Author Topic: Help constructing portfolio after windfall  (Read 3877 times)

TypicalVillain

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Help constructing portfolio after windfall
« on: June 21, 2015, 03:12:25 PM »
Just got a windfall of about $300,000. Late 20s, married, live in CA, would like to invest in taxable account for the long term! I also have about $35,000 in my ROTH IRA. Already have an emergency fund so we're good there. I would like to do all this investment at Vanguard if possible, since I already have money there. No 401k option. My income is currently about $30k but with the wife combined we are in the 25% bracket.

I'll probably do about 90/10 stock/bond split for maximum growth. The main issue is avoiding tax and taking best advantage of my tax-free space. I'm very torn about the issue of where to put bonds (and can't get a clear recommendation from anyone), so I was thinking of compromising with an allocation like this:

TAXABLE
$180k Vanguard Total Stock
$90k   Vanguard Total Int'l
$30k   Vanguard Intermediate California Tax-exempt Muni Bonds

ROTH IRA
$16k   Vanguard Total Stock
$8k     Vanguard Total Int'l
$11k   Vanguard Total US Bond

What do you think? I'm also considering putting some active funds in the ROTH, such as replacing some of total US stock with their dividend growth fund (VDIGX).

EDIT: added my income.
EDIT 2: No debts (I payed them all off with some other money that came from this windfall). The $300k is after taxes were paid, so no worries there. Looking for this money to be invested about 30 years to retirement. Now, I would like to have kids and a house within the next 5 years - I haven't mentioned I also put away about another $50,000 from the windfall into a savings account for that. Yes, I'm extremely lucky for this money, and I plan to put a big chunk of my income into charity now that I have a more secure future.
« Last Edit: June 21, 2015, 06:13:32 PM by TypicalVillain »

Dicey

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Re: Help constructing portfolio after windfall
« Reply #1 on: June 21, 2015, 03:18:24 PM »
Following to see what great advice you get and also if someone who knows more about taxes than I calls you on why you are so concerned with avoiding them. I always thought it was better to go for best results and pay the taxes out of your earnings than to make choices in fear of taxes. We'll see...
Congratulations on your windfall, BTW. I hope it was not a result of the loss of a loved one.

MDM

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Re: Help constructing portfolio after windfall
« Reply #2 on: June 21, 2015, 03:25:15 PM »
TAXABLE
$180k Vanguard Total Stock
$90k   Vanguard Total Int'l
$30k   Vanguard Intermediate California Tax-exempt Muni Bonds

ROTH IRA
$16k   Vanguard Total Stock
$8k     Vanguard Total Int'l
$11k   Vanguard Total US Bond

What do you think?

Certainly not unreasonable. 

As Diane C notes, the degree to which going for tax-exempt funds makes sense depends somewhat on your marginal tax bracket.  In CA that can get high, but if your normal income is more modest then it may not be such a big incentive.

As for active vs. index, well, there is a non-negligible chance active will do better.  Said chance is also, historically, <50%.  So, as Dirty Harry said, "you've got to ask yourself one question: 'Do I feel lucky?'"

Financial.Velociraptor

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Re: Help constructing portfolio after windfall
« Reply #3 on: June 21, 2015, 03:41:37 PM »
TAXABLE
$180k Vanguard Total Stock
$90k   Vanguard Total Int'l
$30k   Vanguard Intermediate California Tax-exempt Muni Bonds

ROTH IRA
$16k   Vanguard Total Stock
$8k     Vanguard Total Int'l
$11k   Vanguard Total US Bond

What do you think? I'm also considering putting some active funds in the ROTH, such as replacing some of total US stock with their dividend growth fund (VDIGX).


Probably makes sense?  We probably need to know the end goal to know if this "fits."  Do you plan to FIRE?  Target portfolio size to FIRE?  Target FIRE date?  What is your debt profile and interest rates ("investing" by paying down high interest debt is valid too)?  Do you have "enough" insurance?  Is grad school on the horizon?  Children on the horizon?  Other big items we need to know about?

MidWestLove

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Re: Help constructing portfolio after windfall
« Reply #4 on: June 21, 2015, 03:48:53 PM »
+1 to what was already said - if you have debts , may make sense to review their state.
if you do not have debts but planning major purpose, portion of the windfall could be used for that (i.e. house down payment).
do you know if windfall taxable to you this year?

otherwise, your asset allocation is ok. Bond typically are put into tax advantaged accounts (to minimize income/taxes), in your case with 30k in income it should not make that much of the difference. What is more important is that you do act on the investments (vs waiting for "perfect time" or blowing it altogether) - how sensitive are you to 'loss' (i.e. if you invest now and market ebbs and flows as it usually does and your 300k becomes 250k, will you panic? sell and run?) ? if you are very sensitive to any paper loss, will you feel more comfortable with investing it over time (i.e.  50k chunks over next 6 months) , a type of 'averages'?

Also, why Roth at all? at your income level wouldn't it make sense to get maximum tax deduction?


 

TypicalVillain

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Re: Help constructing portfolio after windfall
« Reply #5 on: June 21, 2015, 04:08:05 PM »
+1 to what was already said - if you have debts , may make sense to review their state.
if you do not have debts but planning major purpose, portion of the windfall could be used for that (i.e. house down payment).
do you know if windfall taxable to you this year?

Added some more details to the original post. But, no debts now, and I have already set aside $50k to be kept in cash to help for a down payment in maybe 3 years. We have some other accounts for this purpose so we'll have at least $100k for a down payment.

otherwise, your asset allocation is ok. Bond typically are put into tax advantaged accounts (to minimize income/taxes), in your case with 30k in income it should not make that much of the difference. What is more important is that you do act on the investments (vs waiting for "perfect time" or blowing it altogether) - how sensitive are you to 'loss' (i.e. if you invest now and market ebbs and flows as it usually does and your 300k becomes 250k, will you panic? sell and run?) ? if you are very sensitive to any paper loss, will you feel more comfortable with investing it over time (i.e.  50k chunks over next 6 months) , a type of 'averages'?

Yep, I plan to DCA this over maybe 6 months or so, I'm just trying to decide a good allocation. One thing I'm concerned about is that everyone is saying now is a crazy time for bonds since rates will be rising. I will certainly increase the amount in bonds over the years anyway, to increase security. But I am strong enough to handle a paper loss!

Also, why Roth at all? at your income level wouldn't it make sense to get maximum tax deduction?
Well I expect my income to go up a lot so I guess I'm locking in my low rates right now?

forummm

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Re: Help constructing portfolio after windfall
« Reply #6 on: June 21, 2015, 04:10:27 PM »
+1 to what was already said - if you have debts , may make sense to review their state.
if you do not have debts but planning major purpose, portion of the windfall could be used for that (i.e. house down payment).
do you know if windfall taxable to you this year?

otherwise, your asset allocation is ok. Bond typically are put into tax advantaged accounts (to minimize income/taxes), in your case with 30k in income it should not make that much of the difference. What is more important is that you do act on the investments (vs waiting for "perfect time" or blowing it altogether) - how sensitive are you to 'loss' (i.e. if you invest now and market ebbs and flows as it usually does and your 300k becomes 250k, will you panic? sell and run?) ? if you are very sensitive to any paper loss, will you feel more comfortable with investing it over time (i.e.  50k chunks over next 6 months) , a type of 'averages'?

Also, why Roth at all? at your income level wouldn't it make sense to get maximum tax deduction?

$30k married? At that level, he's paying almost no tax. Probably good just to do a Roth.

forummm

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Re: Help constructing portfolio after windfall
« Reply #7 on: June 21, 2015, 04:16:15 PM »
otherwise, your asset allocation is ok. Bond typically are put into tax advantaged accounts (to minimize income/taxes), in your case with 30k in income it should not make that much of the difference. What is more important is that you do act on the investments (vs waiting for "perfect time" or blowing it altogether) - how sensitive are you to 'loss' (i.e. if you invest now and market ebbs and flows as it usually does and your 300k becomes 250k, will you panic? sell and run?) ? if you are very sensitive to any paper loss, will you feel more comfortable with investing it over time (i.e.  50k chunks over next 6 months) , a type of 'averages'?

Yep, I plan to DCA this over maybe 6 months or so, I'm just trying to decide a good allocation. One thing I'm concerned about is that everyone is saying now is a crazy time for bonds since rates will be rising. I will certainly increase the amount in bonds over the years anyway, to increase security. But I am strong enough to handle a paper loss!

If you have the money now, and you expect the market to go up over time, then you are expecting to lose out by sitting on the cash now. Just put it to work for you. No matter what level you buy in at now, it's going to be up in 20 years when you need it. DCA is nice as an idea for people investing every paycheck. But for lump sums it doesn't make sense to delay investing if the investments are for the long term. If you buy today and prices go down later, so be it. They are more likely to go up. And pay out dividends.

If you want bonds, then buy them. You can't predict what the timing of the rate increases will be. It sounds like interest rates will rise very slowly and very little in the near term. Those expectations are already priced into the bonds right now. Don't try to time the market. You will be worse at it than a professional investor (and they aren't all that good at it either).

Financial.Velociraptor

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Re: Help constructing portfolio after windfall
« Reply #8 on: June 21, 2015, 04:29:09 PM »
I'm with forummm.  You just need to pull the trigger.  The AA is reasonable; the timing aspect is always a roll of the dice.  You plan to have the funds invested for decades, a few months of DCA is trivial. 

Gratz, you exit the starting gate with a huge advantage.

TypicalVillain

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Re: Help constructing portfolio after windfall
« Reply #9 on: June 21, 2015, 05:29:44 PM »

If you want bonds, then buy them. You can't predict what the timing of the rate increases will be. It sounds like interest rates will rise very slowly and very little in the near term. Those expectations are already priced into the bonds right now. Don't try to time the market. You will be worse at it than a professional investor (and they aren't all that good at it either).

Thanks! I will probably do this. Just a bit of a psychological hurdle :)

So people seem to agree these are good choices for bond funds? I don't have any international bonds, but maybe I'll add that later as my IRA grows...

MidWestLove

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Re: Help constructing portfolio after windfall
« Reply #10 on: June 21, 2015, 06:10:26 PM »
yes, good fund choices for bond - either total bond fund (which you have) or vanguard intermediate term investment grade (which is where we are ended up using), both are fine.

not sure why you want munis in your taxable - is this part of your ER fund? If your AGI truly 30k and below, why bother with them? According to this you state income tax rate is under 4% anyway...
http://www.tax-brackets.org/californiataxtable

if this is not an emergency fund/reserves , then may be move all bond allocation into tax advantaged and used stocks in taxable. if this are reserves, muni's are ok option (we use both limited term tax exempt and intermediate term tax exempt in that space)

TypicalVillain

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Re: Help constructing portfolio after windfall
« Reply #11 on: June 21, 2015, 06:21:55 PM »
not sure why you want munis in your taxable - is this part of your ER fund? If your AGI truly 30k and below, why bother with them? According to this you state income tax rate is under 4% anyway...
http://www.tax-brackets.org/californiataxtable
Sorry, should have included wife's income. With that we are in the 25% bracket.

thedayisbrave

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Re: Help constructing portfolio after windfall
« Reply #12 on: June 22, 2015, 07:41:36 AM »
First of all, congratulations on the windfall!

Second, read this: http://www.bogleheads.org/wiki/Managing_a_windfall

It looks like your AA is in good shape.  I like it.  I'm with forummm - just DCA into the market and forget about it, you'll be golden.