Managing a windfall

[ShawnHoo]

Here's a financial planning scenario for you:

I was fortunate enough to have my employer go through a successful IPO this past summer. This has left me in an enviable, although unfamiliar, situation.

I've diversified somewhat, cashing out about $175K post-tax. I still have on the order of $125K post-tax remaining in vested stock, and I'm going to be vesting the remaining half of my grant for two more years. I've placed my cashout in a mix of Vanguard funds: 60% domestic equities, 20% intl equities, 10% bonds, 10% REITs.

I'm 27 y/o, single with no dependents, renter, and no debt other than a car payment that's at 3.65% fixed. I live well below my means in terms of income.

Am I on the right track with the Vanguard funds? Should I have cashed out more company stock at this point? Any other things I should/shouldn't do? This may very well be the biggest lump sum gain I experience in my lifetime, so I don't want to blow this.

[LondonBroil]

I think your best investment would be to stake me in a 4000/8000 game at the Bellagio. 15 BBs might be on the low side, but I'll play tight.

[BradleyT]

You're probably wasting $10,000 a year with no equity to show for it by renting.

[DesertCat]

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I've placed my cashout in a mix of Vanguard funds: 60% domestic equities, 20% intl equities, 10% bonds, 10% REITs.


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So far, very good job. My only quibble is you might not need the bond fund at your age. The highest long term returns are in equities.

As far as how much to cash out of your companies stock, that depends on what you think it's true value is, as well as how many future options you think they will grant you as well. If you think the company is over valued, or that you will be rapidly given more options, sell all you can when you can.

As far as a house, it's not bad advice, but it all depends on the cost. If your rent is less than the after tax cost of the house (not just interest, but taxes, insurance, and maintainance and lost income from your downpayment), then you'd be counting on appreciation to make it a good deal.

Appreciation has been very hot in many areas lately, regression to the mean (and the idea that interest rates can't decline much further) says future appreciation is likely to be much worse, or even negative for a time.

[Germane]

Contrary to popular belief, renting is not really a waste. The rental rate is simply the user cost of capital. All that money you spend on the house payments can be invested to earn back that "wasted" 10K. That said, there are tax advantages that make home ownership a decent investment.

On the other side of things, home prices are at all time highs and rents are at all time lows. I don't plan to buy a house anytime soon.

[BradleyT]

Yes I do agree that renting CAN be a better play if you can make more interest by investing that $175,000 than your rent payment + home appreciation would be.

However there's much more value to owning a home than simply "homeowners equity".

[gvibes]

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So far, very good job. My only quibble is you might not need the bond fund at your age. The highest long term returns are in equities.

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Bonds are lower EV, but variance is much more of a beatch in investing than in poker. I would have recommended a higher percentage of assets in bonds.

[RunDownHouse]

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Bonds are lower EV, but variance is much more of a beatch in investing than in poker.

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Not over 35 years, as is likely the case for someone 27 years of age.

You don't say what specific funds you're in, but you'll have a hard time doing better than being in various index funds.

[Glenn]

Not all money someone saves is for their retirement. He might actually want to spend some of it within a few years, especially since he doesnt own a house.

[sprmario]

Can i suggest putting some money into an energy fund?

I have it as about 20% of my portfolio as a nice play on oil and energy prices. Mine has gone up about 25% since October which is a pretty nice increase. I think it's a good hedge because the one thing that could really hurt this economy is high energy prices which could lead to inflation and drag down a lot of key sectors.

If you don't plan to trade this a lot you might look into ETF's which have zero fees vs. any funds like vanguard.

[Ray Zee]

if you can swing it owning your own house is a no brainer. especially with the 2/5 rule for taxes. you can move everytwo years and collect appreciation tax free.
plus if you keep it in 20 years you own it free and clear while the other way you are still paying rent which goes up as your portfolio does. unless we have inflation, then rent goes up inversely to your portfolio. not good. renting is good if you move alot or have a fear of owning something that may tie you down somewhat.
i have met many people that said they should not have invested in stocks but never one that said they wished they didnt own their own home. own both

[snowbank]

I heard a saying somewhere: "whether you rent, or whether you buy, you pay for the space you occupy"

Somethin like that. Anways, buy. There's almost no reason not to if you have the ability.

[ajm36]

Buy a copy of William J O'Neil's book "How to Make Money in Stocks". If you like that book, take a look at Dave Landry on Swing Trading and The Master Swing Trader by Alan Farley (Alan has a web site as well called thehardrightedge.com with lots of free educational material). Also, check out a web site called Tradingmarkets.com. If you want to ride the equity see-saw of mutt funds and have low returns over the decades, you are on the right track. However, with that kind of capital and at your age, you need to be MUCH more aggressive. It will take some time, but with that much money and enough determination, you can be well on your way to a whole new career free from office buildings, daily commutes, and bosses. Just take my suggestion, do YOUR OWN research, and see if the life of an equities and derivatives trader is for you. Good luck.

[DesertCat]

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Buy a copy of William J O'Neil's book "How to Make Money in Stocks". If you like that book, take a look at Dave Landry on Swing Trading and The Master Swing Trader by Alan Farley (Alan has a web site as well called thehardrightedge.com with lots of free educational material). Also, check out a web site called Tradingmarkets.com. If you want to ride the equity see-saw of mutt funds and have low returns over the decades, you are on the right track. However, with that kind of capital and at your age, you need to be MUCH more aggressive. It will take some time, but with that much money and enough determination, you can be well on your way to a whole new career free from office buildings, daily commutes, and bosses. Just take my suggestion, do YOUR OWN research, and see if the life of an equities and derivatives trader is for you. Good luck.

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Or you could just cash out everything and set it on fire. Not only would it be more fun, but I'm pretty sure it will offer returns similar to "swing trading".