How to invest (relatively) large sums?

[Felonious Monk/Fignozzle]

I've got the usual 401k, a little liquidity via a Money Market fund, and that's pretty much it.

If events continue forward in their expected direction, I anticipate a modest windfall which may range as high as several hundreds of thousands in U.S. coin of the realm.

My priorities would be to maximize returns while still preserving the principle, while structuring for the optimum tax advantages.

Any of you have experience or insight into how to best arrange an investment like this?
As always, the advice is appreciated.

Thanks,
Fig

[MaterDei]

What kind of return are you expecting?  Munies fit the bill if you're not after too high of a return.

[Felonious Monk/Fignozzle]

Tax deferred, tax-exempt, or
I'd love to have a solid 7% tax-deferred.  What can I realistically expect?

[grampster]

Wire the funds to grampster and he shall guard them well.

Seriously, you need to inquire from people you know and trust, that are investing other than through their company, to provide you with the name of a money manager they know and trust.  That manager will have a track record that is long and successful.  Be wary of those that advertise a lot.  Successful people rarely have to advertise.  They have word of mouth; the best recomendation.  Be doubly wary of those who proclaim to be Christian and use that to promote themselves.  I think you know why.

I'm preparing to hand over my 401k to a fellow that has been a client of mine for about 20 years, so I have had time to observe that he has been successful and he is not in jail at the present.

E mail me if you like and I'll give you his name and how to contact him so you can see about him yourself.

[MaterDei]

Munis are tax exempt but I don't think 7% is within the realm of possibility given where interest rates currently reside.  I'm clueless though, others probably have much better ideas...

[The Rabbi]

First thing is to pay off debt.

You havent said what your time frame is.  Do you want to retire in 20 years?  Do you need to send a kid to college next year?  It makes a difference.
Avoid active mutual funds like the plague.  Their high fees and low returns just arent any good.
You have several options: fixed income and equity (e.g. stocks).  Fixed income will insure the principle against loss, but does not help if inflation picks up.  Nor does it help if you lock in at 4% and rates go to 8%.
Over any 20 year period equities have returned about 7-8% after inflation.  That is comforting.  I would look at index mutual funds and buy a basket of those along with some fixed income offerings.  That is for the least hassle in investing.
But it is a big topic and many many books have been written on this.  Maybe the best investment of all is in some self-education on the topic.

[Phantom Warrior]

You said "How to invest..." and I was like "Oh goody."  And then you said "large sums" and I was like "Ohhhh..."

[bratch]

Look into a manager. My parents invested a decent amount of money and the company gave them quite abit of money if they would keep the account for a fixed period of time.  Free money has the best return;)

[Werewolf]

In the current market 7% with little or no risk and tax free is pretty much a pipe dream.

Quality munis are paying 2% to 4% these days - emphasis on quality. And they're really not tax free because of the alternative minimum tax. In other words too many folks were living off of the interest they made on munis and not having to pay any tax. The leaches in congress just couldn't abide that so voila the AMT.

US Treasury bills and notes are federal income tax exempt but not state. But then AMT comes into play there too.

Your age really has a lot to do with how you choose to invest. In general the younger you are the more risk (and thus higher potential returns) you can assume.

Find a qualified financial planner and go from there.

[280plus]

Look at the Vanguard Admiral funds. Some of them perform very well and require for a minimum the amounts you are talking about. I can't say anything about them in regards to tax deferment. I'd suggest packing away the maximum you can each year into IRAs for a start. I had some funds that were taxable upon withdrawal that I eventually rolled all over into IRAs and defered all the taxes to when I hope to show minimal income each year after retirement.

http://flagship4.vanguard.com/VGApp/hnw/content/Funds/FundsAdmiralSharesOverviewJSP.jsp?Entry=VGFundsOV

I'm not a VAngaurd rep or anything but I own other Vanguard so I've gone over some of their reports and I liked the Admiral shares but don't have the 100 Gs to put down...

[Ben]

I like dealing with Vanguard too, for whatever that's worth. I do my IRA (mostly Wellesley (sp?) Fund) and non-TSP, non-retirement stuff with them as well.

[Paddy]

Since I'm in a similar situation, I've had the same questions.  Some rambling thoughts in no particular order:

Max out your 401k.  Make the maximum contributions allowable each year, these are all tax deferred as is any employer match.  I don't think you can have deductible IRA contributions in the same year you make 401k contributions.

Tax deferred sounds good, but it presupposes that tax rates will remain the same when you income decreases in retirement.  How far away is that?  I'd bet on tax increases in future years.

You need a plan.  How much will you need at retirement and how far away is that?  With that information you can determine what your rate of return needs to be.  Diversify.  For example, I'm 59 so I can't afford to take big risks.  Preservation of capital is my main goal.  For me, it's 60% in cash or cash equivalents (t-bills, cds, etc.  you can 'ladder' any cds) 20% mutual funds and maybe 20% stocks or hard money loans secured by trust deeds.   If your younger with many more years before retirement, you can afford to be more aggressive with long term investments.

Just some thoughts.

[Felonious Monk/Fignozzle]

First thing is to pay off debt.

You havent said what your time frame is.  Do you want to retire in 20 years?  Do you need to send a kid to college next year?  It makes a difference.
Avoid active mutual funds like the plague.  Their high fees and low returns just arent any good.
You have several options: fixed income and equity (e.g. stocks).  Fixed income will insure the principle against loss, but does not help if inflation picks up.  Nor does it help if you lock in at 4% and rates go to 8%.
Over any 20 year period equities have returned about 7-8% after inflation.  That is comforting.  I would look at index mutual funds and buy a basket of those along with some fixed income offerings.  That is for the least hassle in investing.
But it is a big topic and many many books have been written on this.  Maybe the best investment of all is in some self-education on the topic.

Other than a leftover ~10k student loan, I am debt-free.  Competely.

I have 3 kids to send to college; 16, 14, and 10.  Kicker is, in our little town, if they graduate from the local H.S. with a "B" average or better, their first 2 years at community college is completely paid-for.  They'll all be doing their first 2 years at community college.

Retirement's nothing I want to do now; I WOULD like to re-evaluate the career path a little, maybe explore some things I haven't had the lattitude to be able to consider.

[thebaldguy]

Very few brokers talk about savings bonds - 'cause they don't earn any commission on them! Check out the inflation adjusted I bonds. They pay a rate of return that's adjusted for inflation.  They're also exempt from state tax when you cash them in.

Always remember to diversify. Some stocks, some bonds, some mutual funds, some cd's, etc. Don't put all of your eggs in one basket. Don't forget to pay yourself - get rid of debt when possible, and that includes student loans and credit cards. Put something aside for the kids' college - an educational savings IRA may be a good idea.

Oops! I forgot about the IRA/Roth IRA. Maybe a good idea to look into as well.

[280plus]

an educational savings IRA may be a good idea.

+1

[...has left the building.]

Fig,


I like index funds as much as the Rabbi and he also alluded to the disadvantages of fixed income instruments. We are in an environment of rising rates at worst and flat rates at best. That means fixed income instruments are currently favorable for the issuer, not the investor. But...

You're a smart guy; since you are, I would talk to at least a reputable financial planner as well as a CPA. Compile a list of options and evaluate them to the best of your ability (and with input from people who are unbiased as to earning from your situation). You have a lot of things to think about that really need to be written down and thought upon. For example, if all three of your children go to an in-state public U, how much of your retirement account does that leave for you? In what time frames? Basically, first evaluate what you have to work with and when you will have it. Liquidity will play a factor since you have to spend some of your savings for their college. My initial approach to your situation would be to draw a detailed picture of timeframes and sums; only then would I think about picking individual products that of course tailor themselves to liquidity, tax advantages, etc.

[280plus]

Daniel,

How does one go about finding a REPUTABLE financial planner? The ones I've met (a few but not many) seem to be more interested in getting my money in their pockets to do with as they please. I felt like I was in a hard sell situation every time I initiated contact with a rep.

[...has left the building.]

280plus,

That's a very reasonable question. I work in the financial industry so I have aquaintances and relatives who are financial planners; I suppose I take it for granted how hard it is to find good help. As a general rule, people who work for the big firms such as Goldman Sachs, Merrill, or Smith Barney tend to have more experience and education than say a planner who works for American Express Financial. But of course, there are exceptions to this rule nationwide. The large firms also have better support and information IMHO. I would start at the bigger firms if you can't get any recommendations from close friends or relatives. If the planner is going for the hard sell like a used car dealer, he is a salesman, not a planner. Regardless, don't let them intimidate you because after all, you are the one that is hiring them. Even if you don't go with a planner, it doesn't hurt to talk to them to at least get a feel for your different options.

[280plus]

If the planner is going for the hard sell like a used car dealer, he is a salesman, not a planner.

Now THAT'S a key piece of information. Because that's exactly how I felt.

FWIW, I was just going over some of my stuff and I found that by going down the list of Vanguard funds a few years back and picking several that had average return rates since inception of 10% or better and placing somewhat equal amounts in each I have to date realized total of 6.5% for one year and 10.2% for my 3 year return on the total of my investments in that fund group. I'm tempted to tweak it a bit because their Strategic Equity fund has outperformed all the others by a fair margin at 9.97% for one year but then who knows how it will perform this year. I'm thinking the ones that didn't do as well are due sooner or later. The diversity allows me to not worry so much about which sector will outperform the others each year so maybe I'll just sit back and watch some more...

Look at  those Admiral funds though. Some of the since inception returns are phenomenal. Problem is a lot of the best ones are closed IIRC.

Oh, I do have an uncle in the broker business. Unfortunately for him, some of my picks did better than his.

LOL...

Oh, in case anyone's interested, the funds I have are: STAR, Asset Allocation, Equity Income, Strategic Equity and Total Stock Market Index.

[Paddy]

A question about 'Financial Planners'.  How are they paid?  It has been my experience that they typically push some investment vehicle with a heavy (5%-6%) front load.  It may or may not be a decent investment; it may or may not be suitable for the client.  What other sources of income do Financial Planners have other than sales commissions from a front load?

[280plus]

Someone correct me or add to this if necessary but IIRC a loaded fund takes and pays the broker up front while a no load fund pays from fees drawn out by the fund. One thing my uncle stresses is, "NO LOAD!! NO LOAD!!" (He's a loud talker. ) You should watch any form of ball game with him. He's a screamer...

[The Rabbi]

A question about 'Financial Planners'.  How are they paid?  It has been my experience that they typically push some investment vehicle with a heavy (5%-6%) front load.  It may or may not be a decent investment; it may or may not be suitable for the client.  What other sources of income do Financial Planners have other than sales commissions from a front load?

Good point.  The answer is they vary.  Some make commissions from selling products and some are "fee based" planners.  Generally the advice I have heard is to go with the fee based planners over the others.  If someone is doing both then they are likely sleazeballs.  If they are doing neither they are likely either incompetant or sleazeballs or maybe both.
Watching costs is the best investment return you can have.  It is amazing that when people put money in 401Ks and the like they fail to notice the fees involved.  The SEC has a website that lets you analyze the effect of fees.  What is the difference between a 1.5% expense ratio and a .35% expense ratio over 10 years?  You would be amazed.

[...has left the building.]

If the planner is going for the hard sell like a used car dealer, he is a salesman, not a planner.

Now THAT'S a key piece of information. Because that's exactly how I felt.

FWIW, I was just going over some of my stuff and I found that by going down the list of Vanguard funds a few years back and picking several that had average return rates since inception of 10% or better and placing somewhat equal amounts in each I have to date realized total of 6.5% for one year and 10.2% for my 3 year return on the total of my investments in that fund group. I'm tempted to tweak it a bit because their Strategic Equity fund has outperformed all the others by a fair margin at 9.97% for one year but then who knows how it will perform this year. I'm thinking the ones that didn't do as well are due sooner or later. The diversity allows me to not worry so much about which sector will outperform the others each year so maybe I'll just sit back and watch some more...

Look at  those Admiral funds though. Some of the since inception returns are phenomenal. Problem is a lot of the best ones are closed IIRC.

Oh, I do have an uncle in the broker business. Unfortunately for him, some of my picks did better than his.

LOL...

Oh, in case anyone's interested, the funds I have are: STAR, Asset Allocation, Equity Income, Strategic Equity and Total Stock Market Index.

It sounds like you're performing solidly!

[...has left the building.]

A question about 'Financial Planners'.  How are they paid?  It has been my experience that they typically push some investment vehicle with a heavy (5%-6%) front load.  It may or may not be a decent investment; it may or may not be suitable for the client.  What other sources of income do Financial Planners have other than sales commissions from a front load?

The Rabbi outlines it well. I wouldn't advise Fig to go with a planner necessarily, but to probe a few different ones for ideas. Even though some of them are as slick willies, you can still get a good idea of what's out there. If I were in his situation, I would draw up a timetable, talk to the planners/research/etc. to gather ideas, then go from there.

[280plus]

It sounds like you're performing solidly!

So far so good. I was pleasantly surprised when I saw those figures.