Novice question

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Old Man
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Novice question

Post by Old Man » Mon Sep 24, 2018 4:23 pm

I am an 82 year old, fairly healthy, happily married, with one son (gainfully employed) and two grandsons in high school. I have no experience in this investing game. My home is mortgage free, we have lived within our means on my pension and social security income of about $108,000 annually. My life insurance policy is worth $72,000. A very recent car sale has put almost $3 million in my bank account after the tax hits. Of that I plan on covering our grandson’s college education and subsequent 20 years of minimum monthly income small enough that they will need to get a job but will not go hungry. To accomplish that plan I expect to put a little over $1 million into 509 and trust accounts. That leaves a balance of just under $2 million. Sitting in a checking account with today’s interest rates will watch it vanish with inflation. My wife and I plan on aging in place with home health care as needed.

For my age and looking at the Laura suggestions for allocation it would appear that I should be looking at about 20/70/10 (stocks, bonds, cash). I have knowledgeable help available for the stocks portion. In looking at the YTD Vanguard numbers for mutuals (bonds and money markets) it seems that I can find one year to 18 month CD’s with better returns at the moment. Is there good reason for not using the CDs vs mutuals over the next year or two.

Appreciate any suggestions/guidance on this query.

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grabiner
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Re: Novice question

Post by grabiner » Mon Sep 24, 2018 6:33 pm

Welcome to the forum!
Old Man wrote:
Mon Sep 24, 2018 4:23 pm
In looking at the YTD Vanguard numbers for mutuals (bonds and money markets) it seems that I can find one year to 18 month CD’s with better returns at the moment. Is there good reason for not using the CDs vs mutuals over the next year or two.
The YTD numbers for bonds are not the numbers you want to look at. If you hold a bond to maturity, the return will be equal to the current yield on the bond. If the yield on the bond rises, its price will fall, but your return if you hold it from that point to maturity will still be equal to the now-higher yield. Therefore, the changes in price which reduced the past returns of bond funds are not relevant to future expectations.

Instead, the proper comparison is between the SEC yield of the fund and the yield of an alternative investment, such as a CD of the same duration. For example, Admiral shares of Vanguard Short-Term Bond Index currently yield 2.90%, with a duration of 2.7 years; this could be compared to the yield of a 2.7-year CD (likely a 2.5-year or 3-year CD since those are more common terms). The bond index does have a bit more risk because it has some coporate bonds which are not guaranteed by the government.

A more common recommendation for a bond fund is Admiral shares of Vanguard Total Bond Market Index, with a 3.20% yield and a duration of 6.1 years; this could be compared to the yield of a 6-year CD.
Wiki David Grabiner

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Duckie
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Re: Novice question

Post by Duckie » Mon Sep 24, 2018 6:47 pm

Old Man wrote:A very recent car sale has put almost $3 million in my bank account after the tax hits.
What kind of car sale nets $3 million?

RickBoglehead
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Re: Novice question

Post by RickBoglehead » Mon Sep 24, 2018 6:59 pm

You imply you are buying individual stocks. Why?

Grt2bOutdoors
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Re: Novice question

Post by Grt2bOutdoors » Mon Sep 24, 2018 6:59 pm

grabiner wrote:
Mon Sep 24, 2018 6:33 pm
Welcome to the forum!
Old Man wrote:
Mon Sep 24, 2018 4:23 pm
In looking at the YTD Vanguard numbers for mutuals (bonds and money markets) it seems that I can find one year to 18 month CD’s with better returns at the moment. Is there good reason for not using the CDs vs mutuals over the next year or two.
The YTD numbers for bonds are not the numbers you want to look at. If you hold a bond to maturity, the return will be equal to the current yield on the bond. If the yield on the bond rises, its price will fall, but your return if you hold it from that point to maturity will still be equal to the now-higher yield. Therefore, the changes in price which reduced the past returns of bond funds are not relevant to future expectations.

Instead, the proper comparison is between the SEC yield of the fund and the yield of an alternative investment, such as a CD of the same duration. For example, Admiral shares of Vanguard Short-Term Bond Index currently yield 2.90%, with a duration of 2.7 years; this could be compared to the yield of a 2.7-year CD (likely a 2.5-year or 3-year CD since those are more common terms). The bond index does have a bit more risk because it has some coporate bonds which are not guaranteed by the government.

A more common recommendation for a bond fund is Admiral shares of Vanguard Total Bond Market Index, with a 3.20% yield and a duration of 6.1 years; this could be compared to the yield of a 6-year CD.
5 year US Treasuries are paying 2.96%, no State/local taxes. 7 years are paying 3.04%. No credit risk, no principal risk if held to maturity. CDs also have no credit/principal risk but you have to structure it properly to obtain full FDIC coverage. Bond index funds as noted above have credit risk and principal risk if you don’t hold for duration.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

jehovasfitness
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Re: Novice question

Post by jehovasfitness » Mon Sep 24, 2018 7:23 pm

Duckie wrote:
Mon Sep 24, 2018 6:47 pm
Old Man wrote:A very recent car sale has put almost $3 million in my bank account after the tax hits.
What kind of car sale nets $3 million?
As a car guy I'm intrigued.

Was this a historic Ferrari?

alex_686
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Re: Novice question

Post by alex_686 » Mon Sep 24, 2018 8:00 pm

Old Man wrote:
Mon Sep 24, 2018 4:23 pm
For my age and looking at the Laura suggestions for allocation it would appear that I should be looking at about 20/70/10 (stocks, bonds, cash). I have knowledgeable help available for the stocks portion. In looking at the YTD Vanguard numbers for mutuals (bonds and money markets) it seems that I can find one year to 18 month CD’s with better returns at the moment. Is there good reason for not using the CDs vs mutuals over the next year or two.
As others have stated, look at the bond fund's SEC yield.

I would counter why CDs? Most people cite certainty and control of a CD over a mutual fund. This implies they have a lower risk. They don't. They have about the same level of risk and return as a comparable mutual fund. I personally think it is a bit of a wash. I favor intermediate bond funds, but that is just my read on interest rates and level and comfort of risk.

Lastly, I would question the 20/70/10 allocation. The "age in bonds" is a rule of thumb, not a rule. Low expenses relative to pension / SS implies you have a high ability to take risks. Now, there is a difference between "ability" and "willingness".

CRTR
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Re: Novice question

Post by CRTR » Mon Sep 24, 2018 8:13 pm

the short answer to your question is NO. There is NOT a good reason for not using CDs over bonds or bond funds for the next couple years. In fact, I would make the argument if your time horizon is, in fact, two years, CDs would be the better option because there is not interest rate risk. For example, I consider Vanguard Short Term bond fund to be one of the best and safest options out there for short term bond investing. If you would've held this fund over the past year, you would have lost 0.6% . . .not bad given the interest rate increases we've had. Over the same period, you would have made almost 3% with a CD ladder. There is ZERO interest rate risk with a CD and your opportunity costs are minimal is interest rates do rise since your investing horizon is only a couple years.

The key point here is that you have a short time horizon. You mention "the next 18 months or so" in your post. There is a fair bit of interest rate uncertainty on the near horizon with most forecasting some rate increase. So, I could not recommend a bond as a short term investment for that reason. If your time horizon were longer, I'd be making a different recommendation.

Old Man
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Re: Novice question

Post by Old Man » Mon Sep 24, 2018 9:29 pm

First of all thank you all for the detailed responses in such a short time. Clearly it is an education for me and I appreciate your willingness to share opinions and ideas.

The car story is I did sell a historic Ferrari, see:
https://www.youtube.com/watch?v=ibqZCt5Snow
https://www.youtube.com/watch?v=lOtOHVL ... e=youtu.be
https://www.youtube.com/watch?v=HpfJ1b- ... e=youtu.be

Back to the situation at hand, since this is such a major change in my financial position I have been cautioned by several folks that I need to take my time and sort through what I want to plan to accomplish in the balance of my lifetime. Hence my time line horizon of the next year or year and a half. That is enough time to figure out that plan and learn how to accomplish it. In the meantime I do not want the money to sit fallow. Interesting comment regarding "ability" and "willingness" as I have not had to address that thought process before concerning finances. I will also read up on the SEC yields and Treasuries to better understand them.

Again thank you for the interesting and challenging responses.

Robert

jehovasfitness
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Re: Novice question

Post by jehovasfitness » Mon Sep 24, 2018 9:59 pm

That's amazing. Thanks for sharing.

bh7785
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Re: Novice question

Post by bh7785 » Tue Sep 25, 2018 1:55 pm

Old Man wrote:
Mon Sep 24, 2018 9:29 pm
First of all thank you all for the detailed responses in such a short time. Clearly it is an education for me and I appreciate your willingness to share opinions and ideas.

The car story is I did sell a historic Ferrari, see:
https://www.youtube.com/watch?v=ibqZCt5Snow
https://www.youtube.com/watch?v=lOtOHVL ... e=youtu.be
https://www.youtube.com/watch?v=HpfJ1b- ... e=youtu.be

Back to the situation at hand, since this is such a major change in my financial position I have been cautioned by several folks that I need to take my time and sort through what I want to plan to accomplish in the balance of my lifetime. Hence my time line horizon of the next year or year and a half. That is enough time to figure out that plan and learn how to accomplish it. In the meantime I do not want the money to sit fallow. Interesting comment regarding "ability" and "willingness" as I have not had to address that thought process before concerning finances. I will also read up on the SEC yields and Treasuries to better understand them.

Again thank you for the interesting and challenging responses.

Robert
Holy cow, that's you!? That (first) video has actually been on my "Liked" videos since it was published. Great stuff!! You were a wonderful guest to the show, great story.

bloom2708
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Re: Novice question

Post by bloom2708 » Wed Sep 26, 2018 9:49 am

Congratulations on your sale and windfall.

You are in the right place for advice. Go slow.

You are in the position to both take a bit of risk or not take much risk.

A fund like the Vanguard Tax-Managed balanced fund (47 stocks/53 bonds) might be a good option. One fund solution.

Consider a number of reasonably simply/low cost solutions. Fantastic videos and a beautiful car!
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