Windfall

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
CrazyQBall
Posts: 5
Joined: Thu Aug 16, 2007 12:01 am

Windfall

Post by CrazyQBall »

Hey guys, I am in my mid-20s and I was fortunate enough to come across a sizeable windfall from the family. In my current situation, I have a very comfortable living standard, I max out both my 401(k) and Roth IRA every year, but I am concerned with how to properly invest this windfall.

Specifically, I cannot contribute anymore to my non-taxable accounts, so I am really trying to find ways to invest in tax minimized funds and investments with low turnover.

A couple more things to add: My AA right now is about 75/25 and will get more conservative over time. Also, the main reason I am hesitant to invest this money in the stock market is that it might be used for grad school in 3-5 years, so I am reluctant to leave it to market risk.

Any input would be appreciated.

Thanks.
TimDex
Posts: 936
Joined: Mon Feb 19, 2007 5:27 pm

x

Post by TimDex »

If you're going to use the money within 3-5 years, then I would put it in a money market fund, either Vanguard's Prime MM or Treasury MM.

What you're not contemplating using in the near future, coordinate it with your tax deferred accounts and treat it all as one portfolio. See the two "stickies" by Laura at the top of this forum conversation list for more information.

The key is developing an investment plan with an asset allocation strategy that you can easily live with. It may mean using tax efficient stock index funds in taxable, and using your tax deferred plans for tax inefficient asset classes such as bonds, reits, etc.

Tim
"All man's miseries derive from not being able to sit quietly in a room alone. " -- Pascal
User avatar
Mel Lindauer
Moderator
Posts: 31206
Joined: Mon Feb 19, 2007 8:49 pm
Location: Daytona Beach Shores, Florida
Contact:

Post by Mel Lindauer »

Money you'll need in less than five years shouldn't be invested in equities. I agree that either a money market or ST bond fund would be more appropriate.

Regards,

Mel
User avatar
grabiner
Advisory Board
Posts: 28296
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Windfall

Post by grabiner »

CrazyQBall wrote:Hey guys, I am in my mid-20s and I was fortunate enough to come across a sizeable windfall from the family. In my current situation, I have a very comfortable living standard, I max out both my 401(k) and Roth IRA every year, but I am concerned with how to properly invest this windfall.

Specifically, I cannot contribute anymore to my non-taxable accounts, so I am really trying to find ways to invest in tax minimized funds and investments with low turnover.

A couple more things to add: My AA right now is about 75/25 and will get more conservative over time. Also, the main reason I am hesitant to invest this money in the stock market is that it might be used for grad school in 3-5 years, so I am reluctant to leave it to market risk.
The amount that you expect to need for grad school should be in a money-market or short-term bond fund. If you get a fellowship or your employer pays, you can always move it to stock later.

The rest of the money is part of your retirement savings. If you want to stick to 75/25, you probably want to hold the bonds in your tax-deferred accounts, because you can hold stocks tax-efficiently in a taxable account. Use tax-managed funds or large-cap or total-market index funds.

For example, Total Stock Market Index, Tax-Managed International, and Emerging Markets Index (this is what I use); Total Stock Market Index and FTSE All World Ex US (good if you can't meet the Tax-Managed minimum); Tax-Managed Growth and Income, Tax-Managed Small-Cap, and Tax-Managed International (if you want to overweight small-caps).
smithdad
Posts: 219
Joined: Tue Sep 18, 2007 10:05 am

529

Post by smithdad »

Check into using a 529 plan for the portion that you will be using for school. You could then have the earnings on that money tax free if using it to pay for school possibly sheltering some of that money. You could use a conservative investment vehicle like MM or ST bond if available in the 529 plan.
Valuethinker
Posts: 41476
Joined: Fri May 11, 2007 11:07 am

Re: Windfall

Post by Valuethinker »

CrazyQBall wrote:Hey guys, I am in my mid-20s and I was fortunate enough to come across a sizeable windfall from the family. In my current situation, I have a very comfortable living standard, I max out both my 401(k) and Roth IRA every year, but I am concerned with how to properly invest this windfall.

Specifically, I cannot contribute anymore to my non-taxable accounts, so I am really trying to find ways to invest in tax minimized funds and investments with low turnover.

A couple more things to add: My AA right now is about 75/25 and will get more conservative over time. Also, the main reason I am hesitant to invest this money in the stock market is that it might be used for grad school in 3-5 years, so I am reluctant to leave it to market risk.

Any input would be appreciated.

Thanks.
The rule of thumb that is theoretically correct is to match the duration of your assets to the duration of your liabilities.

So for retirement you want 30 year+ investments (stocks, REITs, international funds etc.).

For a major cash expenditure you want short term bonds or CDs. Money Market Funds have the problem that since their duration is low (90 days or less) they don't hedge you against big falls in interest rates (2002-03 MMFs paid sub 1% yield).

If CDs then within the FDIC limits. If bonds, then of high credit quality. If you are of a high enough tax bracket, this might include a ST tax exempt municipal bond fund.

And as other posters have mentioned, maximise all tax-deferred investment opportunities.
sport
Posts: 9664
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Post by sport »

QBall,
If I had money that I would need to spend (or might need to spend) in 3 to 5 years, I would put it in an FDIC insured 3-year CD. If the amount is large, do not put more than 100K in any single bank. The CD will have an interest rate similar to that of the money market funds. However, the rate will be locked in for the full 3 years. MM funds are subject to short term changes in yield.

In short, if you think interest rates will fall over the next 3 years, the CD is better. If you think rates will rise over the next 3 years, the MM fund is better. If you think you cannot tell what rates will do over the next 3 years, and you are satisfied with current rates, the MM fund will protect you against lower rates.

Best wishes,
Jeff
Post Reply