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Experienced CFP, fee-only, Independent RIA, passive investment philosophy, DFA qualified
48 people found James's answers helpful
7 out of 7 people found this answer helpful
I concur with Jarrett's advice, and I would add this additional perspective: Using someone else's
I concur with Jarrett's advice, and I would add this additional perspective:
Using someone else's money to buy an asset (like a house) is sometimes referred to as "leverage". A lever amplifies an input force to provide a greater output force. In the same way, a small amount of home equity (the down payment) can appreciate dramatically, even if the home appreciation is modest. For example, a $1 million home is purchased with a 10% down payment, or $100,000. This $100,000 is the purchaser's equity. Subsequently the home increases in value by 10% to a value of $1,100,000. This results in a dramatic equity increase of 100%, as the equity doubles from $100,000 to $200,000. Of course if the home depreciates by 10%, the equity disappears. This volatility in equity is both the blessing and the curse of real estate investing with leverage: potentially higher return; higher risk.
Another point: If you hold a significant portion of your investment portfolio in long term fixed income securities, a long term fixed mortgage can counteract the detrimental effects of rising interest rates and rising inflation. The long term bonds may be the worst possible investment to hold in an inflationary scenario, but having a long term fixed mortgage may be the best. For example, let's assume that the prevailing long term 30 year rate on both U.S. Treasuries and fixed mortgages is 4%. Subsequently, both inflation and long term rates rise to 10%. Your portfolio of 30 year treasury bonds is still earning 4%, but in real inflation adjusted terms, it is losing 6% per year. However, you are still only paying 4% on your mortgage, but the balance you owe in real terms is declining by 10% per year.
In summary, a long term fixed mortgage can amplify your return on equity in the likely event the home appreciates in value, and it is also a great tool in an inflationary environment. Other benefit include the forced savings and the tax advantages. I would have to know more to give you specific advice, but in general if you have a long time horizon and are willing to invest in equities, I would likely go the mortgage route.
7 out of 8 people found this answer helpful
Others have given some good financial advice; allow me to address the behavioral aspect of inheriting
Others have given some good financial advice; allow me to address the behavioral aspect of inheriting a large lump sum:
Most who inherit a large lump sum think they are rich. They aren't. $1 million is not enough to retire successfully for most people. Your question implies that you will be spending the account down beginning now. That is likely a mistake. It would be wiser to invest it for a later retirement; pretending it is not available for any withdrawals until that time.
Those who accumulate a large account through decades of hard work have a high level of respect for the funds; and are loathe to spend them frivolously. This is not the case for those who inherit. In our firm we have a label for those who inherit large lump sums: we refer to them as "grocery cart clients". We set aside $200 for the day your account is completely depleted. It is then used to buy a grocery cart to hold all of your earthly possessions when you are homeless.
I am exaggerating here to make a point: inheriting a large lump sum can be the worst thing that can happen: A hardworking person inherits and thinks they are rich. They quit work and start spending the funds. In a few years, they are not only broke, but now they are lazy as well. Don't let that happen to you!
You are likely much more responsible than that: after all you are serious enough to ask the question. It is wonderful that you have inherited the funds; and I hope you don't allow this to become less productive in your work life, or less responsible in your spending. All the best to you.
4 out of 4 people found this answer helpful
Many folks are intimidated when buying or selling precious metals. I'm glad you are there to help
Many folks are intimidated when buying or selling precious metals. I'm glad you are there to help your grandmother to sell her gold bars.
First, you want to deal with a local gold dealer. Almost all towns have at least one store that buys and sells gold, silver, coins, and other collectibles. Shipping gold is expensive because 1) it is heavy, and 2) it's value makes insurance necessary. By bringing the gold bars to a local store yourself, you avoid those costs.
But before you bring the gold to a store, call two or three of them and get price quotes. Look at the gold bars for any brand names or "hallmarks". Some of them will add to the value of the bar. Most bars, however, are simply worth the "spot" price of raw gold bullion. The spot price is a price that is widely quoted. Compare the quotes and bring the bars to the store with the highest quote. It should be a price that is quite close to the spot price; certainly not more than 2% less.
One other item to be aware of: gold is considered a "collectible" for income tax purposes. This means that there is no favorable capital gains tax treatment. Capital gains on gold are taxed at a high 28%. If your grandmother has income that is low enough, you may be able to sell portions of her gold each year without tripping an income tax. For specific tax advice, talk with a competent CPA. All the best!
6 out of 7 people found this answer helpful
Ah…the age-old debate between commissions and fees! To really understand the difference, realize
Ah…the age-old debate between commissions and fees! To really understand the difference, realize that in the investment business there are not one, but two distinct business models:
1) securities sales, and 2) financial advice.
A security salesman may call him/herself a financial advisor, a financial planner, a "fee-based advisor" or any other number of other titles, but the fact is that a security salesman is not being paid to give advice. The proper titles for a salesman include stock broker, registered representative, or insurance agent. Like any salesperson, he/she is being paid a commission to sell a product for a financial institution. The salesman must be a registered representative
of the institution; so an easy way to identify a salesman is to look on his/her
business card, website, or yellow page advertisement for that term. If you see the term "registered representative", you are dealing with a salesman, regardless of the title he/she uses.
Your salesman may be attempting to do the very best he can for you; most do. But there is a
problem: he doesn’t work for you. He works for, (and is paid by) the institution he is registered with. That institution is likely to reward him most for selling products that are highly profitable for the firm. Those products tend to be the most expensive products for you. An unscrupulous salesman may sell the products that pay the highest commissions: notorious in this area are limited partnerships, non-traded REITS, fixed and variable annuities, and permanent life insurance policies. Not coincidentally, these products tend to be illiquid, subject to surrender charges if not held for a number of years, and with high internal ongoing costs.
Some salesmen may frequently buy and sell stocks or bonds within your account as a way to generate commissions. This practice, known as “churning” is detrimental because of the cumulative costs.
But the biggest problem with a commissioned salesperson is that most of them give biased and inferior financial advice. They are not paid to give advice, and their judgment is clouded by their end goal of selling a product. As they say, “You get what you pay for”, and with a salesman, you get a product.
If you want advice, hire an advisor. An advisor is paid to give advice, not to sell a product. I would look for the term “fee-only” to insure that you are truly dealing with an advisor. An advisor works for you, not for an institution. You pay the advisor directly for advice, and you do not pay commissions, because the advisor does not sell products at all. Instead of selling products, an advisor buys securities for you. The conflict of interest inherent in commissioned sales is gone; an advisor generally is paid a fee based upon the size of your account. You are both motivated to have the account grow; when you prosper, your advisor prospers; when you suffer, your advisor suffers.
The advisor is financially motivated to help you succeed, and that includes selecting securities that are low in cost. In my experience, investors who rely upon salesman pay on average more than 2.5% per year for their investments when all components of cost are added together (loads, 12b1-fees, turnover costs, and cash drag). A cost-conscious advisor who uses a passive strategy is likely to cost less than half of that, even when the fee for advice is included.
The value of advice goes beyond investment selection. A competent advisor will give valuable advice in all the major areas of a financial plan: cash reserve and liability management, savings and withdrawal rates, education planning, advanced income tax strategy, projections to determine feasibility of retirement, insurance evaluation and estate transition. Most importantly, an experienced advisor can act as your “behavioral coach”, preventing you from making costly mistakes such as market timing and holding concentrated positions. This comprehensive financial planning advice is often a bigger factor in your success than anything else.
In summary, I advise you to retain the services of a fee-only advisor.
4 out of 5 people found this answer helpful
I am assuming that your annuity is the common "deferred annuity", which carries a surrender
I am assuming that your annuity is the common "deferred annuity", which carries a surrender charge, and by "maturing" you mean that the surrender charge will disappear in January. I am assuming that the annuity has grown in value, and I am also assuming that it is a "variable" annuity, meaning that it is invested into various "subaccounts" with market values that fluctuate. Finally, I am assuming that the annuity is not held inside a qualified retirement plan like an IRA or 401k. If any of those assumption are incorrect, let me know, as that would change my answer.
If the assumptions are indeed correct, then the first part of the answer is easy: It is in your best interest to get out of that annuity in January. You are not required to; if you so choose you can stay in the annuity, but that is not advisable. The reason for this is simple: all of the deferred annuities that were sold with surrender charges are more expensive than they need to be. It is quite likely that when the various hidden costs including the M&E charge (mortality and expense), the sub-account expense ratios, the transactions charges based on turnover, the administrative charge, and cash drag are totaled together, your total expenses are north of 3% per year, and perhaps even 4% per year. Contrast that with an annuity that does not pay a commission to an insurance agent; some of these annuities charge only about .6% per year when all costs are totaled. If you retain the services of a fee-only financial advisor, your "all-in" costs are likely to be half of the costs you are paying now, and in addition you will obtain valuable ongoing advice. The new annuity will provide various sub-accounts as well, and a conservative portfolio can be built within the new annuity. The technique I would use to transfer from your existing annuity to the new less expensive annuity is the "1035 exchange", also known as a "like kind" exchange. You may be familiar with the "1031" like kind exchange that applies to real property. The 1031 exchange is the equivalent for insurance contracts such as deferred annuities.
You have not yet paid income tax on the growth within your annuity. Through a 1031 exchange, the tax deferral will continue; in other words you will not pay income tax when you exchange to the new annuity. The income taxes are only paid when a deferred annuity is liquidated, either as a monthly installments or a lump sum.
If you liquidate the annuity rather than 1035 exchanging it, you will pay income tax on the amount over your cost basis (the "deferred interest") at ordinary income tax rates. For example, if you originally deposited $100,000 into the annuity, you would owe tax on the $35,000 "deferred interest". This can be a viable option if you are in a low income tax bracket year. For example, you may have a year with large medical or charitable expenses, and that may allow you to liquidate the annuity and pay tax on the $35,000 in a very low tax bracket.
More likely it will benefit you to take the taxable income gradually over time, in which case a 1035 exchange to the new low-cost annuity followed by systematic withdrawals from the new annuity will make more sense. If the annuity is completely liquidated rather than 1035 exchanged to a new annuity, I would recommend a massively diversified account in which the majority of the account is invested into passively managed bond funds containing short term high quality corporate, treasury, mortgage, and TIPS bonds. A smaller percentage (perhaps 20% to 30%) of the account would be invested into passively managed equity funds containing domestic, international, emerging, and real estate equities.
When you turn 70 1.2 you will be required to begin withdrawals from your 401k. Unless there is "after tax" money in your 401k, every penny of those withdrawals will be taxable. The annuity, on the other hand, contains a significant amount of "after tax" money. Your deposits to the annuity have already been taxed, so you will not pay tax when they are withdrawn. Deferred annuities withdrawals are treated as interest first, principal second. Assuming that you have a cost basis of $100,000, the first $35,000 in withdrawals will be taxable, but the last $100,000 in withdrawals will be considered a tax free return of principal.
Once you have withdrawn the first $35,000, you may be able to enjoy a very low tax bracket for a few years as you live on the other $100,000. This may even allow you to take tax free Social Security benefits, as the taxability of Social Security benefits depends upon the amount of other taxable income you receive. This window of opportunity is likely to close when you are 70 1/2, because the required distributions from your 401k are likely to push you into a higher tax bracket.
I have only scratched the surface here: there are many caveats and other factors that may influence your decision. I would retain a competent fee-only CFP.
All the best!
3 out of 4 people found this answer helpful
The "rule of thumb" is to maintain an emergency fund equal to between three and six months of income.
The "rule of thumb" is to maintain an emergency fund equal to between three and six months of income. Here is my rule of thumb: "There IS no rule of thumb".
As your question implies, an emergency fund which traditionally has been held in cash equivalents (money market mutual funds, bank savings, etc) earns close to 0% interest, and is therefore losing value in real terms every year. It hasn't always been like this, but currently cash equivalents earn less than the rate of inflation. In a 3% inflation environment, a cash equivalent earning 1% is losing 2% per year in real terms; hardly a good place to have any significant amount of money.
In addition, most people have easy access to low interest credit if emergency funds are needed. For example, a home equity loan typically carries a very low finance charge (for example, recently the interest rates on home equity loans has been in the range of 2.5%). Also, home equity loan interest is tax deductible, so the "tax equivalent" interest rate on a 2.5% home equity loan for a taxpayer in a 25% tax bracket is only 1.875%. The home equity loan can be applied for without significant cost now, and utilized only if needed.
I would advise you to structure your emergency funds into two tiers:
Tier 1) A small amount of about 1 month's income in a "1st tier cash reserve" traditional emergency fund (bank savings, money market mutual fund, etc)
Tier 2) A larger amount of perhaps three month's income into a "2nd tier cash reserve" in a non-qualified account such as an individual or joint brokerage account, invested into a massively diversified basket of securities. I would keep the equity exposure in this account to 20% of the account balance, with the other 80% invested into a portfolio of shorter term, higher quality bonds. The overall character of this account is that while there can be principal losses it is quite stable in value, and over very long periods of time it should earn at least the inflation rate, eliminating the real losses experienced in a traditional cash reserve account.
If you are in a high income tax bracket you might consider tax-free municipal bonds for the bond portion, whereas if you are in a low bracket, taxable bonds such as corporate and treasury bonds make more sense. If the dreaded "emergency" happens, you may choose to use this account, or conversely you may choose to tap the home equity loan. A conservative account such as this can be used for opportunities as well as emergencies. Often an investor will discover on short notice that they want to buy a piece of real estate or personal property such as a car, and having a stable account available to use at any time as a source of capital can make life less stressful.
All the best to you.
3 out of 4 people found this answer helpful
The challenge of investing your inheritance is a good one to have. You will want to make the most
The challenge of investing your inheritance is a good one to have. You will want to make the most of it to provide the income you need. But let's not conclude that in order for you to receive a high income from your account, you need investments that produce a high income. I know how ridiculous that sounds, so let me explain that a bit further:
Securities can earn you money in two, and only two ways: 1) they can produce income, and 2) they can grow. The combination of the two is called total return.
Income takes the form of bond interest, stock dividends, or real estate rental payments. Growth is generally obtained from equity ownership in stock or real estate.
Now here is where it gets a bit tricky for an investor who wants high income: A bond paying 7% interest sounds better than one that pays 2% interest. It's not. It is simply a higher risk investment. In fact, investors who reach for high yields have the potential to lose money overall if their bond investments fall in value.
Bonds are often referred to as guaranteed investments, but remember that a guarantee isn't worth much if the bond issuer is unable to repay you. A bond issuer with low creditworthiness must pay a high interest rate to entice you, and those high interest bonds are more likely to lose some or all of their value. Likewise, long term bonds generally pay higher interest rates than short term bonds, but in certain economic environments long term bonds can permanently lose much of their real value.
The moral of the story is that it is not income that matters, it is total return. A massively diversified portfolio that includes stock and real estate investments in addition to bonds is likely to have a lower income than a strictly bond portfolio, but the total return is likely to be higher, and it is more likely to result in a positive investing experience over your lifetime.
My advice in a nutshell? Don't try this at home. Retain the services of a fee-only CFP who can advise you not only concerning the investments, but also the planned rate of withdrawal, income tax considerations, and other major areas of your financial plan.
3 out of 4 people found this answer helpful
I don't think you are making a mistake. If this is the gal you plan on marrying, I would call this
I don't think you are making a mistake. If this is the gal you plan on marrying, I would call this a good "investment" :)
2 out of 3 people found this answer helpful
OK, here is some "tough love" for you. Let's begin with the assumption that you are
OK, here is some "tough love" for you. Let's begin with the assumption that you are not illegally trading on non-public information.
A stock's price is a reflection of all known public information, both positive and negative. What will move the future price of the stock is information that is not yet available. In other words, you would need to be a prophet to predict what stocks are "buys".
No one, and I mean no one, has the slightest idea regarding the future direction or magnitude of price changes in any security or market, period. Not for a year, a month, a week, a day, a minute, or a second.
Investing in single stocks is thus akin to gambling, including the house odds (trading costs). The range of outcomes is wide; you may hit a grand slam, and you may strike out. Most investors do not see their investment portfolio as an end in itself; rather it is a means to other ends. Typically they count upon their investments to fund important goals such as retirement income. A narrower range of outcomes (more stability) is desired.
The way to achieve that is to diversify, and massively. The average expected return on a basket of diversified stocks is no lower than the average expected return of a single issue stock, but the risk is considerably less. In other words, by diversifying you can lower your risk without lowering your expected return.
I advise you to diversify into passively managed funds rather than investing in any single issues.
1 out of 1 person found this answer helpful
From your question I see that you already understand the cost advantage of passive index funds over active
From your question I see that you already understand the cost advantage of passive index funds over active funds, so I won't beat that dead horse.
But index funds have other advantages as well: primary among them are that index fund managers admit that they cannot reliably "beat the market". They console themselves with the fact that neither can anyone else.
Most people assume that past performance should enter into your decision making progress. It shouldn't. Those who subscribe to the efficient market hypothesis understand that the price of publicly traded securities are a fair reflection of true value, and that it is not possible to predict which securities will outperform the market as a whole. Therefore we believe that any past over-performance achieved by a fund is due to random chance and nothing else. A fund that has had spectacular performance in the past is just as likely to be a dog in the future as any other fund.
Index fund managers as a whole do a very good job of mimicking their benchmark index (less their small costs), I wouldn't focus on the tenure of the manager or the past performance. In an index fund, the performance you are seeing is due largely to the performance of the underlying index, not due to any skill in stock picking.
There are some items I would focus on:
1) Will you be depositing or withdrawing from the fund often? If so, I would use an open end mutual fund, not an ETF. An EFT will generally carry some cost for buying and selling. (Although some can be traded without cost in certain situations).
2) Are you looking at the overall asset allocation of your portfolio? There are diversification benefits to investing over a wide range of asset classes including (on the equity side) domestic, international, emerging, and real estate equities, (and on the bond side) treasury, corporate, municipal, mortgage, and TIPS bonds. In other words, an S&P 500 index fund is not going to cut it. Index funds that invest in International and Emerging market stocks will carry a higher expense ration than the domestic index funds, but in my view the benefits outweigh that cost.
3) Are you working with a Dimensional (DFA) qualified advisor? If so, there are benefits to that. While the expense ratios may be slightly higher, the turnover costs are likely to be lower, and there is benefit to DFA's market research which has shown that a tilt toward value and small stocks, in addition to a "direct profitability" dimension can add to your returns.
Dimensional's market research is not to be confused with fundamental stock research, which attempts to determine whether a stock is under or over- valued based upon circumstances that are particular to a certain stock. We could easily get lost in the weeds here, so I will simply say that history has shown that DFA's market research results in reliable results, whereas fundamental research does not.
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I believe that investors have been taken advantage of by the investment industry for far too long. I want investors to have a more positive experience; to rely upon unselfish advisors who honor their values and care about them as people; to have some semblance of financial security and to achieve success.
My experience as a broker taught me the dark side of the investment business; the obsession over sales and revenue, the hidden costs, the conflicts of interest, and the lack of interest in delivering comprehensive financial planning that is so crucial to the successful attainment of important goals.
That experience has given me the ability to easily spot the common vices in the investment business, and motivated me to become completely independent in order to engage in more virtuous business practices. I partner with clients to manage their wealth with a focus on reducing conflicts of interest, containing their costs, and providing total transparency. I deliver comprehensive financial planning advice, behavioral coaching, and education. This is of great value to my clients; far more than mere investment portfolio design and management.
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