Smart long-term investing - how to best allocate extra cash?

[beginner.wci]

Hi,

Long time lurker, first time poster. My husband and I are trying to figure out the best way to put our earnings to work and would appreciate the feedback of this fantastic group.

We're 32 and 34 yo, no kids (yet), no student loans. Our joint income is 600-700K. We've been maxing out our 401(k)s and Roth IRAs and have 520k in tax advantageous retirement accounts (mostly in target date funds (meh - we need to work on it). 50k in a taxable brokerage account (Vanguard index stock and bond ETFs). $42k in an emergency fund ($15k in a savings account; the rest in bond/stock ETFs). We own an investment property worth $250k (we have a small loan (2%) on it but our tenant pays it down for us + some extra sufficient to cover taxes & generate profit). We own a $2.2m house in CA with $1.2m mortgage on it (30 yr, fixed, 3.3%) (I know, this sounds horrendous, but welcome to California...). We also have a small personal loan of $84k (5 yrs, quarterly payments, 4%).

We're about to get a lump sum amount of $70k (extra earnings) and are trying to figure out how to best invest it. I've already maxed out my Roth IRA and 401(k) for the year. No major expenses in sight, although we'd love to get a dog this year. We're thinking about the following:

1) use it all to pay down our personal loan.
2) use $20k to pay down our personal loan; invest 30k in a VC fund (we have an opportunity) & invest $20k in our taxable brokerage account (index funds).
3) use $20k to pay down our personal loan and invest the rest in a VC fund.
4) any other ideas?

Thank you all very much in advance for your guidance.

[Larry Ragman]

1. You are both doing well
2. No reason to knock target date funds. They are fine, especially if you don’t have any particular insight into how better to invest (3 fund portfolio?)
3. Do either of your work 401k/403b plans allow mega backdoor Roth? If so, think about doing that.
4. To your question, I’d pay off the loan. Heck take some of the emergency funds and pay it off completely. (Then budget to build it back up over a reasonable period.)

Can’t really evaluate the VC thing except a 1 in 10 hit rate is supposed to be good and many don’t get that. I’d have to know a lot about the VC team and their success rate to invest with them. Sure, you could take a flyer for the excitement of being a “sophisticated” investor, but you don’t need to do so.

[childay]

1. You are both doing well
2. No reason to knock target date funds. They are fine, especially if you don’t have any particular insight into how better to invest (3 fund portfolio?)
3. Do either of your work 401k/403b plans allow mega backdoor Roth? If so, think about doing that.
4. To your question, I’d pay off the loan. Heck take some of the emergency funds and pay it off completely. (Then budget to build it back up over a reasonable period.)

Can’t really evaluate the VC thing except a 1 in 10 hit rate is supposed to be good and many don’t get that. I’d have to know a lot about the VC team and their success rate to invest with them. Sure, you could take a flyer for the excitement of being a “sophisticated” investor, but you don’t need to do so.

+1
Pay off the loan for sure. I wouldn't call $80K loan small even at your income. Leave the VC alone

[Hatton]

Pay off the loan. Take the pledge to never borrow in this way. Get the dog. Do the VC in a year or two.

[DocNextDoor]

Pay off loan or start 529 if kids planned

[beginner.wci]

2. No reason to knock target date funds. They are fine, especially if you don’t have any particular insight into how better to invest (3 fund portfolio?)
3. Do either of your work 401k/403b plans allow mega backdoor Roth? If so, think about doing that.
4. To your question, I’d pay off the loan. Heck take some of the emergency funds and pay it off completely. (Then budget to build it back up over a reasonable period.)

Can’t really evaluate the VC thing except a 1 in 10 hit rate is supposed to be good and many don’t get that. I’d have to know a lot about the VC team and their success rate to invest with them. Sure, you could take a flyer for the excitement of being a “sophisticated” investor, but you don’t need to do so.[/QUOTE]

Thank you all for your helpful responses! There is still a part of me that wants to do the VC investment, but I agree that paying off our personal loan is a much smarter choice.

2. Roger re: target date funds. I thought that if we switch to a 3 fund portfolio it may be easier to track our asset allocation and rebalance accordingly, but I understand that target date funds are doing that for me (and their asset allocation is largely in line with what we would have done).

3. Yes, my husband has an option to make mega backdoor Roth contributions each year and he's maxing them out.

Point taken regarding debt pledge. If I knew back then what I know (or think that I know) about investing now, we probably would have invested our down payment in index funds. I started reading up about investing only a few months ago. It also didn't help that California renal prices are astronomical, we're paying only slightly more in monthly mortgage payments compared to what we paid in rent. Nevertheless, lesson learned! I'm very grateful that I stumbled upon this community.

[Tangler]

Pay loan, NO VC, get dog

[xraygoggles]

I would not pay off the personal loan, 4% is not bad at all. You have enough liquidity to pay it off whenever you like, so it's not a big deal anyways.

VC fund.. hmm, not sure what that means, are you referring to a syndicate? Where you pool your funds with others for a startup investment or group of investments? I am a wannabe angel-investor of sorts, but I like to pick and choose individual companies - I wouldn't personally join a syndicate, unless I really knew the manager and had an idea of what companies they were considering.

Taxable account always a good idea. In fact, it might be wise to forego both of the above and just plow it all in taxable even.

[beginner.wci]

Thank you all for your responses, much appreciated. Sorry for a belated response on my end. I had a log going on at work and personally, but I'm finally back on track.

Here's what we ultimately did:
- repaid a large portion of our personal lon - it's now down to $35k and we pay $150 in interest on it per month (the plan is to get rid of it entirely within the next 2-3 months)
- we refinanced our mortgage to 3.0% with closing cost of $4k only
- we ended up investing $30k in the VC fund (we're not really counting this amount in our net worth, but if it works out, it may yield great returns).
- we keep a savings rate of 50-60% and after having maxed out our tax advantaged accounts, we're putting everything into a brokerage account (VTSAX and VTIAX, we decided to keep bond investments in the tax advantaged accounts only, so traded them for index funds (it was a small amount anyway)).
- didn't get a dog yet! turns out husband is allergic to dog fur, so we're looking for a hypoallergenic breed and that's not an easy task these days since everyone seems to be getting dogs!
- decided to try to retire at 40 if we can and move abroad then, only time will tell.


Regarding the above VC fund question asked by xraygoggles, yes, that's what I'm referring to. Most of the VC funds are structured as LPs, so you're effectively becoming a limited partner investor and pool your money with other LPs and the general partner chosen by the LPs is managing the funds (typically for a yearly flat management fee, but in our case we don't need to pay any management fees, so we thought it was a great opportunity). The VC fund invests in early stage tech and biotech companies in the US and abroad. One needs to be an accredited investor to invest, but I suppose almost everyone on this forum qualifies.

[Ozarka]

Out of curiosity, what kind of returns can be had on the VC side of things with a $30k investment (assuming it hits)? 50%, 1x, 2x?

[Sampter]

FYI, no such thing as a hypoallergenic dog

[beginner.wci]

Out of curiosity, what kind of returns can be had on the VC side of things with a $30k investment (assuming it hits)? 50%, 1x, 2x?

It really depends on the investment year, the fund and the investments that the fund made. Typically, a good VC fund would yield anything between 10-30% annually, but if it hits, it may be way larger than that. It's really almost like gambling and we have not invested a lot (only $30k), so really just curious to see how it's going to play out in real life. Might be money down the drain. Might also not be a better option that putting it all into the stock market. Or it may. No one knows.

[beginner.wci]

FYI, no such thing as a hypoallergenic dog

Le sigh. Really don't want to get a turtle

[CordMcNally]

Typically, a good VC fund would yield anything between 10-30% annually, but if it hits, it may be way larger than that. It's really almost like gambling and we have not invested a lot (only $30k), so really just curious to see how it's going to play out in real life.

It isn't almost like gambling, it is gambling. I also got a kick out of the 'we have an opportunity' in the original post. You'll come to find out that every high income person has many of these 'opportunities'. It isn't a special opportunity. They're just looking for people with money and try to make it sound exclusive.

[beginner.wci]

It isn't almost like gambling, it is gambling. I also got a kick out of the 'we have an opportunity' in the original post. You'll come to find out that every high income person has many of these 'opportunities'. It isn't a special opportunity. They're just looking for people with money and try to make it sound exclusive.

Good point. My partner wanted to commit $50k, but it sounded insane to me. And we successfully fought off Northwestern Mutual (they're simply relentless).

That ship has sailed now, so we'll see where we end up with it. The bottom line is, the more I read and listen to podcasts, the more aware I am of how things might actually play out in real life. So at least another lesson learned.