28 year old with $1.4 million in cash investing for the first time. My thoughts.

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Topic Author
calcada
Posts: 19
Joined: Fri Jun 12, 2020 3:50 pm

28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by calcada » Thu Jul 30, 2020 10:36 pm

Hi,

I am 28 years old. I have 1,4 million USD in my bank accounts in cash. This is all my net worth. I have no debt. I own nothing. I am single. I wanted to share my thought process with you and to hear any advice you might have for me. I am a long time reader, first time poster.

This cash has been sitting there doing nothing for the last 5 years being quickly eaten away by my living expenses and inflation. It was around $1,6 million 5 years ago. As you can imagine, I feel the urgency to invest this cash to preserve and grow it. I got lucky with a software app I made in 2014. That is where the money came from.

I currently don't have any income. I do have degrees but I never had a job and it doesn't look like I will get one soon. I am still figuring out what to do with my life. Therefore, it is a possibility that I won't have much income in the future or that I have already made most of the money I will ever make in my lifetime. I am being conservative here and I sure hope that this won't be the case as $1,4 million will not last a lifetime. Of course I will have to find some work and get an income. However, it is a possibility and a consideration I have when designing my portfolio and deciding on asset allocations. My goal is to invest long term for growth and preservation.

It is painful to have missed out on the great returns of both stocks and bonds during their current bull market for the last 5 years. I have procrastinated for long enough and I am determined to invest my capital and create an intelligent buy and hold portfolio for life.

It currently looks like the worst possible time to start investing my whole networth into the markets as we near the end of decades long bull markets. Stocks and bonds are at all time highs and interest rates are at historic lows. At these high valuations and during these very uncertain times there is a high risk of a market downturn. In the event of a stocks/bonds market crash I would lose substantial amounts of money without having enjoyed any of the great returns of the past decade. This is very scary to me but I do not intend to try and time the markets, nor do I intend to keep standing on the sidelines with a 100% decaying cash position which I think is worse. I will most likely DCA over the next 6 months.

Question 1) What is your opinion on this? Considering that in todays world and market conditions a crash could be imminent, with stocks and bonds at ATH, do you still think I should start investing or should I maintain my 100% cash position until the imminent crash? Any advice on how to DCA?

Most common advice given to 28 year olds is to invest in equity heavy portfolios, say 80/20, and DCA every month as they get paid. This is an agressive portfolio but it makes sense for them as their portfolio size is not yet very large so they are not risking to lose huge amounts of money in downturns and as they are aiming for growth. They have a long time horizon and stable future income to ride out the volatility and to grow their portfolio with high expected returns due to their high equity allocation.

I do not think this advice is suitable for me. Although I have the same long time horizon, I do not have the stable future income to DCA every month. My investing will most likely be lump sum over a short period of time. I would also be standing to lose large amounts of money in a volatile equity heavy portfolio. I do not think I can stomach a loss of 30% or more on a $1,4M portfolio. On the other hand, like all 28 year olds, I do have a long time horizon and would also like to aim for growth although with a focus on preservation and minimizing portfolio drawdown. I am confident in my ability to stick to a solid investment plan and ride out the volatility to achieve growth for decades to come. I would never panic sell and would try to buy more in a crash.

Question 2) How would you modify a typical 28 year old's portfolio if they had $1,4M to invest?

I realize that I am in a very fortunate position and I would like to take full advantage of it. I want to create an intelligent buy and hold portfolio that will allow me to grow and preserve my capital so that I could retire early and be financially independent for the rest of my life in case I don't make substantial amounts of money like this again.

Portfolio Design:

I started with the Global Market Portfolio that both Sharpe and Fama recommends. Using market caps of indexes I have:

54% Total World Stocks (VT)
46% Total World Bonds (BNDW)

Sharpe also suggest adding TIPS to a retirement portfolio so I add 10% SCHP as a permanent lifelong holding and 5% cash for my living expenses and as an emergency fund since I do not have an income.

We arrive at Portfolio #1:

45.9% Total World Stock (VT)
39.1% Total World Bond (BNDW)
10% TIPS (SCHP)
5% Cash

Because I have an appetite for additional risk and believe that factor tilts, however controversial, will achieve higher expected return over the long run, I introduce diversified factor tilts to the GMP. The factor loads I aim for were inspired by Robert T's posts:

Small (target long-term load = 0.25)
Value (target long-term load = 0.2)
Momentum (target long-term load >= 0)

Small Value US: SLYV,IJS or VIOV
Small Value ex-US: DLS
US Momentum: MTUM

With the following equity allocations,

VT (40%)
SLYV(35%)
DLS (15%)
MTUM (10%)

I achieve the following factor loads,

SMB (0.286)
HML (0.205)
MOM (0.005)

We now arrive at Portfolio #2:

18.36% Total World Stock (VT)
16.065% Small Value US (SLYV)
6.885% Small Value ex-US (DLS)
4.59% Momentum (MTUM)
39.1% Total World Bond (BNDW)
10% TIPS (SCHP)
5% Cash

To this portfolio I wanted to add some risk parity strategies, the idea behind Dalio's all weather portfolio. Inspired by azanon's thread, I replace the fixed income portion of the portfolio with long duration nominal bonds (EDV), long duration TIPS (LTPZ), gold (GLDM) and commodities (BCI) while counting TIPS towards the fixed income portion of the GMP (46%):

viewtopic.php?f=10&t=206028

We now arrive at Portfolio #3:

20.52% Total World Stock (VT)
17.955% Small Value US (SLYV)
7.695% Small Value ex-US (DLS)
5.13% Momentum (MTUM)
21.85% Long duration TIPS (LTPZ)
12.486% Long duration nominal bonds (EDV)
4.682% Gold (GLDM)
4.682% Commodities (BCI)
5% Cash

This portfolio is interesting to me as it combines my 3 favorite ideas in investing. It holds stocks/bonds in global market proportions (54/46), it achieves my desired value and size factor loads while offsetting the negative momentum load and it incorporates some risk parity strategies.

These risk parity strategies will somewhat balance risk exposures across asset classes and future possible economic climates, reducing the necessity of market timing. They will help minimize the overall portfolio's maximum drawdown while helping the portfolio perform well in all economic climates and not just prosperity. This idea of risk parity appeals to me, especially at this time, as I start investing at all time highs after a 30 plus year bull market in bonds and and a 10 plus year bull market in stocks. I can't say this doesn't make me nervous.

This portfolio does exceptionally well when backtested and compared to some other portfolios.

I could increase the expected return of this portfolio by increasing its equity allocation to 75% and removing gold, commodities and TIPS. It is no longer an all weather portfolio.

We arrive at Portfolio #4:

28.5% Total World Stock (VT)
24.94% Small Value US (SLYV)
10.69% Small Value ex-US (DLS)
7.12% Momentum (MTUM)
23.75% Long duration nominal bonds (EDV)
5% Cash

This portfolio has a high expected return due to its high equity allocation and factor tilts. I kept EDV as it behaves like a 1.5x leveraged LTT fund. I like the idea of leveraging a lower risk asset like bonds to increase their returns and volatility to balance out their risk with the equity portion of a portfolio. I believe this would improve returns and diversification of the portfolio.

This only happens to an extent in this portfolio as it is equity heavy (75/25) and 1.5x leverage is not enough to achieve risk parity between equity and fixed income. EDV does have some benefits of a leveraged bond ETF without the high expense ratio.

This portfolio also does exceptionally well when backtested and compared to some other portfolios.

Finally of course, I consider the 4-fund portfolio (70/30) which is popular for its simplicity. Vanguard recommends 40% of the stock allocation in international stocks and 30% of the bond allocation in international bonds to maximize diversification benefits.

Portfolio #5:

39.9% Total Stock Market (VTI)
26.6% Total International Stock (VXUS)
19.95% Total Bond Market (BND)
8.55% Total International Bond (BNDX)
5% Cash

Although similar to the Global Market Portfolio (Portfolio #1), this has a higher expected return than the GMP due to its higher equity allocation. What I like about this portfolio is its simplicity, its popularity amongst retail investors, low expense ratios and low tracking error risk.

What I dont like is that it is tilted heavily towards prosperity. I am hesitant to make a bid on prosperity after decades long prosperity in both stocks and bonds. This portfolio has high downside risk and not enough downside protection. I dont like that it has no factor tilts to capture size and value premiums.

Question 3) These are the portfolios I am considering. Which one of these portfolios (#1-5) do you like the best? How would you improve it? How would you go about deploying the capital into the portfolio? Do you think there is a better portfolio that is more suitable for me?

Assume all accounts are non-taxable. I just want to focus on financial theory.

Bonus:

I think holding the Global Market Portfolio and leveraging up the whole world by 1.5x for higher risk and return would be my portfolio of choice if it was simple and cost effective for a retail investor to do.

As an alternative investment and perhaps a business endeavour I am considering using 15% of my money towards a downpayment on an investment property. This would allow me to diversify into real estate, apply leverage (5x) to build wealth and earn income.

I have an important decision to make. Thank you in advance for your help and advice.
Last edited by calcada on Fri Jul 31, 2020 7:40 am, edited 6 times in total.

BuckyBadger
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Re: 28 year old with $1,4 million in cash investing for the first time. My thoughts.

Post by BuckyBadger » Thu Jul 30, 2020 10:38 pm

Maybe i missed it. Why do you never want to have a job?

000
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Joined: Thu Jul 23, 2020 12:04 am

Re: 28 year old with $1,4 million in cash investing for the first time. My thoughts.

Post by 000 » Thu Jul 30, 2020 10:45 pm

Backtesting doesn't matter. Also taxes do matter.

If you have never invested in stocks before, consider limiting stocks to 50% of your total portfolio to start with. In my opinion, you don't need lots of different funds. For my own equity allocation, I just have VTI (US stock index) and VEA (ex-US Developed Markets stock index).

Personally, I would not want to buy a bunch of long term bonds right now unless willing to hold for the whole term. Increasing interest rates could devastate a fund like EDV.

If you never work again and have no inheritance coming, how will you live on this for 60+ years?
Last edited by 000 on Thu Jul 30, 2020 10:55 pm, edited 1 time in total.

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Re: 28 year old with $1,4 million in cash investing for the first time. My thoughts.

Post by abuss368 » Thu Jul 30, 2020 10:47 pm

calcada wrote:
Thu Jul 30, 2020 10:36 pm
Hi,

I am 28 years old. I have 1,4 million USD in my bank accounts in cash. This is all my net worth. I have no debt. I own nothing. I am single. I wanted to share my thought process with you and to hear any advice you might have for me. I am a long time reader, first time poster.

This cash has been sitting there doing nothing for the last 5 years being quickly eaten away by my living expenses and inflation. It was around $1,6 million 5 years ago. As you can imagine, I feel the urgency to invest this cash to preserve and grow it. I got lucky with a software app I made in 2014. That is where the money came from.

I currently don't have any income. I do have degrees but I never had a job and it doesn't look like I will ever get one. I am still figuring out what to do with my life. Therefore, it is a possibility that I won't have much income in the future or that I have already made most of the money I will ever make in my lifetime. I am being conservative and I sure hope that this won't be the case as $1,4 million will not last a lifetime. However, it is a possibility and a consideration I have when designing my portfolio and deciding on asset allocations. My goal is to invest long term for growth and preservation.

It is painful to have missed out on the great returns of both stocks and bonds during their current bull market for the last 5 years. I have procrastinated for long enough and I am determined to invest my capital and create an intelligent buy and hold portfolio for life.

It currently looks like the worst possible time to start investing my whole networth into the markets as we near the end of decades long bull markets. Stocks and bonds are at all time highs and interest rates are at historic lows. At these high valuations and during these very uncertain times there is a high risk of a market downturn. In the event of a stocks/bonds market crash I would lose substantial amounts of money without having enjoyed any of the great returns of the past decade. This is very scary to me but I do not intend to try and time the markets, nor do I intend to keep standing on the sidelines with a 100% decaying cash position which I think is worse. I will most likely DCA over the next 6 months.

Question 1) What is your opinion on this? Considering that in todays world and market conditions a crash could be imminent, with stocks and bonds at ATH, do you still think I should start investing or should I maintain my 100% cash position until the imminent crash? Any advice on how to DCA?

Most common advice given to 28 year olds is to invest in equity heavy portfolios, say 80/20, and DCA every month as they get paid. This is an agressive portfolio but it makes sense for them as their portfolio size is not yet very large so they are not risking to lose huge amounts of money in downturns and as they are aiming for growth. They have a long time horizon and stable future income to ride out the volatility and to grow their portfolio with high expected returns due to their high equity allocation.

I do not think this advice is suitable for me. Although I have the same long time horizon, I do not have the stable future income to DCA every month. My investing will most likely be lump sum over a short period of time. I would also be standing to lose large amounts of money in a volatile equity heavy portfolio. I do not think I can stomach a loss of 30% or more on a $1,4M portfolio. On the other hand, like all 28 year olds, I do have a long time horizon and would also like to aim for growth although with a focus on preservation and minimizing portfolio drawdown. I am confident in my ability to stick to a solid investment plan and ride out the volatility to achieve growth for decades to come. I would never panic sell and would try to buy more in a crash.

Question 2) How would you modify a typical 28 year old's portfolio if they had $1,4M to invest?

I realize that I am in a very fortunate position and I would like to take full advantage of it. I want to create an intelligent buy and hold portfolio that will allow me to grow and preserve my capital so that I could retire early and be financially independent for the rest of my life in case I don't make substantial amounts of money like this again.

Portfolio Design:

I started with the Global Market Portfolio that both Sharpe and Fama recommends. Using market caps of indexes I have:

54% Total World Stocks (VT)
46% Total World Bonds (BNDW)

Sharpe also suggest adding TIPS to a retirement portfolio so I add 10% SCHP as a permanent lifelong holding and 5% cash for my living expenses and as an emergency fund since I do not have an income.

We arrive at Portfolio #1:

45.9% Total World Stock (VT)
39.1% Total World Bond (BNDW)
10% TIPS (SCHP)
5% Cash

Because I have an appetite for additional risk and believe that factor tilts, however controversial, will achieve higher expected return over the long run, I introduce diversified factor tilts to the GMP. The factor loads I aim for were inspired by Robert T's posts:

Small (target long-term load = 0.25)
Value (target long-term load = 0.2)
Momentum (target long-term load >= 0)

Small Value US: SLYV,IJS or VIOV
Small Value ex-US: DLS
US Momentum: MTUM

With the following equity allocations,

VT (40%)
SLYV(35%)
DLS (15%)
MTUM (10%)

I achieve the following factor loads,

SMB (0.286)
HML (0.205)
MOM (0.005)

We now arrive at Portfolio #2:

18.36% Total World Stock (VT)
16.065% Small Value US (SLYV)
6.885% Small Value ex-US (DLS)
4.59% Momentum (MTUM)
39.1% Total World Bond (BNDW)
10% TIPS (SCHP)
5% Cash

To this portfolio I wanted to add some risk parity strategies, the idea behind Dalio's all weather portfolio. Inspired by azanon's thread, I replace the fixed income portion of the portfolio with long duration nominal bonds (EDV), long duration TIPS (LTPZ), gold (GLDM) and commodities (BCI) while counting TIPS towards the fixed income portion of the GMP (46%):

viewtopic.php?f=10&t=206028

We now arrive at Portfolio #3:

20.52% Total World Stock (VT)
17.955% Small Value US (SLYV)
7.695% Small Value ex-US (DLS)
5.13% Momentum (MTUM)
21.85% Long duration TIPS (LTPZ)
12.486% Long duration nominal bonds (EDV)
4.682% Gold (GLDM)
4.682% Commodities (BCI)
5% Cash

This portfolio is interesting to me as it combines my 3 favorite ideas in investing. It holds stocks/bonds in global market proportions (54/46), it achieves my desired value and size factor loads while offsetting the negative momentum load and it incorporates some risk parity strategies.

These risk parity strategies will somewhat balance risk exposures across asset classes and future possible economic climates, reducing the necessity of market timing. They will help minimize the overall portfolio's maximum drawdown while helping the portfolio perform well in all economic climates and not just prosperity. This idea of risk parity appeals to me, especially at this time, as I start investing at all time highs after a 30 plus year bull market in bonds and and a 10 plus year bull market in stocks. I can't say this doesn't make me nervous.

I could increase the expected return of this portfolio by increasing its equity allocation to 75% and removing gold, commodities and TIPS. It is no longer an all weather portfolio.

This portfolio does exceptionally well when backtested and compared to some other portfolios.

We arrive at Portfolio #4:

28.5% Total World Stock (VT)
24.94% Small Value US (SLYV)
10.69% Small Value ex-US (DLS)
7.12% Momentum (MTUM)
23.75% Long duration nominal bonds (EDV)
5% Cash

This portfolio has a high expected return due to its high equity allocation and factor tilts. I kept EDV as it behaves like a 1.5x leveraged LTT fund. I like the idea of leveraging a lower risk asset like bonds to increase their returns and volatility to balance out their risk with the equity portion of a portfolio. I believe this would improve returns and diversification of the portfolio.

This only happens to an extent in this portfolio as it is equity heavy (75/25) and 1.5x leverage is not enough to achieve risk parity between equity and fixed income. EDV does have some benefits of a leveraged bond ETF without the high expense ratio.

Finally of course, I consider the 4-fund portfolio (70/30) which is popular for its simplicity. Vanguard recommends 40% of the stock allocation in international stocks and 30% of the bond allocation in international bonds to maximize diversification benefits.

This portfolio also does exceptionally well when backtested and compared to some other portfolios.

Portfolio #5:

39.9% Total Stock Market (VTI)
26.6% Total International Stock (VXUS)
19.95% Total Bond Market (BND)
8.55% Total International Bond (BNDX)
5% Cash

Although similar to the Global Market Portfolio (Portfolio #1), this has a higher expected return than the GMP due to its higher equity allocation. What I like about this portfolio is its simplicity, its popularity amongst retail investors, low expense ratios and low tracking error risk.

What I dont like is that it is tilted heavily towards prosperity. I am hesitant to make a bid on prosperity after decades long prosperity in both stocks and bonds. This portfolio has high downside risk and not enough downside protection. I dont like that it has no factor tilts to capture size and value premiums.

Question 3) These are the portfolios I am considering. Which one of these portfolios (#1-5) do you like the best? How would you improve it? How would you go about deploying the capital into the portfolio? Do you think there is a better portfolio that is more suitable for me?

Assume all accounts are non-taxable. I just want to focus on financial theory.

Bonus:

I think holding the Global Market Portfolio and leveredging up the whole world by 1.5x for higher risk and return would be my portfolio of choice if it was simple and chost effective for a retail investor to do.

As an alternative investment and perhaps a business endeavour I am considering using 15% of my money towards a downpayment on an investment property. This would allow me to diversify into real estate, apply leverage (5x) to build wealth and earn income.

I have an important decision to make. Thank you in advance for your help and advice.
I would consider the Two Fund Portfolio Of Total Stock (or S&P 500) and Total Bond as recommend by Jack Bogle and Warren Buffett.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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2pedals
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Re: 28 year old with $1,4 million in cash investing for the first time. My thoughts.

Post by 2pedals » Thu Jul 30, 2020 10:48 pm

What are your expenses? I can't see 1.4 million lasting very long since living expenses tend go up as you age. I would do whatever I could to produce stable income through a business or a job.

corp_sharecropper
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Re: 28 year old with $1,4 million in cash investing for the first time. My thoughts.

Post by corp_sharecropper » Thu Jul 30, 2020 10:52 pm

You need to invest that money ASAP, forget about it, and focus intensely and just applying yourself - you seem smart, educated, and articulate to me - and live off what income you earn... Like a hungry 28 year old does, typically. You sound like someone who's smart but needs a fire under their ass to get moving, put that 1.4 mil crutch away for now, invest it. And don't chalk up your previous creation to dumb "luck", I mean it's always good to be humble but I hope you feel pride/satisfaction, internally at least.
Last edited by corp_sharecropper on Thu Jul 30, 2020 10:53 pm, edited 1 time in total.

austin757
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Re: 28 year old with $1,4 million in cash investing for the first time. My thoughts.

Post by austin757 » Thu Jul 30, 2020 10:52 pm

OP, you have a very interesting story. Something that I picked up on almost immediately is that you seem to be concerned about your future. You’re confused and seemingly unsure how to proceed with life. I think you should have a more positive attitude and realize how well you’ve done. To build an app from scratch that amounted to $1.4 million is no small feat. Try to remember that if you get down about your situation.

While I suppose you could stay “retired” for many years with your nest egg, I’d suggest you find work. Maybe it’s something that you enjoy and/or relates to your degree. Or maybe it’s something new that you’ve never done before and want to try out. Point is that you may benefit from being out in the work force, creating relationships, learning new skills, etc. As far as your portfolio goes, an 80/20 sounds about right. Consider DCA if the lump sum will keep you up at night. Best of luck

Topic Author
calcada
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Re: 28 year old with $1,4 million in cash investing for the first time. My thoughts.

Post by calcada » Thu Jul 30, 2020 10:56 pm

BuckyBadger wrote:
Thu Jul 30, 2020 10:38 pm
Maybe i missed it. Why do you never want to have a job?
I will work. I am currently working on some personal projects while I figure out what to do. I do want to get a job.

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AerialWombat
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Re: 28 year old with $1,4 million in cash investing for the first time. My thoughts.

Post by AerialWombat » Thu Jul 30, 2020 11:19 pm

Have you considered the ultimate in simplicity, such as a 1-fund portfolio?

You sound like a good candidate for something such as the LifeStrategy conservative fund, the Vanguard Retirement Income Fund (VTINX), or Wellesley (VWINX). Tax Managed Balanced Fund, perhaps.

Here’s what I noticed: You’ve drawn down $200k in 5 years. That’s $40k a year. That’s less than 3% withdrawal rate. You can thus likely live on your nest egg for the rest of your life in a conservative portfolio, such as 20/80 or 30/70.

Plenty of time to then find your passion project.

Edit: Just realized I gave you US fund suggestions, but you’re using non-US numerical format. So if you’re in another country, I’d still recommend a conservative AA, with around 50% equities perhaps if you are in a country with negative bond yields.

annu
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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by annu » Thu Jul 30, 2020 11:44 pm

Stick to 3 fund portfolio, if you have the itch do International bonds, but I feel it is not big a factor.
Since it will be taxable account, I would focus more on tax efficiency and boglehead wiki has very good suggestions.

For e.g., replacing Total Bond with Tax Exempt bonds , or using VTCLX(https://investor.vanguard.com/mutual-fu ... file/VTCLX) based on your expect tax bracket might be more worth investigating.

Also with that much to invest, you should get some freebie incentives, so do look into that as well. All vendors have some form of extra service when you invest high dollar amount like yourself.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by geerhardusvos » Fri Jul 31, 2020 12:11 am

duplicate
Last edited by geerhardusvos on Fri Jul 31, 2020 7:21 pm, edited 1 time in total.
VTSAX and chill

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by geerhardusvos » Fri Jul 31, 2020 12:12 am

calcada wrote:
Thu Jul 30, 2020 10:36 pm
Hi,

I am 28 years old. I have 1,4 million USD in my bank accounts in cash. This is all my net worth. I have no debt. I own nothing. I am single. I
I have an important decision to make. Thank you in advance for your help and advice.
Put all your money in VTSAX tomorrow, and never draw down more than 3% per year and you will be fine. If you need to go back to work for a year or two, that might help significantly make up for not having invested your money five years ago. Then once you have worked another 2 to 5 years, you don’t have to feel bad anymore about missing out and can move in with your life
VTSAX and chill

alibaba123
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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by alibaba123 » Fri Jul 31, 2020 12:34 am

If i were in your situation i would dump everything into a global stock index fund like VT. If withdrawals are needed, i would keep it to a minimum and make sure i do not exceed a 2% withdrawal rate. Should be manageable especially if you have a job on the side.

"But stock markets are at all time highs!" Is a phrase that's been repeated all the time, but each time the stock markets goes on to set new highs. It is evidence that it works. If it does not set new highs, it means the philosophy of index investing is broken. So lump sum or dca, whatever your choice is, i recommend getting your money invested.

Luckywon
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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by Luckywon » Fri Jul 31, 2020 12:34 am

It's surprising to me that you are a long time reader but five years ago put all liquid assets in cash and kept it there. I'd be interested to hear more on why you did this, ignored all the wisdom on this board during those five years, and now are suddenly ready to do something different.

Your question #1 is a perennial asked and answered on a regular basis. Again, surprising to me that as a long time reader you would ask about market timing.

I'd suggest you invest VTSAX 60%, VGTSX 20% and VBTLX 20%.

Again, odd to me that you would sit cash 100 % for five years and then all of a sudden be seeking alpha through factor tilts etc.

My feeling is that your financial future and happiness hinge more on what you decide to do career wise rather than how you invest the $1.4 million.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by Triple digit golfer » Fri Jul 31, 2020 1:07 am

Given that you can't stomach a 30% loss, I'd go 60/40 or 50/50 stock/bond and hold that forever.

Vanguard LifeStrategy Moderate Growth is an all in one fund that holds 60% stocks, 40% of which are international, and 40% bonds. It is highly diversified.

Read longinvest's post here:

viewtopic.php?t=287967

Regardless of your equity allocation, if the market tanks soon after you invest, you'll have regret. You have to mentally tell yourself that whatever gains you gave up before are sunk costs. Forget about them. In fact, they aren't costs at all because you never had the money. It's a non issue.

Think of your portfolio for what it is: a pot of cash. How should you invest it?

You are 28 and have $1.4 million with presumably a low cost of living. You don't need to earn a lot of money, or perhaps any money at all of you're drawing only 3% per year. But your attitude on finding a job is poor. You can go work and make some money if you need to. You seem highly intelligent to me and I bet you could do fine, even if you did happen to get lucky with your app, which I very much doubt. Maybe a bit of luck, but I don't know anybody who has made a million bucks through luck and I don't know any 28 year olds worth anywhere near $1.4 million. Give yourself some credit and be confident! You're in probably the top 3% of wealth in this country and top 0.5% for your age. I get that you feel your future income potential may be low, but don't let that fear paralyze you. One, you don't need a lot of future income. Two, your mindset can hold you back. Have some confidence, get out there in the job market!

Best of luck to you and, by the way, congratulations on a job well done!
Last edited by Triple digit golfer on Fri Jul 31, 2020 6:01 am, edited 1 time in total.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by ohit1 » Fri Jul 31, 2020 1:15 am

A Safe Withdrawal Rate (SWA) of 4% on $1.4m is $56,000. It would be possible to withdraw that every year, increase for inflation and not run out of cash. Drop that SWA closer to 3% if you really want to be sure.

Some parts of the US $56k/year is a great income given all the free time you have anyway to fill how you choose.

Certainly get yourself motivated to keep yourself healthy, occupied and focussed (or something). But don't assume $1.4m is not a lot.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by palanzo » Fri Jul 31, 2020 1:22 am

ohit1 wrote:
Fri Jul 31, 2020 1:15 am
A Safe Withdrawal Rate (SWA) of 4% on $1.4m is $56,000. It would be possible to withdraw that every year, increase for inflation and not run out of cash. Drop that SWA closer to 3% if you really want to be sure.

Some parts of the US $56k/year is a great income given all the free time you have anyway to fill how you choose.

Certainly get yourself motivated to keep yourself healthy, occupied and focussed (or something). But don't assume $1.4m is not a lot.
OP is 28. What is he going to do at 58 after withdrawing 4%?

LarryCarell
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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by LarryCarell » Fri Jul 31, 2020 4:56 am

Hello OP,

I am in the same situation. I ve decided to DCA 1,5% of my investment money on monthly basis until we pass the covid crisis.

learn2
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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by learn2 » Fri Jul 31, 2020 5:49 am

The post by triple digit golfer seems to be very reasonable.

A few thoughts:
Tilting seems fun/ stands to reason etc etc, but how long would you feel able to commit to your tilts in the various portfolios? Ben Felix has mentioned on the rational reminder podcast that small value has taken 20 years at times to yield a benefit. I just wouldn’t want to be in a situation 2-3-4 years from now trying to change asset allocations drastically over a change of heart or attitude toward the various tilts. ( you may understand each factor very well and be fully committed so this may not be helpful :happy ).

The three fund portfolio seems to stand to good reason, with a high yield savings acct. you could always add tilts later if desired. Then you just pick your asset allocation and let it go. ( disclaimer: I do use a few treasury Index funds for some of bonds as opposed to only bnd).

Good luck!

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Re: 28 year old with $1,4 million in cash investing for the first time. My thoughts.

Post by Jack FFR1846 » Fri Jul 31, 2020 6:33 am

calcada wrote:
Thu Jul 30, 2020 10:56 pm
BuckyBadger wrote:
Thu Jul 30, 2020 10:38 pm
Maybe i missed it. Why do you never want to have a job?
I will work. I am currently working on some personal projects while I figure out what to do. I do want to get a job.
Apply at Amazon, assuming there's a warehouse in your area (they are everywhere). My son works in a warehouse and tells us stories every day of the clowns who are fired or quit. In short, if you are at all employable, you'll do well. What's that mean? You get there on time (if you're early, they pay you for the extra time), you do your work, you don't just walk away and disappear during your shift.

After all of 2 weeks, it's looking like my son may already get a promotion because he willingly teaches new people the jobs he's been doing.
Bogle: Smart Beta is stupid

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by sd323232 » Fri Jul 31, 2020 7:05 am

too long and complicated to read it all, i would say same if you had $1k, $100 million, or $10 billion, VTSAX AND CHILL.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by Brianmcg321 » Fri Jul 31, 2020 7:28 am

100% in VTSAX. Let it sit for a few years. If you had done this 5 years ago you would have $2.6mil now. Ouch.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by tibbitts » Fri Jul 31, 2020 7:53 am

ohit1 wrote:
Fri Jul 31, 2020 1:15 am
A Safe Withdrawal Rate (SWA) of 4% on $1.4m is $56,000. It would be possible to withdraw that every year, increase for inflation and not run out of cash. Drop that SWA closer to 3% if you really want to be sure.

Some parts of the US $56k/year is a great income given all the free time you have anyway to fill how you choose.

Certainly get yourself motivated to keep yourself healthy, occupied and focussed (or something). But don't assume $1.4m is not a lot.
4% is not an historically SWR for the OP due to age, but I think the OP is sophisticated enough to know that. However certainly $1.4M is a considerable sum, especially since it's apparently in taxable(?).

jibantik
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Re: 28 year old with $1,4 million in cash investing for the first time. My thoughts.

Post by jibantik » Fri Jul 31, 2020 8:44 am

Jack FFR1846 wrote:
Fri Jul 31, 2020 6:33 am
calcada wrote:
Thu Jul 30, 2020 10:56 pm
BuckyBadger wrote:
Thu Jul 30, 2020 10:38 pm
Maybe i missed it. Why do you never want to have a job?
I will work. I am currently working on some personal projects while I figure out what to do. I do want to get a job.
Apply at Amazon, assuming there's a warehouse in your area (they are everywhere). My son works in a warehouse and tells us stories every day of the clowns who are fired or quit. In short, if you are at all employable, you'll do well. What's that mean? You get there on time (if you're early, they pay you for the extra time), you do your work, you don't just walk away and disappear during your shift.

After all of 2 weeks, it's looking like my son may already get a promotion because he willingly teaches new people the jobs he's been doing.
Why would a guy with 1.4 million dollars and the software/design skills to develop a 1.4 million dollar app choose to go move boxes for amazon in the middle of a pandemic?

BTW OP, your funds are too complicated and don't make sense. Invest in VTWAX and maybe a small percentage in bonds and never think about it again. If it were me, I would FIRE and work on personal projects for the rest of my life. If you want a job then go for it, but you are in absolutely no rush to find one. If I had 1.4 million dollars, moving boxes in an amazon warehouse would be pretty low on my list of things to do...

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Re: 28 year old with $1,4 million in cash investing for the first time. My thoughts.

Post by KingRiggs » Fri Jul 31, 2020 8:55 am

jibantik wrote:
Fri Jul 31, 2020 8:44 am
Jack FFR1846 wrote:
Fri Jul 31, 2020 6:33 am
calcada wrote:
Thu Jul 30, 2020 10:56 pm
BuckyBadger wrote:
Thu Jul 30, 2020 10:38 pm
Maybe i missed it. Why do you never want to have a job?
I will work. I am currently working on some personal projects while I figure out what to do. I do want to get a job.
Apply at Amazon, assuming there's a warehouse in your area (they are everywhere). My son works in a warehouse and tells us stories every day of the clowns who are fired or quit. In short, if you are at all employable, you'll do well. What's that mean? You get there on time (if you're early, they pay you for the extra time), you do your work, you don't just walk away and disappear during your shift.

After all of 2 weeks, it's looking like my son may already get a promotion because he willingly teaches new people the jobs he's been doing.
Why would a guy with 1.4 million dollars and the software/design skills to develop a 1.4 million dollar app choose to go move boxes for amazon in the middle of a pandemic?

BTW OP, your funds are too complicated and don't make sense. Invest in VTWAX and maybe a small percentage in bonds and never think about it again. If it were me, I would FIRE and work on personal projects for the rest of my life. If you want a job then go for it, but you are in absolutely no rush to find one. If I had 1.4 million dollars, moving boxes in an amazon warehouse would be pretty low on my list of things to do...
Because a job puts money in your pocket and allows you to invest for the future instead of spending it. Any job has worth.
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Watty
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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by Watty » Fri Jul 31, 2020 9:13 am

One thing to consider is that to qualify for Medicare when you are 65 is that you need about 10 years of work history of paying into Medicare either but working in a typical job or being self employed. To make it clear, you do not automatically qualify for Medicare when you turn 65, you or a spouse has to have paid into it for a required amount of time while you were working.

There may be ways to pay extra to get into Medicare if you do not have that work history but that would be too expensive for you.

The good news is that it does not require a high level of income so if you ever had a part time job in high school or college that that may been enough to count towards your ten years. You can get your earning history in the Social Security web site. Even if it is just a part time job it would be good to start working and earning those Medicare credits while you are young and able to work just in case something happens like you are disabled and cannot work later on. You can find the details of what it takes to qualify for Medicare on the Medicare web site.

One thing you should do is to make sure that you have health insurance but you may need to wait until the open enrollment period in November/December to get an ACA policy. Don't think that just because you are young that you won't need it.
calcada wrote:
Thu Jul 30, 2020 10:36 pm
I am still figuring out what to do with my life.
You have already had six years and reading between the lines you do not sound overly happy with the way your life is now. If that is correct then it may be time to consider getting some professional counseling to help you figure out what you want to do.
calcada wrote:
Thu Jul 30, 2020 10:36 pm
It currently looks like the worst possible time to start investing my whole networth into the markets as we near the end of decades long bull markets.
I agree and we may just be the beginning of a Pandemic(which is a scary thought), political problems, and a recession or possible depression.

I am terrible at market timing but now would be a very good time to be very cautious. One problem is that keeping the money in cash has its own risks since cash might not do well.

I am going to take somewhat contrary stance on what you should do with your money. I think that you should just leave it in fairly safe investments for the next six months or a year while you figure out what you are going to do about working since how that turns out will greatly affect how you should invest your money. After you get that figured out then you might want to use one of the more complex portfolios you were thinking about.

They are not real tax efficient but you are likely in a low tax bracket so that might not matter but Vanguard has what they call Life Strategy funds and you could put part of your money into one of the more conservative versions of those. Like the Retirement Income or Conservative Growth funds.

https://investor.vanguard.com/mutual-fu ... estrategy/#/

You might do something like put a million dollars into one of those and keep the other $400K in cash like investments to cover your living expenses or if you want to buy a modest house if you are sure you want to stay where you are now.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by redraider11 » Fri Jul 31, 2020 9:14 am

Hello,

I am 28 and in a similar situation as yourself. I inherited close to 1.2mil from a few deaths in my family over the past 2 years. As money has arrived after the sale of land/bank transfer, I found it hard to take the lump sum approach to investing. So glad I went for it and caught some gains before and during this COVID downturn. All of this is psychological and telling yourself the "market is at an all time high" will leave you kicking yourself as you have found out on your own.

After being a long time lurker on this site, I decided to contact Vanguard Personal Advisory Service to see what they would recommend someone who had such a long time horizon as myself. With the amount of cash you have to invest, you will be included in VG Flagship Services which includes an assigned CFP. Its the lowest few advisory service that you will find in the market, and they fit the Boglehead philosophy to a T. Over time, the advisory fee will cost you a pretty penny, but there services can be canceled at any point. This might be a good route to go just to get your toes in the water until you feel comfortable to go it on your own. At the very least, you can get a free consultation & see what portfolio design they would recommend for you.

Hope you eventually find a career that you enjoy and forget that this large account even exists, future you will be living lavishly if you do so!

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by Toons » Fri Jul 31, 2020 9:22 am

I would get a job.
Consider Vanguard Balanced Index Fund.

:mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by ohit1 » Fri Jul 31, 2020 9:22 am

palanzo wrote:
Fri Jul 31, 2020 1:22 am
OP is 28. What is he going to do at 58 after withdrawing 4%?
Good point. Drop the SWA to 3% or even 2% ?

It could provide a good framework where:

* cash is invested and not sitting in cash.
* create a lifestyle within a clear monthly/annual income (the set/known % from the investments)
* opportunity to then fill the free time with personal self-development or increase in lifestyle (or both)
* not feeling as if the money is inflated away in cash or driven to splurge on anything - because you are consuming some of it and enough motivation to then work for more income.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by tibbitts » Fri Jul 31, 2020 9:24 am

redraider11 wrote:
Fri Jul 31, 2020 9:14 am
...
After being a long time lurker on this site, I decided to contact Vanguard Personal Advisory Service to see what they would recommend someone who had such a long time horizon as myself. With the amount of cash you have to invest, you will be included in VG Flagship Services which includes an assigned CFP. Its the lowest few advisory service that you will find in the market, and they fit the Boglehead philosophy to a T. Over time, the advisory fee will cost you a pretty penny, but there services can be canceled at any point. This might be a good route to go just to get your toes in the water until you feel comfortable to go it on your own. At the very least, you can get a free consultation & see what portfolio design they would recommend for you.
...
OP is definitely not a candidate for PAS.

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midareff
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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by midareff » Fri Jul 31, 2020 9:30 am

55% Total World Stocks (VT)
40% Total World Bonds (BNDW)
5% Cash + High Yield Savings + CDs.

I might even go more aggressive than that at 60% equities, perhaps 70% to 75% if you venture forth and do what everyone your age should do.. Get A Job.
Last edited by midareff on Fri Jul 31, 2020 9:31 am, edited 1 time in total.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by Outer Marker » Fri Jul 31, 2020 9:30 am

calcada wrote:
Thu Jul 30, 2020 10:36 pm
I am 28 years old. I have 1,4 million USD in my bank accounts in cash. This is all my net worth. I have no debt. I own nothing. I am single. I wanted to share my thought process with you and to hear any advice you might have for me. I am a long time reader, first time poster.

This cash has been sitting there doing nothing for the last 5 years being quickly eaten away by my living expenses and inflation. It was around $1,6 million 5 years ago. As you can imagine, I feel the urgency to invest this cash to preserve and grow it. I got lucky with a software app I made in 2014. That is where the money came from.
Just write a new app!

Seriously, though, its evident you have the brainpower to put your human capital to work, and there seem to be no bounds on what talented software gurus can earn on the west coast. If you don't want to do that, I'd move to a low cost country like Panama and put your assets into something simple and low cost like a 3 fund portfolio or 1-fund blended portfolio.

Blue456
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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by Blue456 » Fri Jul 31, 2020 12:50 pm

calcada wrote:
Thu Jul 30, 2020 10:36 pm
Hi,

I am 28 years old. I have 1,4 million USD in my bank accounts in cash. This is all my net worth. I have no debt. I own nothing. I am single. I wanted to share my thought process with you and to hear any advice you might have for me. I am a long time reader, first time poster.

This cash has been sitting there doing nothing for the last 5 years being quickly eaten away by my living expenses and inflation. It was around $1,6 million 5 years ago. As you can imagine, I feel the urgency to invest this cash to preserve and grow it. I got lucky with a software app I made in 2014. That is where the money came from.

I currently don't have any income. I do have degrees but I never had a job and it doesn't look like I will get one soon. I am still figuring out what to do with my life. Therefore, it is a possibility that I won't have much income in the future or that I have already made most of the money I will ever make in my lifetime. I am being conservative here and I sure hope that this won't be the case as $1,4 million will not last a lifetime. Of course I will have to find some work and get an income. However, it is a possibility and a consideration I have when designing my portfolio and deciding on asset allocations. My goal is to invest long term for growth and preservation.

It is painful to have missed out on the great returns of both stocks and bonds during their current bull market for the last 5 years. I have procrastinated for long enough and I am determined to invest my capital and create an intelligent buy and hold portfolio for life.

It currently looks like the worst possible time to start investing my whole networth into the markets as we near the end of decades long bull markets. Stocks and bonds are at all time highs and interest rates are at historic lows. At these high valuations and during these very uncertain times there is a high risk of a market downturn. In the event of a stocks/bonds market crash I would lose substantial amounts of money without having enjoyed any of the great returns of the past decade. This is very scary to me but I do not intend to try and time the markets, nor do I intend to keep standing on the sidelines with a 100% decaying cash position which I think is worse. I will most likely DCA over the next 6 months.

Question 1) What is your opinion on this? Considering that in todays world and market conditions a crash could be imminent, with stocks and bonds at ATH, do you still think I should start investing or should I maintain my 100% cash position until the imminent crash? Any advice on how to DCA?

Most common advice given to 28 year olds is to invest in equity heavy portfolios, say 80/20, and DCA every month as they get paid. This is an agressive portfolio but it makes sense for them as their portfolio size is not yet very large so they are not risking to lose huge amounts of money in downturns and as they are aiming for growth. They have a long time horizon and stable future income to ride out the volatility and to grow their portfolio with high expected returns due to their high equity allocation.

I do not think this advice is suitable for me. Although I have the same long time horizon, I do not have the stable future income to DCA every month. My investing will most likely be lump sum over a short period of time. I would also be standing to lose large amounts of money in a volatile equity heavy portfolio. I do not think I can stomach a loss of 30% or more on a $1,4M portfolio. On the other hand, like all 28 year olds, I do have a long time horizon and would also like to aim for growth although with a focus on preservation and minimizing portfolio drawdown. I am confident in my ability to stick to a solid investment plan and ride out the volatility to achieve growth for decades to come. I would never panic sell and would try to buy more in a crash.

Question 2) How would you modify a typical 28 year old's portfolio if they had $1,4M to invest?

I realize that I am in a very fortunate position and I would like to take full advantage of it. I want to create an intelligent buy and hold portfolio that will allow me to grow and preserve my capital so that I could retire early and be financially independent for the rest of my life in case I don't make substantial amounts of money like this again.

Portfolio Design:

I started with the Global Market Portfolio that both Sharpe and Fama recommends. Using market caps of indexes I have:

54% Total World Stocks (VT)
46% Total World Bonds (BNDW)

Sharpe also suggest adding TIPS to a retirement portfolio so I add 10% SCHP as a permanent lifelong holding and 5% cash for my living expenses and as an emergency fund since I do not have an income.

We arrive at Portfolio #1:

45.9% Total World Stock (VT)
39.1% Total World Bond (BNDW)
10% TIPS (SCHP)
5% Cash

Because I have an appetite for additional risk and believe that factor tilts, however controversial, will achieve higher expected return over the long run, I introduce diversified factor tilts to the GMP. The factor loads I aim for were inspired by Robert T's posts:

Small (target long-term load = 0.25)
Value (target long-term load = 0.2)
Momentum (target long-term load >= 0)

Small Value US: SLYV,IJS or VIOV
Small Value ex-US: DLS
US Momentum: MTUM

With the following equity allocations,

VT (40%)
SLYV(35%)
DLS (15%)
MTUM (10%)

I achieve the following factor loads,

SMB (0.286)
HML (0.205)
MOM (0.005)

We now arrive at Portfolio #2:

18.36% Total World Stock (VT)
16.065% Small Value US (SLYV)
6.885% Small Value ex-US (DLS)
4.59% Momentum (MTUM)
39.1% Total World Bond (BNDW)
10% TIPS (SCHP)
5% Cash

To this portfolio I wanted to add some risk parity strategies, the idea behind Dalio's all weather portfolio. Inspired by azanon's thread, I replace the fixed income portion of the portfolio with long duration nominal bonds (EDV), long duration TIPS (LTPZ), gold (GLDM) and commodities (BCI) while counting TIPS towards the fixed income portion of the GMP (46%):

viewtopic.php?f=10&t=206028

We now arrive at Portfolio #3:

20.52% Total World Stock (VT)
17.955% Small Value US (SLYV)
7.695% Small Value ex-US (DLS)
5.13% Momentum (MTUM)
21.85% Long duration TIPS (LTPZ)
12.486% Long duration nominal bonds (EDV)
4.682% Gold (GLDM)
4.682% Commodities (BCI)
5% Cash

This portfolio is interesting to me as it combines my 3 favorite ideas in investing. It holds stocks/bonds in global market proportions (54/46), it achieves my desired value and size factor loads while offsetting the negative momentum load and it incorporates some risk parity strategies.

These risk parity strategies will somewhat balance risk exposures across asset classes and future possible economic climates, reducing the necessity of market timing. They will help minimize the overall portfolio's maximum drawdown while helping the portfolio perform well in all economic climates and not just prosperity. This idea of risk parity appeals to me, especially at this time, as I start investing at all time highs after a 30 plus year bull market in bonds and and a 10 plus year bull market in stocks. I can't say this doesn't make me nervous.

This portfolio does exceptionally well when backtested and compared to some other portfolios.

I could increase the expected return of this portfolio by increasing its equity allocation to 75% and removing gold, commodities and TIPS. It is no longer an all weather portfolio.

We arrive at Portfolio #4:

28.5% Total World Stock (VT)
24.94% Small Value US (SLYV)
10.69% Small Value ex-US (DLS)
7.12% Momentum (MTUM)
23.75% Long duration nominal bonds (EDV)
5% Cash

This portfolio has a high expected return due to its high equity allocation and factor tilts. I kept EDV as it behaves like a 1.5x leveraged LTT fund. I like the idea of leveraging a lower risk asset like bonds to increase their returns and volatility to balance out their risk with the equity portion of a portfolio. I believe this would improve returns and diversification of the portfolio.

This only happens to an extent in this portfolio as it is equity heavy (75/25) and 1.5x leverage is not enough to achieve risk parity between equity and fixed income. EDV does have some benefits of a leveraged bond ETF without the high expense ratio.

This portfolio also does exceptionally well when backtested and compared to some other portfolios.

Finally of course, I consider the 4-fund portfolio (70/30) which is popular for its simplicity. Vanguard recommends 40% of the stock allocation in international stocks and 30% of the bond allocation in international bonds to maximize diversification benefits.

Portfolio #5:

39.9% Total Stock Market (VTI)
26.6% Total International Stock (VXUS)
19.95% Total Bond Market (BND)
8.55% Total International Bond (BNDX)
5% Cash

Although similar to the Global Market Portfolio (Portfolio #1), this has a higher expected return than the GMP due to its higher equity allocation. What I like about this portfolio is its simplicity, its popularity amongst retail investors, low expense ratios and low tracking error risk.

What I dont like is that it is tilted heavily towards prosperity. I am hesitant to make a bid on prosperity after decades long prosperity in both stocks and bonds. This portfolio has high downside risk and not enough downside protection. I dont like that it has no factor tilts to capture size and value premiums.

Question 3) These are the portfolios I am considering. Which one of these portfolios (#1-5) do you like the best? How would you improve it? How would you go about deploying the capital into the portfolio? Do you think there is a better portfolio that is more suitable for me?

Assume all accounts are non-taxable. I just want to focus on financial theory.

Bonus:

I think holding the Global Market Portfolio and leveraging up the whole world by 1.5x for higher risk and return would be my portfolio of choice if it was simple and cost effective for a retail investor to do.

As an alternative investment and perhaps a business endeavour I am considering using 15% of my money towards a downpayment on an investment property. This would allow me to diversify into real estate, apply leverage (5x) to build wealth and earn income.

I have an important decision to make. Thank you in advance for your help and advice.
In the following order:
1) Place your cash in high yield savings accounts
2) Invest your money very conservatively 50:50 would probably be highest AA right now but maybe something even lower like 40:60.
3) Read books on investing
4) usajobs.gov and get any job

Keep in mind that conservative 2% withdraw from your portfolio would grow your wealth and provide you with indefinite $2300 a month income. All you need is a simple job to do well for yourself. I would look into working for post office so that I could get good pension and decent pay and health insurance. I would move to an apartment where rent is no more than $1500 a month, a studio would be best.

palanzo
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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by palanzo » Fri Jul 31, 2020 1:52 pm

Outer Marker wrote:
Fri Jul 31, 2020 9:30 am
calcada wrote:
Thu Jul 30, 2020 10:36 pm
I am 28 years old. I have 1,4 million USD in my bank accounts in cash. This is all my net worth. I have no debt. I own nothing. I am single. I wanted to share my thought process with you and to hear any advice you might have for me. I am a long time reader, first time poster.

This cash has been sitting there doing nothing for the last 5 years being quickly eaten away by my living expenses and inflation. It was around $1,6 million 5 years ago. As you can imagine, I feel the urgency to invest this cash to preserve and grow it. I got lucky with a software app I made in 2014. That is where the money came from.
Just write a new app!

Seriously, though, its evident you have the brainpower to put your human capital to work, and there seem to be no bounds on what talented software gurus can earn on the west coast. If you don't want to do that, I'd move to a low cost country like Panama and put your assets into something simple and low cost like a 3 fund portfolio or 1-fund blended portfolio.
Exactly so. The OP had a job that netted him 1.4 million. How many here have done that by age 28? If the OP still enjoys software development then just keep writing apps, either by himself or contracting his services. App development services are sought after especially for those who have developed a successful app.

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LilyFleur
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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by LilyFleur » Fri Jul 31, 2020 2:14 pm

Presumably OP's money is in a taxable account and not well protected from creditors. I would recommend umbrella insurance and taking any job with benefits. Health insurance and a 401k with its protections would round out OP's investments. Saving the max in a 401k puts money in a well-protected pot.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by ThatsMyFamJam » Fri Jul 31, 2020 4:21 pm

If you are not prepared to take a 30%-40% hit potentially in the next down market, you may want to start out DCA into a more conservative (given you are only 28) allocation, like 60/40, for the portion you don't expect to touch in 10 years. And earn a few bucks to supplement the portion that is not invested to cover your living expenses.

Yes, historically, the market has eventually hit new highs even after buying at the prior top, but this pandemic looks to be an unprecedented, "this time is different," Black Swan event, so I wouldn't rely too much on that history.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by 7eight9 » Fri Jul 31, 2020 4:55 pm

Right now your burn rate is app. $40K/year. You like to write software. Have you considered becoming a "digital nomad" and moving to one of the popular places - Penang Island, Chiang Mai, Da Nang, etc. You could likely reduce your burn rate to $10K. Then what is the rush to get into the market. If you aren't comfortable jumping in to the deep end of the pool so to speak (as evidenced by the past five years) then why rush it? Cut your burn rate, maybe write some new software and don't stress the markets.
I guess it all could be much worse. | They could be warming up my hearse.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by palanzo » Fri Jul 31, 2020 5:14 pm

7eight9 wrote:
Fri Jul 31, 2020 4:55 pm
Right now your burn rate is app. $40K/year. You like to write software. Have you considered becoming a "digital nomad" and moving to one of the popular places - Penang Island, Chiang Mai, Da Nang, etc. You could likely reduce your burn rate to $10K. Then what is the rush to get into the market. If you aren't comfortable jumping in to the deep end of the pool so to speak (as evidenced by the past five years) then why rush it? Cut your burn rate, maybe write some new software and don't stress the markets.
Good idea but depending on the OP's location that may not be possible now.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by Sandtrap » Fri Jul 31, 2020 5:26 pm

Go to work full time for paycheck and pension.
Try not to be reliant on the $1.4 million investment for living expenses.
Invest in Vanguard Balanced Index Fund at 60/40 allocation, or Target Date Fund, or Other balanced fund.
Set aside certain amounts for going back to school if needed, expenses, etc.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by 000 » Fri Jul 31, 2020 5:29 pm

OP, if you did it before, you can probably do it again. Spending a few years on your own ventures is IMO going to be more rewarding than a 9-5 job. Note this board is very conservative about entrepreneurship.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by yules » Fri Jul 31, 2020 7:14 pm

calcada wrote:
Thu Jul 30, 2020 10:36 pm
Hi,

I am 28 years old. I have 1,4 million USD in my bank accounts in cash. This is all my net worth. I have no debt. I own nothing. I am single. I wanted to share my thought process with you and to hear any advice you might have for me. I am a long time reader, first time poster.

This cash has been sitting there doing nothing for the last 5 years being quickly eaten away by my living expenses and inflation. It was around $1,6 million 5 years ago. As you can imagine, I feel the urgency to invest this cash to preserve and grow it. I got lucky with a software app I made in 2014. That is where the money came from.

I currently don't have any income. I do have degrees but I never had a job and it doesn't look like I will get one soon. I am still figuring out what to do with my life. Therefore, it is a possibility that I won't have much income in the future or that I have already made most of the money I will ever make in my lifetime. I am being conservative here and I sure hope that this won't be the case as $1,4 million will not last a lifetime. Of course I will have to find some work and get an income. However, it is a possibility and a consideration I have when designing my portfolio and deciding on asset allocations. My goal is to invest long term for growth and preservation.

It is painful to have missed out on the great returns of both stocks and bonds during their current bull market for the last 5 years. I have procrastinated for long enough and I am determined to invest my capital and create an intelligent buy and hold portfolio for life.

It currently looks like the worst possible time to start investing my whole networth into the markets as we near the end of decades long bull markets. Stocks and bonds are at all time highs and interest rates are at historic lows. At these high valuations and during these very uncertain times there is a high risk of a market downturn. In the event of a stocks/bonds market crash I would lose substantial amounts of money without having enjoyed any of the great returns of the past decade. This is very scary to me but I do not intend to try and time the markets, nor do I intend to keep standing on the sidelines with a 100% decaying cash position which I think is worse. I will most likely DCA over the next 6 months.

Question 1) What is your opinion on this? Considering that in todays world and market conditions a crash could be imminent, with stocks and bonds at ATH, do you still think I should start investing or should I maintain my 100% cash position until the imminent crash? Any advice on how to DCA?

Most common advice given to 28 year olds is to invest in equity heavy portfolios, say 80/20, and DCA every month as they get paid. This is an agressive portfolio but it makes sense for them as their portfolio size is not yet very large so they are not risking to lose huge amounts of money in downturns and as they are aiming for growth. They have a long time horizon and stable future income to ride out the volatility and to grow their portfolio with high expected returns due to their high equity allocation.

I do not think this advice is suitable for me. Although I have the same long time horizon, I do not have the stable future income to DCA every month. My investing will most likely be lump sum over a short period of time. I would also be standing to lose large amounts of money in a volatile equity heavy portfolio. I do not think I can stomach a loss of 30% or more on a $1,4M portfolio. On the other hand, like all 28 year olds, I do have a long time horizon and would also like to aim for growth although with a focus on preservation and minimizing portfolio drawdown. I am confident in my ability to stick to a solid investment plan and ride out the volatility to achieve growth for decades to come. I would never panic sell and would try to buy more in a crash.

Question 2) How would you modify a typical 28 year old's portfolio if they had $1,4M to invest?

I realize that I am in a very fortunate position and I would like to take full advantage of it. I want to create an intelligent buy and hold portfolio that will allow me to grow and preserve my capital so that I could retire early and be financially independent for the rest of my life in case I don't make substantial amounts of money like this again.

Portfolio Design:

I started with the Global Market Portfolio that both Sharpe and Fama recommends. Using market caps of indexes I have:

54% Total World Stocks (VT)
46% Total World Bonds (BNDW)

Sharpe also suggest adding TIPS to a retirement portfolio so I add 10% SCHP as a permanent lifelong holding and 5% cash for my living expenses and as an emergency fund since I do not have an income.

We arrive at Portfolio #1:

45.9% Total World Stock (VT)
39.1% Total World Bond (BNDW)
10% TIPS (SCHP)
5% Cash

Because I have an appetite for additional risk and believe that factor tilts, however controversial, will achieve higher expected return over the long run, I introduce diversified factor tilts to the GMP. The factor loads I aim for were inspired by Robert T's posts:

Small (target long-term load = 0.25)
Value (target long-term load = 0.2)
Momentum (target long-term load >= 0)

Small Value US: SLYV,IJS or VIOV
Small Value ex-US: DLS
US Momentum: MTUM

With the following equity allocations,

VT (40%)
SLYV(35%)
DLS (15%)
MTUM (10%)

I achieve the following factor loads,

SMB (0.286)
HML (0.205)
MOM (0.005)

We now arrive at Portfolio #2:

18.36% Total World Stock (VT)
16.065% Small Value US (SLYV)
6.885% Small Value ex-US (DLS)
4.59% Momentum (MTUM)
39.1% Total World Bond (BNDW)
10% TIPS (SCHP)
5% Cash

To this portfolio I wanted to add some risk parity strategies, the idea behind Dalio's all weather portfolio. Inspired by azanon's thread, I replace the fixed income portion of the portfolio with long duration nominal bonds (EDV), long duration TIPS (LTPZ), gold (GLDM) and commodities (BCI) while counting TIPS towards the fixed income portion of the GMP (46%):

viewtopic.php?f=10&t=206028

We now arrive at Portfolio #3:

20.52% Total World Stock (VT)
17.955% Small Value US (SLYV)
7.695% Small Value ex-US (DLS)
5.13% Momentum (MTUM)
21.85% Long duration TIPS (LTPZ)
12.486% Long duration nominal bonds (EDV)
4.682% Gold (GLDM)
4.682% Commodities (BCI)
5% Cash

This portfolio is interesting to me as it combines my 3 favorite ideas in investing. It holds stocks/bonds in global market proportions (54/46), it achieves my desired value and size factor loads while offsetting the negative momentum load and it incorporates some risk parity strategies.

These risk parity strategies will somewhat balance risk exposures across asset classes and future possible economic climates, reducing the necessity of market timing. They will help minimize the overall portfolio's maximum drawdown while helping the portfolio perform well in all economic climates and not just prosperity. This idea of risk parity appeals to me, especially at this time, as I start investing at all time highs after a 30 plus year bull market in bonds and and a 10 plus year bull market in stocks. I can't say this doesn't make me nervous.

This portfolio does exceptionally well when backtested and compared to some other portfolios.

I could increase the expected return of this portfolio by increasing its equity allocation to 75% and removing gold, commodities and TIPS. It is no longer an all weather portfolio.

We arrive at Portfolio #4:

28.5% Total World Stock (VT)
24.94% Small Value US (SLYV)
10.69% Small Value ex-US (DLS)
7.12% Momentum (MTUM)
23.75% Long duration nominal bonds (EDV)
5% Cash

This portfolio has a high expected return due to its high equity allocation and factor tilts. I kept EDV as it behaves like a 1.5x leveraged LTT fund. I like the idea of leveraging a lower risk asset like bonds to increase their returns and volatility to balance out their risk with the equity portion of a portfolio. I believe this would improve returns and diversification of the portfolio.

This only happens to an extent in this portfolio as it is equity heavy (75/25) and 1.5x leverage is not enough to achieve risk parity between equity and fixed income. EDV does have some benefits of a leveraged bond ETF without the high expense ratio.

This portfolio also does exceptionally well when backtested and compared to some other portfolios.

Finally of course, I consider the 4-fund portfolio (70/30) which is popular for its simplicity. Vanguard recommends 40% of the stock allocation in international stocks and 30% of the bond allocation in international bonds to maximize diversification benefits.

Portfolio #5:

39.9% Total Stock Market (VTI)
26.6% Total International Stock (VXUS)
19.95% Total Bond Market (BND)
8.55% Total International Bond (BNDX)
5% Cash

Although similar to the Global Market Portfolio (Portfolio #1), this has a higher expected return than the GMP due to its higher equity allocation. What I like about this portfolio is its simplicity, its popularity amongst retail investors, low expense ratios and low tracking error risk.

What I dont like is that it is tilted heavily towards prosperity. I am hesitant to make a bid on prosperity after decades long prosperity in both stocks and bonds. This portfolio has high downside risk and not enough downside protection. I dont like that it has no factor tilts to capture size and value premiums.

Question 3) These are the portfolios I am considering. Which one of these portfolios (#1-5) do you like the best? How would you improve it? How would you go about deploying the capital into the portfolio? Do you think there is a better portfolio that is more suitable for me?

Assume all accounts are non-taxable. I just want to focus on financial theory.

Bonus:

I think holding the Global Market Portfolio and leveraging up the whole world by 1.5x for higher risk and return would be my portfolio of choice if it was simple and cost effective for a retail investor to do.

As an alternative investment and perhaps a business endeavour I am considering using 15% of my money towards a downpayment on an investment property. This would allow me to diversify into real estate, apply leverage (5x) to build wealth and earn income.

I have an important decision to make. Thank you in advance for your help and advice.
You had $1,6 million 5 years ago and now you have $1,4 million?

So your living expenses are only $40 K to $50 K per year? That’s amazing. What’s your secret? Go ahead and invest it all. Stop worrying about how to optimize your portfolio. Your good fortune and super low expenses gives you the opportunity to focus on yourself and your future and how you want to spend the rest of your life, whether working a regular job, an irregular job, or developing more apps. Focus on your personal capital and happiness. These finances will largely take care of themselves in the mean time.

Yules

palanzo
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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by palanzo » Fri Jul 31, 2020 7:18 pm

Please, please do not Reply with Quote and then write one or two lines. There is a Post Reply button that just replies. The original post is pages long and it takes away from reading all the replies.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by Hubris » Fri Jul 31, 2020 7:40 pm

000 wrote:
Fri Jul 31, 2020 5:29 pm
OP, if you did it before, you can probably do it again.
000, I like this. Someone gave me save guidance years ago, which I dismissed. I think my reasons for dismissing were valid but also I probably didn’t give sufficient recognition to what “got me there”.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by tibbitts » Fri Jul 31, 2020 8:15 pm

Hubris wrote:
Fri Jul 31, 2020 7:40 pm
000 wrote:
Fri Jul 31, 2020 5:29 pm
OP, if you did it before, you can probably do it again.
000, I like this. Someone gave me save guidance years ago, which I dismissed. I think my reasons for dismissing were valid but also I probably didn’t give sufficient recognition to what “got me there”.
I think the OP will know if that's a practical possibility or not. Six years can be an eternity in app years. Some people excel at a certain time and with a certain technology, or just hit on one great idea, etc. Other people seem to have the talent and interest to keep repeating successes over and over.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by 000 » Fri Jul 31, 2020 8:19 pm

tibbitts wrote:
Fri Jul 31, 2020 8:15 pm
Hubris wrote:
Fri Jul 31, 2020 7:40 pm
000 wrote:
Fri Jul 31, 2020 5:29 pm
OP, if you did it before, you can probably do it again.
000, I like this. Someone gave me save guidance years ago, which I dismissed. I think my reasons for dismissing were valid but also I probably didn’t give sufficient recognition to what “got me there”.
I think the OP will know if that's a practical possibility or not. Six years can be an eternity in app years. Some people excel at a certain time and with a certain technology, or just hit on one great idea, etc. Other people seem to have the talent and interest to keep repeating successes over and over.
All true. However I felt my post was reasonable considering the suggestions to immediately get a job just for the income.

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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by colodane » Fri Jul 31, 2020 8:26 pm

Watty wrote:
Fri Jul 31, 2020 9:13 am
One thing to consider is that to qualify for Medicare when you are 65 is that you need about 10 years of work history of paying into Medicare either but working in a typical job or being self employed. To make it clear, you do not automatically qualify for Medicare when you turn 65, you or a spouse has to have paid into it for a required amount of time while you were working.
Watty makes an EXCELLENT point! Medicare (at least for now) is GOLDEN. You want to be eligible for it.

I admit to not reading every line of all the content above, but medical insurance in general (even at your young age) is an important consideration.

Comprehensive medical insurance, either free or heavily subsidized, is another good reason to have a job.

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calcada
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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by calcada » Fri Jul 31, 2020 8:38 pm

geerhardusvos wrote:
Fri Jul 31, 2020 12:12 am
Put all your money in VTSAX tomorrow, and never draw down more than 3% per year and you will be fine. If you need to go back to work for a year or two, that might help significantly make up for not having invested your money five years ago. Then once you have worked another 2 to 5 years, you don’t have to feel bad anymore about missing out and can move in with your life
Even during a global pandemic that has increased unemployment by almost 20 million in the US and millions more globally, that caused countless businesses to shut down, that caused people to spend less and businesses to make less revenue? And yet the stock market hasn't reflected any of this at all and is still going strong only because the Federal Reserve injecting trillions of USD into the system. This is what worries me.

The stock market may reflect one day that we are indeed in a recession or even a depression after I have bought in at ATHs. I fear this may only be the beginning of the effects of this pandemic. I just don't see how I can buy into the stock market at such a time and at such valuations.

Dalio says its crazy to hold bonds, yet alone buy them, as central banks continue to print money. Can't buy bonds either then.

I was considering buying real estate but if the economy collapses real estate will follow. So I am not hurrying to buy real estate.

Here I am with a 100% cash position while the Fed is printing trillions more of the same paper I have. Devaluing it even faster. I can't maintain my current position any longer either. I need to make a move.

It feels like nothing is a good buy and I have no good moves to make. Except maybe Gold and TIPS.
Last edited by calcada on Fri Jul 31, 2020 8:41 pm, edited 1 time in total.

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calcada
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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by calcada » Fri Jul 31, 2020 8:40 pm

Thank you everyone for all your replies. Please keep them coming. I am reading all of them. They are giving me a lot to think about.

000
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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by 000 » Fri Jul 31, 2020 8:41 pm

calcada wrote:
Fri Jul 31, 2020 8:38 pm
It feels like nothing is a good buy and I have no good moves to make. Except maybe Gold and TIPS.
Have you heard of the Permanent Portfolio?

Note that this is intended to be a counterpart to a "Variable Portfolio" seeking high growth. i.e. a bucket strategy
Last edited by 000 on Fri Jul 31, 2020 8:46 pm, edited 2 times in total.

RocketShipTech
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Re: 28 year old with $1.4 million in cash investing for the first time. My thoughts.

Post by RocketShipTech » Fri Jul 31, 2020 8:42 pm

calcada wrote:
Fri Jul 31, 2020 8:38 pm
geerhardusvos wrote:
Fri Jul 31, 2020 12:12 am
Put all your money in VTSAX tomorrow, and never draw down more than 3% per year and you will be fine. If you need to go back to work for a year or two, that might help significantly make up for not having invested your money five years ago. Then once you have worked another 2 to 5 years, you don’t have to feel bad anymore about missing out and can move in with your life
Even during a global pandemic that has increased unemployment by almost 20 million in the US and millions more globally, that caused countless businesses to shut down, that caused people to spend less and businesses to make less revenue? And yet the stock market hasn't reflected any of this at all and is still going strong only because the Federal Reserve injecting trillions of USD into the system. This is what worries me.

The stock market may reflect one day that we are indeed in a recession or even a depression after I have bought in at ATHs. I fear this may only be the beginning of the effects of this pandemic. I just don't see how I can buy into the stock market at such a time and at such valuations.

Dalio says its crazy to hold bonds, yet alone buy them, as central banks continue to print money. Can't buy bonds either then.

I was considering buying real estate but if the economy collapses real estate will follow. So I am not hurrying to buy real estate.

Here I am with a 100% cash position while the Fed is printing trillions more of the same paper I have. Devaluing it even faster. I can't maintain my current position any longer either. I need to make a move.

It feels like nothing is a good buy and I have no good moves to make. Except maybe Gold and TIPS.
If you actually believe what you say about valuations, you should be doubling down on ex-US stocks and small cap value.

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