Incoming M1 trying to plan my finances

[Frogger27]

Hello everyone. I would love some advice on planning my financial future and how to allocate my money to meet my goals.

 

Background: Incoming M1. Zero loans in undergrad and am planning on not taking out loans during medical school. I have about 110k that I am looking to invest.

 

Financial Goal: I would like to not touch this money until I am an attending (so 7-10 years)... Hopefully will use it as a downpayment on a home. Would like to have ~10% annual return.

With my current situation I think it is worth me being aggressive now since I am young and not planning on using this money for ~10 years. I also am not completely dependent on this money since I have my school/living situations paid for.

Any advice/tips on how I should use this given my situation? I am currently switching financial advisors after educating myself more on this and realizing I was getting hammered with completely unnecessary fees (2%+), but would like some advice on things I should discuss with my advisor and wanted to see if any of you had been through something like this.

[The White Coat Investor]

I'd love to have a 10% annual return over a 7 year period too, but unfortunately that's not something that can be dictated. Over such a short period, that's a big gamble. If it is a requirement, you will need to take on significant risk AND be okay if it doesn't come true.

Since you don't need the money for 7+ years, why not invest it? I would be a little cautious about how you do so though, since you probably have no idea what your risk tolerance for loss is. Why not start with a 75/25 or 60/40portfolio and if loss doesn't bother you in your first bear market, ramp up the risk then. However, you need to learn to accept what the market gives you. Maybe that's 15% for you time period. maybe it's 5%. Maybe it's -5%. But get used to not being able to dictate your short term returns to the market.

[Frogger27]

Thanks for your reply! Sorry if it was not clear but I am going to invest this money and wanted advice on what people think would be a good allocation/some tips on strategy that I should talk to my financial advisor about. I am okay taking on some risk with this since I am young and not dependent on this money.

 

What do you mean 75/25 or 60/40? Is that a stock/bond allocation? I currently have about 30% bond allocation but they weren't returning me anything and I feel in my situation would be better using elsewhere.

[CM]

Here are expected 10-year real (i.e., removing the effect of inflation or deflation) returns for various asset classes based on projections from Research Affiliates: https://interactive.researchaffiliates.com/asset-allocation.html#!/?currency=USD&model=ER&scale=LINEAR&terms=REAL&type=Equities.

Here are 7-year expected real returns from GMO: https://www.gmo.com/docs/default-source/research-and-commentary/strategies/asset-class-forecasts/gmo-7-year-asset-class-forecast-(2q2017).pdf?sfvrsn=2. (One-time free registration might be required.) I think that GMO expects significantly lower returns than Research Affilitiates because it forecasts mean reversion over a shorter horizon than RA.

Good luck finding 10% (even nominal) returns.

If I knew that I needed that money in 7 or 10 years to buy a house, then I would put it in a mix of TIPS, CDs, and US government bonds. If I didn't need $110K in real terms at that horizon, but just some significant down payment, and I was willing to take a chance on increasing the pot at the risk of a lesser house, then I'd put 25% in a foreign stock index that tracks EAFE (or similar).

I'd be more aggressive if the stock market was priced to reward risk, but it is not.

You can place your bet and take your chances, but if you really need the money at that horizon, there is a good chance it won't be there if you put it in the stock market. This was the total real return (dividends reinvested) to the S&P 500 from March 2000-March 2010: -2.794% per year (or -24.680% cumulative).

[CM]

Frogger27 wrote:

I am okay taking on some risk with this since I am young and not dependent on this money.

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If you need the money in 7-10 years, then your youth is irrelevant. If you actually intend to invest it for retirement, that is a different goal.

[Frogger27]

I am currently maxing out my Roth IRA at 5500 so I have been putting money towards retirement.

 

 

Apologize on my lack of knowledge on this... Finance/investing is all new to me and I am just beginning to educate myself

[Frogger27]

I guess a question here is what would be the min. % bond allocation in my portfolio you would have in my situation?

[CM]

If you are in your 20s and you intend to retire at 65, AND you will not sell in a panic during bear markets, then it is reasonable to have essentially all of your investments in assets that offer the highest returns, even if those assets are likely to be volatile. (This assumes you also have a separate emergency fund, adequate insurance, etc.)

However, I think it's fair to say that most people would recommend somewhere between 60% and 90% in stocks, with the rest in bonds, cash, and perhaps real estate.

However, these people tend to be agnostic about prospective returns. That is, they assume they'll receive something like the historical return without regard to the current valuation of stocks or bonds. So when the S&P 500 sold for a normalized, inflation-adjusted PE (PE10) almost 50% greater than the 1929 peak, but long-term TIPS provided 4.5% real yields, these people would still put the bulk of assets in the S&P 500 index. (This occurred in 2000.)

I think this reasoning is misguided, but if you are going to work hard at being a doctor and you want to spend your free time doing something besides studying investments, then you will probably be better off following that path.

Go to bogleheads.org and read the wiki. It won't take long and you'll be miles ahead of where you are now.

[The White Coat Investor]

Frogger27 wrote:

I currently have about 30% bond allocation but they weren’t returning me anything and I feel in my situation would be better using elsewhere.

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What you seem to be missing is that "not returning anything" is better than losing 30%, which is one potential outcome of investing aggressively.

[jfoxcpacfp]

If you have flexibility, then I see no reason you should not invest in an appropriately diversified equity mutual fund portfolio as long as you can control your emotions during the normal corrections and bear markets.

My recommendation would be to invest as above for the next 5 years and then purchase high-quality corporate bonds timed to mature at the planned date of house purchase. By flexibility, I mean that, if the market is down 5 years from now due to a correction or bear, then you may need to move the purchase of your house back a year or take on more debt from a doctor loan than you had originally planned until the market comes back. Just don't liquidate until the market moves back to its perfectly normal upward trend.

With a 7 - 10 year window (which already indicates flexibility), you should be fine. Just don't expect to keep your money invested until you are ready to purchase. Dial back to cash and bonds in that 5-year window or, if the market is down, wait until you can. By no means should you liquidate when the market is down - it will come back and reach new highs.

For a better explanation and the specifics of how to invest your money, read Simple Wealth, Inevitable Wealth.

[Frogger27]

WCI I definitely understand your point that getting no return is better than losing money.. I guess my main concern is that in my current situation should I be taking on more risk? I know that the common sentiment is to be conservative, but in my situation I'm not sure a 60/40 is the best allocation (hence me seeking as much advice as I can)

JFox, do you recommend putting all of my money into mutual funds for the time being or allocating it differently? I am in a position that my timing for using this money is very flexible and I can ride out some volatility in the market

[childay]

Agree with JFox.  I would put it all in stock index funds and leave it alone.  This is assuming you would be ok NOT using it for a house downpayment if the market is down, IE that you could save up the cash early in your attendinghood and rent for a while etc.  If you are definitely going to use it for downpayment I would do as CM suggests and put it in bonds, TIPS, savings account etc (not stocks).

[q-school]

If we think this through, how likely are you to need the money when you are an attending? You will be making big time bucks and can cover expenses including down payment of house with future income stream, given that you will have no educational debt and will have been living with resident income for several years.

It's great that you have already saved 110k. Awesome. Keep those habits and it won't really matter how you invest the money. You will pick a reasonable way to do it.

There is a saying. Pigs get slaughtered. Don't worry about trying to get to 100 percent efficiency. Trust me. There will always be a stock that you knew would be explosive and didn't buy. .

I continue to maintain that the single best thing you can do in the next two years is to ace step 1. Everything else comes second. Even your present happiness.

[jfoxcpacfp]

Frogger27 wrote: JFox, do you recommend putting all of my money into mutual funds for the time being or allocating it differently? I am in a position that my timing for using this money is very flexible and I can ride out some volatility in the market

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Yes, I do, (equity mutual or index funds, to be specific) as long as you can ride out ALL (not some) volatility in the market.

[The White Coat Investor]

There's no guarantee that stocks will outperform bonds over 5 years, 7 years, 10 years, 20 years, or even 30 years (imagine the whole world's equities do a Japan for the next 3 decades). That doesn't mean investing money you don't need for at least 5 years at least partially in stocks is a bad idea. You just need to realize the range of possible outcomes your decision to invest that money in equities could produce is quite wide and very unlikely to end up being exactly 10% a year. It just doesn't work like that.

It's NOT just a matter of "riding it out." It's possible that risk shows up that you can't "just ride out" no matter how iron-hard your stomach is. The reason you usually get paid for taking equity risk is because sometimes that risk shows up, and it's not just a matter of waiting 2 years to get your 10% returns.