How would you invest $250,000?
September 10, 2013 7:36 PM   Subscribe

If you had $250k, how would you invest it? What would your investment portfolio look like if you were a guy in his mid 20s?

I inherited $250k from a great-uncle. It's just sitting there in a money market account I opened up with Vanguard because I just don't know what to do with it. The money is coming at a fortuitous time in my life since I'm going through a career change.

Here's some background: I'm male and in my mid/late 20s. I've started freelancing and currently have a pretty small and unsteady income stream (one of my projects that I depend on for most of my income will end at the close of 2013). I'm fairly risk tolerant I think. I would need to financially support my mother who has been laid off and doesn't have much in way of retirement. I would like to start a family within the next five to seven years.

I'm okay with living a spartan lifestyle for now doing what I like (though sometimes I wonder if I should go back to school for petroleum engineering or something) and so want to invest the majority of that inheritance while taking just a little bit out for emergency funds.

I've listened to this NPR podcast (http://www.npr.org/2013/06/05/188306471/resisting-the-temptation-to-win-when-investing) and have read a little bit about how index funds are best, you don't need a money manager, and Vanguard is the way to go if you are going to invest...the basic stuff.

But let's face it. I studied communications. Numbers scare me. I'm intimidated by all of this. I know some of the general rules. But aside from knowing that someone my age with low risk aversion should go for a 80/20 stock/bond split, I don't know where to start dividing the pot. There are so many different funds out there and other than the expense ratio, I don't know how to craft my own portfolio. But I WANT to know..I just...want to see how someone else would break it down first.

So how would you break it down? And where did you learn the ropes?
posted by anonymous to Work & Money (28 answers total) 30 users marked this as a favorite
 
Property.
posted by typewriter at 7:39 PM on September 10, 2013


Get a financial planner - 250K isn't a joke and that can be turned into a sizable sum managed properly. I wouldn't go the property route, unless it's for personal use - being a landlord is no small task, and there are significant issues that come up including troubled tenants, tax issues, compliance issues, etc.

Get a financial planner that is fee based, not commissioned - most will offer a free consult to discuss. Make sure it's fee based, not commissioned. Also, most financial planners are also advisers - this is something I looked for with my guy as he can then handle my investments in accordance with my financial goals that we set up.
posted by lpcxa0 at 7:44 PM on September 10, 2013 [10 favorites]


If I were in your shoes, I might keep sitting on a great majority of that cash. You have a lot of possible cash money needs in the next 5-7 years: school maybe, family maybe (I assume that could mean any of the following: house/moving, wedding, kids), supporting your Mom maybe. You do not want all your cash tied up in stocks or bonds if you're going to be needing it. If I were in your shoes, I might invest somewhere around $50-75k in a target-date retirement fund and sit on the rest.
posted by ThePinkSuperhero at 8:00 PM on September 10, 2013 [2 favorites]


William J. Bernstein's book The Intelligent Asset Allocator is a technical-but-practical study of how best to allocate your retirement assets. It very thoroughly explains the math behind market risk and reward and shows how this has affected investment performance over time. There is an updated version of the book titled The Four Pillars of Investing, which attempts to remove some of the mathematics behind the explanations presumably to make it more palatable for a general audience. I prefer the original, although Four Pillars does have some additional content. No matter how you choose to invest this money, I would suggest that you will have a much better understanding of the way the market works, which will give you an all-important measure of confidence. If you agree with Bernstein's strategy, he gives specific allocation suggestions that are easy to follow.

Bernstein keeps a website called The Efficient Frontier.

So much of investing wisely is about avoiding the emotions and cognitive traps that are built in to the human species. Carl Richards' The Behavior Gap is a quick pop-psy read that illuminates some of the mental murkiness that leads to bad decision making about money. Richards' book won't lay out a plan for you, but it will definitely help you understand when your gut feelings may be leading you astray.
posted by samuelad at 8:21 PM on September 10, 2013 [1 favorite]


2nd'ing financial planner. You want one that does fee-for-service. They don't make a commission from anything you invest in so your needs come first.

Then you just need to figure out what you want that money to do for you and what your priorities are. You can invest some in index funds but that's a pretty long-term thing and would be good for funds that you set aside for retirement accounts. There are investments that don't really grow the principle but will generate steady income which might be nice to cover fluctuation in your other income sources. You want to have some cash on hand for emergencies but you probably won't ever have an emergency that requires $20,000 right-the-fuck-now. You might be able to get better returns on your "emergency funds" if it's okay for it to take a few days (or weeks or a month) to get access to all of it penalty free.

A financial planner can explain the options to you and make recommendations, you just need to be able to explain your wants and needs.

If you haven't already (or aren't planning on it) you should pay off any debt you have with anything over 5% (at least). There are reasons not to pay off all of your debt (that I know have been covered in other ask.me questions) which you might or might not agree with but anything over 5% should be paid off without question (in my mind at least).
posted by VTX at 8:24 PM on September 10, 2013 [2 favorites]


Really depends on what you want to do. If you throw all of that in an index fund and sit on it for 20 years while you keep working and contributing to it, you can probably retire when you're 40, if you like.
posted by empath at 8:36 PM on September 10, 2013 [2 favorites]


Though I rarely disagree with TPS, please don't just keep the money in savings or a money market account even if you want to use it soon.

Put it in an index fund and it will be almost as accessibly as a savings account and you won't get penalized for removing it, but you will make money instead of having it be stagnant.
Avoid putting it in CDs (which make nothing now anyway) or any long-term commitments, but put it somewhere. I already regret not doing this earlier with my much more modest savings.
posted by rmless at 8:47 PM on September 10, 2013 [5 favorites]


A financial planner is the best idea, but to answer your question with how I personally would do it--or did it, since I inherited a reasonable sum not too far back--this is what I would do/did and may help you with the thought process.

Pay off any debts where the interest rate is higher than what I'd be looking for as a good rate of return, so probably anything above 4-5% except a house loan.

Establish a savings of about 6 months of expenses. This is handy for both sudden shocks like getting laid off but it also makes nice leverage for your other things since, if you're responsible, you can basically give yourself 0% interest loans and pay yourself back. Obviously this requires being responsible.

Figure out where I would need money in the next few years. For example, if you think you'll want to buy a house, it'd be a good idea to keep a down payment fairly liquid. Or school. Or whatever. In my case, we'll need to replace one of the cars in the next 5 years and I move fairly often, so I kept enough money for that in something fairly liquid and safe.

Max out your contributions to your retirement accounts. Consider this throwing that money in a vault that says DO NOT OPEN UNTIL AGE 65. It's gone. Probably safe, but untouchable. Okay, you CAN touch it, but don't, it's dumb.

One thing you may want to consider re: retirement planning is some of the brokerages have mutual funds that are basically "I plan to retire in 30/40/50/60/etc. years" funds, so they start off with a fairly aggressive blend and as your retirement date gets closer and closer, they move more and more of their holdings into safer things. It's something to think about and one way to do it.

From there, I opened a brokerage account. I went with Fidelity since most of the investors I know use it and like it, but I've heard Vanguard is good, too.

From there, I went to their mutual fund evaluator and took a look at well-rated funds with good returns and low expenses. I'm sure Vanguard has something similar. In my case, just those few criteria took it from like 4000 different mutual funds to 90.

(I do mutual funds because I don't have the time or patience to evaluate each individual stock and keep up with it and the bond markets were trembling because a couple cities were making large noises about defaulting).

There are tons of articles about how to pick a mutual fund so I'll skip the details on that, but basically I looked for funds in those results that had good lifetime returns, then good 1 and 3 year returns, then picked a portfolio built around several levels of risk, so I have some in index funds and some in more aggressive growth funds, and that kind of thing. In my case, I tend to stick to sectors where I can at least eyeball the list of companies and go "Nope!" or "Seems legit!", but by and large I stick to the numbers.
posted by Ghostride The Whip at 8:59 PM on September 10, 2013 [4 favorites]


I think that putting it in an index fund (or a mix of funds) is a good idea, but the asker should be aware that an index fund is not risk free-- it can lose a substantial portion of its value in a short period of time.

Leaving the money in cash for years is (probably) a bad idea, but leaving the money in cash for a month or two while you educate yourself on the pros and cons of various options is reasonable. You may miss out on a few percentage points gain, but avoid making a large mistake.

Bogleheads.org's forums are more focused toward financial advice than AskMe. They tend to follow the principles of their namesake John Bogle (founder of Vanguard) and believe that the market is efficient enough that portfolios comprised of low cost broad indices combined with relatively risk free assets (US bonds) provide the performance for any particular risk tolerance. If that sentence sounded like mumbo jumbo, then it would be a good idea to educate yourself before making any decisions about such a large sum.
posted by justkevin at 9:35 PM on September 10, 2013 [1 favorite]




I would make regular investments (say 10k monthly for 20 months) in an S&P 500 fund, with the rest going to a rainy day / emergency fund account (savings or money market). Also using some to max out IRAs or 401(k)s
posted by zippy at 10:18 PM on September 10, 2013 [1 favorite]


Don't be intimidated. The investment industry wants you to feel scared to invest on your own, so they make things look complicated. It's actually rather simple. You don't need to build a fancy portfolio. What you want is low fees and diversification, and you can get that with a total stock market index fund plus a total bond index fund. I think Vanguard also has a REIT index fund that you can put some money into too. Do not put all your money into one thing like property, that's way to risky. Be sure to consider how liquid you need your money to be. I think most Vanguard index funds probably have a fee if you take money out within 90 days (or something like that) of investing it. And please, don't watch the ups and downs of the stock market every day after you invest. Think long-term.
posted by Dansaman at 10:25 PM on September 10, 2013 [1 favorite]


Four points, in order:

1). Pay off any debt at high rates, e.g. credit cards. If you're frugal, this may not be a big issue for you, congrats! But this is the highest guaranteed return on your money.

2). It sounds to me like you have a combination of needs; some short term potential expenses due to fluctuating income and helping your mother, some medium term potential expenses for a family and/or school, then the long term project of retirement. You need to figure out what portion of the money is heading to which pot; this is seriously important and a financial planner will help here.

3). It may be helpful going forward to separate out these pots into different accounts. It can mess with your head to see a big total in a bank account, when only a small amount is available to spend -- you feel wealthier and spend more. So the long-term and medium-term pots should be set aside to sort of vanish, especially if you are drawing from the short term regularly.

4). The short term is 100% money market. The medium term might be a 50/50 stock and bond mix, and the long term 80/20 or even 90/10 if you could stand it. Again, here is where a fee based planner will earn their money. You are correct in being at Vanguard, and seeking low cost index funds for these investments. I personally don't think Americans invest enough abroad in general.

I would wind up with something like
Short term:
100% in a higher interest FDIC insured money market bank account. (In Canada, I would recommend ING Direct - don't know about the US.)

Medium term:
35% Total Market Bond
15% Total International Bond
30% Total Stock Market Index
20% Total International Stock Index
Alternate: A single shot investment in Life Strategy Conservative Growth (60% bonds) or Moderate Growth (40% bonds).

Long term:
10% Total Market Bond
50% Total Stock Market Index
25% Developed Markets Index
15% Emerging Markets Index
Alternate: A single shot investment in Target Retirement 2050

Note that the Admiral series shares require $10K investments; if your investments are much smaller than that, you're slicing the pie too small.
posted by Homeboy Trouble at 10:38 PM on September 10, 2013 [4 favorites]


I should note that if your thoughts on "starting a family" expenses are things like moving to a larger place, buying a minivan or the like, then it's medium term; college for a yet-unconceived child is long term at this point.
posted by Homeboy Trouble at 10:41 PM on September 10, 2013


Just chiming in to recommend a fee-only financial planner.

Based on my experience, here's what you might expect from the process: you start by doing some research to find a good fee-only financial planner. Then you pick one and make an appointment. You take a risk-tolerance assessment (it's good to know going in that you're risk-tolerant but important to get a nuanced sense of just how risk-tolerant -- I went in thinking I was risk-averse but found out I'm not as risk-averse as I had assumed). Then you spend about an hour talking about the stuff you've laid out here-- timelines for family and retirement, potential expenses like helping out your mother, going back to school, etc. Then the planner takes a few days or weeks and sends you a proposal outlining the services s/he thinks you might benefit from (which, in addition to investment advice, could include tax planning, insurance/benefits, etc) and a cost estimate. You look it over, sign off on it, have another meeting to make sure s/he has a complete picture of your assets and needs. Then you provide a bunch of information, they go off and draw up a plan, and go over it with you explaining all the recommendations. For me, the initial batch of planning (which I think was comparable to what you need) cost about $3,500, though I imagine that will vary widely by location, experience of the planner, and so forth. For me, it was well worth it.
posted by pocketfullofrye at 10:47 PM on September 10, 2013 [1 favorite]


If you read just one book, I suggest "The Four Pillars of Investing" by Bernstein. That will teach you the ropes.
posted by 99percentfake at 12:03 AM on September 11, 2013 [1 favorite]


Any honest financial planner will mostly reiterate the advice above: keep a "rainy day fund" plus whatever you expect to spend in the next year or two in a cash-equivalent money market fund, and split the rest between stocks, bonds, and "other assets" such as real estate, using low-fee mutual funds, and then sit on it. Picking funds is a guessing game, they won't know a special secret fund that consistently outperforms the market, I think the Vanguard whole-market funds will do as well as any. What they probably _can_ help with is any fancy tax deferrals you are eligible for, e.g. Roth or regular IRAs.

As a guess, I'd keep $50K in the money market, up to $50K in bond funds, and the rest in stocks. And I'd leave it all at Vanguard, they are consistently lower cost than others. How much, if any, you put in bonds depends on your level of risk tolerance and paranoia.
posted by mr vino at 4:16 AM on September 11, 2013


I would at least buy some real estate. Foreclosures in places like Central Florida and Nevada are a great investment.
posted by Flood at 4:45 AM on September 11, 2013


The main thing I'd recommend is to implement your plan gradually, if that's possible.

This is a really weird time for investing right now, with interest rates extremely low and the stock market very high. Trickling your money in [wherever] over a period of a couple years helps defend against going all in just prior to more 2000/2008 type excitement.
posted by mattu at 5:12 AM on September 11, 2013


Similar questions have been asked here before and I think I remember Mutant offering some pretty good advice on a few threads. Check out his profile.
posted by chillmost at 5:47 AM on September 11, 2013 [1 favorite]


You are very fortunate and your great-uncle was very generous. You now have Fuck You money and it can make your life glorious!

First of all, you seem to have some concrete ideas for how you want your life to be as you move through the years. So you're ahead of the game in a lot of ways.

I have a CPA who is a great guy for bouncing ideas off of for dealing with large sums of cash. He's not a financial advisor per se, but he's the guy I go to for financial advice. Find one of him in your neck of the woods and discuss all the ins and outs of what to do with this money. Tax ramifications, investments, etc. Your CPA may know a good financial planner (fee based, non-commission) who can guide you into investments you feel comfortable with.

You're right not to do much of anything with the money until you have a game plan in place.

Random people on the internet is a good start, but get with a professional so that you can see this as seed money, and watch it grow.
posted by Ruthless Bunny at 5:50 AM on September 11, 2013


I'd pay off any debt and invest the rest with an eye towards enabling a very early retirement, or at least a part-time work lifestyle. If you can average 7% annual returns $250K becomes $2 million in 24 years. Assuming you are adding to a 401K at work in the meantime, you can check out well before you are 50 and either live frugally as an early retiree, or draw 4% a year out ($50K) to supplement some other part-time income and not have to work as hard as the rest of us.

You've been handed an amazing opportunity.

Vanguard has financial planners that will work with you via video conference.
posted by COD at 5:53 AM on September 11, 2013


Start educating yourself - Motley Fool, Yahoo Finance, MSN Money, Forbes, etc. Get the money invested so it starts growing, diversify, pay attention to it at least quarterly, but not constantly, i.e., don't ignore it and don't churn it, generating fees. Start out at least a bit conservative, and as you learn more, you can take more educated risks. Make sure you have a 6 moth emergency fund pretty easily accessible. Educate yourself about tax issues that affect you. The reason people recommend a fee-based planner is that their recommendations are not driven by commission. Commission-based financial advisors have a terrible track record for you, but make lots of profit from your account.
posted by theora55 at 6:55 AM on September 11, 2013


I'm thirding Vanguard Target Retirement funds. Definitely take a minute to look at those.

First, they're a good way to get a fix on some standard investment approaches. If you go to odinsdream's link and click the various funds under "Decide which fund is right for you," you can see the stocks/bonds/short-term-reserves mix they use for various lengths of time -- anywhere from "I'm saving for 40 years out" to "I'm trying to live on my funds now." That can give you a basic reference point for what might make sense for your goals.

Second, it's a super easy way to put your money somewhere sensible while you figure out what to do next. Check me on this, but as far as I can tell it would take five minutes and cost close to $0 to move your funds from the Vanguard money market account to a target-X account (or back out, once you need the money), and you'll probably be pretty close to where you'll end up after going through the whole planning process.
posted by jhc at 7:06 AM on September 11, 2013


Everything you need to know about investing in 129 words.

Really.

(Previously, for the mefite reaction.)
posted by alms at 7:14 AM on September 11, 2013


The advice you've gotten on this page about asset allocation may not differ substantively from what a paid financial planner will tell you. I myself would prioritize minimizing mutual fund management fees, financial consulting fees, and taxes on earnings. In your case, I would buy a few low cost index funds from Vanguard and leave the money there until I needed it, then take it out. Vanguard's target retirement funds are pretty reasonable also.

There is no evidence that attempts to time the market are effective, nor that managed mutual funds earn a higher return than passive funds, net of fees.
posted by deadweightloss at 7:37 AM on September 11, 2013


before you go throwing it all at index funds, I would evaluate your life and see if it makes sense to buy a modest place to live for yourself rather than paying rent, then invest the rest. If you buy a reasonable house in cash, you'd likely come out ahead even if you moved in 2 or 3 years vs paying rent (you wont necessarily make money on a sale, but you would probably lose more renting in that time period).
posted by WeekendJen at 8:28 AM on September 11, 2013


Some good and bad advice here (always be suspect if someone says "You must do X, it is a great investment." Good investments come and go, and nobody has all the answers).

One more thing to consider: you're young and with this kind of money you can tolerate some pretty significant risk. Consider seeking out one or two very non-diversified, risky investments, especially in a field you care about. For example, I had not nearly as much as you have to work with to invest, and I'm in my late 20s. My wife and I put most of it in boring investments, but one chunk went to buy a 1% share in a small brewery. We'll see how it pans out over the next few years, but the first year looks good, and it's money that I like having a personal interest/investment in. I want to see the brewery succeed. If it goes very well, the return will be great. If it fails, the return will be 0%. It's much more risk than, say, investing in Apple, but I can handle the risk and I like having both the potential upside and the personal connection.
posted by craven_morhead at 9:22 AM on September 11, 2013


« Older What's the audio version of Dateline?   |   What's the best short term/least hassle cell phone... Newer »
This thread is closed to new comments.