Portfolio builders - what's the frequency?

In My Humble Opinion
1

Where would you start on building a portfolio? I pretty much ran my business at treetop level, but now the proceeds from the sale of assets is starting to come in, and I know I should be putting it to work.

So where would you invest? I’ve got $20,000 to start with and I can add about $10,000 every three months. I’ll confess to being a babe in the woods with long-term financial instruments and even the (possibly) shorter term stock market (my one foray there was basically a wash - Compaq).

Ultimate goals are, in the near term, to buy a home in about a year to a year and a half, and finally, of course, to retire. Credit debt is nonexistent (that was the first goal).

Homes where I’d like to live (my current neighborhood) run from about $150K to $400K. Some friends urge the M.O. of getting together a 20% down payment whereas others beat the drum for continuing in my current (cheap-ass duplex) situation for a couple of more years until I can buy outright. The latter appeals to me, but which makes more sense?

2

So I gather there’s some obvious reason why you’re not just going to a financial planner?

3

Nah, I’m meeting with my bank’s folks next week, and my CPA when I schedule it. I just wanted to get some TM feedback.

4

DON’T BUY A HOUSE 4 CASH!!!

Unless 100K is too troublesome to fool with.

If you are young, get aggressive. Call some pro’s like Fidelity Investiments (I have no connection with them other than some personal investiments).

If ya got say 100K or whatever and want a house, one may put the cash down and just pay property taxes or have a small monthly payment = house and lots of disposable income which is easily disposed of or invested relatively slowly - relative to starting with the 100K or whatever.

If the 100K… is invested and the house is financed = larger monthly payment, but ya got the house and $$$. After 30 years = house paid 4 and lots of $$$$$$$$ (oh my! how do I cover the larger payment? - well ya still got the original $$$, hopefully more because its been gaining in the market - perhaps not JUST RECENTLY)

1st plan in the long term = house and no investment other than the house and a cash flow that may or may not continue and unknown value on the house.

2nd plan = You have the house + $$$.

Good Luck.

5

You sound like you’re off to a good start. There are a LOT of things to consider, and if there’s anything that you’d like covered in more detail, feel free to email me.
First, mutual funds are fine in their own right, but there are some things to beware. The first is loads, or fees that you are charged for the priviledge of investing in the fund. Some fund loads are front-end (you buy shares in the fund at a percentage above their actual price), and some are back-end (you lose a percentage of what you withdraw as you take it out). The back-end loads tend to get smaller the longer you remain in them, eventually dropping to zero after 5-10 years. There are plenty of good no-load funds to invest in, though, and there’s no reason why you should sacrifice part of your holdings in a loaded fund when the total return is as high in a no-load. The second thing to watch out for in a mutual fund is distributions. Virtually all funds will have dividend and capital gains distributions (short and long term); these distributions are taxable, so you can be stuck with a tax bill EVEN IF THE FUND LOSES MONEY. Sucks, doesn’t it? One exception to this would be stock index funds, which typically don’t have capital gains distributions.
With the kind of money you’ve got, you can create your own mutual fund. The simplest thing to do would be to buy a few shares of each of the Dow Jones 30 Industrials (a list of these stocks can be found in many places, I’m too lazy to go find a URL right now). Or buy shares in the 30 biggest (by market cap) companies in the S&P 500. Since you said you’ll have more money to invest each quarter, buy a little more every three months. You can even reinvest the dividends, if you wish. If after a while, you want to broaden your stock holdings, buy shares in the next 30 biggest companies.
Don’t put all your money in equities, though. Buy some T-Bills and municipal bonds. Look into 1st Trust Deed funds. Be sure to keep some money (about 6 months’ net salary) where you can get to it quickly, like a money market fund through your bank.
What’s your 401(k) look like? Does your company offer one? If so, put as much into it pre-tax as you can. If you’re self-employed, look into a SEP-IRA. With a SEP-IRA, you can add money both as an individual ($2000/year) and as the employer (up to a percentage of the employee’s salary, and I think that percentage is 25%, you might want to verify this).
Buying a house is always a good idea. Don’t put less than 20% down, so you can avoid the unnecessary expense of Private Mortgage Insurance. There is some wisdom to carrying a mortgage, since you get the interest deduction and can earn more on your principal than you would pay in interest after taxes. Plus, if the value of the house increases, you’ll have leveraged a little money into a LOT of money. However, there’s a lot to be said for owning your house outright, especially if you’re planning to retire early. The less your monthly obligations are, the less you’ll have to earn to retire, and the smaller your nest egg has to be. Further, if you’re relying on your investments to pay the mortgage, and there’s a protracted drop in the market, you will have to crack into your nest egg sooner than you might have hoped. This is the voice of experience: I am 41, and will retire within the next year; I would have retired this past March if the stock market hadn’t gone sour…but I’m a patient man.
A good rule of thumb on where your money should be invested is to look at how soon you’ll need it. If you need it in less than 6 months, you shouldn’t have it in equities; in fact, money needed that soon should be fully liquid (savings account or money market).
That’s all I can think of right now. As I said, feel free to email me, and I’ll be happy to answer any further questions.

6

Steverino has it right. That said, if you’re looking at a down payment of 50-60K in 18 months, you may not want to mess with equities at all. You are certainly going to want to underweight them until that down payment is secure.

Mortgages are good. You can get 5:1 leverage on an investment that is probably increasing in value and it is the only decent source of a tax deduction left.

Additionally, you will want to have 6 months living expenses in very low-risk, liquid investments (think money market or very short-term bond funds).

And with that, I’ll send this thread to IMHO.

7

Well, later I’ll have some more time to weigh in. In the meantime, it looks like you could seriously benefit, long term, from some good, unbiased, professional financial advice. The guys to get it from? DEFINITELY not your friggin’ bank! Those guys exist to sell CD’s. Everything else is a fallback position and very possibly loaded. Now, a CD isn’t a bad thing at all for short-term money, such as the down payment you’re going to want to come up with for the house. I prefer maybe a short-term bond fund, though, if you have an 18 month time horizon. Little more risk, little more return. But that’s small potatoes.

Main thing you want to do is go find yourself a Certified Financial Planner–that’s C.F.P.

NOT a friggin’ insurance salesman who calls himself a financial planner and then tries to pitch “whole life,” “universal life,” and annuities. Those are good for his commissions, but bad for your portfolio. (Fees are too high.)

Find a good ‘fee-only’ C.F.P. (meaning you write him a check for his advice, he’s not working on commission. So there’s no potential conflict of interest whatsoever. Not that it’s wrong, but you need a good LONG TERM plan, and for that you needn’t be paying a load. His advice will pay you dividends for many years, or many decades.)

So how do I find a good C.F.P, you ask? Well, you could try their website: http://www.cfp-board.org/ I think.

Or, the October issue of Mutual Funds Magazine will be publishing a table of some of the best financial planners in the country, on a peer-nomination business. That’d be a good place to start.
Sounds like you’re Self Employed, so you’re going to want to ask him about how to set up a SEPP (Self Employed Pension Plan or Simplified Employee Pension Plan),

You’re going to want to decide between a Roth and Traditional IRA. And you may want to look at starting yet another one for your spouse (even if she doesn’t work, she can work for your business, and you can pay her right into that IRA.)

If you have children, you’ll want to ask about an Education IRA or a Section 529 college savings plan as well.

Since you won’t be able to put all your eggs into the IRA’s (the law only allows you to put so much in per annum) then tax-efficiency is going to matter.

I respectfully disagree with “building your own mutual fund” with the top 20-30 stocks of the Dow or S&P 500 for a couple of reasons. 1. This system self biases in favor of buying stocks while they’re expensive. That’s why they’re at the top of the Dow (which isn’t market cap weighted) or the S&P 500 (which is.) It’s better to buy cheap than to buy expensive.

Some sophisticated investors can do quite well building their own fund, and it does have some advantages in that you can control when you pay taxes on gains--control you lose when you work through a mutual fund.

But it sounds like, with just 20,000 going in, you’d benefit more from the professional management of a good, diversified, no-load, and low-expense mutual fund (probably an index fund).

Index fund expenses (fees) are extremely low, and since there is very little trading within the fund (it buys stocks within an index and holds them as long as they remain within the index), there are few buys and sells, and so the funds are naturally very tax efficient. It’s not going to make sense to have a private professional portfolio manager until your portfolio is at LEAST $100,000. (Most firms won’t look at anything less). And even then you’d be paying 1-1.5% or even 2% per year in fees (as opposed to 0.18% for the Vanguard 500 Index fund or 0.20% for the Vanguard Total Stock Market fund.

Further, since you admitted you were pretty novice about investing, you’re the LAST guy you want picking your own stocks.

So: I’d steer you towards an index fund (I like Vanguard’s 500 and Tot. Stck Mkt. Also, look at their Balanced (60-40 split between stocks and bonds, generally) but Vanguard, Fidelity, TIAA-CREF, USAA, and T.Rowe Price, all will take good care of you.)

Now, how much of that ought to be in stocks is something to discuss with a planner. A lot of that will depend on your own personal comfort level with risk and risk tolerance.

Sector funds are for millionares and suckers. Doesn’t sound like you’re one of them yet.

Some reading:

Mutual Funds for Dummies is excellent, I think. Start there.

Then Peter Lynch’s “One Up on Wall Street” and John C. Bogle’s “Common Sense and Mutual Funds.”

Then learn everything you can about Warren Buffett and how he picks stocks.

That’s a start. More later.

Oh, who the f**** says you have to live in a 150,000 dollar house? (unless you live near S.F, NY, or Honolulu. Then you’re stuck.)

One other thing: the Short Term stock market is for suckers.
What city are you in, anyway, beatle?

8

One other thing:

Since you have a good lump sum to invest, you might consider an ETF, or exchange traded fund. Vanguard’s Total Stock Market Viper might be a good place to start with long term money.

They don’t make sense for a series of small investments because there’s a per-trans. fee. But they’re good for big hits of tens of thousands of dollars which you’re going to leave alone for a while.

Still, don’t take my word for it. Talk to a planner, and check out his advice thoroughly.

9

Can’t say that Steverino is wrong, just a bit too conventional, IMO, on a couple of issues.

Just can’t believe in down payments. Even a CD will earn more than PMI costs.

I also don’t believe in buying a bunch of different instruments just because they are available. We have been told that one must diversify, and that means buying bonds or even gold… I do believe there is a place for such relatively safe, pridectible, and liquid assets - I just don’t believe they are right for young, earning, investors, except to plan for short term cash needs - like buying a house.

Hang in there Steverino, things will turn soon. I too had hoped on reaching another stage in my life by now.

10

Thanks, Blown! The only point on which I’d disagree is PMI; it’s utterly unnecessary, and difficult to get rid of once you’re stuck with it. You have to prove to the lender that the loan-to-value is no more than 80%, and the lender can still refuse to drop the PMI if you haven’t made all your payments on time (not within the grace period, but before the grace period even starts). If you’ve made a few payments during the grace period, the lender can force you to keep PMI until you’ve proven that you can make payments on time. It’s a hassle, and an avoidable one. But, really, PMI payments are chicken feed compared to the rest of the investment portfolio.

As far as a balanced portfolio, it depends on the individual. You are correct in stating that the younger investor can take more risks with his capital, because he is young enough to earn it again should the unthinkable happen. But I’ll defend myself on this issue: the OP stated he wanted to retire (early, I presume), which changes the priorities of investing. Impending retirement would mean shifting some of your portfolio out of higher-risk equities. There’s nothing wrong with putting some of your nest egg in lower-risk investments. In fact, the “safest” portfolio when you factor both risk and performance over the long haul is about 16% bonds and 84% equities. That’s not overly conservative.

I’m not at all worried about the stock market. It will turn around in 12-18 months. And if it takes longer to turn around, I’ve got time to wait. Technically, I could retire right now, I just want to retire in a little more opulence :slight_smile:

As far as CFPs go, interview several of them and find out what they want to put you into. Many CFPs will steer you toward loaded mutual funds; they get a commission from the fund company that comes out of the load. Many other CFPs will invest you directly in several stocks (which is the equivalent of building your own mutual fund), and charge you a quarterly portfolio management fee. The management fee is tax-deductible (fund loads are not, however), but nobody’s in the 100% tax bracket: you are still out some dough as a result.

I agree that you should stay away from CFPs that are part of insurance companies. When your only tool is a hammer, everything looks more or less like a nail, and such CFPs tend to steer you into in life insurance. The purpose of life insurance is to replace lost future income, it’s not needed if you’ve got enough dough to retire or your estate is big enough for your surviving spouse and children to live off.

I’ve mentioned in another thread that I invested in a 1st Trust Deed fund. These are definitely worth looking into, as they pay a lot more than bonds without much more risk. The fund I’m in has paid an average of 12.5% APR this year, which is a whole lot better than most equities are doing.

Depending on where you live and how much you have to invest, commercial property like an apartment complex can be very lucrative. This has the benefit of earning money with no real effort from you: you hire a building super who handles the repairs, and you draw you profit after all bills are paid. Whether this makes sense would depend on the apartment rental market in your area.

The most important thing anyone with new-found wealth can do is educate himself. We’re all born virgins: none of us knew any of this stuff when the doc slapped our bottoms. And my background is not in finance, I’ve been a software engineer for the past 20 years; if I can learn it, anyone can. So, I hope the OP takes the time to read the recommended books, and keeps asking questions.

11

The OP will probably find this out when he files his tax return for 2001, but you start losing deductions when you make “too much” money. I don’t know what the cut-offs for single people are, but I do know that as Married Filing Jointly, you start losing the personal deduction for you and your dependents at $128,000 gross income. And at $250,000 (or thereabouts), you start losing the Schedule A deductions (property tax, state income tax, mortgage interest). That really sucks, because as Manhattan pointed out, a home mortgage is one of the last good deductions left.

12

TRUE THERE
Guess I was not paying enough attention about the ready to retire part.

PMI Ha!!! Why do we have to pay for the lenders insurance!? What a scam.

13

There is very little disagreement among the posters here, since we’re all interested in money :slight_smile:
What anyone who wants to invest has to achieve is a balance between two inextricably linked goals: wealth accumulation and wealth preservation. Where your balance point lies depends on your investment time horizon (how soon you’ll need your wealth), the time you’d have to earn the wealth again should you lose it, and the certainty that you are able to earn it again. (If you just won the state lottery or you’re a dot-commer who got lucky on stock options, chances are you won’t repeat that stroke of brilliance for the next few years.)
Wealth accumulation is about asset growth, cash flow, and tax liabilities. What is your expected rate of return on your investment? Can you generate enough cash from it to pay your expenses? And what are the tax consequences of your investment? I’m speaking of income taxes here, since those mitigate your asset growth and cash flow; sales, property, and estate taxes are more properly components of wealth preservation.
Wealth preservation is about asset protection, risk, and asset depletion (from spending and inflation). Your assets need protection from lawsuits and estate taxes. Risk is simply the likelihood that your investment will lose money; generally speaking, the greater the reward (asset growth), the greater the risk. You can’t control inflation, but you can get a handle on your own spending. I’m not saying you should live like a monk – enjoy your money! Just get value for your dollar, whether that value is in real worth or intangibles (a once-in-a-lifetime vacation).
One final thought. It is said that time is money, but really the reverse is true: money is time. Money represents a portion of your life that you have given to someone else (your employer or your client). The more money you have, the less of your life you must sacrifice, and the more time you will have to yourself.
Good luck!