Entire portfolio is taxable - How best to handle long-term?

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walt0903
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Entire portfolio is taxable - How best to handle long-term?

Post by walt0903 » Mon Jan 18, 2010 9:59 pm

Hi,

I love this forum. I am a big fan of the Millionaire Next Door and Stop Acting Rich books by Thomas Stanley.

I have a few questions and was hoping to get any advice anyone would like to provide.

I gambled purely on a gut feeling early last year, and with the consent of my wife, speculated on just two stocks with our entire life savings in February and March last year and am waiting for Feb/Mar to sell my shares so it is taxed at 20% instead of 35%. With the sell of these shares, my wife and I will be able to choose what we would like to do with our hours during the day.

We have two kids, one in public school and the other about to start public school. We have no debt, and are renting a house right now. We do not want to buy a house right now as we just moved to Florida and are still getting used to the area. We believe it would be another year or two, maybe more, until we felt comfortable with the idea of buying. We bought/sold/moved a couple times in the past few years with job changes so we are kind of exhausted of that process and like the freedom of renting where we are renting right now.

I am 32 and my wife is 29. We are wanting to spend 3.6% of our portfolio. I have accounted for the taxes from selling our shares, and with the cash value of our account after taxes we can spend just a bit more than the 160k/year I have us budgeted in Excel to spend yearly. I just have to determine where to put this money for it to grow and be stable and last our lives.

I decided on (55/45 to 60/40) stock/bond allocation and this will all be in a taxable account.

We do not have any Traditional IRA's or 401k's. I have a Roth IRA but only have $17k in it so am excluding it as it has no material effect on the questions I have right now. I have just under six months of our income in a savings account so we do not have to make a decision right away, and can spend our savings until the decision is made.

I have been searching for other posts on allocation and seem to always find that most are in tax-deferred accounts.

I just finished looking at the "rev9a Backtest Portfolio with Trev H data" spreadsheet in another post, and it seems that from 1972-2009 VG Wellington has one of the higher ending portfolio value with fairly low standard deviation yet almost all the growth as the higher volatility choices.

I want spending power to keep up with inflation and the ability to withdrawal 3.6% of whatever the portfolio value is on Dec 30th. I can't imagine how the world will look in 60+ years, but we would like to plan on being able to continue withdrawing 3.6% of the portfolio value for that time frame. From what I can tell on the Firecalc website, this would have us spend less during recessions, and spend more during booms. Hopefully with having a lower volatility portfolio this would have an effect that is less noticeable.

We are really too young to "retire", so we likely find ourselves having some other job(s) here and there, whether it be consulting, or volunteering, but for the near future, our earned income would be zero. We are both frugal people and have no plans on burning through this money. We just saw Christmas Carol with the our oldest child and my wife joked that I was very much like Scrooge, though I like to think I am closer to his personality after his "visits".

Having our net worth more than quadruple really has gotten us risk averse. As much as we would like to see the value get bigger, it really does hurt our stomach and our heads to think about it getting smaller. This means we would want a low standard deviation, yes?

We realize keeping our money in VG will keep costs down but how can we keep our yearly taxes down while spending the 3.6% of the overall portfolio?

I realize if we put it into Wellington, we would spend the quarterly dividends, and then sell whatever shares we needed to meet our 3.6% of Dec 30th portfolio value. This seems easy enough and would keep the stock/bond allocation the same over the years.

Another idea I had was having the stock portion (55-60%) divided between VG Total Stock Market Index, VG FTSE-ex US Fund, and VG Small-Cap Value Fund. The remaining bond portion (40-45%) was going to be all VG Tax-Exempt Intermediate Fund. Since the stock portion would out-pace the bond portion, the allocations would get more aggressive over time, so my balancing idea for that is below.

The dividends from the bond fund and the dividends from the stock fund would both be reinvested into the bond fund. Could then sell shares (3.6% of portfolio) for the upcoming years spending, of either the stock fund OR the bond fund on Dec 30th to adjust the existing stock/bond allocation back to the allocation just mentioned above.

Is one idea better than the other? Anyone have any other ideas?

Thanks to all - and sorry for such a long-winded post.

Walt

kd2008
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Post by kd2008 » Tue Jan 19, 2010 7:55 am

I am absolutely not an expert at these things so please take my advice with a pinch of salt. I like the second option better with you maintaining the asset allocation. This way you can take advantage of tax loss harvesting should there be an opportunity in the future.

As far as guessing your two stocks ..was one of them Dollar thrifty? :D

KyleAAA
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Post by KyleAAA » Tue Jan 19, 2010 8:36 am

First of all, congratulations. That took balls. Second, don't fool yourself into thinking you can repeat. Count your blessings and move on.

Third, I think 3.6% may be a bit aggressive for somebody your age. It will PROBABLY turn out okay, but I'd be more comfortable spending a maximum of 3% in your situation.

Fourth, asset allocation. My feeling is that your target allocation is too aggressive. 60/40 is great if you want moderate levels of growth and don't depend on the income from your portfolio entirely, but it can still be quite volatile. You can expect to lose 30% or so of your portfolio in the next bear market. Can you bear that kind of loss without an outside income to fall back on? Personally, I'd go with a 40/60 allocation. But then, I'm conservative. You have no real need to take on much additional risk, and 40/60 should easily keep pace with inflation.

Wellington fund is a fine fund, but I prefer the slice n' dice approach. I might divide my stock portion equally between the three stock funds you mentioned, and keep most of the rest in the interm-term muni fund; however, I'd think about keeping around 5% or so of my portfolio in cash for living expenses and as an ER.

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fluffyistaken
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Post by fluffyistaken » Tue Jan 19, 2010 8:48 am

Congrats! My advice is to not wait till Feb/March but to lock in your gains now, even if it means paying the extra 15% in taxes. Or at least lock in half of the gains. What goes up fast can come down even faster.

Or maybe see if you can lock in the gains till long-term cap gain rates kick in by buying some Feb/March puts on those two stocks.

livesoft
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Post by livesoft » Tue Jan 19, 2010 8:52 am

Another idea I had was having the stock portion (55-60%) divided between VG Total Stock Market Index, VG FTSE-ex US Fund, and VG Small-Cap Value Fund. The remaining bond portion (40-45%) was going to be all VG Tax-Exempt Intermediate Fund. Since the stock portion would out-pace the bond portion, the allocations would get more aggressive over time, so my balancing idea for that is below.
This is something that I would do. Your tax-bracket may not justify tax-exempt bonds though, so you need to better estimate what things will look like in years two and onward. For example, you will be paying your own health insurance which will probably be more than 7.5% of your AGI, so some can be deductible.

Also check out http://www.early-retirement.org/forums/ for lots of folks like you who have retired early.

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walt0903
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Post by walt0903 » Tue Jan 19, 2010 11:46 am

kd2008 wrote:I am absolutely not an expert at these things so please take my advice with a pinch of salt. I like the second option better with you maintaining the asset allocation. This way you can take advantage of tax loss harvesting should there be an opportunity in the future.

As far as guessing your two stocks ..was one of them Dollar thrifty? :D
Thanks kd2008, I will look more at tax loss harvesting advantages. It wasn't Dollar thrifty, it was Ford and Bank of America.

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walt0903
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Post by walt0903 » Tue Jan 19, 2010 11:58 am

KyleAAA wrote:First of all, congratulations. That took balls. Second, don't fool yourself into thinking you can repeat. Count your blessings and move on.

Third, I think 3.6% may be a bit aggressive for somebody your age. It will PROBABLY turn out okay, but I'd be more comfortable spending a maximum of 3% in your situation.

Fourth, asset allocation. My feeling is that your target allocation is too aggressive. 60/40 is great if you want moderate levels of growth and don't depend on the income from your portfolio entirely, but it can still be quite volatile. You can expect to lose 30% or so of your portfolio in the next bear market. Can you bear that kind of loss without an outside income to fall back on? Personally, I'd go with a 40/60 allocation. But then, I'm conservative. You have no real need to take on much additional risk, and 40/60 should easily keep pace with inflation.

Wellington fund is a fine fund, but I prefer the slice n' dice approach. I might divide my stock portion equally between the three stock funds you mentioned, and keep most of the rest in the interm-term muni fund; however, I'd think about keeping around 5% or so of my portfolio in cash for living expenses and as an ER.
Thanks KyleAAA. It was quite a roller coaster for us watching it everyday with a lot of sleepless nights. We are definitely not trying to repeat this. We count ourselves very lucky and blessed and are looking for low volatility now.

I have been back and forth on firecalc trying to debate between 3.2% and 3.6%. I thought I came to a revelation with Firecalc when I instead of taking 3.6% of initial amount and increase that for inflation, but instead to only take 3.6% of the portfolio value on Dec 30th. If it happens to be 20% lower due to bear market then our upcoming years income would be that much lower. This was part of the reason of wanting low volatility, to reduce the variance in our yearly spending. Doing so appears, though I could of very well read it incorrectly, allows for 3.6% to last the 50year time frame I gave it with 95% success rate. I read Ben Stein (some article with Hell I think in the name) who may have said 80-85% is more than enough success rate given the potential for pre-mature death, wars, etc.? Am I at all reading the firecalc correctly?

I am going to look at what 40/60 to 50/50 does in our spreadsheets this evening. I am OK going more conservative, as I am mainly just following spreadsheets/chart results and trying to not lose out to inflation. I will look more at the rev9 spreadsheet and compare the allocation differences and will focus on final "real" portfolio value taking into consideration volatility.

BarbK
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Post by BarbK » Tue Jan 19, 2010 12:05 pm

I would have thought one of them was TCK.....it was about $44-48, went down to $2 and is now about $40. I owned it at $48, bought some at $10 and more at $7 then stopped buying. I've sold on the way up - last sell about $39....I just own a little now.

Anyway, Great job on your investment!!!! If this is your source of income, you might want to lock in some profits - maybe up to 25% tax bracket worth ... plus maybe put some stop limits just in case.

BTW - I always did better selling with disregard to taxes....it seems that when I waited for the stock to become LT, I missed out on more profit than taxes paid.

Definitely keep us posted on what you do.

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fluffyistaken
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Post by fluffyistaken » Tue Jan 19, 2010 12:14 pm

Also, you may want to look at the Permanent Portfolio (lots of threads here about it if you search) and/or just devote a large chunk of your portfolio to gold, probably in physical form. I *hate* gold as an investment but if I'm understanding you correctly you have more money than you know what to do with and really are focused on preservation as opposed to growth. Gold is still probably the best hedge against any number of things-are-very-bad-but-civilization-still-exists scenarios and devoting a quarter of your portfolio to gold still leaves you plenty of money.

Also, if you don't mind answering... If I'm understanding you correctly, you say that you can spend $160K/yr which is 3.6% of your portfolio which puts your portfolio north of $4M and you also say your trade quadrupled your net worth. Does that mean you already had $1 million at your young age still decided to risk it all on those two stocks? :shock:

dbr
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Post by dbr » Tue Jan 19, 2010 12:20 pm

You will probably find that AA within a conservative range doesn't affect things very much. Spending rate and spending rules as you see in FireCalc are more important. Starting at a young age and trying to retire for such a long time is going to require lots of flexibility to respond to events. I doubt most models have much validity for such long retirements.

Please don't confuse a schlock commentator such as Ben Stein with William Bernstein, found at The Efficient Frontier http://www.efficientfrontier.com/ and author of The Retirement Calculator From Hell, which you have found to be a good read.

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walt0903
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Post by walt0903 » Tue Jan 19, 2010 12:24 pm

BarbK wrote:I would have thought one of them was TCK.....it was about $44-48, went down to $2 and is now about $40. I owned it at $48, bought some at $10 and more at $7 then stopped buying. I've sold on the way up - last sell about $39....I just own a little now.

Anyway, Great job on your investment!!!! If this is your source of income, you might want to lock in some profits - maybe up to 25% tax bracket worth ... plus maybe put some stop limits just in case.

BTW - I always did better selling with disregard to taxes....it seems that when I waited for the stock to become LT, I missed out on more profit than taxes paid.

Definitely keep us posted on what you do.
Yeah that is what my wife is telling me too. We are in a way "betting" again that we won't see a 15% drop over the next 30-40 days. I'll look at the exact numbers again to see what the two stock prices would have to go down to, to "break even" on the 15% vs 35%. I will also look at how many shares we can sell to take us to the 20% bracket, and then maybe hold the rest until the 366th day for LT gain. Thanks for those ideas. Will let you know.

Tramper Al
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Post by Tramper Al » Tue Jan 19, 2010 12:27 pm

walt0903 wrote:I gambled purely on a gut feeling early last year, and with the consent of my wife, speculated on just two stocks with our entire life savings in February and March last year and am waiting for Feb/Mar to sell my shares so it is taxed at 20% instead of 35%. With the sell of these shares, my wife and I will be able to choose what we would like to do with our hours during the day.
So, essentially that you are saying is that your entire retirement portfolio is at the moment invested in these two stocks with a time horizon of a few weeks? If the only thing that has to happen for your financial security to be assured is for this sale to occur, I would find a way to sell now, at least effectively.
walt0903 wrote:We are in a way "betting" again that we won't see a 15% drop over the next 30-40 days. I'll look at the exact numbers again to see what the two stock prices would have to go down to, to "break even" on the 15% vs 35%. I will also look at how many shares we can sell to take us to the 20% bracket, and then maybe hold the rest until the 366th day for LT gain. Thanks for those ideas. Will let you know.
I thought someone made this obvious suggestion already, but now I can't find it above. Use options to substantially (maybe even fully) reduce your interim exposure to these two stocks. There are associated costs for this insurance, but it is very short term and I think you will find that amount is far less than the 20% difference in tax rates.

The question is would you sell both stocks today if at the LTCG rate? If yes, then hedge the exposure now. Unwind everything when you reach 1 year for the LTCG rate. Then you have no market effects between now and then. Only a lower tax rate for the gain.

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walt0903
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Post by walt0903 » Tue Jan 19, 2010 12:46 pm

fluffyistaken wrote:Also, you may want to look at the Permanent Portfolio (lots of threads here about it if you search) and/or just devote a large chunk of your portfolio to gold, probably in physical form. I *hate* gold as an investment but if I'm understanding you correctly you have more money than you know what to do with and really are focused on preservation as opposed to growth. Gold is still probably the best hedge against any number of things-are-very-bad-but-civilization-still-exists scenarios and devoting a quarter of your portfolio to gold still leaves you plenty of money.

Also, if you don't mind answering... If I'm understanding you correctly, you say that you can spend $160K/yr which is 3.6% of your portfolio which puts your portfolio north of $4M and you also say your trade quadrupled your net worth. Does that mean you already had $1 million at your young age still decided to risk it all on those two stocks? :shock:
I have always been leery of investing in gold. I am not sure what has caused me to feel this way, but subconsciously I have this aversion to it. I would need to consider some other inflation hedge. Maybe gold/oil mining companies, but gold is heavy, and I can't imagine putting it in a safe that I would need to physically defend.

Yes, I was trying not to put amounts but I realize it is nearly impossible to avoid when making these type of decisions. The initial investments was approx $1.2M. About a third was from savings over the past 13 years. Another third was from selling all of my long-term contracted clients that I had with my erp/consulting business and the rest was from the sale of our house. We actually bought shares twice in February in the two stocks while our house was for sale, and when the house closed, we took the proceeds and bought the remaining shares. My wife says it was going to be a reckless stupid decision if the companies went bankrupt, or a reckless lucky decision if they ended up doing well. We were lucky and reckless. Definitely not going to repeat this again. I really don't know what I was thinking now that it has happened. I think it was "There is just no way these two companies are going to zero." Obviously they could have, as GM did. Not going to roll the dice anymore. That is for sure.

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walt0903
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Post by walt0903 » Tue Jan 19, 2010 12:56 pm

Tramper Al wrote:
walt0903 wrote:I gambled purely on a gut feeling early last year, and with the consent of my wife, speculated on just two stocks with our entire life savings in February and March last year and am waiting for Feb/Mar to sell my shares so it is taxed at 20% instead of 35%. With the sell of these shares, my wife and I will be able to choose what we would like to do with our hours during the day.
So, essentially that you are saying is that your entire retirement portfolio is at the moment invested in these two stocks with a time horizon of a few weeks? If the only thing that has to happen for your financial security to be assured is for this sale to occur, I would find a way to sell now, at least effectively.
walt0903 wrote:We are in a way "betting" again that we won't see a 15% drop over the next 30-40 days. I'll look at the exact numbers again to see what the two stock prices would have to go down to, to "break even" on the 15% vs 35%. I will also look at how many shares we can sell to take us to the 20% bracket, and then maybe hold the rest until the 366th day for LT gain. Thanks for those ideas. Will let you know.
I thought someone made this obvious suggestion already, but now I can't find it above. Use options to substantially (maybe even fully) reduce your interim exposure to these two stocks. There are associated costs for this insurance, but it is very short term and I think you will find that amount is far less than the 20% difference in tax rates.

The question is would you sell both stocks today if at the LTCG rate? If yes, then hedge the exposure now. Unwind everything when you reach 1 year for the LTCG rate. Then you have no market effects between now and then. Only a lower tax rate for the gain.
Yes Tramper Al, everything. We still have some nights where we do not sleep very well thinking we will wake up and see a large correction to the downside. Especially with what happened last week when JP Morgan announced and stocks went down. They seem to have recovered today but this day-to-day watching isn't healthy.

fluffyistaken talked about options too. I just sent an email asking for option access. It is not a feature on my account right now. I am not familiar with options but will look at them today. If today was the 366th day they both would have been sold at start of the day.

We have margin at 5.5% APY. We could on margin, short sale a third of our portfolio value of the two stocks, that would reduce our exposure 33%. If it drops over the next 30-40 days, it would reduce the drop by a third, and if it went up, we would only experience 2/3's of the gains over the next 30-40days. Not sure how much percentage options reduces exposure, but will look at it right away.

kd2008
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Post by kd2008 » Tue Jan 19, 2010 12:57 pm

Another thing you have done very well I think is to have a large chunk to invest in the first place. Equating withdrawal rate of $160k/yr to 3.6%, gives a portfolio size of ~4.5 million. So that gave 1.125 mill to begin with.

Not many 32 yr olds can claim to have that much at such a young age.

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walt0903
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Post by walt0903 » Tue Jan 19, 2010 1:04 pm

dbr wrote:You will probably find that AA within a conservative range doesn't affect things very much. Spending rate and spending rules as you see in FireCalc are more important. Starting at a young age and trying to retire for such a long time is going to require lots of flexibility to respond to events. I doubt most models have much validity for such long retirements.

Please don't confuse a schlock commentator such as Ben Stein with William Bernstein, found at The Efficient Frontier and author of The Retirement Calculator From Hell, which you have found to be a good read.
dbr, I agree. We seem to find 45/55 to 55/45 very similar on a year by year basis. We enjoy firecalc when looking at the 30 and 40 year time frames since more comparisons are available. What fascinates me is when I start looking at the rev9 lazy portfolio tab and see so many different variables and that even more conservative portfolios outperform aggressive portfolios.

My apologies on The Efficient Frontier author. I definitely meant William Bernstein. Not sure why my brain thought of Ben Stein!

Tramper Al
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Post by Tramper Al » Tue Jan 19, 2010 1:09 pm

walt0903 wrote:fluffyistaken talked about options too. I just sent an email asking for option access. It is not a feature on my account right now. I am not familiar with options but will look at them today. If today was the 366th day they both would have been sold at start of the day.

We have margin at 5.5% APY. We could on margin, short sale a third of our portfolio value of the two stocks, that would reduce our exposure 33%. If it drops over the next 30-40 days, it would reduce the drop by a third, and if it went up, we would only experience 2/3's of the gains over the next 30-40days. Not sure how much percentage options reduces exposure, but will look at it right away.
Well, I'm starting to get nervous for you now. I didn't look up B of A, but it seems to me Ford is up about 10-fold since around the time you bought it? So maybe that $600K is $6M or so? Up about 1.5% (or $90K) just so far today?

Personally, if I were you I would not be concerned about capturing any % of the gains in the next 30-40 days. You are ready to be out, after all. I am not experienced in selling short, so am uncertain if that is the best approach (vs. buying puts or selling calls). Maybe you can buy Saab? Not the stock but the company. There are people on this board that can help you work out the hedge if that's what you want.
Last edited by Tramper Al on Tue Jan 19, 2010 1:11 pm, edited 1 time in total.

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walt0903
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Post by walt0903 » Tue Jan 19, 2010 1:10 pm

kd2008 wrote:Another thing you have done very well I think is to have a large chunk to invest in the first place. Equating withdrawal rate of $160k/yr to 3.6%, gives a portfolio size of ~4.5 million. So that gave 1.125 mill to begin with.

Not many 32 yr olds can claim to have that much at such a young age.
Thank you for the compliment. I realize that saving the money in the first place was important and difficult. For the last few years I have not had much time to spend with my wife and kids working as much as I was. One of the other most difficult decisions we have come to is not telling our family about this luck we have experienced over the past year in the stock market. It has been difficult to keep from them, with me selling my business, our home, and us renting a house now. But we want to avoid any type of negative effects that having a lot of new money could have with family members down the road. They live in other states so that has helped with it not being much of an issue.

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Post by Tramper Al » Tue Jan 19, 2010 1:13 pm

walt0903 wrote:One of the other most difficult decisions we have come to is not telling our family about this luck we have experienced over the past year in the stock market.
I think for many people the difficult part about making a killing like this would be to admit luck and walk away from the dark side for good, never to speculate so wildly ever again. I hope you can do this!

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fluffyistaken
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Post by fluffyistaken » Tue Jan 19, 2010 1:18 pm

walt0903 wrote:
fluffyistaken wrote:Also, you may want to look at the Permanent Portfolio (lots of threads here about it if you search) and/or just devote a large chunk of your portfolio to gold, probably in physical form. I *hate* gold as an investment but if I'm understanding you correctly you have more money than you know what to do with and really are focused on preservation as opposed to growth. Gold is still probably the best hedge against any number of things-are-very-bad-but-civilization-still-exists scenarios and devoting a quarter of your portfolio to gold still leaves you plenty of money.

Also, if you don't mind answering... If I'm understanding you correctly, you say that you can spend $160K/yr which is 3.6% of your portfolio which puts your portfolio north of $4M and you also say your trade quadrupled your net worth. Does that mean you already had $1 million at your young age still decided to risk it all on those two stocks? :shock:
I have always been leery of investing in gold. I am not sure what has caused me to feel this way, but subconsciously I have this aversion to it. I would need to consider some other inflation hedge. Maybe gold/oil mining companies, but gold is heavy, and I can't imagine putting it in a safe that I would need to physically defend.

Yes, I was trying not to put amounts but I realize it is nearly impossible to avoid when making these type of decisions. The initial investments was approx $1.2M. About a third was from savings over the past 13 years. Another third was from selling all of my long-term contracted clients that I had with my erp/consulting business and the rest was from the sale of our house. We actually bought shares twice in February in the two stocks while our house was for sale, and when the house closed, we took the proceeds and bought the remaining shares. My wife says it was going to be a reckless stupid decision if the companies went bankrupt, or a reckless lucky decision if they ended up doing well. We were lucky and reckless. Definitely not going to repeat this again. I really don't know what I was thinking now that it has happened. I think it was "There is just no way these two companies are going to zero." Obviously they could have, as GM did. Not going to roll the dice anymore. That is for sure.
Wow that's quiet the story. Again congrats and lock in the gains ASAP. It wouldn't be fun to have an even crazier story of having it all go to zero because you wanted to save on taxes.

Also, as far as hedging against very bad times, I don't think gold miners or oil drillers are quite the same hedge as actual physical gold. Just look at what was happening to them in the fall of 2008. And $1M in gold is only about 60 pounds, so it's not like you'd need a Scrooge McDuck size safe to keep it all. Most likely (and hopefully) it will end up a useless "investment" but it could end up being the difference between misery and comfortable life in some unlikely but not impossible scenarios.

Tramper Al
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Post by Tramper Al » Tue Jan 19, 2010 1:23 pm

fluffyistaken wrote:Also, as far as hedging against very bad times, I don't think gold miners or oil drillers are quite the same hedge as actual physical gold. Just look at what was happening to them in the fall of 2008. And $1M in gold is only about 60 pounds. . .
A $4M+ taxable investment in the 4 corners of the permanent portfolio today? I predict the OP would become something of an expert in the tax loss harvest / wash sale rules by the end of this very year. Not that there's anything wrong with that.

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walt0903
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Post by walt0903 » Tue Jan 19, 2010 1:27 pm

Tramper Al wrote:
walt0903 wrote:fluffyistaken talked about options too. I just sent an email asking for option access. It is not a feature on my account right now. I am not familiar with options but will look at them today. If today was the 366th day they both would have been sold at start of the day.

We have margin at 5.5% APY. We could on margin, short sale a third of our portfolio value of the two stocks, that would reduce our exposure 33%. If it drops over the next 30-40 days, it would reduce the drop by a third, and if it went up, we would only experience 2/3's of the gains over the next 30-40days. Not sure how much percentage options reduces exposure, but will look at it right away.
Well, I'm starting to get nervous for you now. I didn't look up B of A, but it seems to me Ford is up about 10-fold since around the time you bought it? So maybe that $600K is $6M or so? Up about 1.5% (or $90K) just so far today?

Personally, if I were you I would not be concerned about capturing any % of the gains in the next 30-40 days. You are ready to be out, after all. I am not experienced in selling short, so am uncertain if that is the best approach (vs. buying puts or selling calls). Maybe you can buy Saab? Not the stock but the company. There are people on this board that can help you work out the hedge if that's what you want.
Thanks, we find ourselves watching CNBC or going to their website in some fashion all day every day now. It can sometimes even annoy us to watch but we find ourselves not very successful in changing the channel.

Yes in hindsight if we would have put it all in Ford instead of splitting it up, we would have even more, and less if vice versa. We invested $1.1M, about 500k in Ford, and 600k in Bank of America, kept 100k for living expenses, hoping what has happened happen, but never realized it would have gone up as much as it has in so little time. We will have to pay income taxes of either 800-825k @ 20% or $1.1-1.2M @ 30-35% and will be have to safely invest approx 4-4.5M after taxes depending on the tax bracket. We definitely are not trying to intentionally capture any more upside.

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fluffyistaken
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Post by fluffyistaken » Tue Jan 19, 2010 1:31 pm

Tramper Al wrote:
fluffyistaken wrote:Also, as far as hedging against very bad times, I don't think gold miners or oil drillers are quite the same hedge as actual physical gold. Just look at what was happening to them in the fall of 2008. And $1M in gold is only about 60 pounds. . .
A $4M+ taxable investment in the 4 corners of the permanent portfolio today? I predict the OP would become something of an expert in the tax loss harvest / wash sale rules by the end of this very year. Not that there's anything wrong with that.
No doubt. But as questionable as PP is at growing wealth, I think it's hard to top it at preserving wealth which I think what OP's focus should be at this point. My wife is a very creative shopper :D but even she would get exhausted trying to spend $160K year after year. I'd take $120K/yr at 99% probability of safety over $160K/yr at 90-95%.

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Post by HomerJ » Tue Jan 19, 2010 1:40 pm

That was an incredibly crazy thing to do... If you had 1.2 million at the bottom of the market last March, you'd be up to 1.7 million or so even with just plain old conservative 50/50 Total Stock Index / Total Bond Index..

You would have been easily on target to retire at 40-45 with your 4 million... even without saving another cent... with the worst downside probably being you might have to work to 45-50 instead...

Instead you took a chance of losing ALL of it, and having to start over completely from scratch...

Wow...

Almost makes me sick thinking about it... I can't imagine the heartache you must have had living it... What kept you from selling after doubling the money?

Congrats on your good fortune... Sounds like you're smart enough to put it to good use... Enjoy your time with your children! Don't risk it again!

If I was in your situation I'd probably just go 50% TSM/50% TBM and pay the taxes... Or maybe split the bond portion into Tax-Exempt Bond Index and TBM.

I'd also probably set up stop-losses right now instead of risking another downturn to save on taxes...

Don't take this as a negative post... I'm glad for you the same way I'm glad for those Deal or No Deal contestests who risk $300,000 in the hand for a chance for a million (or $10) and win... Still drives me crazy to see them take that risk though... :)

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Post by walt0903 » Tue Jan 19, 2010 2:01 pm

fluffyistaken wrote:
Tramper Al wrote:
fluffyistaken wrote:Also, as far as hedging against very bad times, I don't think gold miners or oil drillers are quite the same hedge as actual physical gold. Just look at what was happening to them in the fall of 2008. And $1M in gold is only about 60 pounds. . .
A $4M+ taxable investment in the 4 corners of the permanent portfolio today? I predict the OP would become something of an expert in the tax loss harvest / wash sale rules by the end of this very year. Not that there's anything wrong with that.
No doubt. But as questionable as PP is at growing wealth, I think it's hard to top it at preserving wealth which I think what OP's focus should be at this point. My wife is a very creative shopper :D but even she would get exhausted trying to spend $160K year after year. I'd take $120K/yr at 99% probability of safety over $160K/yr at 90-95%.
I tell my wife that our budget is overly conservative, that we couldn't possibly spend that much per year, and she always comes back jokingly and similing saying "I'll show you how!" We will likely spend less than this, as I even raised our grocery budgets and every other variable spending category, just so that we couldn't possibly go "over" budget. So the 160K/yr may end up being more like 140k, just can't say 100% for sure yet.

What concerns me when I look at firecalc is they recommend for 40yr+ time frames that you need 65-75% in stocks to have a good safe withdrawl rate. I would prefer to have 45-55% in stocks, so that is why I lowered the rate to 3.6% of portfolio and then went with the radio button "Percentage of Remaining Portfolio:" on Firecalc's Spending Model tab, since we are OK with not having "constant spending power" during the years. If the 3.6% withdrawl rate in 'real' terms dipped to 120k, we would just forgo all the expensive vacations and reduce shopping and entertainment, and when during boom years, we probably won't even spend more than the 160k in real terms, since we will probably find it difficult enough to even spend that now when I look at our budget spreadsheets.

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Post by walt0903 » Tue Jan 19, 2010 2:12 pm

rrosenkoetter wrote:That was an incredibly crazy thing to do... If you had 1.2 million at the bottom of the market last March, you'd be up to 1.7 million or so even with just plain old conservative 50/50 Total Stock Index / Total Bond Index..

You would have been easily on target to retire at 40-45 with your 4 million... even without saving another cent... with the worst downside probably being you might have to work to 45-50 instead...

Instead you took a chance of losing ALL of it, and having to start over completely from scratch...

Wow...

Almost makes me sick thinking about it... I can't imagine the heartache you must have had living it... What kept you from selling after doubling the money?

Congrats on your good fortune... Sounds like you're smart enough to put it to good use... Enjoy your time with your children! Don't risk it again!

If I was in your situation I'd probably just go 50% TSM/50% TBM and pay the taxes... Or maybe split the bond portion into Tax-Exempt Bond Index and TBM.

I'd also probably set up stop-losses right now instead of risking another downturn to save on taxes...

Don't take this as a negative post... I'm glad for you the same way I'm glad for those Deal or No Deal contestests who risk $300,000 in the hand for a chance for a million (or $10) and win... Still drives me crazy to see them take that risk though... :)
Yeah, the moment we did it we were having buyers remorse. It wasn't until we started seeing it go up so quickly that we started to feel OK. So thankful it didn't turn back down. I still get sick thinking about the next 30-40 days. I find myself waiting until midnight to goto sleep so I can see what Europe is doing, hoping its a positive open for them so I can sleep better. What kept us from selling was the fact that it happened so quickly. We weren't expecting that, and then ran figures and decided we wanted to try to wait for LT capital gains tax rate, and if it just plateaued for the remainder of the year we would still be very much ahead of where we started. Instead it kept going up and we just kept counting down the days.
We liked Deal or No Deal when it was on, not sure if it is still on?, but yes, we felt the same way about the contestants. We would call them crazy if they took the 300k and then end up having the million in their case, but then would also call them crazy if they went for it and lost everything.

retired recently
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Post by retired recently » Tue Jan 19, 2010 2:13 pm

Congratulations!! I am 41 and am in a pretty similar situation as yourself (or where you will be if those stocks don't crash in the next few weeks) although I did not get there quite so fast. Seems that it is worth it to use options to lock those gains in. Surely you can get it set up pretty quickly...

My goal is to increase my portfolios value annually by inflation plus 0.5 to 1% plus withdraw enough to comfortably live on. I look every six months to see if I am above or below and adjust my spending accordingly. I am only a bit over a year into doing this but it seems to have worked so far and I think it should work going forward. My withdrawal rate is about 3.5% which is fine for us.

In setting my asset allocation, I used a higher % than my age in bonds given that I do not intend to work and am not at a typical retirement age. My bond allocation is currently heavily in inflation indexed and short term bonds. I split my stock funds into US/Intl equally. I almost exclusively use Vanguard for my funds given their low expense rations.

I think you will find yourself worrying more and more about inflation. I think that I-bonds might be very good for you to consider to invest in although the annual limits are low but still over time it adds up. Plus if you use for your kids education, I think tax free.

Good Luck!!!

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Random Musings
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Post by Random Musings » Tue Jan 19, 2010 4:06 pm

For all the heartwarming stories of four-baggers, there are many more in the negative direction.

At least Ford is the best of American car makers, Bank of America is a gift from the American Taxpayers and the continuing long-term decline of the dollar.

RM

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renditt
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Post by renditt » Tue Jan 19, 2010 4:07 pm

Congrats even though what you did is completely crazy!

Personally I can't believe you will actually wait another 30 days to get a better tax rate. Either get protection immediately or sell at least some of it now.

But then I would have sold once they doubled and would have missed most of the run up, so don't listen to me...

One last word: Why would you keep so much in stocks once you have $4m??? How will you feel if stocks go down 50% and you lose a cool $1m? I would probably go 25:75. And don't worry about the 3.5% or whatever, surely you will work again at some point in the future, even if it is just for fun.

good luck

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Post by chuck-lyn » Tue Jan 19, 2010 4:23 pm

Hi Walt and congratulations on your nerve and good fortune!

I am not a stock trader or gambler (much) but I think there is something called a "trailing stop loss" capability or somesuch.

If it were me, I would do something immediately if not sooner to insure against a big loss. Markets tend to fall much more quickly than they tend to rise. Look at the blivit in 1987 and the sawtooth shape market in the following year.

That said, on to your question of what to do with the money. There will be as many options as there are responders. I like Wellington very much and use it in my taxable myself. It pays about 3.4% on the NAV as best I recall. This payout consists of dividends and capital gains but I don't know the percentage of each or how much is qualified currently. At a 65/35 stock/bond allocation, I guestimate about 8% nominal CAGR going forward, which could give you some inflation fighting growth. Wellington has about 13% foreign stocks, which is light but better than nothing. The fund invests mostly in large cap value stocks. If you want more foreign and small cap exposure you could use Wellington as your core and add additional funds to suit your new nerve and taste.

Best of luck to you and I hope all goes well!

Cheers,

charlie

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simba
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Post by simba » Tue Jan 19, 2010 5:15 pm

Wow. Congratulations. You must have some nerve to invest 1.1M in 2 stocks and risk it all ;)
Thank your stars and move on.

Read some of the books listed in the reading list. Check out Taylor's investment gems.

As others have said, sell 25/50 or even 100% and capture your profits.

As far as your asset allocation is concerned, check Bill Bernstein's Taxable Ted portfolio he outlined in his books.

Don't be in a hurry to invest it all. Get educated.

-HTH
Simba

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Post by Chip » Wed Jan 20, 2010 7:35 am

We could on margin, short sale a third of our portfolio value of the two stocks, that would reduce our exposure 33%. If it drops over the next 30-40 days, it would reduce the drop by a third, and if it went up, we would only experience 2/3's of the gains over the next 30-40days.
I'm not positive, but I believe this sort of strategy is considered a constructive sale. i.e. if you are long Ford in one account and short Ford in another you are considered to have actually sold the stock and CG taxes are due. So you don't avoid the STCG by doing this. I think Tramper Al's suggestion of using options is probably a good one, but if I were you I would carefully review the constructive sale rules before doing anything.

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Post by Tramper Al » Wed Jan 20, 2010 9:42 am

Chip wrote:
We could on margin, short sale a third of our portfolio value of the two stocks, that would reduce our exposure 33%. If it drops over the next 30-40 days, it would reduce the drop by a third, and if it went up, we would only experience 2/3's of the gains over the next 30-40days.
I'm not positive, but I believe this sort of strategy is considered a constructive sale. i.e. if you are long Ford in one account and short Ford in another you are considered to have actually sold the stock and CG taxes are due. So you don't avoid the STCG by doing this. I think Tramper Al's suggestion of using options is probably a good one, but if I were you I would carefully review the constructive sale rules before doing anything.
Yes, I could see how that might be the case, as side by side long and short positions would sum to zero. Perhaps the additional variables involved in the option pricing (implied volatility, time value of money, etc.) which result in an imperfect hedge will pass muster. I did once use puts to hedge several long positions I would sell in 2 months (identical STCG/LTCG issue). However, the securities involved were index ETFs, so it was not necessary to use what was substantially identical.

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Post by Nermal » Wed Jan 20, 2010 11:05 am

You did something most non-bogleheaded -- you made a massive bet on just two stocks, on margin. You timed your bets perfectly and made a killing. Yet, despite the runaway success of your non-bogleheaded strategy, you saw the bogle-light. You are blessed indeed.

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Post by walt0903 » Wed Jan 20, 2010 12:15 pm

chuck-lyn wrote:Hi Walt and congratulations on your nerve and good fortune!

I am not a stock trader or gambler (much) but I think there is something called a "trailing stop loss" capability or somesuch.

If it were me, I would do something immediately if not sooner to insure against a big loss. Markets tend to fall much more quickly than they tend to rise. Look at the blivit in 1987 and the sawtooth shape market in the following year.

That said, on to your question of what to do with the money. There will be as many options as there are responders. I like Wellington very much and use it in my taxable myself. It pays about 3.4% on the NAV as best I recall. This payout consists of dividends and capital gains but I don't know the percentage of each or how much is qualified currently. At a 65/35 stock/bond allocation, I guestimate about 8% nominal CAGR going forward, which could give you some inflation fighting growth. Wellington has about 13% foreign stocks, which is light but better than nothing. The fund invests mostly in large cap value stocks. If you want more foreign and small cap exposure you could use Wellington as your core and add additional funds to suit your new nerve and taste.

Best of luck to you and I hope all goes well!

Cheers,

charlie
Hi chuck-lyn,

Thanks for the info about Wellington and stop losses. I have been reading about options and will have "option access" tomorrow but it is quite confusing to me. I went online just now and set two stop limit orders on both stocks. I took the 12PM price, did the math, and placed the limit orders at 5% below current price. 15.68 for Bank of America and 11.00 for Ford. Hopefully it doesn't drop 5% between now and the LT tax rate, but at least I can now work with three sets of precise numbers, best case if they both can hold up another month, middle case if one sells early and one doesn't & worst case if both sell early. Will be extremely happy under any of these situations. I must say it feels much better to have these orders placed.

I am going to go read some more posts and try to work on spreadsheets now. Thank's for your input!

Walt

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Post by fluffyistaken » Wed Jan 20, 2010 12:22 pm

Just FYI, a stop-loss or a stop-limit order does not guarantee execution at the set price. If something horrible happens to BoA or Ford overnight it's conceivable that their stock opens 50% or 80% down and that's price you'll get on a stop-loss order, not your set price. And if you have a stop-limit order then it simply wouldn't execute. By no means do I think it's likely to happen, but it's not impossible.

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Post by Arbez » Wed Jan 20, 2010 3:10 pm

Your alternative (Total Stock Market Index, FTSE-ex US Fund, Small-Cap Value Fund, Tax-Exempt Intermediate Fund) will probably be better than Wellington after taxes. Wellington bonds might not be what you want: long duration corporate bonds. Taxes on dividends will probably go up next year to ordinary income tax rates. Muni bonds will probably give you a better after tax return.

For example: VG Tax-Exempt Intermediate Fund (VWITX) yield is now at 3.79%, and a corporate bond fund like RPSIX has a yield of 4.46%. With a 40% tax rate, the difference in after-tax yield is 1.11%. So, the impact of bond choice on your overall portfolio might be in the range of 0.5%.

Also, consider other investments:
Look into 529 accounts for your children.
Fully fund your Roth IRA accounts. Even though the amount you can contribute yearly may seem low, it will snowball over time. And IRAs have some advantages for taxes and bankruptcy protection. If you get sued the IRA is protected in some cases.

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Post by Tramper Al » Wed Jan 20, 2010 3:21 pm

fluffyistaken wrote:Just FYI, a stop-loss or a stop-limit order does not guarantee execution at the set price.
Yeah, I see what you (Walt) are trying to go with this, but I'm not sure it does much for you. If your priority is to retain 95% of the current value, then the surest way would be to sell now at 100%.

The added cost of STCG vs. LTCG is something like 15% of the gains? So the stop loss event would actually cost you at least the 5% loss plus the 15% extra in taxes?

I don't think that setting up a downside-protecting hedge for a liquid stock like Ford is going to have an implied cost nearly this high.

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Post by Tramper Al » Wed Jan 20, 2010 3:25 pm

fluffyistaken wrote:Just FYI, a stop-loss or a stop-limit order does not guarantee execution at the set price.
Yeah, I see what you (Walt) are trying to go with this, but I'm not sure it does much for you. If your highest priority is to retain 95% of the current pre-tax value, then the surest way would be to sell now at 100%.

The added cost of STCG vs. LTCG is something like 15% of the gains? So the stop loss event would actually cost you at least the 5% loss plus the 15% extra in taxes?

I don't think that setting up a downside-protecting hedge for a liquid stock like Ford is going to have an implied cost nearly this high.

I have a pretty good (not great) book called something like "Options for the Conservative Investor". It covers all the basics, pricing, mechanics and what not. Definitely some stuff on hedging unwanted portfolio exposure too. I think the I-want-to-sell STCG/LTCG scenario is even in there. I could report back with the author/title tonight if there is any interest.

Actually, here it is:
http://www.amazon.com/Options-Trading-C ... 517&sr=8-1

The problem with almost all of the other Options how-to books is that they basically start off with something like "so you have a hunch that stock X is going up, this is how you act on your prediction to make big gains", and that sort of thing. You know, like you last March!

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Post by walt0903 » Wed Jan 20, 2010 10:45 pm

Tramper Al wrote:
fluffyistaken wrote:Just FYI, a stop-loss or a stop-limit order does not guarantee execution at the set price.
Yeah, I see what you (Walt) are trying to go with this, but I'm not sure it does much for you. If your highest priority is to retain 95% of the current pre-tax value, then the surest way would be to sell now at 100%.

The added cost of STCG vs. LTCG is something like 15% of the gains? So the stop loss event would actually cost you at least the 5% loss plus the 15% extra in taxes?

I don't think that setting up a downside-protecting hedge for a liquid stock like Ford is going to have an implied cost nearly this high.

I have a pretty good (not great) book called something like "Options for the Conservative Investor". It covers all the basics, pricing, mechanics and what not. Definitely some stuff on hedging unwanted portfolio exposure too. I think the I-want-to-sell STCG/LTCG scenario is even in there. I could report back with the author/title tonight if there is any interest.

Actually, here it is:
www dot amazon dot com/Options-Trading-Conservative-Investor-Increasing/dp/0137042000/ref=sr_1_1?ie=UTF8&s=books&qid=1264019517&sr=8-1

The problem with almost all of the other Options how-to books is that they basically start off with something like "so you have a hunch that stock X is going up, this is how you act on your prediction to make big gains", and that sort of thing. You know, like you last March!
Thanks Tramper Al! I just ordered it w/ overnight delivery. I think I just made the amazon window for it to arrive tomorrow. I did more reading and it looks like I would want to buy February put options for Bank of America at 16.00 and Ford at 11.00. I'll read the book as soon as it arrives. From what I read, I think each day as it gets closer the options decrease in value(premium), so would be cheaper to buy them each day as it gets closer to the third Friday of the month. Thank you for the reference!!

To everyone, I have been reading more about how standard deviation(volatility) affects the end CAGR result and "our sleep" and when we look at the backtested-rev9a portfolios, we are somewhere between Wellington and Wellesley with regards to the comfort on downside risk. I think we are going to try to put together a 50/50 portfolio, maybe 40/60, but it appears 50/50 offers 0.5% real return portfolio growth after the 3.6% withdrawal rate, which may help with health care premiums as they rise much faster than inflation.

Right now we are in the spreadsheet and looking at two portfolios:

Taxable Account Portfolio One (50/50):

15% VG Total US Market Admiral VTSAX
10% VG Small Cap Value VISVX
15% VG Intl Developed VDMIX
10% VG Emerging Market Admiral VEMAX
25% VG Intermediate-Term Treasury Admiral VFIUX
25% VG Total Bond Market Admiral VBTLX

If I read the spreadsheet correctly, it has 10.56% Std. Dev. with average return of 11.45% (Down Std. Dev. of 5.07% and Up Std. Dev. of 6.63%), with CAGR of 10.94%. This was for 1972-2009.

AND

Taxable Account Portfolio Two (40/60):

10% VG Total US Market Admiral VTSAX
10% VG Small Cap Value VISVX
10% VG Intl Developed VDMIX
10% VG Emerging Market Admiral VEMAX
30% VG Intermediate-Term Treasury Admiral VFIUX
30% VG Total Bond Market Admiral VBTLX

If I read the spreadsheet correctly, it has 8.99% Std. Dev. with average return of 11.01% (Down Std. Dev. of 3.93% and Up Std. Dev. of 6.05%), with CAGR of 10.64%. This was for 1972-2009.

I think if we went with a portfolio similar to one of these then we would need to have all the dividends deposited into a Money Market Account and each December we would transfer the MMA balance to our Checking Acct for next years budget. If allocations were off then need to buy/sell specific funds to correct that and if the MMA did not have enough funds for next years budget, sell whichever fund that was above the asset allocation % and use those funds to increase the money market balance till it met the 3.6% of portfolio.

Arbez,

I will create a sample return with TurboTax and input dividends as non-qualified, since I think they may expire at the end of this year, and see what tax bracket changes occur. I think maybe if the fixed income portfolio was tax-exempt, the dividends from the stock portion may not raise the tax bracket high enough and the tax-exempt dividends would lose their value. Not really sure till I test. Thank you for all the advice!

Walt

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Post by avalpert » Wed Jan 20, 2010 11:14 pm

Congrtulations on your good luck and I don't want to sound like a jerk but I feel someone should point this out for any other readers - what you did may have taken nerves but it was also quite stupid and reckless with two children to care for.

As for allocation and management going forward - I would suggest 3.6% is a bit aggresive a withdrawl rate given your time horizon. You probably would need at leat 60/40 for that to last - and hope we don't see a repeat of the last decade in your next four. When you run simulations, what percent of the time do you run out of money? Have you modeled in any costs for the children to go to college?

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Post by BarbK » Thu Jan 21, 2010 8:58 am

avalpert wrote:Congrtulations on your good luck and I don't want to sound like a jerk but I feel someone should point this out for any other readers - what you did may have taken nerves but it was also quite stupid and reckless with two children to care for.
Geez!!! No doubt it was definitely risky, but he's a young guy, had acquired over $1M before, so he is definitely capable of doing it again (being female, this is the only reason why I think his wife went along with it).

--
BTW - Did you see how many hits, this thread has? There must be a lot of people following it.

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Post by avalpert » Thu Jan 21, 2010 12:01 pm

Did your BAC stop-loss execute today as planned?

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walt0903
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Post by walt0903 » Thu Jan 21, 2010 1:02 pm

avalpert wrote:Did your BAC stop-loss execute today as planned?
Hi Avalpert,

Yes it went through about an hour ago. I also made the decision to sell Ford at 11.20 shortly after the stop loss on Bank of America occurred. Deleted my middle and best case scenario's out of spreadsheet just now.

My options investing book from amazon hasn't arrived yet. Funny!

Walt

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Post by m_j_paquette » Thu Jan 21, 2010 1:58 pm

walt0903 wrote:
avalpert wrote:Did your BAC stop-loss execute today as planned?
Hi Avalpert,

Yes it went through about an hour ago. I also made the decision to sell Ford at 11.20 shortly after the stop loss on Bank of America occurred. Deleted my middle and best case scenario's out of spreadsheet just now.

My options investing book from amazon hasn't arrived yet. Funny!

Walt
Congratulations! No, really. You've done a heck of a job, and for now you're safe in cash and have a great portfolio lined up going forward.

I'd say the next step is for you and your wife to get a couple of nights of sound, worry-free sleep while the trade settles and the market fluctuates without you.

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Post by mikep » Thu Jan 21, 2010 2:46 pm

I see little reason to own both Intermediate treasury and total bond market since total bond includes ~1/3 treasuries.

For 4MM if you want this to keep up with inflation you badly need some inflation protected bonds. I would suggest loading up on some TIPS. Maybe replace intermediate treasury with TIPS. Half TIPS and half TBM is the most common bond allocation recommendation here. Also could get your annual fill of I-bonds every year for better tax treatment.

Also I agree on holding 20-25% stocks, maybe eliminating tax inefficient small value with that amount of money.

Other poster mentioned to contribute to an IRA, which you cannot do without any earned income.

I'm sure there are many more stories like the OP's who went on the other side, like GM.

To anyone getting ideas: Don't try this at home.
Last edited by mikep on Thu Jan 21, 2010 2:56 pm, edited 1 time in total.

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Post by Tramper Al » Thu Jan 21, 2010 2:53 pm

walt0903 wrote:
avalpert wrote:Did your BAC stop-loss execute today as planned?
Hi Avalpert,

Yes it went through about an hour ago. I also made the decision to sell Ford at 11.20 shortly after the stop loss on Bank of America occurred. Deleted my middle and best case scenario's out of spreadsheet just now.

My options investing book from amazon hasn't arrived yet. Funny!

Walt
Wait, so you are out? No more Ford or B of A and the cost was the 5% loss plus STCG taxes? You should sleep better now.

Probably not a bad outcome at all, and we appreciate your tax dollars to help reduce the deficit.

Now I'd be a little restless until I had my new AA implemented. Two days of carnage and all that. But that's just me.

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Post by chuck-lyn » Thu Jan 21, 2010 3:40 pm

Walt, congratulations!!

I think you should sit on that money for awhile until you are very sure what you want your AA to be. The most important decision is the split between stocks and bonds. That decision will dominate your expected returns going forward. The specific funds are secondary as long as you are well diversified.

Keep in mind that all of your buy-sell transactions in the future will be taxable events in your taxable account. Over time as your stock funds grow, your capital gains will grow also, causing angst when you need to rebalance. Over long periods of time, many people become locked in to their fund holdings. They may wish to transfer to some other funds and are inhibited because of the tax consequences. So choose wisely now.

For that reason, I like balanced funds in a taxable account IF you need the income distributions for living expenses anyway. The primary advantage of balanced funds is that they are simple and rebalance for you without causing taxable events. Some people will rightly argue that you can always sell some of your "winners" each year to provide living expenses and to rebalance. I like both Wellington or Wellesley because of their long history of success (not a guarantee, of course) as a core holding, augmented by other funds to broaden the exposure.

My own choice, and I am 75, is to use Wellington and Mid-Cap Blend in my taxable and all bond funds in my IRA and ROTH. For maximum simplicity, you could just use one of Vanguard's Target Retirement funds with the AA you want now. Over time these funds gradually become less agressive, shifting to less stock and more bonds.

You have almost reached the finish line by locking in your gain. Now take a few days or weeks even to settle on your long term strategy. Continue to seek advise on this forum and test out your ideas yntil you are sure.

Good luck and Cheers,

charlie

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englishgirl
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Post by englishgirl » Thu Jan 21, 2010 4:00 pm

I know it seems like peanuts, but I would immediately put $20,000 into traditional non-deductible IRAs. ($5k each for 2009 and 2010). Then just keep adding the max each year. And convert to Roth each year that this is still possible, paying the taxes as you go.

Right now it doesn't really affect the amount of tax deferred space, but after 30 years as the rest of your portfolio starts shrinking, it could make a difference. And IRA's are often protected in the event of bankruptcy and other similar judgments - while bankruptcy does not seem on the cards right now, by becoming wealthy you have become more of a target for people to sue you, so I would try to keep some assets protected.

And congratulations!
Sarah

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Post by Tramper Al » Thu Jan 21, 2010 4:05 pm

chuck-lyn wrote:Over time as your stock funds grow, your capital gains will grow also, causing angst when you need to rebalance. Over long periods of time, many people become locked in to their fund holdings. They may wish to transfer to some other funds and are inhibited because of the tax consequences. So choose wisely now.
While that's good advice of course, you do understand that the OP has just today realized the largest taxable short term capital gains of his lifetime. Or mine for that matter. After this, it's hard to imagine he'll have a lot of angst about paying a bit in taxes to keep his portfolio where he wants it to be. I thought that was what the interesting part of the thread was all about.

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