Beginner Part 2; $2M liquid to allocate

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ValuFamPV
Posts: 14
Joined: Tue Mar 26, 2019 11:48 am

Beginner Part 2; $2M liquid to allocate

Post by ValuFamPV » Tue Oct 01, 2019 1:21 pm

This is my second post and I am following your advice and providing more specific information and specific questions (as suggested) so I can get additional insights and suggestions.

37 year old, married father of two in CA.

-Low seven figure income – recently hit this income level after steady climbing - heavily fluid/commission based but would put a floor at $600k and ceiling in $1.5M range.

Current holdings:

$350,000 in non-vested corporate stock (publicly traded)

$50,000 in vested corporate stock

401k –
His - $520,000 (T Rowe Price 2040- target fund at $40% and L&G S&P 500 index at 35%; International index 10%; Sterling total return bonds 5%; 10% cash)
Hers - $150,000 (2045 target fund)

Merrill Account - $450,000 – Top Holdings:

Vaneck Cevtors AMT-Free - $95,000
Powershares National AMT free muni bond - $80,000
Blackrock Glbl Allocation PRT C - $50,000
Vanguard Info Tech ETF - $30,000
Vaneck Vectors High Yield Muni - $25,000
Vanguard Industrial ETF - $25,0000
Ishares Inc Core MSCI Emerging Market ETF - $25,000

We have $50,000 saved in 5 year old’s 529; and $25,000 in 2 year olds 529 (Merrill)

We both have $20k or so in our old Roth IRA (Merrill).

We have two mortgages.

-Rental property purchased for $878k in 2012; appraised at $1.8M in 2019; generating $90,000 pretax annual income. Owe $685,000 on mortgage at 3.5% 30 year fixed.

-Primary residence – purchased 2017, 3.8% - 30 year fixed; purchased for $2,050,000 and owe $1,570,000.

-No other debt.

-I have $500,000 in Vanguard Money market waiting to be allocated.

-I am holding $1,550,000 in cash, though portion of this has a tax liability. {$1.19M 7-year forgivable loan awarded in 2019, meaning the lump sum was given to me, and I pay taxes on it as it vests - 1/7 annually - (meaning I’ll declare an additional $170k annually over next 7 years}. So ultimately that $1,190,000 will have a tax liability of roughly $595k over 7 years. I would like to earn enough off the lump sum now to help pay that tax liability. Sitting in my checking account obviously does not do that. Let me know if I explained this well enough.

My initial thought is as follows:

Allocate the $500,000 in 50/25/25 allocation between VTI (50%) and CA Muni Funds VCADX (25%) and VCLAX (25%).
Then deposit and invest $100,000 quarterly over next 24 months in VTI (45%), VGTSX (15%), VCADX (20%) and VCLAX (20). Is staggering these investments over 24 months seeking dollar cost averaging smart or stupid? I have little faith In our current market, but know that for the long term investor, it ultimately mutes out.

As for the cash still on hand for taxes/etc, any specific strategy there for getting at least SOME return on it? I realize the idiocy behind keeping $1.5M in checking but really don’t know enough about where to start. Frustrating to say the least.

Any other strategies and insights appreciated. I’ve now read common sense on mutual funds and continuing the additional reading list prescribed on this forum.

Truly grateful and thx for all.

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goodenyou
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Re: Beginner Part 2; $2M liquid to allocate

Post by goodenyou » Tue Oct 01, 2019 1:53 pm

There are a lot of ways to deploy your capital. I would put the cash in a high yield money market to start with. I wouldn't leave $1.5M in a "checking account". Beside the fact that it is above the $250K threshold of FDIC (money market doesn't have FDIC...but you could use a Treasury MM that is safe), I would be very reluctant to have that kind of money in a checking account with any sort of ATM or debit card and checks floating around. Probably small risk, but that's me.

At your income and less need for cash flow, you could pay down the mortgages. The 3.8% is low, but so are bond yields. There are arguments about not paying off the entire mortgage being disadvantageous because the payment stays the same unless you refinance, but with a high income it's insignificant. I paid off my mortgage many years ago and used the additional cash flow to juice the 529 plans of my 3 kids. Glad I did it.

As far as DCA vs. lump sum, The advantage over the long term goes to lump sum. But, it's a tough pill to swallow for potentially a long time to see your principle immediately decline on paper/digital. I invested a lump sum in 2000 without the ability to add to the initial investment (closed retirement account), and it took a long time to recover and have a positive return (over a decade).

I would put your investments into a portfolio analyzer and see if your overall portfolio is in line with your desired AA. I am not familiar with some of your investments, but I would be very aware of what kind of fees you are paying. Excess fees are a killer of returns. Also, be sure your asset location is efficient, as you are in a stratospheric tax bracket with Federal, and all the California add-ons. I would also be reluctant to have a tremendous overweight in one state's munis, even if there were tax advantageous. It adds another dimension of risk.

Good luck!
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

Topic Author
ValuFamPV
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Joined: Tue Mar 26, 2019 11:48 am

Re: Beginner Part 2; $2M liquid to allocate

Post by ValuFamPV » Mon Oct 07, 2019 4:25 pm

Thanks for the reply.
I am going to spend some more time reviewing whether the CA Muni funds suggested should make up entirety of my bond portfolio or should be littered in to the bond holdings. Obviously don’t want to defeat the purpose of Bogle strategy and keep things super simple with a super small # of funds.

I went ahead and moved $750k from cash to a Vanguard money market account just to get it out of the bank. I’ll begin moving more once I have a plan.

So many ways to go. Maybe this is why folks defer to the Merrill’s of the world. Overwhelming

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Watty
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Re: Beginner Part 2; $2M liquid to allocate

Post by Watty » Mon Oct 07, 2019 9:20 pm

ValuFamPV wrote:
Tue Oct 01, 2019 1:21 pm
-Primary residence – purchased 2017, 3.8% - 30 year fixed; purchased for $2,050,000 and owe $1,570,000.
.......
As for the cash still on hand for taxes/etc, any specific strategy there for getting at least SOME return on it? I realize the idiocy behind keeping $1.5M in checking but really don’t know enough about where to start. Frustrating to say the least.
I would just pay off the mortage on your primary residence. That would be a risk free tax free 3.8% return and you could then save your "mortage payment" each month to be able to pay the taxes as the loan forgiveness vests.

The big question is how likely it is that you would need to pay the loan back. You could set up a home equity line of credit and margin accounts in case this might be needed. Some brokerages have much lower margin loan rates so you may want to research that.

You would also have less sequence of returns risk since you would not have to worry about the market dropping right after you invest $1.5 million.

Paying off the rental property is a bit different since it is at a bit lower interest rate and you may be able to deduct the interest as a business expense.

Topic Author
ValuFamPV
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Re: Beginner Part 2; $2M liquid to allocate

Post by ValuFamPV » Tue Oct 08, 2019 10:22 pm

Yeah; I’ve been toying with that idea. There is value in eliminating that debt and saving the 3.8% risk free. Not sexy, but valuable. I’ll need to check on any tax deductions I’m forfeiting but suspect you are right and that’s a good strategy - especially when I have little faith in the market. I’m thinking I’ll pay off the full 1.5M in next two years, putting 750k in combination of bonds/stocks/money market for now and then remaining $750k to pay down mortgage and knock out remaining $750k next year. I could get rid of it entirely now but think I want to cast a wider net and do both over next 12 months. Any insight in to my plan to load CA muni bonds as my bond holding? Should I balance these out with a total bond index? Was pushed to the CA muni bonds for tax reasons but am nervous per above to have all bond holdings in the same state.

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Watty
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Re: Beginner Part 2; $2M liquid to allocate

Post by Watty » Tue Oct 08, 2019 11:45 pm

ValuFamPV wrote:
Tue Oct 08, 2019 10:22 pm
Any insight in to my plan to load CA muni bonds as my bond holding?
I would not consider muni bonds in my taxable account until all my tax advantaged retirement accounts were 100% bonds.

It is important to remember that when you are looking at your asset allocation you look at all the accounts combined.

CurlyDave
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Re: Beginner Part 2; $2M liquid to allocate

Post by CurlyDave » Wed Oct 09, 2019 12:06 am

ValuFamPV wrote:
Tue Oct 08, 2019 10:22 pm
Yeah; I’ve been toying with that idea. There is value in eliminating that debt and saving the 3.8% risk free. Not sexy, but valuable. I’ll need to check on any tax deductions I’m forfeiting but suspect you are right and that’s a good strategy - especially when I have little faith in the market. I’m thinking I’ll pay off the full 1.5M in next two years, putting 750k in combination of bonds/stocks/money market for now and then remaining $750k to pay down mortgage and knock out remaining $750k next year. I could get rid of it entirely now but think I want to cast a wider net and do both over next 12 months. Any insight in to my plan to load CA muni bonds as my bond holding? Should I balance these out with a total bond index? Was pushed to the CA muni bonds for tax reasons but am nervous per above to have all bond holdings in the same state.
The mortgage interest tax deduction on your primary residence is limited. The mortgage interest on the rental property is a business cost and is 100% deductible.

Personally, I would not pay down the mortgages. Look at the CAGR of the S&P 500, many ETFs follow this, SPY is my favorite. It is 10+% over the past 10 years. No it is not guaranteed, but that is a very healthy risk premium over 3.8%.

l1am
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Re: Beginner Part 2; $2M liquid to allocate

Post by l1am » Wed Oct 09, 2019 12:06 am

Watty wrote:
Tue Oct 08, 2019 11:45 pm
I would not consider muni bonds in my taxable account until all my tax advantaged retirement accounts were 100% bonds.

It is important to remember that when you are looking at your asset allocation you look at all the accounts combined.
I disagree, I only hold (muni) bonds in my taxable. The bonds-in-tax-advantaged mantra needs to be resisted on this forum, I see it everywhere.

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