UHNW on paper - advice fire-testing AA

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mmetz79
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Joined: Mon Jan 02, 2017 4:32 pm

UHNW on paper - advice fire-testing AA

Post by mmetz79 » Mon Jan 22, 2018 2:57 pm

Hello Bogleheads! Long-time lurker/reader here. I am in a fortunate financial position, but am looking for advice, fire-testing, and devil's advocacy on my current AA thinking in a unique situation.

I own a family-owned business based in AZ. I recently sold a small portion of the business to an private equity partner and had a ~$5M windfall. The rest of my ownership in the business is valued at ~$50M. That ownership is currently illiquid but may become liquid in the next 3-5 years.

For simplicity, assume that the $5M in liquid assets is all my assets. My current thinking is to go 100% VWIUX (VG's int-term tax-exempt bond fund). Why such a bizarre AA vs a mix of stocks/bonds? Because the rest of my illiquid on-paper assets are highly correlated to the equity markets. So, in reality, I may be more like 90/10 stocks/bonds, since a stock market growth/decline would have a significant impact on my illiquid assets. That is my current thinking. I'd love to hear other perspectives. I'm also feeling a bit of FOMO as the stock market continues to rise, but trying to tune that out.

I've read the other $50M threads on the forum. Current approach is to continue a simple AA in Vanguard funds, managing my money myself for the time being. I've already talked to the "top-tier" wealth management firms, but can't justify the fees. I would of course welcome other opinion and perspectives. I've taken care of some foundational elements already (estate, generational family planning, insurance, etc).

Thank you all for your feedback!

More context added by request:

Age: 43
Family: Married with 3 children
Liabilities: Negligible (no mortgage/debt/loans)
Expenses: $100k-$150k annual spend (obviously lifestyle expense may increase from current state)
Last edited by mmetz79 on Tue Jan 23, 2018 1:40 pm, edited 1 time in total.

bloom2708
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Re: UHNW on paper - advice fire-testing AA

Post by bloom2708 » Tue Jan 23, 2018 9:48 am

I can see what you are thinking. I would probably choose a 30-40% equity allocation. Yes, your $5 million could drop 20%, but it could also continue to grow.

Assuming this is post tax. Using Vanguard Admiral funds.

25% Total US Stock index
15% Total International Stock index
60% Int-Term Tax-Exempt bond index

You could do 10-20% of your bonds in Limited-Term Tax-Exempt if you were worried about near term interest rates rising. Nobody knows.

Just an idea. We don't have $5 million, but the 3 funds are what we use in taxable at Vanguard.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

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midareff
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Re: UHNW on paper - advice fire-testing AA

Post by midareff » Tue Jan 23, 2018 10:38 am

Without knowing things like your age, personal/family liabilities and expenses, etc., this is a less than complete picture. While the value of your business may have ties to equity prices the $5M you acquired is a separate and distinct item/portfolio. Since your risk tolerance for this money seems muted, a conservative portfolio of equities and bond funds would top my list. Perhaps 40% in equities split 50/50 US and International. The 60% balance in bond funds such as 20% to 25% Intermediate Term Tax-Ex Muni Bonds (VWIUX), 20% to 25% Intermediate Term Bond Index (VBILX) which is roughly 52% US Treasury Bonds and 48% Corporate Bonds, and the remaining 10% to 20% in (VTABX) the Total International Bond Market. A portfolio with lots of diversification and a retiree type of equity risk.

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BolderBoy
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Re: UHNW on paper - advice fire-testing AA

Post by BolderBoy » Tue Jan 23, 2018 12:37 pm

mmetz79 wrote:
Mon Jan 22, 2018 2:57 pm
For simplicity, assume that the $5M in liquid assets is all my assets. My current thinking is to go 100% VWIUX (VG's int-term tax-exempt bond fund). Why such a bizarre AA vs a mix of stocks/bonds? Because the rest of my illiquid on-paper assets are highly correlated to the equity markets.
Ummmm, I wouldn't do that. How about 50/50 in VWIUX and VTSAX? My thinking is that you are, on the one hand, looking at the $5M as real (which I think is correct, because you have it in your hand) but are looking at the illiquid, on-paper assets as real, too - which they are not. As you say, they may become real in 3-5 years, but aren't now.

So invest here-and-now with what you have in-hand, here and now.

You can also do some Google searching for "the efficient frontier" and look at the graphs. They show that in general a 100% bond portfolio performs worse than a portfolio with some stocks in it.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

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TomatoTomahto
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Re: UHNW on paper - advice fire-testing AA

Post by TomatoTomahto » Tue Jan 23, 2018 12:46 pm

@mmetz79, welcome to the forum. I’m all for it.

Since the other 90% is strongly correlated with the equity markets, there’s no need to have FOMO. We don’t know much else about you, but $5M should be a strong Liability Matching Portfolio.

Congratulations.

KyleAAA
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Re: UHNW on paper - advice fire-testing AA

Post by KyleAAA » Tue Jan 23, 2018 1:01 pm

I'd likely invest conservatively in your situation but I wouldn't go 100% bonds. At a minimum, 20-30% in stocks seems wise just as an inflation hedge if nothing else. Even if your business decreased in value by 2/3, you'd still be set for life if you sold it at that price.

mmetz79
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Re: UHNW on paper - advice fire-testing AA

Post by mmetz79 » Tue Jan 23, 2018 1:40 pm

I appreciate the feedback. I suppose that's a different way of thinking about it...how would I invest the current liquid assets even if the rest of the illiquid business value went to zero? In that case, it might be more like a 40/60.

Other information requested:

Age: 43
Family: Married with 3 children
Liabilities: Negligible (no mortgage/debt/loans)
Expenses: $100k-$150k annual spend (obviously lifestyle expense may increase from current state)

Dottie57
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Re: UHNW on paper - advice fire-testing AA

Post by Dottie57 » Tue Jan 23, 2018 1:50 pm

bloom2708 wrote:
Tue Jan 23, 2018 9:48 am
I can see what you are thinking. I would probably choose a 30-40% equity allocation. Yes, your $5 million could drop 20%, but it could also continue to grow.

Assuming this is post tax. Using Vanguard Admiral funds.

25% Total US Stock index
15% Total International Stock index
60% Int-Term Tax-Exempt bond index

You could do 10-20% of your bonds in Limited-Term Tax-Exempt if you were worried about near term interest rates rising. Nobody knows.

Just an idea. We don't have $5 million, but the 3 funds are what we use in taxable at Vanguard.

I think this looks good. Some growth, but the rest in FI.

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