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300k in bonds in IRA to convert to total stock market index fund. How?

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  • 300k in bonds in IRA to convert to total stock market index fund. How?

    Good friend asked me the other day what to do. 55 year old who ignores the market. Plans to work until 65-70 (10-15 year time window until retirement).

    Asset allocation (AA) is 3 fund portfolio. All in fidelity. 60:40 stocks bonds

    She has a 60:40 portfolio and wants to have a 90:10 portfolio.

    Risk Tolerance: She is 55 and has been investing since 2003.

    She has a high risk tolerance (never looks at market and did not panic during the 2007-2009 housing crisis/recession, nor did she pay attention to the drop with covid).

    She looks at her investments once a year (end of year) and she was looking this week and she asked me for advice.

    She never looks at the market and is more interested in baking, cooking, gardening, etc.

    She was 100% invested in stocks prior to Jan 2020 when she want to 60:40 because she was told by an friend / advisor that she should have age - 10% in bonds.

    Now thinks this is too conservative for her and so she asked me if it would be crazy for her to 90:10 with a 6 month emergency fund of cash.

    She is a really good saver, very frugal and has a combined household income of 200k with no debt other than a mortgage.

    I think I know the answer, but I want to see what others say. I asked her what she wants to do and she said: "lump sum back into stocks".

    If she converts 300k in her bonds to stocks she will then have a 3 fund portfolio AA: 90:10 stocks bonds with 30% international. All in fidelity total market funds.

    She plans on contributing to these every month until she retires and she does not plan to use this money for 15 years (age 70).

    Valuations are high and I discussed with her.

    I said, most people (myself included) say lump sum but that the minute she converts it the market might drop 50%.

    She said: "I still want to do lump sum, because I have heard you say that time in beats timing and I do not expect to use this money for 15 years"

    I told her what I thought but I figured I would ask you guys too and show her the results.

    Q: How would you convert the 300k from bonds to stocks?
    24
    Lump sum and ignore the noise.
    75.00%
    18
    DCA back into stocks slowly over the next year.
    12.50%
    3
    Value average (using spreadsheet and value path) back into market over next year
    4.17%
    1
    Wait for a market drop and then lump sum. (time it)
    0%
    0
    90:10 is crazy for a 55 year old. Stay 60:40
    4.17%
    1
    Some other option (please explain)
    4.17%
    1

  • #2
    She seems like she knows what to do. She’s picking reasonable stocks and as long as she feels good about AA then more power to her. Personal finance is for her to decide how much risk she wants to take.

    Comment


    • #3
      Lump sum for now, sure, but perhaps she will want to consider moving towards a more conservative AA within five years of retirement. If converting 300k in bonds is equivalent to 30% of her portfolio, then her nest egg is 1M? Seems like someone frugal with 200k income investing in index funds for 20 years would have built up a little more. Maybe there have been some bumps in the road l. Thankfully, SSI should cover a decent portion of her expenses when the time comes.

      Comment


      • #4
        I would vote on her being more conservative, if she is going to work for the next 15 years, her time in retirement may not be as long as she thinks it is going to be , better to have a nest egg when you want to quit, than to have a big market crash at a time of a health problem or some other life changing issue occurs. If she works until she is 70, with the money she has now, future savings and SS , her financial needs may not be that great.

        Comment


        • #5
          Originally posted by TheDangerZone View Post
          Lump sum for now, sure, but perhaps she will want to consider moving towards a more conservative AA within five years of retirement. If converting 300k in bonds is equivalent to 30% of her portfolio, then her nest egg is 1M? Seems like someone frugal with 200k income investing in index funds for 20 years would have built up a little more. Maybe there have been some bumps in the road l. Thankfully, SSI should cover a decent portion of her expenses when the time comes.
          Yeah, this was just a quick curbside question I got in the break room.

          My guess is the net worth is higher? She is a little reluctant to discuss financial stuff (unlike me).

          Think she was giving me smaller numbers so as to not disclose how much she has saved.

          She knows I am interested in personal finance so she wanted my opinion.

          She just wanted my thoughts on lump sum vs DCA.

          She already made up her mind to be more aggressive and 90:10 is the AA she likes. (with little debt + 6mo EF)

          When I mentioned value averaging (Michael Edelson has a cool book on it and spreadsheet downloads) she looked at me like I was crazy.

          She said, "listen, I look at this once a year......you want me to download a spreadsheet and follow a value path?"

          I said: Ok,....... yeah, you are right, just lump sum it.

          The funny thing is that she will probably do better with a lump sum and looking at it one time per year than I would using value averaging and a value path spreadsheet!

          Thanks for the input!

          Comment


          • #6
            90/10 from 60/40 seems like a drastic change- will this person want 90/10 in retirement? or 5 years from it? Maybe better to figure out that allocation and strive towards it (80/20? 75/25?) instead. Never know what may pop up in the next few years healthwise etc that may speed up retirement plans. 55 much different from 35 when saying "i want to work 10-15 more years".

            Have her consider the cash Efund as part of the bond allocation, then go towards her eventual end goal. I like hedging my bets so I would put half in right now, and DCA the other half over the next 6 months to make it there. Its actually what I'm doing with all the excess Efund I had saved up that I do not need anymore. So if there's a drop on 1/14/22, sorry guys. Or plan ahead to put money in on 1/17

            Comment


            • #7
              Originally posted by billy View Post
              90/10 from 60/40 seems like a drastic change- will this person want 90/10 in retirement? or 5 years from it?
              That is what hit me as I read this post. Suddenly going from 60:40 to 90:10 as one gets closer to retirement struck me as a form of FOMO

              Comment


              • #8
                If it’s me and this market, I’m somewhere between buying the dips and putting together a plan that forces me to enter. I know the rule, but you’re not going to convince me that buying at the top of a historical bull is a good idea with that chunk of change. Of course, this will explain why I’m currently carrying 15% cash that’s burning a hole in my pocket, but that money is ready for the dips.

                For your friend, lump sum is best.

                Comment


                • #9
                  Originally posted by Dewangski1 View Post
                  If it’s me and this market, I’m somewhere between buying the dips and putting together a plan that forces me to enter. I know the rule, but you’re not going to convince me that buying at the top of a historical bull is a good idea with that chunk of change. Of course, this will explain why I’m currently carrying 15% cash that’s burning a hole in my pocket, but that money is ready for the dips.

                  For your friend, lump sum is best.
                  That’s just it though—are we at the top, or still on the way up?

                  I certainly don’t know. I wouldn’t make decisions thinking that you or anyone else knows either.

                  Certainly depends on the time horizon as well. Zoom out far enough and we’re always on the way up.

                  The answer is always lump sum, statistically.

                  If that has a bitter taste, then 50% lump sum and 50% DCA over the next 6-12 months, maximum, might go down a little easier.

                  But that’s a behavioral/psychological fix to a mathematical question.

                  Comment


                  • #10
                    Originally posted by bovie View Post

                    That’s just it though—are we at the top, or still on the way up?

                    I certainly don’t know. I wouldn’t make decisions thinking that you or anyone else knows either.

                    Certainly depends on the time horizon as well. Zoom out far enough and we’re always on the way up.

                    The answer is always lump sum, statistically.

                    If that has a bitter taste, then 50% lump sum and 50% DCA over the next 6-12 months, maximum, might go down a little easier.

                    But that’s a behavioral/psychological fix to a mathematical question.
                    I don’t disagree in the slightest. Keeping cash to buy 5% dips is how I get my fix and add a little excitement to a boring indexing strategy. It’s like I know alcohol is bad for me, but that still doesn’t keep my away from it.

                    Comment


                    • #11
                      So here we are, the market has been on an historic tear for a number of years. The market has climbed as interest rates travelled to rock bottom over a number of years. Market valuation indicators are at extreme highs. Inflation has recently become much more significant leading to the possibility of a continuously rising interest rate environment. And that could lead to a significant pull back in the market, or not. No one knows.

                      While you can never say it enough, no one knows what the market will do, there is certainly the possibility that we could be in for some very poor years in the market going forward, or not. In her shoes, I might consider making an adjustment from 60/40 to 70/30, or 75/25. But to go to 90/10 means that she is exposing herself to the potential loss of 45% of her investment value as she approaches retirement. If she stays at 70/30, she is exposed to potential 35% loss in value.

                      In general, I would recommend a more conservative allocation than 90/10 at her age. But without knowing her annual spend and planned withdrawal rate, it is impossible to recommend an asset allocation. If she has way more than she needs, then there is a lot more flexibility, depending on goals. Does she want to assure a safe withdrawal rate that will allow maintenance of lifestyle? Or does she have way more than she needs and a desire to take on more risk to maximize inheritance for the heirs?

                      Comment


                      • #12
                        The thing is it’s not fomo changing her asset allocation. She was 100/0 before this advisor/friend convinced her to go 60/40.

                        She has a high risk tolerance and this would be more in line with what she wants to be. Another option if she’s big saver and her numbers would be to just add to equities until she gets to her 90/10 allocation.

                        Comment


                        • #13
                          She was 100% invested in stocks prior to Jan 2020 when she want to 60:40 because she was told by an friend / advisor that she should have age - 10% in bonds.

                          -This is what concerns me. If she’s a set it and forget it, truly high risk tolerance then why did she follow this bad advice? Makes me think 90:10 is still probably too risky, maybe 75:20:5 and then can tweak from there over the years if wants more risk. My two cents.

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                          • #14
                            For me the key bit of info is the 15 year time frame. She's clearly risk tolerant and hands off so lump sum it.

                            Comment


                            • #15
                              Thank you and happy new year!

                              I shared with her this post!

                              She gave me an update.

                              1. She is going to go 80:20, lump sum.

                              2. She is increasing her savings rate

                              3. Her annual spending is 110k & total net worth 3.1M (she owns some rental realestate, single family homes, which her husband manages)

                              Thanks for the help!
                              Last edited by Tangler; 01-01-2022, 03:13 AM.

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