Please help me come up with a plan for DS

[Deleted]

I need some help figuring out the asset allocation and what to buy. Thanks in advance for your suggestions and time.

DS has a taxable account with gifts from FIL at Schwab.  It currently is worth about 72k.  FIL intends to keep gifting DS the gift tax exclusion amount each year.  We also plan to open a separate account and gift DS 28k this year. There's no dedicated purpose for these accounts.  We would just like for him to have some money put aside for life, to start a business, buy a house, etc.  DS is four years old and it's my understanding that the account from FIL will have to be turned over to him at 18.  Because of the nature of the account we have a fiduciary duty to DS so we can't do anything too risky with it.  We pay all the income taxes on it so we're not too concerned with being tax efficient in this account even though it's not sheltered.

Right now most of the account is sitting in cash. DH has purchased a few things so right now it looks like this:

2% Abbott Labs (ABT)
2% Abbvie Inc. (ABBV)
3% Johnson & Johnson (JNJ)
5% McDonalds (MCD)
3% Proctor & Gamble (PG)
2% Target Corp. (TGT)
3% Wal-Mart (WMT)
total: $13,747

2% iShares TR Barclays TIPS
2% Vanguard REIT
<1% Vanguard S&P 500 ETF
total: $3,447

deposit accounts: $54,754

I just finished reading the Four Pillars of Investing so I have some basic understanding of how this works but I have a lot of questions.  It convinced me to stick with indexes rather than trying to pick individual stocks.  What do you think would be an appropriate mix in this scenario?  I'm leaning 70-80% mix of REITS, stocks, and precious metals.  How many ways should I divide it within that mix with an account this size?

So far I have as possibilities:

cash equivalents
bonds
   gov't
   corporate
   munis

For the domestic should I try to get all four sectors?
 
foreign (do I buy something from all three regions?)
REITS
Gold (DH doesn't want to buy this now - he feels it's too high.  Is that market timing or reality?)

Once I decide on the allocation how do I research what indexes to buy to make sure they are not overlapping?  Should I just stick with the well known names? What role do dividend stocks play in all of this? Should I keep what DS already has and work it in or start over completely?

Sorry for all the really basic questions!
 

[The Virginian]

Looks like you guys have a great handle on things right now !

I personally would stay away from Bonds as Interest rates are artificially low and many are predicting a collapse when they do rise. ( Maybe add then in the future when things settle down.

I never allocate more than 4% of my portfolio to any item, stock, funds, whatever.

I would continue to add more stocks - Large, Iconic, Dividend Stocks.
 You are short in many sectors, consider adding Telecomunicatons ( VZ & T), Energy (XOM, CVX, DUK, Ed,FE, SO) , Technology (IBM, INTL, ) Agriculture ( ADM, Monsanto) Consumables ( KRFT, MDLZ, CLX, ) Congomerates ( GE ) ............. I love individual Dividend stocks, manage them myself which you can do through Schwab, TD Ameritrade, E-Trade ....... not sure if that's what you are doing or not.
I use Schwab and you can choose to have dividends buy more stock, which is what I do. This acts like DCA( Dollar Cost Averaging ) and acts to compound returns. Over a long period of time, 14 years or more,  in your case it will serve you well.

As for Gold, I stay away. Maybe consider some Mining stocks in silver and gold or a Precious metals ETF.

I stay away from Insurance, Banks, Transportation .......... but many do not - this is just a personal preference.

Also look to WXYZ's Model Portfolio in the Long Term Thread. He has some great picks.

Oh, and in Schwab ---- They have a tool that let's you know what percentage of the portfolio you have in various sectors, a very useful tool to ensure you are well balanced.

[2kids10horses]

I was lucky enough to have funds to invest for my kids when they were born.  Their college, grad school, and probably first house are now fully funded!

I did choose some stocks, and for the most part, it worked out well.  (I chose MSFT and INTC 18 years ago.  They're down from their peaks, but still huge profits...)  About 1/2 the money was in individual stocks, half in mutual funds. 

If I had to do it over again, I would choose the Index ETFs over the mutual funds.  But, they didn't exist then, so even if I had a time machine, I couldn't change what I did.

Bonds or gold have no place in a portfolio like this for long term growth.

Unlike WXYZ, I also like mid-cap and small-cap stocks.  One option is to put 1/3 in Large Cap, 1/3 in mid, and 1/3 in Small, but then again, it would just be easier to put it all in a Total Market fund!  One advantage would be to having them separate is being able to reallocate every year to the 1/3, 1/3, 1/3 allocation. 

You might want to look into setting up a trust to hold this money.  It might cost a little bit to set up, but you can make sure it all doesn't get blown on a Ferreri on someone's 18th birthday!  I have mine set up (I am the Trustee) so that I can dispense the funds for education and maintenance as I see fit.  The kids can take 1/3 of the funds at their 25th birthday, 1/2 the funds at their 30th birthday, and it all goes to them on their 35th birthday.  So, I can retain some control over the funds for some period of time to keep them from blowing it, or if I see fit, the funds would be available for education, maintenance, buying a house, business, etc.

[clarkrl2]

I think most total market funds are market cap weighted which means the 1/3 large cap, 1/3 mid cap, 1/3 small cap allocation would give a greater exposure to the mid and small cap indexes. Of course you would need to look at the specific fund prospectus to see how it was weighted.

My retirement funds currently go into American Funds  RIDCX. I also have other funds retirement funds with TIAA-CREF. There are a lot of reputable mutual fund companies that have low expenses and competitive returns. I prefer mutual funds for my long term retirement investments. Index funds take human error out of the equation. I do think over the long term you need some exposure to asset classes other than stocks. If it were me I would begin with mutual funds and add stocks only after I became familiar with them to the point I was confident in my assessment.

[2kids10horses]

Feb 19, 2013 1:08:33 GMT -5 clarkrl2 said:

I do think over the long term you need some exposure to asset classes other than stocks.

With "stocks" these days, you can get exposure to most all asset classes.  REITS offer exposure to real estate, and using ETFs you can get exposure to commodities (gold, oil, etc.)  You can even buy bond funds.  One benefit is immediate liquidity.

In my case, my kids Trusts are invested solely in stocks and Mutual Funds.  My daughter is a freshman in college, so I am using her Trust to pay for her tuition and housing.  Fortunately, she did get a scholarship that's paying about 1/2 her costs.

The balance in her account is sufficient to pay for all 4 years and then some.  One financial advisor told me I should liquidate enough to pay for all 4 years, and keep it in "cash".  Instead, I'm pulling it out as needed.  I've made two payments so far (one in August, the other in November) and the balance of her account is more than it was when I started withdrawing.  Sure, the market's been up, and there's no guarantee this will continure for another 3 years, but it's working right now.  If I had withdrawn the funds to pay for 4 years of college last fall, the gains in the account would have been much less.

[Deleted]

Feb 19, 2013 8:50:25 GMT -5 2kids10horses said:

Feb 19, 2013 1:08:33 GMT -5 clarkrl2 said:

I do think over the long term you need some exposure to asset classes other than stocks.

The balance in her account is sufficient to pay for all 4 years and then some.  One financial advisor told me I should liquidate enough to pay for all 4 years, and keep it in "cash".  Instead, I'm pulling it out as needed.  I've made two payments so far (one in August, the other in November) and the balance of her account is more than it was when I started withdrawing.  Sure, the market's been up, and there's no guarantee this will continure for another 3 years, but it's working right now.  If I had withdrawn the funds to pay for 4 years of college last fall, the gains in the account would have been much less.

The adviser's advice seems to be good advice.  No need to try to squeeze a few extra percent out of it when you have your goal covered.   There is a real possibility of another 40-50% drop in the market.  

[2kids10horses]

Archie,

There always is a chance the market can drop.  At this point, even if the market were to drop 50% today, that would leave more than twice the amount needed to pay for the next 3 years. The dividends alone pay for about half the cost of college.  If I sold the stocks and mutual funds, the money market isn't paying anything close to that.

[Deleted]

Both accounts will be in trusts.  Because of the nature of the trust from FIL I have to be invested in bonds as well since I have a fiduciary duty.  100% stocks are too risky for that.   DS also has to be given access to that account at 18 and yes, I'm terrified.   DH and I will have much more discretion with the trust we set up.

Personally I think it is a mistake to try to cover all the bases you appear to be trying to cover in your allocation. I (obviously) prefer going very simple with the indexes and letting the power of compounding and achieving market returns do the rest. There will be plenty of BIG CAP dividend paying stocks in both those indexes.

So your advice would be to sell these stocks and stick with indexes?  I can do that.

I will be back after I do some research on funds and post what I ended up going with.

I'm confused about one thing - how do index funds rebalance without selling and buying?

[Deleted]

Feb 19, 2013 9:12:02 GMT -5 2kids10horses said:

Archie,

There always is a chance the market can drop.  At this point, even if the market were to drop 50% today, that would leave more than twice the amount needed to pay for the next 3 years. The dividends alone pay for about half the cost of college.  If I sold the stocks and mutual funds, the money market isn't paying anything close to that.

That is fair.  I just think it is too risky to have funds you want to use in the next 4 years invested in the stock market.

[Deleted]

I understand that you are not offering financial advice. 

I did not know that the individual funds contained a mix so that it's possible to get a balanced portfolio by just buying one or two.  I will look into it.

[2kids10horses]

I am the trustee of the Trusts for my kids, and I have a Fiduciary duty to protect their interests.  I put 100% of the money into stocks and stock Mutual Funds.  Some of the stocks did well.  Some did very, very well.  Others did awful.  They actually lost money!  But the ones that did very, very well have made up for that.  (The same thing happens in Mutual Funds.  Some of the stocks the Funds invest in do well, some don't.  It's the overall return that matters.)

If it makes you feel any better, bonds are yielding very little right now.  Interest rates are at historic lows.  Which means that when interest rates rise, and they will - no one knows when - but when interest rates rise, the value of existing bonds will fall.  Which means the prices will drop.  Which means bonds will lose money.  Sure, they will still pay their interest, but it would be less money than what new bonds would pay.  THEREFORE, bonds are not a good buy right now.

My opinion is that "as a Fiduciary" it would not be in my beneficiary's best interest to buy bonds at this time.

But, hey, I'm with WXYZ, I'm not giving advice to you either.  I'm just saying what I'm doing as the Fiduciary Trustee for my kids Trusts.

[2kids10horses]

I just re-read one of your prior posts, and it said that the FIL has already set up a Trust and it will dissolve when the kid reaches 18.

That's probably not the best thing... can the FIL change it?  If not, then so be it.

Given that, the Trusts you set up should be different.  My Trusts for the kids state they can get 1/3 at at 25.  I chose this age since they should have graduated from college by then.  I, as Trustee, control the funds, and I would have used them for college, etc.  It's what's remaining we're talking about.  They have access to 1/3 at 25, but they can leave it in the Trust if they'd rather.  At 30, they have access to 1/2, and the balance goes to them at age 35.  My wife is successor Trustee if something were to happen to me.

To give you an idea, my daughter's Trust is currently worth about $355,000.  College costs $50,000 per year, but she gets $25,000 in scholarships.  So, I pay a little over $8,000 for each school quarter from her account.  The market's been good.  I started paying her tuition last August and her account was worth $350,000.  I've made two payments, and her account is worth more now than before.  Heck, she gets about $8,000 in dividends, so I only have to draw $17,000 from "principal" each year.

[Deleted]

Whatever you do, your children are very lucky to have grandparents and parents that are looking out for their future. Good for you. I believe it IS the responsibility for older generations to help the youngest generation get on their feet with education, etc.

Thank you.  DH was very lucky to get so much help from his parents and grandparents so we feel we should do the same, otherwise it's not being respectful of their efforts.

it said that the FIL has already set up a Trust and it will dissolve when the kid reaches 18.

Not dissolve but we have to send DS a Crummey letter each year letting him know that he has the right to withdraw the gifted amount.  Until he's 18 he doesn't really have a choice in the matter but once he's an adult it's in his hands. DH chose to let his parents administer his trust until he was 28.

Our trust is set up similar to yours - that DS will have the right to 1/3 at 18, and then at intervals after that.

I spent some time reading about the various funds and indexes today and will keep up the research.  I've been trying to read the Long Term Investor thread and it's starting to make more sense to me now.

[yogiii]

anne, take a look at the vanguard wellesley fund.  It is similar to the wellington fund but heavier on bonds.  I believe wellington is something like 65% stocks, 35% bonds and wellesley is 40% stocks, 60% bonds.

[2kids10horses]

www.cnbc.com/id/100478351

This is a link on cnbc about expectations for bonds.

A "crash" in bonds may or may not happen.  But nearly everyone agrees that interest rates will rise.  Which means that the value of existing bonds will fall.