazy hard there or what! I believe both in what hard work and education can do. OK most importantly we can go there an have authentic Korean BBQ that you grill at the table.

The loan is basically working like leverage for you. If you aren't worried about job loss and not being able to pay it back and could possibly have to sell distressed assets for living expenses, then I don't see the rush to pay it off.

I recommend Vanguard Total World Stock ETF (VT) 0.11% ER. It's got the world it's global cap market weighting.

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BolderBoy
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Re: Military: Investing a Windfall in Expensive Market?

Post by BolderBoy » Mon Sep 18, 2017 12:07 pm

TheCav14 wrote:
Mon Sep 18, 2017 1:53 am
I'm torn because the interest rate on the loan is so low that it doesn't make much sense to pay off, but at the same time the stock market is very expensive now with PE ratios near historic highs. Thoughts?
The answer is in the manifesto:

"Carrying debt is as appealing as being covered with leeches, and has much the same effect. The idea that many, indeed most, people seem to happily cover themselves with debt is so beyond my understanding it is hard to imagine how, let alone why, the downsides would need be explained.

Take out your sharpest knife and start scraping the little blood-suckers off.

This includes car loans."

Pay it off.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

FRANK2009
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Re: Military: Investing a Windfall in Expensive Market?

Post by FRANK2009 » Mon Sep 18, 2017 12:30 pm

First off, it is an honor to help a service man, so thank you...


Some thoughts:

-Continue to invest via the TSP. Put in as much as you can, for as long as you can. Ideally, this would be your entire career.

-Although the interest rate on the Honda is exceedly low, it sounds like you want to pay it off. You also want to invest. What about 50/50? Invest half your money, put half toward the loan? After the loan is paid, invest as much as possible.

-Learn and read as much as you can. Ask questions here. We've all been in your shoes as far as investing is concerned.

Frank

Fishing50
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Re: Military: Investing a Windfall in Expensive Market?

Post by Fishing50 » Tue Sep 19, 2017 1:45 am

Great job choosing Roth TSP. Consider adding some traditional TSP later in your career, when you are solidly deferring from the 25% tax bracket. With a 28yr officer pension, we'll have room for Roth conversions in the 15% tax bracket before we start Social Security.

I recommend investing the $8K in VTSAX or Vanguard International Index Fund (VTIAX) which are very tax efficient. VTIAX is better than I Fund because it includes emerging markets.
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

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Watty
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Re: Military: Investing a Windfall in Expensive Market?

Post by Watty » Tue Sep 19, 2017 7:20 am

If you don't already have a separate emergency fund then I would just put the $8K into a saving account and use it as your emergency fund. You can find savings accounts that pay over 1% if you look around but I don't have a link handy.

https://www.bogleheads.org/wiki/Emergency_fund

Emergency funds are not just for bad things, occasionally you will run into situations where having cash available will allow you to take advantage of an unexpected good situation too.

You could also start up a car fund and add a bit to it each month once your car loan is paid off so that you can pay cash for your next car.

SimplicityNow
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Re: Military: Investing a Windfall in Expensive Market?

Post by SimplicityNow » Tue Sep 19, 2017 8:49 am

The thing is you don't know if you are buying high. This may be the lowest the market is ever again. Without a working crystal ball, no one can tell. Over the long term the market has gone up. Invest according to your asset allocation.

It doesn't make much sense to pay off a 0.75% loan early other then for psychological reasons if it gives you peace of mind being debt free.

Cunobelinus
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Re: Military: Investing a Windfall in Expensive Market?

Post by Cunobelinus » Tue Sep 19, 2017 8:08 pm

Logically: throw it promptly into your index fund/ETF of choice -- the one that complements your TSP and IRA in terms of asset allocation, and then continue automatically contributing to your TSP and taxable accounts and let 'em ride.

(alternate option: DCA your lump sum if you're particularly concerned about dropping it all into the market right now -- there are pros and cons to both DCA and lump-sum investing.)

Emotionally: same as above, except pay off your loan promptly.

I had $6-7k left on my USAA loan when I payed it off because I logically understood I'd get a higher return on my money from the market than the .025% or whatever the rate was; however, emotionally I found the idea of debt distasteful and it tugged at me every month seeing $442 go out of my account and into an account that wasn't mine.

Either way, you'll make the right decision for you. If you can convince yourself that you're saving money by keeping that loan around, then good for you. I couldn't do that.

I've been lucky to be able to fund a taxable account concurrent with maxing out my TSP and lump-summing my IRA every year since I found out about them early in my career. I was also lucky to start doing this just before 2008/2009, so I got more bang for my buck early in my investing career.

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slayed
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Re: Military: Investing a Windfall in Expensive Market?

Post by slayed » Tue Sep 19, 2017 8:19 pm

Don't be afraid of debt. If someone offered me a loan with an interest rate of 0.75% I would borrow as much as they would lend me.

Cunobelinus
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Re: Military: Investing a Windfall in Expensive Market?

Post by Cunobelinus » Tue Sep 19, 2017 8:26 pm

slayed wrote:
Tue Sep 19, 2017 8:19 pm
Don't be afraid of debt. If someone offered me a loan with an interest rate of 0.75% I would borrow as much as they would lend me.
I did. And it was worthwhile -- I invested most of it and made more than 0.75% return after taxes. After 3 years or so of "debt" gnawing at me, I elected to pay it off early.

I might make a different decision now, but I still enjoy the peace of mind of being debt-free. It's purely emotional though and I recognize that, but I'm a human with emotions and not 100% rational all of the time. I had to save up to pay it off, since anything invested is off-limits for withdrawal, barring some extremely extenuating/unlikely circumstances.

victw
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Re: Military: Investing a Windfall in Expensive Market?

Post by victw » Tue Sep 19, 2017 9:40 pm

I never get the all or nothing thing with these questions. I always interpret as one of 2 things. Troll or behavioral economics issue.

Anyways - why not double the car payment and invest the rest???

I do hear you about the market feeling crazy. Personally I'm skimming off the top and increasing my FI portion - but I'm older than you.

If you have not dived into William Bernsteins material - I recommend it.

Also - what about taking a Value Average or 3% signal approach? Here's my off the cuff interpretation. If the past year of the market has been above average returns pay down the loan. If the past year has not been so hot - put it in the market. I can't back-test this approach. But I hate debt-so I always feel for the urge to pay it down. Even though I understand that intellectually based on the interest rate the market is the way to go.

Vic

stvyreb
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Re: Military: Investing a Windfall in Expensive Market?

Post by stvyreb » Tue Sep 19, 2017 10:55 pm

as boring as it sounds, pick an allocation, buy index funds. done. PS try to get rid of loans, probably don't bother with Roth this or that, as your too young to know, whether you need tax diversification for another decade or two IMO ; looking at equities return now, shouldn't change your planning either way, that would be "timing" seems to me.

Alchemist
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Re: Military: Investing a Windfall in Expensive Market?

Post by Alchemist » Tue Sep 19, 2017 11:11 pm

First of all, well done on being a Boglehead and financially aware! I am a 30 year old Air Force Captain and was in a similar situation with similar goals three years ago. I am now at a networth or around $270k. It seemed like it took forever to reach $100k, but the next milestone arrived much faster. I'm also hoping to reach $500k by 35. Additionally I am all Roth for my TSP, have a Roth IRA, and a taxable account.

As for what I would do, well I'd pay off that loan. No it does not make much math sense, but I can say from experience that being completely debt free really changes the way you look at money. Its ok if you keep the loan, it is not an insane or foolish idea, but if it bothers you to have it around then get rid of it. As for lump summing your windfall into the market if you keep the car loan, that's fine too. Recently I got a retention bonus from the Air Force (something about them being short people who can fly airplanes), I took the first part and finished off my "Husband's car fund". It is now fully funded for when we buy him a new car in a couple months. The rest? Lump summed it into the market. For me that was VTI (Vanguard total stock market ETF). Sure the market might go down in the near term, but I do not think 2500 is the S&P 500's terminal value anymore than 2000, 1500, or 100 was before it. I do not plan to touch that money for a long, long time. It will certainly be higher than it is today by then.
Cunobelinus wrote:
Tue Sep 19, 2017 8:08 pm

I had $6-7k left on my USAA loan when I payed it off because I logically understood I'd get a higher return on my money from the market than the .025% or whatever the rate was; however, emotionally I found the idea of debt distasteful and it tugged at me every month seeing $442 go out of my account and into an account that wasn't mine.

Either way, you'll make the right decision for you. If you can convince yourself that you're saving money by keeping that loan around, then good for you. I couldn't do that.

I've been lucky to be able to fund a taxable account concurrent with maxing out my TSP and lump-summing my IRA every year since I found out about them early in my career. I was also lucky to start doing this just before 2008/2009, so I got more bang for my buck early in my investing career.
I also did the same thing with that USAA career starter loan. I just paid the stupid thing off because it really was bothering me when it was at $7-8k left. Have not regretted that decision for a moment. Like I said before, it really, truly does change how you behave with money when you no longer have any debt. Allows a certain clarity/focus that is hard to accurately describe

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Pajamas
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Re: Military: Investing a Windfall in Expensive Market?

Post by Pajamas » Tue Sep 19, 2017 11:19 pm

Roth IRAs have a lot of advantages especially for those who stop working earlier than the usual retirement age. Flexibility is a good thing. The future is uncertain, but you have to plan for it anyway or else face it unprepared.

If you want to maximize your long-term returns, then you need to be in the markets. If you decide to wait until the time is right, exactly what would you be waiting for as far as it being the right time? If you decide to wait, how would you then justify not taking all of the money you have already invested out of the markets to wait until the time is right for it, too? Don't you have a lot more than $8,000 already invested? There is some inconsistency there.

At 0.75% interest, it's almost impossible to intellectually justify paying that loan off when you can get essentially riskless investments such as CDs that pay more. But if you don't feel comfortable owing money, it's okay to pay off the loan, anyway. Lots of people here have done the same thing with mortgages and other loans. You don't know for a fact that you would earn more than 0.75% investing the money instead, you could even lose money.

There is some inconsistency there, too. On one hand you are worried about investing the money because you might lose it, and on the other hand you don't want to pay off the loan because you can make more money investing it. Maybe thinking about it that way will help you come to a decision that you feel comfortable with.

If you decide to invest the $8,000 but still don't feel comfortable investing it as a lump sum, then you could invest $1000 a month until it is all in, or something similar.

Regardless of exactly what you decide to do, you're on the right path. Congratulations!

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