Talbot-Lago
The answer to the above question of what to do with a sizable infusion of new cash has multiple answers. This blog lays out one path for individuals fortunate enough to be faced with this question. The following plan assumes one does not need this money for living expenses, but is available for future investing.
Step #1: Place the money in a safe secure investment, yet sufficiently flexible one can easily access it for future investments. One suggestion is to place the money in a short-term risk-free treasury such as SHV. SHV is currently paying 4.86%. One can add or withdrawal money to or from SHV with a few key strokes so it is very liquid. Volatility is extremely low at 0.2% when using a three-year average.
Step #2: One needs to have confidence the U.S. will eventually vote for a competent government, but until that happens one needs a workaround. Assume we have approximately 200 more weeks of misery and the inheritance amounts to $100,000. The $100,000 is parked in SHV or a similar short-term treasury Exchange Traded Fund (ETF).
Step #3: $100,000 divided by 200 is $500 to be invested each week. The argument for this gradual move into U.S. Equities is known as dollar cost averaging. If you check on the Copernicus portfolio (found within the ITA blog) you will see the benefits of dollar cost averaging.
Step #4: Each Monday invest $500 in the stock market. Where within the market might one invest. It is extremely difficult to outperform the S&P 500. VOO or Vanguard’s S&P 500 ETF is a good place to park money for long-term investors. The Copernicus portfolio is one such model tracked here at ITA. If this route seems too risky, break the $500 in half and invest $250 in VOO and $250 in SCHD, a dividend paying Schwab ETF.
Another investing plan is to follow what is known as the Bogleheads 3 where 1/3 goes to U.S. Equities (VOO), 1/3 to Developed International Equities (VEU) and 1/3 to U.S. Bonds (BND).
Yet another Asset Allocation plan is to set up an allocation similar to the Huygens portfolio, also tracked and managed here at ITA. Huygens was updated this morning.
Alternative: A slight variation to Step #4 is to invest more than $500 per week if the market ended lower the prior week and to invest less than $500 if the market was up the prior week. This adds a slight complication to the above investment strategy, but should pay off during the investing period.
As long-time readers of this blog are well aware, I am a strong advocate for Doing It Yourself (DIY) rather than paying for services that rarely add alpha to the owners portfolio. If requiring outside advice I recommend paying a flat fee for the service or not paying more than 50 basis points annually for portfolio management. One investment firm that advertises frequently on TV charges 125 basis points for accounts of one million dollars. That cost is defined as usury.
The hope is that this blog post will stir up some discussion in the Comment section. If you have ideas to contribute that will add or subtract from the above suggestions, please add your advice. We are all eager to learn.
Lowell
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In the above blog I failed to emphasize the important point of rebalancing. If investing only in the S&P 500 this issue is moot. However, suppose one is setting up an asset allocation plan of 60% to VOO and 40% to SCHD. One can keep track of the percentages with your own spreadsheet or use the Kipling Spreadsheet. I highly recommend serious users purchase the commercial program, Investment Account Manager and use it to keep the portfolio in balance and to accurately track portfolio performance.
Lowell