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Chris T
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Need investing advice  Reply with quote  

I'm a 40 year old freelancer in the film business. My gross annual income averages $150,000 (though since I'm self-employed, work can be sometimes volatile and inconsistent). My wife and I own a house (purchased for $800,000, 5 years ago. Now estimated worth over $1.3M). We have $590,000 left on the mortgage = 30yr fixed at 4.0%

I have $220,000 in cash savings and $34,000 in 401k. My wife has $19,000 in her 401k. She works for me (i.e. also self-employed).

Currently my cash is in an online savings account(!!), and is gaining a terrible 0.6% interest or thereabouts. Obviously I need to invest it more aggressively.

I was advised by my accountant that if I'm going to invest on the stock market, that I should consider paying off a chunk (say $50k) of our mortgage at the same time (as a way of 'diversifying' our investing by reducing our mortgage burden).

If I were to do that, and also keep about $50,000 in savings (rainy day), that leaves me with $120,000 to invest in the stock market.

I'm considering Robo-investors (Wealthfront, Betterment etc) vs a human financial manager. Can you advise on the pros/cons of robo-investors vs humans, and also the mortgage payoff etc. Thanks!
Post Wed Mar 23, 2016 11:08 pm
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oldguy
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quote:
I'm considering Robo-investors (Wealthfront, Betterment etc) vs a human financial manager. Can you advise on the pros/cons of robo-investors vs humans, and also the mortgage payoff etc. Thanks!


Of the two I'd give the nod to Betterment. But IMO you don't need either a robo or a human. Ironically, the best performers have been the investors who used unmanaged funds. Only about 15% of the professional mutual fund managers and pension manager are able to beat the generic market (measured by the SP500 Index) - the other 85% don't beat the market by enough to pay themselves and the OH. So why not simply buy the unmanaged SP500 Index Fund? It has an average return of 11%/yr, almost forever. It is diversified across the 500 major companies that make up 80% of US commerce. As for allocation - at your aged you should be 100% in stocks, wait for age 55 or more before easing from wealth-building into wealth-preservation (bonds).

As for prepaying the mortgage - no way, US mortgages are almost least expensive capital in the world. In no other country can someone wander into a bank, ask for a $590,000 loan, ask that the rate be only 4%, and ask that the rate be guaranteed for 30 years, that loan is golden. There will be many times over the next 25 yrs that you will love that 4% capital. Consider - a couple decades from now you may end up borrowing that same money back at 8% to buy a new car - but you won't have to cuz you retained the use of that capital back in 2016.

Several times over the past 40 yrs I refi'd our rental houses, took our $25,000 at a time, and put it in the SP500. In 30 yrs $25k grows to $575,000. And I pay about $120/m ($43,000) for the use of that $25k. Did that with all the houses, more than once with one house.

Here's my suggestion -
1. Keep the 4% 30 yr loan for the full term, don't prepay.
2. With the $273,000, keep as much as possible invested at 11%/yr. Except for about a $10,000 EF, keep that in savings/checking. But $10k is enough dead money, put the rest to work.
$263k at 11%/yr for 25 yrs is $3,500,000. (And the house will be paid off that yr, worth another $3.5M). And there will be more as you add to the 401ks.

As for account types for the $263k, put at least $50k into a taxable fund at Vanguard or Fidelity, invested at 11%/yr. That money is available in one day, a Fall Back EF, if something too big for the $10k EF happens such as extended layoff.
For the rest, use your 401k/roth limits first, then the rest goes in the taxable fund.

But the key metric for all three fund types is the 11%/yr return. http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html#.VvM6tHqyD5x
Check most any 30-year-block, most of them average about 11%/yr.
Post Thu Mar 24, 2016 1:06 am
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SCEngineer
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I seem to start all my posts the same way... oldguy is right... mathmatically.

Betterment is the better robo-advisor once you have 100k invested (only charge 0.15% compared to 0.25% at Wealthfront, and higher elsewhere). As long as you are diciplined and won't panic and pull out your money buying your own growth funds can save you money. I'm lazy and let Betterment do it for me.

It's not a bad idea to put money onto the property. If you look at your monthly budget and see the chuck that goes to the house every month, think what you could do if that was income. It's true that mathmatically investing the difference now will have a higher return in 25 years when the mortgage is up, but theres something satifying about owning the house. Something for you to decide on (with your wife).

The emergency fund that you are setting asside the 50k, since you are self employed that should cover 6 months or so of living expenses. If you spend 10k/month you might want to up that to 60k.

All in all, sounds like you are doing fantastic. Congrats.
Post Sun Mar 27, 2016 11:20 pm
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Chris T
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Thank you both for the smart advice.

I agree that mathematically OldGuy is correct, but the reality is, I'm a very busy guy, and honestly don't have the time, inclination or patience to learn, research, take risks (with my zero knowledge) and deal wit the stress of investing it manually. Hence my attraction to the Robo-investors. I think my work would be jeopardized if I put time and energy into manually investing for the sake of a few % higher return (which could be countered hopefully by me simply earning more money!).

Betterment sounds great, but I've also been thinking about Vanguard. They charge 0.3% fees (fractionally about Wealthfront) but with them you get a human being to advise you and take consultation calls. This for me seems like a good idea since I really know nothing about investing and it could be a way for me to start learning...

Anybody else tried Vanguard?

I'm still rather undecided on the mortgage. It would feel good to pay it off sooner (mere peace of mind), though I know mathematically that we'd be wealthier in the long run to invest the cash at 7-8%...
Post Mon Mar 28, 2016 4:19 pm
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oldguy
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quote:
but I've also been thinking about Vanguard. They charge 0.3% fees (fractionally about Wealthfront) but with them you get a human being to advise you and take consultation calls.


I'm with Vanguard, I've used their VFIAX almost forever, the expense is 0.05% - the fund has had a longterm average return of about 11%/yr.

As you point out, there can be a lot to learn. But investing is an interesting dichotomy - the THEORY is very complex - 1000s of books, derivatives, 'puts', calls, short sales, hedge funds, options, charting, cup & handle, head & shoulders, penny stocks, yada. But when reduced to PRACTICE it is deceptively simple, ie, buy the SP500 Index incrementally, accumulate, never sell.
That simple plan beats 85% of the professional fund managers because the SP500 is an unmanaged fund, low overhead.

0.3% overhead.
$263k at 11%/yr for 25 yrs is $3,573k. At 10.7%/yr it is $3,340k. So, while 0 .3% sounds small, the power of compounding works on it. Almost a quarter million.
""we'd be wealthier in the long run to invest the cash at 7-8%...""
At 7%, the $263k would grow to $1, 427k. Ie, you leave about $2M on the table with that approach. And, sadly, that's what most folks do, they over-think, move the money back & forth, trying to get the best returns - but they miss both the lows & peaks of the timing - that cuts deeply into the power of compounding. A brokerage tracked their clients for a 23 yr period back in the 1980s era, the 'holder' got about 13%/yr, the 'movers' got about 2.5%/yr (in a 13% market).
Post Mon Mar 28, 2016 5:54 pm
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Chris T
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Hi Oldguy et al

I'm finally setup with my Vanguard account and have decided to do the following:

1. Invest $50,000 with Vanguard (probably using their advisor service...for a year at least so I can learn).

2. Invest $50,000 with a Robo-advisor (probably Wealthfront)..for a year at least.

After that year or more I'll see which is performing better. Since I have exactly the same amount invested they should be pretty easy to compare. Also, after that year (or more) I may opt to not do the 'Advisor' services at Vanguard and just self-invest in various Index Funds / ETFS (or just the Vanguard S&P like you suggested).

3. Keep $50,000+ in Emergency Fund. While it might be foolish to keep this much in a Savings account, since i'm a freelancer and my income is highly volatile, I do need the liquidity on occasion (so as not to have to dip into the investment accounts). That said, can anyone recommend a more lucrative way of keeping 'SAFE' money. E,g, half in savings, and half say in Treasury bonds? (with a 1-yr maturity or something). That way the whole $50k is not going to waste...

4. $70,000 is now in my 401k. Due to tax deadline issues I had to rollover my single- 401k to a new Financial Advisor. He happens to be with Merrill Lynch (and I believe is charging 1.1--1.3% in fees/commissions. I thought about moving this soon to a 401k at Vanguard, but I discovered that Vanguard cannot offer account management / rebalancing services for 401k's (which ML does), so I'm undecided about what to do with this money.

Any advice on any of the above points would be most appreciated!
Post Thu Jun 02, 2016 12:26 am
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Chris T
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Also, I'm now paying an additional $700 towards the mortgage each month, which means we're set to pay it off by 2036 (in 20 ys-when I'm aged 60). I decided not to pay-off more for now since that liquidity is important due to my volatile earning (i.e. the possible need for more cash, which if I pay off house would just be invested in the house).
Post Thu Jun 02, 2016 12:35 am
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oldguy
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quote:
(i.e. the possible need for more cash, which if I pay off house would just be invested in the house).


Yeah, I would be pretty careful about lock your capital into the house. Two things - (1) if you ever need that money in the next 20 years, I'm betting that you'll pay more than 4% for it. (2) if things go bad (loss of job) you won't be able to get loans, you'll be broke but sitting on a paid-for house that you cannot touch. In fact if you start to lose the house, you will have no way to save it. Might be better to retain the use of that 20*12*$700. $168,000 in cash might be useful some day.


[/quote]can anyone recommend a more lucrative way of keeping 'SAFE' money. E,g, half in savings, and half say in Treasury bonds? (with a 1-yr maturity or something). That way the whole $50k is not going to waste...
[
quote:


No, no such thing exists. The Law of investing - "risk and return are directly proportional " - no exceptions. (When someone finds the magic investment, it simply means that they have not yet understood the real risk.)
Post Thu Jun 02, 2016 1:11 am
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raybenz1985
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Good , i still suggest you to learn about stocks. trading stocks is very difficult and you can loose very quickly if you have no skills,knowledge,strategies,plans about it. So before start you need to get lot of information about stocks to get good profit in it.


http://courses.wallstreetsurvivor.com
Post Tue Jun 28, 2016 10:45 am
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SophieB
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Re: Need investing advice  Reply with quote  

quote:
Originally posted by Chris T
I was advised by my accountant that if I'm going to invest on the stock market, that I should consider paying off a chunk (say $50k) of our mortgage at the same time (as a way of 'diversifying' our investing by reducing our mortgage burden).


Investing in stock would be really a good thing, however, it would need a lot of time to understand stock so that you'll know how to handle crisis about it. I suggest read these blogs, they have good write ups about stocks. I hope these will help you in deciding where to invest your money Smile

http://itrader.news/?s=stock
http://itrader-stocks.com/
http://itrader-forex.nl/
Post Thu Dec 15, 2016 2:53 am
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oldguy
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quote:
2. Invest $50,000 with a Robo-advisor (probably Wealthfront)..for a year at least.

4. $70,000 is now in my 401k. Due to tax deadline issues I had to rollover my single- 401k to a new Financial Advisor. He happens to be with Merrill Lynch (and I believe is charging 1.1--1.3% in fees/commissions. I thought about moving this soon to a 401k at Vanguard, but I discovered that Vanguard cannot offer account management / rebalancing services for 401k's (which ML does), so I'm undecided about what to do with this money.



No, don't mess with the new Advisor - and you do not want "account management" - 85% of the fund managers are unable to match the unmanaged SP500 Index. And the 15% who match the SP500 are not the same 15% as last year - ie, it is counterproductive to chase them.


quote:
I'm a very busy guy, and honestly don't have the time, inclination or patience to learn, research, take risks (with my zero knowledge) and deal wit the stress of investing it manually. Hence my attraction to the Robo-investors. I think my work would be jeopardized if I put time and energy into manually investing for the sake of a few % higher return (which could be countered hopefully by me simply earning more money!).


Dear Busy. I would HIGHLY recommend "The little book of commonsense investing" by John Bogel. It's a fast read, the best summary of what you want to know that I've seen. You need to apply your income stream to it's "highest and best use". And IMO, you are doing the opposite. Eg, prepaying a 30-yr mortgage is backwards, there are so many better things to spend your money on than on retiring longterm low rate loans. And trying investments to see what does better - that is all known mathematics, no need to reinvent it - actually the yrs that you spend reinventing will be time lost to you.
Post Thu Dec 15, 2016 6:08 pm
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sanvinair1
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Invest in stock market. It can give much higher profit in small term. Stock market only need learning and understand the market. Also many provider are available who provide stock tips, equity tips, mcx tips.
Post Thu Dec 29, 2016 10:40 am
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oldguy
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quote:
1. Invest $50,000 with Vanguard (probably using their advisor service...for a year at least so I can learn).

2. Invest $50,000 with a Robo-advisor (probably Wealthfront)..for a year at least.

After that year or more I'll see which is performing better. Since I have exactly the same amount invested they should be pretty easy to compare. Also, after that year (or more) I may opt to not do the 'Advisor' services at Vanguard

I'm now paying an additional $700 towards the mortgage each month,


To reiterate - in my experience (as an elderly retired rich guy) you're making some serious errors. With your earning potential, time horizon, and real estate holdings, these errors will grow exponentially and affect your far-future by several million.

1. Your $50k experiments - the data is in, that experiment has been done 1000's of times - and the results are useless, stocks are longterm products, a 1-year (or even a 5-year?) experiment tells you that in any given year, stocks may go up 505 - or down 50% - you already know that.
2. Prepaying longterm, low rate fixed loans. The US mortgage provides some of the cheapest capital in the world, no other nation lends for 30 years, fixed rate. But in the US, Job 6-Pac can walk into a bank, ask for a $500k loan, insist on 30 yrs, FR, and ask for <4% - and get the money. A better business move for you would be to refi the loan to 80% of appraisal - but in any case, never prepay 4%, 30 year, FR capital, keep iit full-term.
3. Stop messing with Robo, Planners, Managed Accounts - simply buy the Unmanaged Index. That has been the greatest wealth-builder for decades - and most fund managers, traders, will admit that. Stop trying to "beat the market" and simply "accept the market" - 11%/yr with no fees compounds rapidly- most people are surprised when they learn the math. eg, $50,000 placed at 11% equals $1,150,000 in 30 yrs. You have the financial depth to do that several times. Very Happy
Post Thu Dec 29, 2016 3:31 pm
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shawdenise777
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Forex play is also a worthwhile investment media.
Post Thu Jan 12, 2017 5:55 pm
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GardenCat
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HI
Our experience with Merril Lynch was horrible!!! They continually made errors, you never got the same person and invariably the person you reached knew nothing about what had already happened and couldn't find out! Their over 1% fees are in addition to whatever fees come with wherever the $ is invested, you CAN do better!
Your 401K could be directly rolled into an IRA with Vanguard. Directly means you never touch the money or a check or anything, hence no tax consequences.
If your 401 needs to be handled by an "advisor" find one who is fee only, not commission. You may pay for the original setup but not annual fees.
Your best path is to handle your $ yourself, as much as you can and as you are comfortable with.
Post Fri Jan 13, 2017 6:49 pm
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