Investment Allocation and Related Questions

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Topic Author
willeric
Posts: 7
Joined: Tue Jan 22, 2019 11:40 am

Investment Allocation and Related Questions

Post by willeric » Thu Nov 07, 2019 4:14 pm

I am asking for advice on how to invest for retirement and for my children’s education. I will do my best to follow the posting template, while supplementing with what I think may be helpful information.

My current investments total about $1.1M. I am expecting to receive two lump sum payments, each in the amount of about $1M after tax. I will receive the first in January 2020 and the second I expect to receive two years later in January 2022. These are obviously big payments relative to my current investments, so I’m particularly focused on how to invest those proceeds.

I am 51, married (my wife does not work outside the home), and have three young children (ages 8, 6, and 3). Because I started a family later than usual, my youngest will not graduate college until I’m 69 years old. As a result, I expect to work until I’m 69 or 70.

It is a family priority to send our children to private school K-12, and I also intend to pay for my children’s college education. So, figuring out how to save for and pay for educational expenses is part of my question.

Emergency funds: We have six months’ expenses in a combination of savings accounts and CDs. For what it’s worth, we also have a HELOC for $100K that we’ve never drawn down.

Debt: My only debt is a mortgage for about $375K with a house value of about $1M. It is a 15-year mortgage at a rate of 3.375%. The mortgage matures in 8 years (2027).

Tax Filing Status: Married Filing Jointly

Tax Rate: Federal: 35% marginal rate; State: 5.75% marginal rate; Local 3.2% marginal rate

State: Maryland

Age: 51

Children: Three children (ages 8, 6, and 3).

Desired Asset Allocation: 80% stocks / 20% bonds (though, this is part of my question)

International Allocation: 20% total (or 25% of stocks)

My proposed allocation is the following:
US Equity: 55%
International Equity: 20%
REIT: 5%
Fixed Income: 20%

Size of Portfolio: $1M (Currently; see intro for more info)

Current Retirement Assets:

Taxable
23% SCHX (0.03%) – Schwab US Large Cap (This will be difficult to sell due to unrealized gains.)

His Traditional IRA
31% SCHB (0.04%) – Schwab US Broad Market
15% VXUS (0.09%) – Vanguard Total International
1% SCHH – Schwab U.S. REIT ETF (0.07%)

Her Traditional IRA
7% SCHB (0.04%)

His 401K (About 50% Roth/ 50% Traditional)
23% Guaranteed Investment Contract (Stable Value) paying net 3%

New Annual Contributions
401K – max amount (plus $5,000 company match)
IRAs – max amount allowed
Taxable – about $2,000 per month

401K Funds Available
My current 401K investments are all allocated to a stable value fund paying 3% net. Other available options are below. (Sorry about the formatting.)

Bonds
Prm Diversified Bond (Barings) MDBZX 0.50%
Prm Inf-Pro and Icm (Barings) MIPZX 1.74%
Vanguard Intermediate Term Bond Fund VIBLX 0.07%
Strategic Income (Pioneer) STRYX 0.72%
Premier High Yield (Barings) MPHZX 0.54%
Global Bond (AB) ANAYX 0.58%

Asset Allocation
Asset Allocation Lifestyle (American Funds) RLBGX 0.28%
T.Rowe Price Ret 2035 SJMR 0.65%

Stock
American Funds Large Cap Value RMFGX 0.30%
S&P 500 (Northern Trust) MMIZX 0.12%
Sel T.Rowe Price Blue Chip Growth MBCZX 0.64%
JP Morgan Mid Cap Value JMVYX 0.74%
Vanguard Mid Cap Core VIMAX 0.05%
T.Rowe Mid Cap Growth MEFZX 0.71%
Delaware Small Cap Value DVZRX 0.72%
Vanguard Small Cap Index VSMAX 0.05%
T.Rowe Price New Horizons Small Cap Growth PRNHX 0.78%
American Funds International Large Value RWIGX 0.44%
Vanguard Total International Stock Index VTIAX 0.11%
American EuroPacific Growth Fund RERGX 0.49%
Invesco Emerging Markets ODVYX 1.05%

REIT
DWS RREEF Real Estate Secs Fd RRRZX 0.54%

Other
Franklin Utilities Fund FKUTX 0.74%
Invesco Commodity IBRFX 1.20%

Questions:
1. Allocation. I would love to hear some overall feedback on my proposed allocation. The US equity will likely be in either total market ETFs or, because I have a chunk of SCHX, I may allocate a portion of the investment to a small cap fund (maybe in my 401k). I'm not young, but I also intend to work for a long time. If I felt more comfortable with my fixed income investments, I might be happier with a larger portion there. Which leads to my second question. . . .

2. Fixed Income Investments. I currently have all of the “bond” portion of my portfolio in a stable value fund in my 401K. I am wondering whether this is a good idea. Also, if I do invest in a typical bond index fund, should it be in a tax favored account like an IRA or 401K? Further, would considering investing in a municipal bond index be worth it if I invest in a taxable account? How about individual bonds? The fixed income portion confuses me to no end, especially in today’s rate environment.

3. 401K Choice. I’d love to hear feedback on which of my available options in the 401K makes sense in the context of an overall allocation.

4. Children’s educational savings.

a. My wife and I have made some contributions to a 529 account for each of our children since they were born. As I mentioned above, I expect to receive a lump sum in January 2020 and one in January 2022. From the 2020 payment, I am considering contributing about $100K in each child’s 529 with a view to funding their college education. Good idea or bad idea? (From an investing perspective, I mean. I realize folks have different ideas about whether it is a good idea to pay for their kids’ college expenses.)

b. In a similar vein, from the payment in 2 years, I was thinking of setting aside in a separate account enough money to fund the kids’ private school expenses through high school. This wouldn’t be in a tax advantaged account like a 529. Rather, it would be in a taxable account at my brokerage firm, but the allocation would be made to pay more immediate expenses for education until my youngest graduates high school. The main difference is that the allocation would be much more conservative because of the shorter-term use of the funds.

5. Immediate Investment vs. Dollar Cost Averaging. Whether it is entirely rational or not, I am wary of investing a large portion of my investable assets at one time. Of the 2020 lump sum payment I expect to receive, I intend to invest perhaps $100K per month over the first 10 months of 2020. I figure I would volunteer this information and see what sort of thoughts people had about that proposed approach.

6. Investment Advisor. I was curious if people thought it would be worthwhile to seek the advice of an investment advisor. I spoke with a representative of Schwab who recommended using Schwab’s Intelligent Portfolios, at least for my equity portfolio. I’m not sure that’s necessary or helpful. He also was going to prepare some information relating to proposed fixed income investments, but it sounded complicated (including preferred stock and other “sophisticated” investments). I would not use any advisor who charges an AUM fee, but was curious if it was worth consulting a flat fee advisor.

I sincerely appreciate all feedback on my questions above or any other issues that you would like to comment about. Thanks!

dbr
Posts: 30646
Joined: Sun Mar 04, 2007 9:50 am

Re: Investment Allocation and Related Questions

Post by dbr » Thu Nov 07, 2019 4:41 pm

willeric wrote:
Thu Nov 07, 2019 4:14 pm

5. Immediate Investment vs. Dollar Cost Averaging. Whether it is entirely rational or not, I am wary of investing a large portion of my investable assets at one time. Of the 2020 lump sum payment I expect to receive, I intend to invest perhaps $100K per month over the first 10 months of 2020. I figure I would volunteer this information and see what sort of thoughts people had about that proposed approach.
As soon as you receive the payments that money has to be somewhere. In short it already is invested. The only question is what is the asset allocation you want to hold and once that is known why you would not distribute your assets according to that allocation instead of investing contrary to your plan.

I agree that if large amounts of money land in your pocket and it isn't clear what the plan is, then taking your time and holding money conservatively makes sense. But the timing for that is not $100k/mo. but rather when do you have a plan.

The other side of the conversation is that in the long run holding too conservative an allocation for a short time really doesn't make much difference, and if a person wants to do that, then by all means take your time.

What is a mistake is thinking that stretching out adoption of a more aggessive allocation plan somehow immunizes the plan from risk. Also a mistake would be finally ending up in an asset allocation that does not suit one's objectives.

Short version: It is about asset allocation and not about timing.

Topic Author
willeric
Posts: 7
Joined: Tue Jan 22, 2019 11:40 am

Re: Investment Allocation and Related Questions

Post by willeric » Thu Nov 07, 2019 4:45 pm

Thank you, dbr. That's a good point, and I think it emphasizes that what I really need is a plan in which I am confident. I'm hoping responses to this thread help me get there.

User avatar
patrick013
Posts: 2736
Joined: Mon Jul 13, 2015 7:49 pm

Re: Investment Allocation and Related Questions

Post by patrick013 » Thu Nov 07, 2019 8:18 pm

willeric wrote:
Thu Nov 07, 2019 4:14 pm

I sincerely appreciate all feedback on my questions above or any other issues that you would like to comment about. Thanks!

Fees reduce returns and stocks increase risks. Some items from the wiki that usually help.

Investment Priorities

Tax-efficient Fund Placement

Portfolio Allocation Models

With all that money people tend to go 50-50 stocks and bonds. An aggressive allocation is riskier but can limit risk by staying with a total market stock fund, a low Intl AA (10% ?), even an utility index tilt (VPU) to lower beta and provide return stability etc.. But the choice is yours.
age in bonds, buy-and-hold, 10 year business cycle

stan1
Posts: 7607
Joined: Mon Oct 08, 2007 4:35 pm

Re: Investment Allocation and Related Questions

Post by stan1 » Thu Nov 07, 2019 8:54 pm

If it was me and I was receiving windfalls I otherwise would not have expected while still having a secure job? I'd use the first $1M to pay off the mortgage and fund education accounts for kids. I'd also do some work around the house if it would improve my family's enjoyment of it. Done, what a luxury not to have to worry about those for the rest of your life!

With the second $1M I'd focus on taxable investing account and holdings I planned to hold the rest of my life like Total Stock Market and Total International Stock Market.

I realize this is a conservative and personal approach. Others might make a different choice....

With that whatever happens you are good. You can work to 70 if you want and are able to do so or you'll have the flexibility to do something else if you choose a few years earlier (or if someone chooses for you).

Topic Author
willeric
Posts: 7
Joined: Tue Jan 22, 2019 11:40 am

Re: Investment Allocation and Related Questions

Post by willeric » Thu Nov 07, 2019 9:09 pm

Thank you, Patrick and Stan. I will review the wiki articles.

I have also considered paying down the mortgage and funding the education accounts. Those are likely the use of the second payment. My current thinking (believe me, my thinking has changed quite a bit on this!) is that we will try to shore up our retirement savings with the first payment. We're fortunate to have this nice problem to solve, and I'm trying to be thoughtful about it.

Topic Author
willeric
Posts: 7
Joined: Tue Jan 22, 2019 11:40 am

Re: Investment Allocation and Related Questions

Post by willeric » Sat Nov 09, 2019 2:10 pm

Does anyone have any feedback on the 401K portion of the portfolio? Would I be better off in the Vanguard bond fund instead of the stable value fund? Or. should I instead consider one of the Vanguard stock index funds and find a fixed income investment outside the 401K?

Thanks!

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