Should I preserve parents’ risky portfolio? Or “disobey” them?

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foxtrotgolf
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Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by foxtrotgolf » Tue Dec 26, 2017 9:27 am

Greetings! Long time Boglehead.

Here’s the situation. My mom and dad are now in a nursing home, and can’t make decisions for themselves anymore. I’ve been managing their daily financial matters for the past 6 years. Their investment advisor quit last week, thanks goodness, for he charged them over $22,000 a year for 18+ years. However, to his credit, he built them a substantial income-generating portfolio.

It is now my job to handle their nest egg. I’m excited and terrified at the same time.


Background:
Total Nest Egg is $3M

Emergency funds: $220,000 in brokerage account.
Debt: none
Tax Filing Status: Married
Tax Rate: 28% Federal, 5.12% State
State of Residence: NC
Age: 79 and 80

Dad’s retirement assets:
Traditional IRA - $2.1M
93% Equities (71.6% Large Cap, 12.9% Mid/Small Cap, 8.4% International)
Hundreds of dividend stocks - which last year generated almost $65,000 in dividends.

Joint Brokerage - $382,000
77.4% Fixed income, split evenly between NHMAX and FXNCX
19.8% Mid-cap equities
Generated $11,411.99 in dividends last year.

Mom’s retirement assets:
Traditional IRA - $450K
99.9% Equities (81.5% AAPL, 8.3% COST)
AAPL dividends generated almost $9,000 last year.

SS income:
Mom: $7,428 annual
Dad: $16,356 annual

Contributions: None.
Expenses: They are both in a nursing home, requiring about $130,000 a year total expenses.

Questions:
1. Should I just keep this entire dividend-heavy portfolio as is? Their dividends generate almost $83,000 a year. I do appreciate its double-digit returns over the past several years, however, a 93% stocks allocation for a retired couple in their withdrawal phase seems risky.

2. Maybe I should cash everything out, and rebuild it in a Boglehead way? LifeStrategy or 3-fund?

3. Bonus question: My parents generated this large nest egg over 50+ years, over many bear markets. Who am I to decide their risk level is too high? If my heirs take my (hopefully) multi-million dollar Boglehead portfolio cash it out for CDs, I’d be annoyed, like they were wasting a well-tended gift. I don’t want to snub my parents and their very successful and lucrative investment strategy.

Maybe I should match their risk tolerance in a Boglehead portfolio?

Thoughts? Thanks!

HoosierJim
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by HoosierJim » Tue Dec 26, 2017 9:38 am

They have plenty of money for their needs regardless of their "risky" position. You can Firecalc their $3M at $200K/year for 15 years and have small chance of failure. Since they 'can't make decisions on their own' - have they expressed any wishes at all regarding risk their asset allocation? If not - do what you think is best for them.

student
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by student » Tue Dec 26, 2017 9:41 am

I feel that at this point the primary focus should be to ensure that they have enough money for the nursing home. So I would be more conservative with a 30/70 asset allocation.

jebmke
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by jebmke » Tue Dec 26, 2017 9:42 am

Over 10% of their assets are in Apple.
When you discover that you are riding a dead horse, the best strategy is to dismount.

livesoft
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by livesoft » Tue Dec 26, 2017 9:44 am

The RMDs are how much? I suppose their high tax bracket is coming from the RMDs, right?

I would guess that dividends are not being reinvested, right?

If the RMDs exceed living expenses, then the excess money should go into tax-efficient index funds.

I don't think it matters what you do. The portfolio is mostly in tax-deferred accounts where selling will have no consequences.

(Even if Apple is over 10% of their assets, isn't Apple 5% of world market weight anyways? :twisted:

Do they have any charitable giving wishes?
Last edited by livesoft on Tue Dec 26, 2017 10:30 am, edited 1 time in total.
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beebog
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by beebog » Tue Dec 26, 2017 9:56 am

When your parents set up their AA, do you think they were doing it to support $130,000 in annual expenses or were they supporting a smaller annual expense because they were still at home and therefore could take more risk?

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KlingKlang
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by KlingKlang » Tue Dec 26, 2017 9:56 am

I'm a little confused by the emphasis on dividends, especially in the traditional IRAs. Taxation of tIRAs is determined by withdrawals, not earnings.

Speaking of withdrawals, both of your parents are required to take required minimum distributions (RMDs) from their tIRAs. How large are these and how do they compare with their nursing home expenses? Do they let the dividends accumulate in a settlement account and pay the RMDs from that? If assets have to be sold to meet the RMD requirements who decides which of the "Hundreds of dividend stocks" get sold?

Are your parents able to express a preference as to whether they would like to be 100% certain of never running out of money vs leaving more for their heirs?

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tadamsmar
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by tadamsmar » Tue Dec 26, 2017 10:00 am

Do you have POA for both? Are they still competent so they could change the POA?

I think the current portfolio is too risky, but you need to keep their confidence if they are still competent.

I would use Vanguard Target Retirement Income Fund.

If they are concerned, then you could make changes that conserve the expected after-fees returns. Figure all the excess fees (22,000 or whatever). You can go to more conservative allocation that has a lower expected return since you don't have all those fees. I did something like this for my mother-in-law.

dbr
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by dbr » Tue Dec 26, 2017 10:18 am

At age 80 93% stocks is mainly only at risk of delivering huge wealth to the heirs. A previous poster asked the question about objectives re leaving a legacy.

However, if one wanted to be more comfortable about volatility one could sell all the individual stocks, including Apple and buy a three fund portfolio at perhaps 60/40 asset allocation. For purposes of maintaining their income there is no need to take the risk of 93% stocks nor any benefit. The only real mistake would be to put everything in fixed income.

Dividend stocks or not is neither here nor there and the amount of dividends paid is irrelevant.

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Pajamas
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by Pajamas » Tue Dec 26, 2017 10:33 am

Even if you managed their finances full-time, it would be difficult to manage "hundreds of dividend stocks" in any meaningful way other than not doing anything.

How did the financial manager choose and monitor them and decide when to buy them and when to sell them?

For reasons I don't understand, people who emphasize dividends in creating a portfolio often end up holding too many stocks to effectively manage them and would be better off simply investing in a mutual fund instead of creating their own from scratch.

In your situation, my primary concern in managing their finances would be how to best ensure that their needs are met for the rest of their life. Their present portfolio might meet their needs, but not in the best possible way.

If you are now fully responsible for managing their finances, you should accept that responsibility fully.
Last edited by Pajamas on Tue Dec 26, 2017 10:52 am, edited 2 times in total.

donall
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by donall » Tue Dec 26, 2017 10:35 am

With 3 million and a withdrawal rate of less than 1%, I’d say your parents are set. To honor your parents I don’t think you need to keep the portfolio the same but try to preserve and grow the portfolio. This seems like a legacy portfolio rather than a portfolio necessary for living expenses. Income from investments is 2.85%. What are the RMDs? Can you invest in more conservative investments to yield the same or more?

kerplunk
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by kerplunk » Tue Dec 26, 2017 10:36 am

I would trust Vanguard on this one: Vanguard Target Retirement Income Fund.

You would probably sleep better at night knowing that you made a safe decision.

dbr
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by dbr » Tue Dec 26, 2017 10:40 am

donall wrote:
Tue Dec 26, 2017 10:35 am
With 3 million and a withdrawal rate of less than 1%, I’d say your parents are set. To honor your parents I don’t think you need to keep the portfolio the same but try to preserve and grow the portfolio. This seems like a legacy portfolio rather than a portfolio necessary for living expenses. Income from investments is 2.85%. What are the RMDs? Can you invest in more conservative investments to yield the same or more?
The current withdrawal rate is about $106,000 out of $3M or 3.5%. But it is still true that for the shorter time frame of an 80 year old person life expectancy, that is very safe. Statistically an earlier demise is probably more likely than a drastic increase in expenses for some reason.

I hope you didn't make the mistake of thinking dividends are not withdrawals, because they are.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by AlohaJoe » Tue Dec 26, 2017 10:41 am

foxtrotgolf wrote:
Tue Dec 26, 2017 9:27 am
a 93% stocks allocation for a retired couple in their withdrawal phase seems risky.
What's risky about?

I mean...what specific risk do you think they are subject to?

Even if there is a Japan-style equities crash that takes 3 decades to recover, they still have enough money to last the rest of their lives.

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Tamarind
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by Tamarind » Tue Dec 26, 2017 10:43 am

If your parents are still competent but have granted you POA to take this off their plates, you should talk to them about this. Explain that their advisor quit but you can find a new guy for them who is cheaper AND has a great track record (Vanguard PAS) and they have plenty of money so nothing to worry about. Assess their willingness to take risk along the lines of the Vanguard questionnaire. You already know they have high ability and low need. Then change AA in accordance with their wishes (either before or after in-kind transfer to VG, depending on who is the current custodian). If they like income showing up in their accounts, make sure that you have automatic withdrawals set up.

If you don't have POA, you don't have the right to change their investments. Leave them alone. But you might look into getting POA if they remain competent to grant it for many other reasons.

They have plenty of money, regardless, so you don't need to be super conservative. In fact, please don't put it all in CDs. If that were my nest egg I'd probably be at 50/50. But 75/25 is also viable for their situation.

Even if you leave the AA alone, see what you can do to make withdrawals more tax efficient and limiting individual stock risk (luckily no tax consequences to selling all those individual dividend stocks in the IRAs).

How do RMDs + SS compare to their annual expenses?

If you are solely responsible for their finances, make sure you REALLY understand RMDs.

Dandy
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by Dandy » Tue Dec 26, 2017 10:44 am

I think that you are responsible for their financials. It is not prudent in my opinion for their very high equity allocation and over reliance on individual stocks. I think their former adviser was not good for doing such a high risk portfolio. So I would ignore what the adviser did and your parent's wishes and do a much more sensible portfolio of low cost index funds, FDIC products etc. Prudent handling is really on you.

I would consider what Dr. Wm Bernstein recommends for those who have enough - stop playing the game. Put 10-15 years worth of potential portfolio draw downs in "safe" products e.g. Savings Accounts, CDs, Money Markets etc. and the rest in a "risk" portfolio with a conservative allocation e.g. 30% or so equities and the rest in intermediate bond fund(s).

Periodically, review the adequacy of the "safe" portfolio and top it off if expenses have increased. Also, take some or most of the yearly withdrawals from the "risk" portfolio when it does well - like this year. That will stretch out the coverage of the "safe" portfolio.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by inbox788 » Tue Dec 26, 2017 10:51 am

jebmke wrote:
Tue Dec 26, 2017 9:42 am
Over 10% of their assets are in Apple.
Yes, I noticed that too, and concentration like that can be a bit risky, but practically speaking, it's only about 3-4X the average persons Apple holdings. We've all got an out-sized Apple holding simply because it's currently the biggest market cap company out there. While it's prudent to diversify, I wouldn't sweat over it.

OP, I'm not sure why you're is excited or terrified. You've got plenty of other things to worry about, and as long as you make a reasonable decision, this shouldn't be a stressful issue. What they got is more risk than necessary, but an acceptable solution to their needs. You could move to a less risky or less costly portfolio and still meet their needs. As long as you're looking out for their needs, and doing the best thing you think, that's all that can be asked of you. And the part about being excited, personal finance isn't all that exciting a topic, and folks here probably find it more exciting than the average person. A good goal to reach would be no matter how exciting the market or bitcoin gets, you don't find excitement in their portfolio.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by dbr » Tue Dec 26, 2017 10:53 am

inbox788 wrote:
Tue Dec 26, 2017 10:51 am
jebmke wrote:
Tue Dec 26, 2017 9:42 am
Over 10% of their assets are in Apple.
Yes, I noticed that too, and concentration like that can be a bit risky, but practically speaking, it's only about 3-4X the average persons Apple holdings. We've all got an out-sized Apple holding simply because it's currently the biggest market cap company out there. While it's prudent to diversify, I wouldn't sweat over it.

OP, I'm not sure why you're is excited or terrified. You've got plenty of other things to worry about, and as long as you make a reasonable decision, this shouldn't be a stressful issue. What they got is more risk than necessary, but an acceptable solution to their needs. You could move to a less risky or less costly portfolio and still meet their needs. As long as you're looking out for their needs, and doing the best thing you think, that's all that can be asked of you. And the part about being excited, personal finance isn't all that exciting a topic, and folks here probably find it more exciting than the average person. A good goal to reach would be no matter how exciting the market or bitcoin gets, you don't find excitement in their portfolio.
Excellent advice.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by deltaneutral83 » Tue Dec 26, 2017 10:53 am

60/40 3F with 20% in International should appease all parties involved. Keep in mind you're saving them $22k a year so that's 15-18% of their annual needs. Without knowing your siblings, and the power they also have, you'd need to discuss with them what you're doing, but 60/40 should be fine for a 50% reduction in equities. I can't imagine having 10% of my portfolio at 80 years of age in one company, AAPL. Scary.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by foxtrotgolf » Tue Dec 26, 2017 10:59 am

Thanks everyone for your thoughtful replies.

In answer to everyone’s questions,
- their RMD last year was $104K, plus $30K of additional expenses, which accounts for the high tax bracket.
- dividends are not being reinvested, they are used to generate their RMD.
- additional funds when needed come from their joint takable account.
- I have POA over my parents
- I am an only child

I’m leaning towards cashing everything out for a 3-fund portfolio, for simplicity’s sake. I don’t have the bandwidth to watch hundreds of individual stocks.

quantAndHold
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by quantAndHold » Tue Dec 26, 2017 11:00 am

Keep in mind that they’ve won the game, so you’re really managing the portfolio for the heirs. I had to do the same for my dad during the last couple of years of his life. He was a very successful investor, so it wasn’t really my place to second guess him, but his investing style was very different than mine, and I wasn’t capable of being successful doing what he had been doing. So I made some changes.

The biggest issue is that this portfolio is too complicated for you to successfully manage. If it were me, I would simplify into a small number of mutual funds, with a 70/30 or 60/40 allocation.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by radiowave » Tue Dec 26, 2017 11:03 am

Emergency funds: $220,000 in brokerage account.
You could move this money into a high yield savings account, e.g. Ally and put some of the cash in CDs (Ally has a 2.0% 1 year CD right now and an 11 month no withdrawal penalty CD at 1.75%).
Hundreds of dividend stocks - which last year generated almost $65,000 in dividends.
Even at 4.95 or 6.95 per trade, converting all these stocks to mutual funds or ETFs could incur significant fees. Are the funds in a brokerage that waives trading fees?
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Pajamas
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by Pajamas » Tue Dec 26, 2017 11:04 am

foxtrotgolf wrote:
Tue Dec 26, 2017 10:59 am
I don’t have the bandwidth to watch hundreds of individual stocks.
The financial advisor didn't, either! :oops:

quantAndHold
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by quantAndHold » Tue Dec 26, 2017 11:07 am

Pajamas wrote:
Tue Dec 26, 2017 11:04 am
foxtrotgolf wrote:
Tue Dec 26, 2017 10:59 am
I don’t have the bandwidth to watch hundreds of individual stocks.
The financial advisor didn't, either! :oops:
I’m thinking that’s probably why AAPL is 10% of the portfolio.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by randomguy » Tue Dec 26, 2017 11:07 am

AlohaJoe wrote:
Tue Dec 26, 2017 10:41 am
foxtrotgolf wrote:
Tue Dec 26, 2017 9:27 am
a 93% stocks allocation for a retired couple in their withdrawal phase seems risky.
What's risky about?

I mean...what specific risk do you think they are subject to?

Even if there is a Japan-style equities crash that takes 3 decades to recover, they still have enough money to last the rest of their lives.
Maybe since Japan was a bit of a long grind down. How would they have done during the 1929 crash when stocks lost something like 90% from peak to trough over 4 years. Taking out 100k/year will rapidly deplete your portfolio if you don't get the rapid bounce back.

Obviously we are talking the edge of the edge cases here. In the more normal 30-50% corrections, you would still have plenty of money. To me the produtent thing would be 10 years in bonds (i.e. odds are that will out live them) and shove the rest in stocks and occasionally refill the bond side. You get 2/3s of the upside and don't have to worry much about market moves. You can go more conservative, but there isn't much of a point.

As far as the portfolio, you sort of either have to let it ride or sell all those dividend stocks. I would just sell them all and buy a dividend fund (if you believe in divs) or TSM/TISM. But that is something that might really bother your parents. They might think of it as having all their eggs in one basket. Instead of focusing on all the stocks, I might just look at the top 10 and look for big risks (i.e. Dad worked for GE and 80% of the portfolio is GE stock). Things like 10% in apple might not be my choice but it isn't horribly bad they way having half your networth in one company is. Doing small changes (say 100k/year converted from div stocks to TSM) might be the way to go to keep your parents comfortable.

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Watty
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by Watty » Tue Dec 26, 2017 11:10 am

foxtrotgolf wrote:
Tue Dec 26, 2017 9:27 am
Their investment advisor quit last week,

---
Or “disobey” them?
You followed their plan by leaving the money with the advisor as long as you did.

With him leaving there is literally no way for you to continue following their plan so there is no guilt with now going with a more conservative approach since there situation is a lot different than it was was 18+ years ago when they set up the portfolio. Their plan was to let that advisor who they trusted manage their money and that is no longer possible.

There is a saying, "A broken clock is right twice a day." Their results are great because we are in a record bull market that is at an all time time so you should not mistake the good results with them having followed some fantastic plan that you need to continue following. If you have their records look to see how they were doing at the market lows in 2008.

I would leave the taxable account alone for now since there might be tax considerations but sell everything in the retirement accounts and put them into relatively conservative mutual funds that are maybe 20 to 30 percent stocks. In the retirement account a Target Date Retirement Income fund would be a reasonable choice and if there are any siblings involved then it would be hard for any of them to claim that you mismanaged their money if you used that.

https://personal.vanguard.com/us/funds/ ... irect=true

One thing that you also need to plan for is that something could happen to you. If you get hit by the proverbial Mack truck then the next advisor that gets assigned to their account could start putting them into very expensive funds with loads that they frequently buy and sell along with terrible annuities. There are many financial "advisors" that specialize in taking advantage of people in nursing homes that don't have anyone else to look out for them.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by foxtrotgolf » Tue Dec 26, 2017 11:12 am

Pajamas wrote:
Tue Dec 26, 2017 11:04 am
foxtrotgolf wrote:
Tue Dec 26, 2017 10:59 am
I don’t have the bandwidth to watch hundreds of individual stocks.
The financial advisor didn't, either! :oops:
Yeah. Their advisor had the nerve to call me and say his new company has less overhead and bureaucracy, which is why I should move my parents' funds there.
Funny how bureaucracy didn't concern him for the previous 15+ years. :annoyed :annoyed

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by mmcmonster » Tue Dec 26, 2017 11:13 am

Dandy wrote:
Tue Dec 26, 2017 10:44 am
[...]I would consider what Dr. Wm Bernstein recommends for those who have enough - stop playing the game. Put 10-15 years worth of potential portfolio draw downs in "safe" products e.g. Savings Accounts, CDs, Money Markets etc. and the rest in a "risk" portfolio with a conservative allocation e.g. 30% or so equities and the rest in intermediate bond fund(s).
Except the portfolio value now is more than the parents could ever spend on their own. Therefore you've got a portfolio aimed at increasing value as much as possible for the heirs.

How about enough bonds/CDs/etc for 15 years of the parents' expenses. The rest completely in stocks or 80% stocks/20% bonds.

That will give the parents safety and the potential to maximize the amount the heirs get.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by Wakefield1 » Tue Dec 26, 2017 11:13 am

Whether they are articulate and lucid or not is very important. If so they should be consulted as for what to do.
If it is up to you completely for the decision and management of the timely responsibilities I would think simplification and reduction of demands on your time and attention would be a high priority.
I would hope the individual dividend paying securities are at least in some kind of low worry automatic direct deposit to one of their accounts that can be accessed to pay the nursing home without having a whole lot of stuff to manage for each individual distribution.
I would think that consolidation into a smaller number of high quality mutual funds,whether aggressive or conservative,would reduce the workload of managing and watching the nest egg.
Last edited by Wakefield1 on Tue Dec 26, 2017 11:20 am, edited 1 time in total.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by Sandtrap » Tue Dec 26, 2017 11:18 am

foxtrotgolf wrote:
Tue Dec 26, 2017 10:59 am
Thanks everyone for your thoughtful replies.

In answer to everyone’s questions,
- their RMD last year was $104K, plus $30K of additional expenses, which accounts for the high tax bracket.
- dividends are not being reinvested, they are used to generate their RMD.
- additional funds when needed come from their joint takable account.
- I have POA over my parents
- I am an only child

I’m leaning towards cashing everything out for a 3-fund portfolio, for simplicity’s sake. I don’t have the bandwidth to watch hundreds of individual stocks.
We are in a similar situation and what we are doing may help you.

FIL recently passed away. WWII career military at age 94. MIL survives but DW has POA.
He also left a large portfolio with a long list of stocks, mostly tech and communications which have done well. However, the allocation was 90/10 or greater.
The issues we considered were/are:
1. Capital gains since many were very old.
2. Need for simplicity because of the number of funds, and in various places.

The steps we are taking are:
0. Set MIL's target allocation at 30/70. eq/fixed. (hares are all over 65 so allocation works for them as well)
1. Set up a 3 fund portfolio with low cost index funds.
2. Take highest cost mutual and managed funds first, sell, and move to the 3 fund.
3. Gradually sell individual funds and move to 3 fund.
4. Transfer to reduce the number of brokerage locations down to 3.
5. Keep the rest of DW's family in the "loop" but in a simple way with no stress, no numbers or details so it's not overwhelming.

I hope this is helpful to you.
j :D

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by lostdog » Tue Dec 26, 2017 11:20 am

kerplunk wrote:
Tue Dec 26, 2017 10:36 am
I would trust Vanguard on this one: Vanguard Target Retirement Income Fund.

You would probably sleep better at night knowing that you made a safe decision.
+1 make it simple.
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by eye.surgeon » Tue Dec 26, 2017 11:28 am

Respecting your parents in this regard means making the proper fiduciary decision with their asset allocation, which is a far cry from what it is currently . The fact that it meets their yearly needs is not justification for keeping as-is, any more than saying your elderly parent can afford to gamble large sums at the roulette table.
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by cjking » Tue Dec 26, 2017 11:39 am

foxtrotgolf wrote:
Tue Dec 26, 2017 10:59 am
I’m leaning towards cashing everything out for a 3-fund portfolio, for simplicity’s sake. I don’t have the bandwidth to watch hundreds of individual stocks.
If they have hundreds of stocks, it sounds like they are diversified, and there's no need to watch the stocks. When we invest in an index, companies in that index are probably going bankrupt (or collapsing out of the index) all the time, and we don't notice or care, because those losses are offset by gains elsewhere. Just treat their whole account as a fund, all you need to monitor is the overall balance. (Actually, I'm not even sure what purpose that would serve.)

If you think you needed to sell equities to buy bonds, it doesn't really take any thought/effort to pick some more or less at random, probably it would minimise costs and maximising remaining diversity to sell the bigger holdings first.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by foxtrotgolf » Tue Dec 26, 2017 11:52 am

eye.surgeon wrote:
Tue Dec 26, 2017 11:28 am
Respecting your parents in this regard means making the proper fiduciary decision with their asset allocation, which is a far cry from what it is currently . The fact that it meets their yearly needs is not justification for keeping as-is, any more than saying your elderly parent can afford to gamble large sums at the roulette table.
Great advice @eye.surgeon. Thanks.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by livesoft » Tue Dec 26, 2017 12:00 pm

foxtrotgolf wrote:
Tue Dec 26, 2017 10:59 am
Thanks everyone for your thoughtful replies.

In answer to everyone’s questions,
- their RMD last year was $104K, plus $30K of additional expenses, which accounts for the high tax bracket.
The 28% marginal income tax bracket doesn't make too much sense to me. We have about the same income from similarly-taxed sources and pay hardly any income taxes. See this post:
viewtopic.php?p=3682049#p3682049
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by foxtrotgolf » Tue Dec 26, 2017 12:16 pm

livesoft wrote:
Tue Dec 26, 2017 12:00 pm
foxtrotgolf wrote:
Tue Dec 26, 2017 10:59 am
Thanks everyone for your thoughtful replies.

In answer to everyone’s questions,
- their RMD last year was $104K, plus $30K of additional expenses, which accounts for the high tax bracket.
The 28% marginal income tax bracket doesn't make too much sense to me. We have about the same income from similarly-taxed sources and pay hardly any income taxes. See this post:
viewtopic.php?p=3682049#p3682049

Thanks for pointing this out! I had not considered Roth IRA conversions and tax consequences.
Any specific advice for me? Until, I'm going to bury myself in this thread from 2007. Thanks again.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by nedsaid » Tue Dec 26, 2017 12:20 pm

foxtrotgolf wrote:
Tue Dec 26, 2017 10:59 am
Thanks everyone for your thoughtful replies.

In answer to everyone’s questions,
- their RMD last year was $104K, plus $30K of additional expenses, which accounts for the high tax bracket.
- dividends are not being reinvested, they are used to generate their RMD.
- additional funds when needed come from their joint takable account.
- I have POA over my parents
- I am an only child

I’m leaning towards cashing everything out for a 3-fund portfolio, for simplicity’s sake. I don’t have the bandwidth to watch hundreds of individual stocks.
You have a fiduciary duty towards your parents, which means you need to act in their best interest. It sounds like they can't make financial decisions anymore, so it is up to you. To me, having an extremely stock heavy portfolio for elderly parents is irresponsible. I would shoot for 30% stocks or at most 40% stocks, I would lean towards 30%. 93% stocks is unbelievable but fortunately we have been in a bull market so everything turned out okay.

I am a single guy and mostly a do-it-yourself investor. I believe that I have a fiduciary duty to myself, thus I find myself rebalancing from stocks to bonds. I have been doing this over the last 4 1/2 years and it seems like all I have been doing is hitting the "sell" button. During this time, I have reduced my stock allocation from 69% to 66%. Doesn't sound like much, but had I done nothing, I would probably be at 75%-76% stocks today. So in dollar terms, it is a fair amount of money. I am a stock guy and hate all of this selling but I have a duty to act prudently as my own portfolio manager as no one else is going to do this for me.

What I would do is use the Vanguard Advisory Service and pay the 0.3% advisory fee, which will cut the advisor fees down significantly. You will be paying about $9,000 a year instead of $22,000 a year. They will get you into a simple portfolio that will be much easier to manage. I would probably keep the advisor until your parents pass away. This takes the burden off of you to manage the portfolio and it adds a layer of protection for you. This would show that you are acting in a prudent manner and would lessen criticism from other family members. I know you are an only child but likely there is other family around.

You will learn a lot during the process and when you inherit you will likely be able to handle all of this on your own. Let them do the driving and make it your task to learn all you can.

You are fortunate that most of the money is in tax deferred retirement accounts so you don't have to worry so much about tax consequences. Best wishes, Ned.
A fool and his money are good for business.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by randomguy » Tue Dec 26, 2017 12:20 pm

livesoft wrote:
Tue Dec 26, 2017 12:00 pm
foxtrotgolf wrote:
Tue Dec 26, 2017 10:59 am
Thanks everyone for your thoughtful replies.

In answer to everyone’s questions,
- their RMD last year was $104K, plus $30K of additional expenses, which accounts for the high tax bracket.
The 28% marginal income tax bracket doesn't make too much sense to me. We have about the same income from similarly-taxed sources and pay hardly any income taxes. See this post:
viewtopic.php?p=3682049#p3682049
Your example isn't remotely the same. Run an example with 104k of RMDs, 25k of SS, 11k+ of divs and you will get pretty close to the 28% bracket (either in or just missing depending on exact details). There isn't a lot of wiggle room here. Things could have been done 15+ years ago but that time has past.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by White Coat Investor » Tue Dec 26, 2017 12:21 pm

foxtrotgolf wrote:
Tue Dec 26, 2017 9:27 am
Greetings! Long time Boglehead.

Here’s the situation. My mom and dad are now in a nursing home, and can’t make decisions for themselves anymore. I’ve been managing their daily financial matters for the past 6 years. Their investment advisor quit last week, thanks goodness, for he charged them over $22,000 a year for 18+ years. However, to his credit, he built them a substantial income-generating portfolio.

It is now my job to handle their nest egg. I’m excited and terrified at the same time.


Background:
Total Nest Egg is $3M

Emergency funds: $220,000 in brokerage account.
Debt: none
Tax Filing Status: Married
Tax Rate: 28% Federal, 5.12% State
State of Residence: NC
Age: 79 and 80

Dad’s retirement assets:
Traditional IRA - $2.1M
93% Equities (71.6% Large Cap, 12.9% Mid/Small Cap, 8.4% International)
Hundreds of dividend stocks - which last year generated almost $65,000 in dividends.

Joint Brokerage - $382,000
77.4% Fixed income, split evenly between NHMAX and FXNCX
19.8% Mid-cap equities
Generated $11,411.99 in dividends last year.

Mom’s retirement assets:
Traditional IRA - $450K
99.9% Equities (81.5% AAPL, 8.3% COST)
AAPL dividends generated almost $9,000 last year.

SS income:
Mom: $7,428 annual
Dad: $16,356 annual

Contributions: None.
Expenses: They are both in a nursing home, requiring about $130,000 a year total expenses.

Questions:
1. Should I just keep this entire dividend-heavy portfolio as is? Their dividends generate almost $83,000 a year. I do appreciate its double-digit returns over the past several years, however, a 93% stocks allocation for a retired couple in their withdrawal phase seems risky.

2. Maybe I should cash everything out, and rebuild it in a Boglehead way? LifeStrategy or 3-fund?

3. Bonus question: My parents generated this large nest egg over 50+ years, over many bear markets. Who am I to decide their risk level is too high? If my heirs take my (hopefully) multi-million dollar Boglehead portfolio cash it out for CDs, I’d be annoyed, like they were wasting a well-tended gift. I don’t want to snub my parents and their very successful and lucrative investment strategy.

Maybe I should match their risk tolerance in a Boglehead portfolio?

Thoughts? Thanks!
There's a lot of room between 30/70 and 93/7. I'd try to dial back the risk some, but probably not to 30/70. Sounds to me like they can tolerate losses better than you can!

If they're in a nursing home already, they're probably not long for this Earth. So I definitely wouldn't sell anything in the taxable account. Take advantage of the step-up in basis there. So make all your changes in the IRA. Should be easy since it is mostly IRA money.

But yes, I'd start simplifying the equities, selling shares and buying index funds. If you want to preserve a value/dividend tilt in their honor, that's easy to do with funds.

Don't be too hard on them. When they started investing nobody knew index funds were the way to go. And they're multi-millionaires! Many Bogleheads are struggling with the opposite problem- how to support their parents.
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by dodecahedron » Tue Dec 26, 2017 12:21 pm

livesoft wrote:
Tue Dec 26, 2017 12:00 pm
foxtrotgolf wrote:
Tue Dec 26, 2017 10:59 am
Thanks everyone for your thoughtful replies.

In answer to everyone’s questions,
- their RMD last year was $104K, plus $30K of additional expenses, which accounts for the high tax bracket.
The 28% marginal income tax bracket doesn't make too much sense to me. We have about the same income from similarly-taxed sources and pay hardly any income taxes. See this post:
viewtopic.php?p=3682049#p3682049
No--you have a very different income situation from the OP's parents. Your gross income subject to ordinary tax rates comes primarily from *earned income* on which you can do things like contribute to tax-deferred retirement plans, flexible spending accounts, etc. to reduce the AGI.

The OP's parents' gross income subject to ordinary tax rates comes primarily from *unearned income* sources (mainly RMDs and some taxable SS) and they are not eligible to contribute to retirement plans. They are also most likely covered by Medicare, rendering them unable to contribute to an HSA. Unless they want to do major QCDs, they are stuck with a much higher AGI than livesoft, even if the gross income amounts are roughly similar.

Edited to add: the difference in your two tax situations is broadly illustrative of how different the tax situations can be for the "over 70" set vs the "under 65" set, even if they have roughly the same gross incomes.
Last edited by dodecahedron on Tue Dec 26, 2017 12:23 pm, edited 1 time in total.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by pkcrafter » Tue Dec 26, 2017 12:22 pm

foxtrotgolf wrote:
Tue Dec 26, 2017 9:27 am
Greetings! Long time Boglehead.

Here’s the situation. My mom and dad are now in a nursing home, and can’t make decisions for themselves anymore. I’ve been managing their daily financial matters for the past 6 years. Their investment advisor quit last week, thanks goodness, for he charged them over $22,000 a year for 18+ years. However, to his credit, he built them a substantial income-generating portfolio.

It is now my job to handle their nest egg. I’m excited and terrified at the same time.


Background:
Total Nest Egg is $3M
They are both in a nursing home, requiring about $130,000 a year total expenses.
I don't see too much of a problem, however, with their high risk portfolio, a loss of 40% is possible. If that happens, it drives the needed withdrawals to over 7%. They could probably sustain this for the rest of their lives, but it simply isn't necessary to get into that situation. So, lower the asset allocation to maybe 40%-50%.
Dad’s retirement assets:
Traditional IRA - $2.1M
93% Equities (71.6% Large Cap, 12.9% Mid/Small Cap, 8.4% International)
Hundreds of dividend stocks - which last year generated almost $65,000 in dividends.
Since this is all in an IRA, there are no consequences to selling. You haven't mentioned if there are mutual funds or just all stocks, but certainly sell the individual stocks, and if there are high fee mutual funds, sell them as well. Yes, a lifestrategy or target fund is a reasonable alternative
Joint Brokerage - $382,000
77.4% Fixed income, split evenly between NHMAX and FXNCX
19.8% Mid-cap equities
Generated $11,411.99 in dividends last year.

Mom’s retirement assets:
Traditional IRA - $450K
99.9% Equities (81.5% AAPL, 8.3% COST)
AAPL dividends generated almost $9,000 last year.
Same here. Sell all and use a LS or TR fund if you are comfortable with those.
SS income:
Mom: $7,428 annual
Dad: $16,356 annual

Contributions: None.
Expenses: They are both in a nursing home, requiring about $130,000 a year total expenses.

Questions:
1. Should I just keep this entire dividend-heavy portfolio as is? Their dividends generate almost $83,000 a year. I do appreciate its double-digit returns over the past several years, however, a 93% stocks allocation for a retired couple in their withdrawal phase seems risky.
I agree, and it just isn't necessary. Dividends come from the invested assets. They aren't a gift, they are basically an automatic withdrawal. If not taken, they are reinvested and used to buy additional shares.
2. Maybe I should cash everything out, and rebuild it in a Boglehead way? LifeStrategy or 3-fund?
That is a very reasonable approach.
3. Bonus question: My parents generated this large nest egg over 50+ years, over many bear markets. Who am I to decide their risk level is too high? If my heirs take my (hopefully) multi-million dollar Boglehead portfolio cash it out for CDs, I’d be annoyed, like they were wasting a well-tended gift. I don’t want to snub my parents and their very successful and lucrative investment strategy.

Their current situation calls for a reevaluation. This isn't the time to sustain a large drop in total assets.
Maybe I should match their risk tolerance in a Boglehead portfolio?
Their risk tolerance has changed, and the "advisor" should never have left them in a high risk portfolio. Maybe it would still work, but it just isn't necessary or even prudent. Your parents built the portfolio, and now it's your job to see that a good portion isn't lost to market gyrations and volatility.


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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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by Dandy » Tue Dec 26, 2017 12:34 pm

How about enough bonds/CDs/etc for 15 years of the parents' expenses. The rest completely in stocks or 80% stocks/20% bonds.

That will give the parents safety and the potential to maximize the amount the heirs get.
I feel that the OP is in a fiduciary position and should focus the investments without an eye on maximizing the value to the heir(s). I'm sure following either of our advice the heirs are likely to do well. But the assets were earned by and for the living benefit of his parents and that should be the focus.

People can live much longer than the "norm". I went to a play last Thursday night and sat next to a man who was 93 and drove 2 hours to bring his wife of 86 to the event. True neither was in a nursing home. But nursing home expenses aren't capped and neither are medical/RX costs.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by Katietsu » Tue Dec 26, 2017 12:36 pm

What type of facility are they in? Skilled nursing care, assisted living? Do you have documentation of their need for help with ADL’s? (Activities of Daily Living). Depending on their situation between 30%-100% of their nursing home/assisted living costs will qualify as a medical deduction. Therefore, they should be paying 0 in federal taxes as is. Please check on this now with someone knowledgeable or post back here on this issue. Depending on the circumstances, some tax deductions are only available for expenses incurred after obtaining appropriate documentation. Note that you may receive a bill that outlines only a portion as medical expenses. You are not always limited to this amount. The entire bill, including that for room and board may be deductible.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by TigerNest » Tue Dec 26, 2017 12:42 pm

Why did the financial advisor quit? I don't think I've ever heard of a financial advisor giving up AUM once they've got their hands on it.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by Bacchus01 » Tue Dec 26, 2017 12:51 pm

quantAndHold wrote:
Tue Dec 26, 2017 11:00 am
Keep in mind that they’ve won the game, so you’re really managing the portfolio for the heirs. I had to do the same for my dad during the last couple of years of his life. He was a very successful investor, so it wasn’t really my place to second guess him, but his investing style was very different than mine, and I wasn’t capable of being successful doing what he had been doing. So I made some changes.

The biggest issue is that this portfolio is too complicated for you to successfully manage. If it were me, I would simplify into a small number of mutual funds, with a 70/30 or 60/40 allocation.

This is what I was going to say. What do they plan for the money when they pass? Because that’s the timeframe you should now consider in the portfolio, where the equity allocation probably doesn’t look so bad. But the complexity of it is hard to manage.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by livesoft » Tue Dec 26, 2017 12:52 pm

TigerNest wrote:
Tue Dec 26, 2017 12:42 pm
Why did the financial advisor quit? I don't think I've ever heard of a financial advisor giving up AUM once they've got their hands on it.
It appears the advisor simply moved to another firm.
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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by mouses » Tue Dec 26, 2017 12:53 pm

Dandy wrote:
Tue Dec 26, 2017 10:44 am
I would consider what Dr. Wm Bernstein recommends for those who have enough - stop playing the game. Put 10-15 years worth of potential portfolio draw downs in "safe" products e.g. Savings Accounts, CDs, Money Markets etc. and the rest in a "risk" portfolio with a conservative allocation e.g. 30% or so equities and the rest in intermediate bond fund(s).

Periodically, review the adequacy of the "safe" portfolio and top it off if expenses have increased. Also, take some or most of the yearly withdrawals from the "risk" portfolio when it does well - like this year. That will stretch out the coverage of the "safe" portfolio.
+1

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by mouses » Tue Dec 26, 2017 12:55 pm

Katietsu wrote:
Tue Dec 26, 2017 12:36 pm
What type of facility are they in? Skilled nursing care, assisted living? Do you have documentation of their need for help with ADL’s? (Activities of Daily Living). Depending on their situation between 30%-100% of their nursing home/assisted living costs will qualify as a medical deduction. Therefore, they should be paying 0 in federal taxes as is. Please check on this now with someone knowledgeable or post back here on this issue. Depending on the circumstances, some tax deductions are only available for expenses incurred after obtaining appropriate documentation. Note that you may receive a bill that outlines only a portion as medical expenses. You are not always limited to this amount. The entire bill, including that for room and board may be deductible.
The medical deduction was almost lost in the tax bill that just passed and seems to be on the target list. I would be careful about assuming it will continue, despite the massive impact its loss will have on people with substantial medical expenses.

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by foxtrotgolf » Tue Dec 26, 2017 12:59 pm

Katietsu wrote:
Tue Dec 26, 2017 12:36 pm
What type of facility are they in? Skilled nursing care, assisted living? Do you have documentation of their need for help with ADL’s? (Activities of Daily Living). Depending on their situation between 30%-100% of their nursing home/assisted living costs will qualify as a medical deduction. Therefore, they should be paying 0 in federal taxes as is. Please check on this now with someone knowledgeable or post back here on this issue. Depending on the circumstances, some tax deductions are only available for expenses incurred after obtaining appropriate documentation. Note that you may receive a bill that outlines only a portion as medical expenses. You are not always limited to this amount. The entire bill, including that for room and board may be deductible.
Last year, I was able to deduct over $100K in medical expenses for them (Yes, I've been doing their taxes as well)

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Re: Should I preserve parents’ risky portfolio? Or “disobey” them?

Post by radiowave » Tue Dec 26, 2017 1:09 pm

nedsaid wrote:
Tue Dec 26, 2017 12:20 pm
. . .

What I would do is use the Vanguard Advisory Service and pay the 0.3% advisory fee, which will cut the advisor fees down significantly. You will be paying about $9,000 a year instead of $22,000 a year. They will get you into a simple portfolio that will be much easier to manage. I would probably keep the advisor until your parents pass away. This takes the burden off of you to manage the portfolio and it adds a layer of protection for you. This would show that you are acting in a prudent manner and would lessen criticism from other family members. I know you are an only child but likely there is other family around.
Would Vanguard Advisory Service work with the OP to sell/convert the hundreds of stocks? if yes, then that makes a lot of sense.
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