Reader Case Study - 25 y/o with significant assets, unsure how to best invest

[LilStache]

Income: $32,500

Current expenses:
Rent and utilities combined- $400/month
Phone- $25/month

I don't keep track of my discretionary spending much because I don't spend frivolously (i.e. no drinking at bars, no shopping, expensive haircuts, etc.)

Assets:
$85,500- Edward Jones account - The vast majority is in Williams Companies Inc and Pembina Pipeline Corp and a very small amount is invested in AT&T Inc and Merk and Co Inc

$5,900- Roth IRA - Vanguard Total Stock Market Index Fund (just started contributing to this year and maxed out)

$2,000- Checking account

Total assets: $93,400

Specific Question(s): I have an Ed Jones account and I know the expense ratio with Ed Jones is much higher than Vanguard but I'm hesitant to move my money. My Ed Jones account has grown significantly just this year by about 20-30k. I'm not sure if I'd see those type of returns in an index fund (which is what I think mmm readers would tell me to invest in) and I'm also worried that I will be taxed heavily if I sell my current holdings. My question is this: should I move my investments out of my Ed Jones account and if so, what should I invest in?

[Gone Fishing]

Did you build your portfolio out of income? If so, good job.  That is quite a nut on $32k/yr at 25!
Since you have individual stocks (instead of EJ mutual funds) you may be able to just transfer them into a lower fee brokerage account without even selling the shares.   

Figure out what your short term/long terms gains are on the EJ account then run a trial tax return on Turbo Tax using your most current paystub and projecting out your income for the rest of the year.  If the tax bite is too much, you may be able to offset some of the taxes by making 401(k) contributions this year if it is available to you.  Otherwise you can wait until next year and fund a Traditional IRA to reduce your taxable income to the point where it would offset your gains.

You can wait for a market correction and move the money then.

If none of this is acceptable, you could also just start another taxable account with Vanguard to invest your excess cash. Over time you will dilute your total effective management fees on your portfolio.   

[Aphalite]

You definitely would not see those returns in an index fund because your exposure is completely in the energy sector right now. Things are gravy now but who knows if the companies you selected will keep up its strong streak. Things are great until they aren't (see April crash in Tech sector). Just like losses in a buy and hold strategy, gains in a portfolio are not real until sold, if you keep your holdings in the companies, you're at the mercy of the investing public if things start going south. That said, the reason you would diversify is to manage volatility, if you truly believe in the Companies you have selected, by all means keep holding on to them. Just keep up your studying of the Companies and any macro economic factors that can affect them (regulation is always huge in energy industry).

[thedayisbrave]

Hi there.  I've been in a similar position, but I'm 24.  My money was actively managed with Morgan Stanley for a while.  I transferred it over to Vanguard in December 2013 but had wanted to for a while before that, just didn't get around to pulling the trigger.  Honestly, I am so much happier... because deep down I knew the fees I was paying were just what I could see.  After I liquidated most everything, I found out I was right... the funds themselves that my advisors put me in had high expense ratios (at least 1%, some up to 2%+) on top of the 1% they were charging me.  Plus, to get out of some of them, since I hadn't held them for long enough - only a few years - they had back loads - additional fees that would be taken out of the proceeds since I exited early.  I ripped the band-aid off, and yes it was painful, but I am now so much happier.  I love managing my own investments (now that I've done enough reading and have a teeny weensie idea of what I'm doing) & I get the feeling that you might too... I mean, you're already posting here and asking questions, so that's like step #1 and #2.

You can see your unrealized gains in your account statement or if you can log onto your account online, through there as well.  I wouldn't let that stop you from moving over to Vanguard.  But the clincher here is, you have to make sure the buy-and-hold/DIY/passive strategy is what YOU truly want.  It doesn't sound like you are totally convinced that the passive indexing method is best, and that's totally fine.  I say, take more time to read up about it.  Look at the Bogleheads forum, read Rick Ferri's research, read some articles by Jack Bogle, etc.  Basically, learn more about why you want to match the market instead of try to beat it (and sometimes end up not beating it).  Because the worst thing you can do (emotionally, not economically) is make the switch and then regret your decision and end up switching to another strategy.  You have to believe in the method and make sure it is a strategy you can stick to.

Good luck!

[Joshua]

First off. Good job on your savings. You are way ahead of the game! The only thing we need to get fixed is your asset allocation. You are heavily invested in energy, which has done well this year, but will lag in other years. And you are exposing your entire portfolio to entirely too much risk. By investing in low cost index funds you diversify that risk away and provide solid returns for the long run. Try to think about it long term rather than over the coarse of just this year. Remember the indexes returned 30%+ last year.

Any stock you sell that has been held over a year is only subject to long term capital gaines. The portion of this falling within the 15% tax bracket will incure no taxes. Above that you are looking at 15% tax. However, if you sell those stocks and take an equivalent amount into your 401k you basically avoided those taxes all together.

Lets do the math...

Single 15% tax bracket is income up to $36,250 in 2014.
Standard deduction and personal exemptions are $6,200 and $3,950
401k is an additional $17,500 of income sheltering

$63,900 you can earn of you max your 401k and still be within the 15% bracket. So if we subtract your salary we get $31,500 that you can sell worth of stock this year and not owe taxes. You simply max the 401k at work and live off of the stock sales. This will effectively transfer the money to your 401k where it can be invested in a low cost index and also grow tax free! Next, open a traditional IRA at vanguard and using the same method funnel $5,500 into that. Since we are in August, you can repeat this process in January and another $37,000 is transfered tax free! That only leaves $11,500 that can be taxed. You can leave that for 2016 or just bit the bullet and pay the taxes and fees to move that last amount.

The answer is YES move out of Edward Jones. Sky high costs that you can cut to almost nothing at vanguard with a better choice of funds. You can also avoid most of the taxes if you use the plan above.

[JGB]

$63,900 you can earn of you max your 401k and still be within the 15% bracket. So if we subtract your salary we get $31,500 that you can sell worth of stock this year and not owe taxes...

Isn't this making the assumption that the initial cost basis was zero? He should not owe capital gains on the amount of the initial purchase, should he?

[gimp]

Max Roth IRA for one person is 5500, not 5900, in 2014. Are you sure your information is correct - you put all 5900 in this year?

[Retired To Win]

...

Assets:
$85,500- Edward Jones account - The vast majority is in Williams Companies Inc and Pembina Pipeline Corp and a very small amount is invested in AT&T Inc and Merk and Co Inc...

Whether you keep your account at Edward Jones or move it elsewhere, you HAVE GOT to diversify your holdings.  A 4-company stock portfolio is way too risky (regardless of what Jim Cramer might say).  Take your profits now.  Make them REAL.  And spread your money some more.

(My "magic number" for my portfolio is a minimum of 16 near-equally weighted stocks in 8 different industries.  That makes the "risk share" for each stock position around 6%, which lets me sleep at night.  But your magic number may be different.  But it can't be 4!)

[FIence!]

Max Roth IRA for one person is 5500, not 5900, in 2014. Are you sure your information is correct - you put all 5900 in this year?

I'm guessing $400 of that is gains the o.p. has seen over the year, and that's the current balance?

[gimp]

Max Roth IRA for one person is 5500, not 5900, in 2014. Are you sure your information is correct - you put all 5900 in this year?

I'm guessing $400 of that is gains the o.p. has seen over the year, and that's the current balance?

Duh. I'm an idiot. Thanks.

[Joshua]

$63,900 you can earn of you max your 401k and still be within the 15% bracket. So if we subtract your salary we get $31,500 that you can sell worth of stock this year and not owe taxes...

Isn't this making the assumption that the initial cost basis was zero? He should not owe capital gains on the amount of the initial purchase, should he?

Oh yea I didn't account for that. Well then he might be able to get it all done this year! Subtract your cost basis and look at your taxable amount, then plug in the numbers.