Author Topic: Reader case study: my net worth is $800k+, how do I get excited about investing?  (Read 8689 times)

lise

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Hi

I am fairly new to Mr Money Mustache, but have been living a similar lifestyle without knowing he existed!  I enjoy good food and love to travel, but don't own a car and get books out of the library. 

I am a single 45 year old women and live a somewhat nomadic lifestyle  I freelance for work.  So for me, it makes sense for me to rent where I live hence why a property where I live is not listed below.  I'm not going to provide you with income and expenses but instead will provide a break down of assets (I have no liabilities).

My problem is not being able to save.  My problem is not being excited about investing; but also not being able to trust an investment advisor; and I worry every now and then I am not investing in the right way.  How do others out there choose how to invest?  How do they get excited about it?  Is there a book that is easy to read about how to make choices that won't bore me to tears?  To be honest, reading this blog is the first I felt some sort of need to be more active in my investing.  I look at the funds I've picked below and wonder if I'm being too safe?


Rental income property (mortgage free) $300,000

Retirement accounts
Vanguard Target Retirement 2030 Fund VTHRX $260,000
Vanguard 500 Index Fund Admiral SharesVFIAX $63,000
Vanguard Total Bond Market Index Fund Admiral SharesVBTLX $11,000
Overseas retirement accounts $58,000

Non retirement accounts
Vanguard LifeStrategy Moderate Growth FundVSMGX $41000

Savings account (I know - way to high at the moment but this is at Ally so rates comparable to CD rates plus I freelance so need a cushion right?) $80,000
Overseas cash $20,000
CD (Ally) $10,000

Would appreciate any feedback!

Heckler

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You don't need to get excited. Set it and forget it till you need it.

thedayisbrave

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You have too much cash.  I'm all about a cash cushion but $80k is a lot... unless your annual spending is $80k.  I keep about $15k liquid, which is slightly over a year's worth of expenses for me.  It doubles as my emergency fund and cash cushion, as I also work a job where I don't get a guaranteed salary (independent contractor).  I have rental property too but they have their separate cushions so I totally know what your need feels like... but I still think $80k is too much.

Index investing sounds like it's right on the money for you... and yeah, that's definitely not exciting.  In fact, it's a GOOD thing that it's not exciting because typically "exciting" to me means chasing performance which has waaaay higher risk of loss than what you're doing. 

Your method could be simplified even further, though.  For example, the Target Retirement Fund already is a balanced fund... it has both Total Stock & Total Bond in it, so by also holding the S&P 500 fund and Bond Fund outside the TR fund you are effectively doubling up in your retirement account.  You could simplify and just put it into the Target Retirement for simplicity.  With index funds, it's not the case where diversification = more funds.  You want to make sure the fund is broadly diversified by investing in the stocks of many companies but generally funds that follow a broad index (Total Stock, S&P 500, etc.) already do that. 

mikefixac

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Looks like you're doing pretty good to me.

About getting excited about investing: Just imagine a couple of doublings of your current net worth. If it's now $800K, 2 doublings is $3.2MM. So with you doing nothing and letting your money do the heavy lifting, that can easily happen in your lifetime.

« Last Edit: January 28, 2015, 12:40:42 PM by mikefixac »

innerscorecard

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You are doing everything right. No need to get excited. You don't want to suffer from "fear of missing out." That causes people to lose money.

I actually also think you don't have too much cash. I think it sounds about right for your current age, place in life, and lifestyle. One size does not fit all. Your current allocation seems just about right for your situation.

morning owl

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You don't really mention what's holding you back from investing, or if anything is holding you back. If it's fear of volatility, or fear of risk, I like to remind myself that the biggest risk in life is running out of money at old age by keeping too much in cash and having a lack of growth, vs. running out of money due to volatility of the stock market. The first scenario is where the risk is. So, you are far better off in the long run to invest your money than to leave it in cash.

If you're interested in index investing, I enjoyed reading Millionaire Teacher by Andrew Hallam. Really clear concepts of investing and rebalancing and otherwise letting things sit there to grow.

If index investing is not for you, there are other ways to invest that don't get talked about too much in this board... I'm a dividend growth investor, because that was the method that appealed and made the most sense to me. For this I would read Benjamin Graham's The Intelligent Investor (not about DGI per se, but a classic on thinking clearly about the market vs. investing emotionally). Dividend Mantra's site is also excellent, and he definitely oozes enthusiasm for this method.

Like others say, you don't really want to get excited about it. You don't want to get emotional about it. When the market dips, it's time to buy. When the market goes up, well your account goes up but it becomes more difficult to find value. That's the gist of it. Stay cool headed and think rationally about it. Over time it's exciting, because you will be making "passive" income, and that's always a great feeling. But the challenge is to learn and stay rational, not to get excited.

Read about different methods though until you find one that clicks with you. I would suggest reading as much as you can before investing in individual stocks, if you decide to go that route. Otherwise, index and ETFs investing are perfectly fine, the only thing you need to know is how to rebalance them when the markets shift. The book above, as well as the Canadian Couch Potato site, are good places to start.

SaintM

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Book suggestion:  Income Investing Secrets by Richard Stooker

$6.50 for a used paperback was money well spent. He encapsulates many of the points made on this and other threads.

http://www.barnesandnoble.com/w/income-investing-secrets-richard-stooker/1100073409?ean=9781450516662

chasesfish

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This may or may not be perfect, but they aren't bad choices.

What are your annual expenses and how much in net income after expenses do you get on the rental property?   That'll give me some ideas on what I would recommend.

lise

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Thank you all for your feedback!  I really had a mind shift after reading your replies and realize that I shouldn't be getting excited by investing.  Slow and steady wins the race.

My main fears were that I wasn't investing to make the most money.  This came after a dinner when I friend announced I wasn't making big enough returns (he claims to make 20% on mutual funds) and then I looked at my fund names and well, the names were sort of boring.  Stupid, I know.

@morning owl and @SaintMichael - I'm going to look at your book suggestions, especially the one about dividend growth.

@thedayisbrave and @innerscore - my annual expenses are not $80,000!  I think I'll drop the cash back a little and invest $20,000 more in non retirement mutuals

@chasesfish - my net rental return on my property is 6% per year.  I've had it for 10 years (mortgage free for 2).  The value is now the same as when I purchased it, so haven't made any capital gains on it with the market the way it is in that particular area.   

Anyway, thanks again for the feedback! 

dandarc

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My main fears were that I wasn't investing to make the most money.  This came after a dinner when I friend announced I wasn't making big enough returns (he claims to make 20% on mutual funds) and then I looked at my fund names and well, the names were sort of boring.  Stupid, I know.
The goal is not to get as rich as possible - the goal (at least in my mind) is to have enough that you don't "need" a job.  Boring is good for investing.  If your friend really is making returns that large, he is likely taking much more risk.  More likely is that he is remembering the good years more than the bad.

morning owl

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Be careful with mutual funds! The fees tend to be extraordinarily high for managed funds. Stick with ETFs and index funds. You can also buy Dividend Growth ETFs, if you don't have the patience for individual stock picking. There are ETFs now for pretty much everything. The fees are considerably lower than they are for mutual funds.

And there's definitely nothing wrong with slow and steady :)

FLBiker

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My main fears were that I wasn't investing to make the most money.  This came after a dinner when I friend announced I wasn't making big enough returns (he claims to make 20% on mutual funds) and then I looked at my fund names and well, the names were sort of boring.  Stupid, I know.

Don't worry about this.  Lots of people claim lots of things.  Index investing is the way to go.

DoctorOctagon

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If I was in your shoes, I would be happy with your current asset allocation, except for one thing.  Are any of your investment accounts a taxable brokerage account instead of a retirement account?  Taxable brokerages function as bank accounts - you can put as much money in and out as you want at any time, without any penalties.  You pay earned income tax on capital gains, but there is a tax loophole to take advantage of with dividends that reduces your tax rate to nearly zero.  I would put nearly all of the $80,000 into a taxable brokerage account, with 100% allocated to a passive index fund that pays a high dividend.

If you hold a stock for more than 60 days, subsequent dividends are considered 'qualified'.  These dividends are taxed at 0%/0%/15%/15%/20%/20%/20% for the 10%/15%/25%/28%/33%/35%/39.6% tax brackets.  There is nothing else that comes close to such low tax rates - with retirement accounts, you're paying the higher earned income tax rates either up front when you put money in (with a Roth), or when you withdraw (with an IRA).  As long as you don't sell the principal stocks that you buy in the taxable account (buy & hold the initial shares forever), you will get a nice little income stream and pay almost no tax.  For the $80,000 in cash you have, that would buy you about $200.00 a month in qualified dividends - cash that is immediately available for use, and is paid quarterly.  Not to mention the principal appreciating in value over long periods of time (your 80,000 will appreciate in value 6% a year on average on top of the dividends), and your dividend yield increasing as the economy grows (figure 6% a year increase, but it could be a LOT more - 10% a year or more, if the bull market doesn't die).  You can set your brokerage up to reinvest the dividends automatically too if you are doing well enough to not need them.

It's a great tool and I use this strategy myself.  I have about 80% of my net worth in a taxable brokerage account; the account currently holds $141,000 and yields $5,000 in dividends a year.  I receive between $300 and $1,100 a month depending on the month in dividends, so I have a backup cash stream taxed at a flat 0% (I make less than 36,000 a year) if I can't find work.  At your level of net worth, you have enough cash flow from rental investment and part-time work to put virtually all of your $80,000 to use in this strategy.  At your age, you could really come out ahead over the 14 or so years between now and when you can utilize your other retirement accounts.

Eric

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Be careful with mutual funds! The fees tend to be extraordinarily high for managed funds. Stick with ETFs and index funds. You can also buy Dividend Growth ETFs, if you don't have the patience for individual stock picking. There are ETFs now for pretty much everything. The fees are considerably lower than they are for mutual funds.

And there's definitely nothing wrong with slow and steady :)

Your brush is a little too broad here.  If you're buying your mutual funds at Vanguard (as it looks like lise is), there are no trading fees and the expense ratios are the lowest in the business. 


The goal is not to get as rich as possible - the goal (at least in my mind) is to have enough that you don't "need" a job.  Boring is good for investing.  If your friend really is making returns that large, he is likely taking much more risk.  More likely is that he is remembering the good years more than the bad.

Yeah.  This. /\

thedayisbrave

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My main fears were that I wasn't investing to make the most money.  This came after a dinner when I friend announced I wasn't making big enough returns (he claims to make 20% on mutual funds) and then I looked at my fund names and well, the names were sort of boring.  Stupid, I know.

Sure, it's possible he made 20% returns in 2013-2014.  It's been a pretty raging bull market out there so I'm sure people are achieving those numbers.  But that can also swing the other way... betcha he won't be making those claims when he is -20% and the market (which the index funds are made to track) are down -12%.  Totally just pulled those numbers out of thin air, but that's the gist of it...

People talk shit about index investing all the time.  I just smile and nod... easier that way.  We were having a holiday dinner and my mother's boyfriend exclaimed that he was up 70% in his IRA in 2014.  I tried my best to hold myself from snorting and telling him to suck an egg (and barely succeeded).  He's had a black mark on him ever since he criticized my investing decisions claiming "he could do better".  So, yeah, people are gonna have shit to say but guess what? It's your life! I think you are doing great :)   

surfhb

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Keep in mind that investors are making lots of good returns right now and everybody loves to yap about how great they are doing and how life is awesome and how they will retire in X numbers years....blah blah blah.   

A market correction is very likely, very soon.    The key to smart investing is to keep an asset allocation which allows you to weather such storms without unloading your funds,  invest at regular intervals and avoid listening to people like this or the financial news.   

I suggest the Boglehead Wiki..... Google that sucker and read every inch of it.   :)


morning owl

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Your brush is a little too broad here.  If you're buying your mutual funds at Vanguard (as it looks like lise is), there are no trading fees and the expense ratios are the lowest in the business. 


I'm not too familiar with Vanguard funds, but aren't they index funds for the most part? I think I said 'managed funds'... if not then my bad, but that's what I meant. There are many *actively managed* mutual funds out there that have fees >2%. When people start bragging about a mutual fund earning 20%, I assume they're talking about actively managed funds... but anyhow, that's what I meant. Index fund fees are usually much less, like <1%.

Gone Fishing

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Sure, you could probably invest a little cash but overall you look pretty good.  The time to get "excited" about investing is when the market takes a 20-30%+ dip!

FarmerPete

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What's your goal?  Investing isn't exciting until you have a goal to shoot for.  It's much easier to get excited about a goal than the tedious work to get there.  For me, being FI is the goal that gets me excited.

johnny847

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Investing when done correctly should be boring as shit. I just use three index funds, and invest on a regular basis with Vanguard's direct deposit service (I would use a 401k if I had access to one). By using low cost broad market index funds (VTSAX, VTIAX, VMBFX), I am guaranteeing myself returns that are slightly less than average. Which is boring - I'm not chasing the "hottest funds." But that's okay.
I know we're pushed in school to not settle for average....but with investing you should be perfectly happy settling for average. Boring and average will get you exactly where you need to be.

Abe

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I agree with the others... if investing is exciting it's probably a bit too risky for most people's tolerance. Generally there is a mis-match between the two, which is only realized when investments lose value. I invest most of my extra savings in vanguard's total stock market index fund. It is extremely low cost in terms of fees and also taxes (have >$100k and only get ~$1000 in dividends - though the gains are "unrealized" I also am not currently paying 30% federal + state tax on them!). The goal for a taxable account is to avoid withdrawing if at all possible as long as one can, which is exactly what index funding is tailored towards.

lise

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Thanks again for all the feedback. 

My retirement accounts are either rollover IRA (from when I used to work for the man and had to rollover my 401(k)'s in to something) or SEP-IRA since I am self employed and am making max contributions I can before tax.

In the past I was using additional cash to pay off the mortgage on the rental property, so have just started putting money in to a Vanguard mutual fund (the non retirement one).  I'm going to look at ETF's.

BTW, I love the relative non bitchiness of the posts I see on this forum!  Nice!

Spondulix

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I didn't really get enthusiastic until I realized how much money I was wasting on a financial advisor, and how easy it is to do responsibly on your own. John Bogle's book "little guide to investing" (or something along those lines) is a really easy read thatll prove that you can't outperform the market - all you have to do is get in indexes and stay in.

I wouldn't recommend Intelligent Investor if you're just getting into it and not that excited. I found it confusing and pretty boring when I was just getting started. Peter Lynch has a classic book called "One Up on Wall Street". If you have any interest in Warren Buffet, his biography is great. The idea of those two isn't to learn the ins and outs of trading, but to see how they THINK about trading. I guarantee you'll start seeing opportunities that you didn't before.

I'd also start by taking a small amount of money (even $500) and go buy a couple stocks that you'd be comfortable owning for a year. Buy some company that you would feel some pride or enthusiasm in saying that you own them. Or, there's services like Motif or Betterment that have different models. Then, just check periodically and see how it's looking. When I got really enthusiastic was when I realized that I earned more in one month of interest than a year in my savings account!

chasesfish

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I think you're doing everything right and you shouldn't get worked up over friends saying you're not getting a high enough return.  6% on a rental property is decent.  You may have an opportunity long-term to do a 1031 exchange and move that money tax-free into a higher yielding investment like a 4-plex or small commercial building.  (I don't think that time is now by the way)

Your Vanguard 2030 is a heck of a mutual fund and a free and clear single family property earning 6% after expenses isn't too shabby, especially when you consider transaction costs converting the house to cash.

The only suggestion I might make is it cut back your cash in half or a little more and use VWINX (Vanguard Wellesley Income Fund).   It has some downside risk but should consistently get you returns that do a bit better than inflation while holding most of its value if we see a crash.  You also have a nice cushion where you don't have to sell if you see a downswing. 

Congrats on your success

dude

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One thing I would caution about the Target Date Funds is to really look at the asset allocation when it hits the Target Date (i.e., 2030).  I've found that, with respect to the TSP, for example, the Target Date Funds get VERY conservative as they near the target date, and in the case of the TSP, they roll into the Income Fund -- the L2030 Fund, for example, ends at 80% bonds (G & F Funds), which is the L Income Fund allocation:

https://www.tsp.gov/investmentfunds/lfundsheet/fundPerformance_L2030.shtml

A portfolio that is 80% bonds is very unlikely to keep up with inflation and will almost certainly run out of money well short of 30 years.  So if you have a mixed blend of the Target Date and other funds, and in particular other bond funds, you may not have nearly enough in equities (the most conservative equity/bond position I'd ever consider is 50/50; the 4% SWR studies assume a 60/40 ratio, and there's evidence to suggest a 75/25 ratio is best for the long haul, i.e., for early retirees who may spend 40+ years drawing on their portfolio).

Eric

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A portfolio that is 80% bonds is very unlikely to keep up with inflation and will almost certainly run out of money well short of 30 years.  So if you have a mixed blend of the Target Date and other funds, and in particular other bond funds, you may not have nearly enough in equities (the most conservative equity/bond position I'd ever consider is 50/50; the 4% SWR studies assume a 60/40 ratio, and there's evidence to suggest a 75/25 ratio is best for the long haul, i.e., for early retirees who may spend 40+ years drawing on their portfolio).

I would say that is not true, dude.  Certainly it has a higher chance of failure than using a higher stock percentage, but 4% inflation adjusted withdrawals using a 25/75 stock/bond split has an 80% chance of surviving 30 years according to the (updated) Trinity Study.  I'm sure 20/80 would be a little worse than 80%, but nowhere near "almost certainly run of out money" territory.  That one quarter to one fifth stocks make a big difference over 100% bonds.  (That said, your overall all message of "pay attention to your asset allocation" is a good one.)

Here's the inflation adjusted withdrawal table for your reference: