Author Topic: Heavy in Cash - Investment Advice  (Read 8844 times)

moneymamma

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Heavy in Cash - Investment Advice
« on: November 24, 2013, 01:55:27 PM »
We have nearly $500K in cash.  We have about 414K in mortgage debt (only debt) with a 3.25% mortgage rate.  Should we put some towards our mortgage or slowly invest that in various index funds?  Would love some advice.   Thanks!

Gray Matter

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Re: Heavy in Cash - Investment Advice
« Reply #1 on: November 24, 2013, 02:08:33 PM »
Neither.  You should give it to me.  :-)

This depends on your risk tolerance, but from a pure financial perspective, it would likely be better to invest it in index funds.  Between the low interest and (I assume) tax deductibility of the interest, you will come out ahead with even relatively modest market returns.

Will

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Re: Heavy in Cash - Investment Advice
« Reply #2 on: November 24, 2013, 03:10:54 PM »
Why slowly invest?  Why not just invest?  And how/why do you have so much cash in the first place?

moneymamma

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Re: Heavy in Cash - Investment Advice
« Reply #3 on: November 24, 2013, 04:00:43 PM »
We had purchased a house 2 years ago and were building up our savings again.   We got busy and didn't have a great plan in place. We max our 401Ks, 529s and I recently did after tax dollars (so an additional $20K) will go into my 401k. 

I said slowly invest to get the dollar cost average benefits.  But I could up the amount in the 3 vanguard index funds and it would invest the money "quickly". 

We want to keep $250K of it is cash for emergencies.   We do vanguard stock index, international and bond.  20% bond and 80% stocks.  We have $5K a month now automatically going into vanguard to slowly reduce the amount in cash.

I am thinking of maybe doing $24K towards mortgage principal to "diversify"

Make sense? 

Will

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Re: Heavy in Cash - Investment Advice
« Reply #4 on: November 24, 2013, 04:13:49 PM »
What kind of emergency could you have that would require $250k?

arebelspy

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Re: Heavy in Cash - Investment Advice
« Reply #5 on: November 24, 2013, 04:47:19 PM »
What kind of emergency could you have that would require $250k?

Paying a kidnapping ransom, of course.

/sarcasm
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

maxdriver

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Re: Heavy in Cash - Investment Advice
« Reply #6 on: November 24, 2013, 05:08:24 PM »
If the OP's post is legit...and I have doubts....he/she needs to meet with a financial advisor and go from there. Given the reported $$ in question and the lack of details that have been provided, it is far from prudent to rely on strangers to provide guidance/advice.

sunshine

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Re: Heavy in Cash - Investment Advice
« Reply #7 on: November 24, 2013, 05:27:31 PM »
I don't have any advicee since I am cash heavy myself. It makes me kind of sad legitamicy is questioned. I am sure glad no one did that to me with my first post.

Stackfault

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Re: Heavy in Cash - Investment Advice
« Reply #8 on: November 24, 2013, 05:51:21 PM »
The more you research this question the more you'll find it's as much about emotions as finances.  Basically, you are investing on margin.  If the investments do well then you will come out ahead and be happy.  If they lose, then you'll wish you'd paid down the mortgage. 

Facing a declining market that I mistook for the top of the recovery and what seemed like imminent layoffs in my department, I paid off my mortgage so that I wouldn't be forced to do it later when the market was even lower.  I'd run the numbers and it seemed like a wash financially given the poor returns I'd had recently from being too conservatively invested.  That was two years ago and I'm still employed.  Since then, the S&P has risen exactly 50% so I clearly would be better off financially if I'd refinanced and invested.  Of course, if I'd lost my job or the market had continued to decline, it would have seemed like a brilliant move to pay it off.   I could still releverage with a new mortgage but with the higher rates and continued uncertainty about my employment, plus the warm fuzzy feeling I get from not having a mortgage, I'm not interested in doing that.   

Ultimately, you will just have to decide how aggressively you want to be leveraged based on your own situation and risk tolerance.  And it's OK to admit that emotions and not just numbers play a role in deciding to pay down or pay off a mortgage.

moneymamma

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Re: Heavy in Cash - Investment Advice
« Reply #9 on: November 24, 2013, 06:08:18 PM »
We are conservative and have 2 kids so that is why the big emergency reserve.  Our expenses are high so we like to have a 2 year cushion.  I guess you are right that we don't really need that much.

Frankies Girl

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Re: Heavy in Cash - Investment Advice
« Reply #10 on: November 24, 2013, 09:01:10 PM »
We are conservative and have 2 kids so that is why the big emergency reserve.  Our expenses are high so we like to have a 2 year cushion.  I guess you are right that we don't really need that much.

If you are holding back $250K for 2 years expenses, that's $125K a year... that's not frugal or conservative. Why are your expenses so high?

Are you here to also try to get better about spending too? This forum is for reducing wasteful spending and maximizing your ability to live on much less while still enjoying a fulfilling lifestyle AND make it possible to retire early... so I would say that while investing is definitely something you can benefit from, getting control of your expenses will help make that money you do have go that much farther. It sounds like your family makes a really high income, so you're already half way there. High income plus a smaller yearly expense means you'll have more to put back and get financially independent that much faster.

I'd suggest you do some more reading here, and on JL Collins' site:

http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
http://www.mrmoneymustache.com/2012/10/08/how-to-go-from-middle-class-to-kickass/
http://www.mrmoneymustache.com/2012/06/01/raising-a-family-on-under-2000-per-year/
http://www.mrmoneymustache.com/2013/04/25/why-should-i-be-frugal-when-im-so-rich/
http://jlcollinsnh.com/stock-series/

moneymamma

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Re: Heavy in Cash - Investment Advice
« Reply #11 on: November 24, 2013, 09:08:18 PM »
I am a real poster...just started following the blog.  Why would I lie?  I have been working my butt off since I was 22 and have 2 young kids...so just got busy and looking for more experienced investors.  And I plan on staying in job for many years longer.  I would rather educate myself and do it myself vs. financial advisor. 

ASquared

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Re: Heavy in Cash - Investment Advice
« Reply #12 on: November 24, 2013, 09:15:35 PM »
Wow what's up with everybody?!? Calm down everyone seriously.  Sorry you are getting such a hard time. 

Kudos to you that you have that much cash saved up.  But seriously - do something better with it, you are losing money every night while you sleep.  To keep 10% of that in cash would be generous, especially given that you seem to have a reliable stream of income.

I'm sure if you read around a bit you will get the same opinion - not really any reason to "slowly invest" in index funds just do it.

Your mortgage rate is low and fixed, so I don't see the point in trying to pay it off.  Logically it does not make sense. If this is important to you though for emotional reasons you could take a portion of your cash and pay it down.

Again - great job getting yourself to such a good place.  You have 2 young kiddos - enjoy them!

Frankies Girl

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Re: Heavy in Cash - Investment Advice
« Reply #13 on: November 24, 2013, 09:24:23 PM »
I am a real poster...just started following the blog.  Why would I lie?  I have been working my butt off since I was 22 and have 2 young kids...so just got busy and looking for more experienced investors.  And I plan on staying in job for many years longer.  I would rather educate myself and do it myself vs. financial advisor.

I personally don't think you're lying or anything. Just wondering where you are and what your plans/goals are and trying to direct you to some of the pertinent blog posts that can help you figure that stuff out. Since it sounds like you're spending a huge amount of money per year, that's one of the things you should also take a hard look at in addition to learning about investing.

We all had to start somewhere...

tooqk4u22

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Re: Heavy in Cash - Investment Advice
« Reply #14 on: November 25, 2013, 07:57:37 AM »
Math based on historical returns will always favor investing over paying off a low rate mortgage....could there be ups or downs, yep, but that is investing. 

Then it comes down to risk tolerance and your desired AA, ask questions and educate yourself for this.

All that said, if you are too worried/uncertain about investing the money, and that in turn will cause you to not invest it, then you absolutely should pay off the mortgage......no sense paying 3.25% to get a return of 0-1% in a savings account.   

dantownehall

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Re: Heavy in Cash - Investment Advice
« Reply #15 on: November 25, 2013, 01:52:22 PM »
Even your emergency cash should be earning something.

It's very unlikely that you will need $250k for an emergency, but it's even more unlikely that you will need it all at once.

If you absolutely want cash, I would put any emergency cash into a ladder of CDs or an equivalent.  Basically, you would keep some cash in very short term CDs for immediate emergencies, and some a few months furhter out, and some a few months further than that, and so on.  You get higher rates on longer CDs, and if you need the cash it becomes available a few months at a time.

With all that said, what I would do is invest all of it in blue chip dividend-growing stocks and/or an index fund and not ever worry about it again.  Check the balance once a year.  I wouldn't bother paying down a 3.25% mortgage early, either.

dragoncar

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Re: Heavy in Cash - Investment Advice
« Reply #16 on: November 25, 2013, 05:17:42 PM »
I would go all in on whatever asset allocation you are comfortable with.  I'm guessing it will be pretty conservative given your current cash allocation.  This is more of a bogleheads thread IMHO

aj_yooper

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Re: Heavy in Cash - Investment Advice
« Reply #17 on: November 25, 2013, 06:20:49 PM »
I would go all in on whatever asset allocation you are comfortable with.  I'm guessing it will be pretty conservative given your current cash allocation.  This is more of a bogleheads thread IMHO

Agree.  OPer, you are in an awesome spot!  Educate yourself about investing: http://www.bogleheads.org/wiki/Bogleheads_investing_start-up_kit I agree in the no financial adviser needed.  Best wishes and stay tuned.  Read about value averaging. 

Welcome.

moneymamma

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Re: Heavy in Cash - Investment Advice
« Reply #18 on: January 03, 2014, 09:25:00 AM »
Thanks everyone who replied especially ZsMom.  We were busy having 2 kids (2 5 and under) and saving to buy a house.
We then had two years for craziness and I went through a hard time. So we didn't pay attention as much as we should have to investing.

With our cash I do want to invest it and wonder if we should do it slowly over a year to get the benefit of dollar cost average or just put it in.  I know you can't time the market.  Here is what we are thinking..go ahead and poke holes.

401K - fully maxed out every year + I will put another 20K in my 401k after tax.  I have great funds and they will grow tax free.
So saving this year in 401Ks will be:  $62,500

Money in cash to invest: $500,000
We have plans to do the following:
-Extra $2K towards mortgage; $4k towards 529 and $5K in vanguard funds which leaves $368,000.
What to with the remaining.  Increase Vanguard funds more aggressively? 

Thanks

aj_yooper

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Re: Heavy in Cash - Investment Advice
« Reply #19 on: January 03, 2014, 10:51:55 AM »
It sounds like you want to have a nice ballast of cash or more liquid money.  Have you considered Pen Fed  Credit Union rates?  That could give you a chance to place some money.  You could do a ladder of maturities, say from 1-5 years, which would ensure liquidity.  https://www.penfed.org/money-market-certificate/

You could also consider buying some I Bonds where you will also get some inflation protection.  Unfortunately, you can do only $10,000 per social security number per year.  Think of it as a project.  http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm

These two options would help build out your fixed interest portion of your portfolio.  I would also get into the Bogleheads site on the investment start up kit.  You have an amazing opportunity to set your family up very well.

Congratulations.

ASquared

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Re: Heavy in Cash - Investment Advice
« Reply #20 on: January 03, 2014, 11:37:10 AM »
Might want to check out betterment.com as well. Just moved our emergency $ there after a long period of weighing pros/cons.  I like the index/etf approach and the simplicity of being able to adjust stocks/bonds or time horizon/risk. 

Carrie

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Re: Heavy in Cash - Investment Advice
« Reply #21 on: January 03, 2014, 12:16:40 PM »
Have you thought about paying a good chunk to the mortgage (maybe half), get your bank to re-amortize it, and then have a lower monthly payment from here on out so that you can reduce your high monthly expenses, therefore needing less in cash as an emergency fund?

I know a lot of folks on here don't mind carrying high mortgages for extended periods of time, but with you stock piling that much cash for security, you might prefer to have a lower debt load to give you some peace of mind. 

I would think that a year's worth of expenses ought to be plenty of cash on hand.  I would keep that much liquid, invest the rest (minus whatever amount to pay down the mortgage that you'd like), and then look at how to reduce yearly expenses below $125k per year.

PeteD01

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Re: Heavy in Cash - Investment Advice
« Reply #22 on: January 03, 2014, 01:34:19 PM »
I presume you got a really high income and therefore you do not have to take much risk with a good part of your wealth.

I would do the following: Pay off the mortgage completely, get a HELOC for emergencies, dump the remainder into an index fund, direct the income fire hose into the same index fund, sit back and enjoy.

Be happy don't worry
Peter

The_Dude

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Re: Heavy in Cash - Investment Advice
« Reply #23 on: January 03, 2014, 07:05:20 PM »
My two cents.

1) I would view the decision to pay off a mortgage or invest the same as the decision to invest on margin.   Yes there isn't the same risk of getting called but if you opened a small margin account and put it in an index you could reduce that risk.  So if that isn't appealing to you think hard on not paying down the mortgage.

2) Historical math supports lump sum investing over dollar cost averaging (DCA).  However for me personally, despite knowing that I chose to bring down a cash position over time rather than instantly.  I made that decision two years ago.  If I'd stuck with the theory I'd be better off today because the past 2 years have been amazing in the market but I slept good at night.  I'd have an even HARDER time today doing a lump sum investment even though DCA was worse for me just because of the multiples the current market is trading at.

3) People with large liquid assets don't need large cash "emergency funds."  Liquid assets includes publicly traded stocks.  If you already have an investable portfolio that is many times your annual expenses then you are better off investing all excess cash in the markets. 

The thing all three of the above items have in common is that emotions will heavily influence people.  Good luck