[jordanmarshall]

Just skimming some of the replies here makes me think you will get better advice on the Bogleheads forum [1]. Despite the minimalist appearance it is actually a great place to get sensible financial advice. I would start with the wiki page on managing a windfall [2], then search through older replies to similar questions. This kind of question gets asked there a lot, so there should be some recent threads.

[1] https://www.bogleheads.org/ [2] https://www.bogleheads.org/wiki/Managing_a_windfall

[nemild]

One more to add is Reddit's Personal Finance, where this question gets asked a lot. The wiki (second link, search for Windfall) esp has a number of great articles on topics like this.

https://www.reddit.com/r/personalfinance/

https://www.reddit.com/r/personalfinance/wiki/index

[alex_sikora]

I'd probably recommend https://old.reddit.com/r/FatFIRE over /r/pf as it's more likely to have people that have experienced getting a large lump sum like this.

[monktastic1]

FatFIRE is for people who want to live large off their savings (usually understood as >$100k/yr passive income, which generally requires $2.5M+ in invested assets). That doesn't seem to describe OP's position. If FIRE is an interest, then https://www.reddit.com/r/financialindependence/ is a better bet.

[Justin_K]

4% roi is far worse than market and real estate averages.

[icedchai]

4% is what FIRE folks consider "safe" over long periods of time. It is based on the well-known Trinity study: https://en.wikipedia.org/wiki/Trinity_study

[Justin_K]

...but it's still worse than market averages.

[rabidrat]

Not anymore.

[Justin_K]

Based upon what?

[koolba]

I really appreciate linking directly to old reddit rather than the crap default.

[BbzzbB]

PF will say the same thing as always (not that it's wrong), i.e. SPY if you're risk-tolerant, some Vanguard I don't recall (VOO?) if you're less so.

[arcticbull]

VOO and SPY are basically the same thing, SPY is older and structured as a trust, VOO is an ETF. Both track the S&P 500. They'll probably recommend some combination of equity and bonds, probably a split between VOO (slightly lower fees and more efficient payout of dividends -- I do mean slightly) and TLT (20+ year treasuries).

VOO and TLT have limited correlation as treasuries are seen as a safe-haven. We've seen huge spikes in treasury funds recently, since they go up in value when interest rates go down. It's a bit unintuitive, but treasury funds have to cycle through their holdings over time to track the index, so when interest rates on new issues go down, older issues command a premium in the amount of pre-paid interest.

[reducesuffering]

VOO is the same index as SPY (SP500), so that can't be it. Maybe you meant BND, a highly popular total bond market ETF that would be for the risk-intolerant?

[csmiller]

Maybe VTSAX?

[arcticbull]

Bear in mind Personal Finance is pretty conservative. Depending on how much time you have in the market you can take some more aggressive bets. I'm not suggesting r/WallStreetBets style investing but something like a risk parity adjusted pairing of 3X leveraged S&P with 3X leveraged treasuries can yield dramatically better returns over time [1]. I'm not recommending it per se, to each their own risk tolerance and research, but suggesting that if you have time in the market, consider being more aggressive.

I'd suggest something like this.

(1) Have 6 months of expenses set aside.

(2) Max out your tax-advantaged retirement accounts.

(3) Allocate some amount of capital to traditional or conservative investments, and some amount to more aggressive plays. The more time you have in the market, the more aggressive you can afford to be. Having both types of investments will give you the comfort you need during rough times that your riskier plays come through eventually.

(4) If you're looking at property, consider setting aside a down-payment. Keep in mind that if you're employed, buying a house in cash may not be the optimal strategy as you can deduct large quantities of your mortgage payments, giving you, with 20% down, a 5X leveraged investment in real-estate with deductible expenses and historically-low interest rates. Mortgage interest rates are just a hair over inflation, and when you deduct the interest from your taxes, you're actually saving money with a mortgage.

(5) Now that you have a large chunk of capital, you can consider financing some purchases yourself at extremely low rates by taking advantage of margin borrowing. InteractiveBrokers offer 1.5% interest margin loans, and you could, if within your risk tolerance, borrow some amount of money collateralized by your (safe) equity positions. This 1.5% interest is also tax-deductible. Obviously be careful, a margin call is something to avoid, but against a $450K portfolio, I personally wouldn't sweat borrowing $45K.

One thing I was able to do personally is borrow enough on margin to make a down-payment on a property. This allowed me to deduct the entire balance of my mortgage, beyond the $750K cap, and at 1.5% the margin interest is much lower than if I'd financed the whole thing.

[1] https://www.bogleheads.org/forum/viewtopic.php?t=272007

[jannotti]

Please stay away from leverage equity index funds.

https://capitalallocatorspodcast.com/wp-content/uploads/2017...

Edit: For more clarity - risk parity can make sense, but I don't think you ever need to use leverage on your equities to get risk parity. The fundamental insight of risk parity investing is that at commonly recommended ratios (50/50, 60/40) the risk (variance) from equities totally dominates the risk from bonds. So the risk parity advice is usually something with a much higher bond mix, but the entire portfolio is leveraged. But DO NOT use levered ETFs that recognize, say, 3x the DAILY movement of the S&P to do this. They don't do what you think. Read that link, or compute the following two scenarios:

1) Market goes up 1.1% on odd days, down 1% on even days. That yields about 9% (200 trading days). But a 3x daily etf product would only get you about 22%, not 27%.

2) Market foes up 1% on odd days, down 1.1% on even. That, sadly, means you lose about 11% on the year. If you use a 3x DAILY etf product, you lose around 75%.

[arcticbull]

Please read the write-up before replying with blanket statements that aren't relevant in this case :)

That issue is addressed in the bogleheads post explicitly ("How much does the leverage cost?" and "Don't you know that leveraged ETFs are only intended to be held for one day?"), basically the ETFs are risk parity adjusted, and the volatility in the ETFs actually what generates the returns. The strategy makes money from volatility, and the 3X leverage is used to add volatility in, exaggerating the returns.

I think you might find the post interesting because it seems like you are interested in investing. What you're saying is again explicitly addressed there, and factored into the calculation. They work an example of that kind of decay, and how it's mitigated. Specifically, it doesn't matter that you have volatility decay in one of the ETFs because they're uncorrelated, and when one goes up the other goes down, canceling out the effect.

Your blanket statement does not apply to this specific strategy. It's not wrong in general, but it's not relevant here.

If you don't want to read the bogleheads write-up it's also addressed on Seeking Alpha [1].

> "That, sadly, means you lose about 11% on the year."

Not if, as you see in the write-up, you pair it with an uncorrelated 3X leveraged asset and rebalance periodically.

The post includes a backtest to 1987.

[1] https://seekingalpha.com/article/4308489-why-leveraged-etfs-...

[blacksqr]

I've been using 3x ETFs for the past few years to pursue a Permanent Portfolio style strategy in one account, and an All Weather strategy in another, rebalance annually, and both have been doing well.

Low net volatility, high returns. Backtesting of the strategy shows total returns just under 3x the return of the unleveraged portfolios, just what I expect given the leverage costs.

I expect both strategies to be both market-agnostic and age-agnostic. About as close to fire and forget as you can get.

[kristopolous]

The right advice is "don't use a leveraged fund unless you want to be involved and look at the market every day"

I've made good money on them as well, but I shuffle money in and out frequently.

It's not a good strategy unless you really want to study things.

[arcticbull]

That’s true in general, but this strategy is basically set it and forget it (rebalance quarterly for best results), and it works because it’s been carefully balanced to offset decay.

[BlackJack]

I like the strategy and employ it on a portion of my 401k. I think you need to do it in a tax-advantaged account, otherwise rebalancing + short term gains will eat away your profits.

Also, that strategy fails in a rising interest rates environment like in the 50s and 60s (not sure of exact years). Fed has indicated keeping rates low for the next two years, but if they start hiking rates after, I think the strategy would underperform.

[arcticbull]

You are probably better off doing this in a tax advantaged account, or if you have a large lump sum you want to invest you can do the rebalancing by adding money over time instead of selling the winner and redistributing it to the loser.

The strategy would fail if both interest rates went up and equities went down or stayed flat. While the potential exists for an underperform condition there in a couple of years I personally suspect the fed won’t raise rates unless equities are performing spectacularly. I’m quite skeptical if their 2 year time frame, even to say we may be looking at the new normal.

[jannotti]

I appreciate your measured response. I certainly had not dug deep into these daily 3X funds, as the daily/drag aspect seemed (seems?) clearly a problem. But, I can't just pretend the 10yr history of UPRO doesn't exist. I'll have to think more about this.

If it were possible (I recognize it isn't, due to margin limits), would it not be better to be 3x leveraged in your margin account, and simply buy the basic S&P and bond products? Wouldn't that avoid the "drag", and you'd end up better off?

[hcknwscommenter]

I don't think you can deduct the interest on the margin loan. The rules are fairly simple. The margin loan funds must be used for investment and not for use. Putting a down payment on a primary residence is certainly personal use.

[arcticbull]

If you have $10K in your checking account and a $440K investment portfolio, and you need to make a $90K down payment, it works like this:

(1) Sell $80K in assets, and use the proceeds, on top of your checking account balance to make a wire transfer.

(2) Now you have $360K in your investment account. You take a margin loan out in the amount of $80K.

(3) Use that $80K to re-establish your $440K investment portfolio.

You haven't used your margin loan to make a down payment, you've sold your assets and used the proceeds to make a down payment. You've then re-taken your investment position using a margin loan. The margin loan isn't collateralizing your down payment, it's making up for a reduction in the net liquidation value of your investment account as a result of your having used it to make a down payment, allowing you to retain your the prior level of exposure to equities in your trading account.

You don't have to go through the actual song and dance, and re-taking your equity positions would result in an IRS wash sale anyways, but that's why withdrawing cash on margin to make a down payment means the margin loan remains an investment expense -- it's there to allow you to retain your desired level of exposure to equities.

[bllguo]

thanks for the link, i will need to give this a thorough read. I understand why most investing advice is conservative and I do plan on having most of my money in those strategies, but I've always thought there must also exist some relatively simple but informed methods for those with higher risk appetites

[banana_maker]

"Despite the minimalist appearance"

As time goes on, a site remaining minimalist like this is a good indicator of value. I'll never understand the desire to move away from high density UX like this to the modern web junk UX that looks more appealing but makes everything more convoluted.

[jordanmarshall]

Agreed! After all, look where we are posting :)

What I was trying to say, but didn't have the space to fully articulate, was that it can look a little noisy and random at first glance. As I write this some of the top threads include posts about replacing a toilet valve, herbicide use, and motivating a son in law. Once you filter through some of this though there are a lot of really smart people giving pretty good financial advice.

[laactech]

Bogleheads is a great resource, and I've used it to learn a lot about investing. However, they tend to be really conservative about investments. I think after reading their wiki, it's important to asses personal risk tolerance and determine your portfolio from there.

Writing an investment policy statement is something bogleheads recommend doing which I would suggest as well. The statement helps guide investment decisions based on goals you wish to achieve.

The most important part of investing is staying the course. Staying the course is hard in bad markets like 2008 or during the pandemic which is why accurately assessing your risk tolerance is so important.

[MuffinFlavored]

Why isn't the tl;dr:

1. put 6 months of expenses in a high-yield savings account that is easily accessible + liquid in case of emergencies

2. max out tax-advantaged accounts. $19.5k/yr 401k + $6k/yr IRA. allocate into anything similar to a target date retirement fund with healthy exposure to US total market/probably light bonds depending on age

3. put the rest in a brokerage account, allocated in the same things your 401k + IRA are allocated in (target date retirement funds that track things similar to VOO/SPY/VTI/FZROX/etc.)

[_skel]

That's good retirement planning advice for normal situations. Having a $450k cash windfall adds a few wrinkles -- there are more investment options available (e.g. buy a house with cash), and the tax consequences of those various options can be very different.

I don't think most people need a financial advisor, but if I had a $450k pile of cash and I wanted to understand the tax consequences of various investments I would definitely pay for a consultation.

[arcticbull]

For what it's worth, at 2.675% interest on a 30-year fixed, buying a house in cash makes very little sense, and a mortgage can counterintuitively earn you money.

1. In general, since the 1970s, house prices have across the United States tracked inflation. The price per square foot on a house, on average, is exactly the same as it was back then (houses are more expensive because the average US house has gotten bigger, and in some metros like SF, city councils have flatly refused to allow building to buff up house prices).

2. A mortgage is basically free when you discount inflation and deduct the interest. The fed target for in the US is roughly 2%. This means that a 2% interest mortgage is free money, i.e. while you pay a 2% interest rate, the principal is worth 2% less, as you get to pay off the 2020 house price using 2021 dollars. So a 2.675% APR mortgage has an effective cost of 0.675%.

3. If you're working you get to deduct the entire 2.675% (of the first $750,000 in mortgage), so you get back up to 45% of it if you're in the top tax bracket. As such, the effective interest rate discounting inflation and interest tax deduction is negative, -0.53% APR.

4. On top of the interest rate on a 30-year fixed being effectively negative (i.e. generating value), you can invest the other 80% of $450,000. You should have no trouble generating 7% per year on that $360,000.

5. In aggregate, your return on capital by making a 20% down-payment on a $450,000 house at 2.675% APR in the top tax bracket could easily be ((0.53% + 7%) * $360,000) per year, plus your house should appreciate in value at inflation, but because it's a 5X leveraged investment, you're generating (2% * $450,000) per year on a $90,000 down-payment.

So, your total return could be:

1. $90,000 @ 10% + $360,000 @ 7.53% or...

2. $450,000 @ 2%.

Given the lack of fees or penalties for pre-payment, you can always pull the ripcord if your situation no longer makes sense by just paying it off.

[scarface74]

With the new tax laws the home mortgage deduction is useless for most people. If you are married filing jointly, the standard deduction is $24000. I paid around $10K in interest last year on a $330K mortgage in its fourth year.

[doktorhladnjak]

If you have no other deductions, you need to max SALT at $10k and owe about $450k on a 3% mortgage before itemizing is worth it

[arcticbull]

Good to know, thanks! I’ve always itemized in the past.

[MuffinFlavored]

1. homeowner's insurance

2. homeowner's associate fees

3. property taxes

4. maintenance/upkeep

don't those cut into your "compare a house to investing in index funds" example?

[arcticbull]

Indeed although you own the house in both cases right, so you can factor that out when making the comparison. It'll impact your total returns equally in both cases, unless I'm misunderstanding you?

[egsmi]

On average this analysis makes sense but cash flow is also important to consider. If the thing you’re investing in to get 7% doesn’t make payments, or has a single bad year and doesn’t yield like it’s supposed to, you could be up the creek.

[arcticbull]

Indeed, I was basing the 7% return on the S&P hence assuming liquidity in the investment. Liquidity matters and, yeah, YMMV. Still works if you invest in CDs instead but it’s not nearly as attractive.

[artosispylon]

I think you should mention the higher risk exposure from having so much liability tied up in a single asset if the house loses value.

Also, why is option 2 @2%? If you're investing the $360k at 7%, you should compare it to the same investment at 7%.

[arcticbull]

Option 1 is a 20% down payment on a $450K mortgage, so a $90K down-payment (10% yield) and a $360K investment in the market (7%) and a $360K mortgage (0.53%).

Option 2 is a $450K cash purchase of a house, which, on average, appreciates at the fed target inflation rate of 2%.

Indeed although in both cases you own the home and are subject to the same depreciation risk right? Although if you're willing to take a credit hit, I suppose you're shifting that depreciation onto the bank.

[nordsieck]

> I don't think most people need a financial advisor, but if I had a $450k pile of cash and I wanted to understand the tax consequences of various investments I would definitely pay for a consultation.

I think you have to be a little careful with this.

Shockingly, most financial professionals do not have a fiduciary duty to their clients. If you pay for advice, I'd definitely recommend getting one that does have a fiduciary duty to their clients.

[arcticbull]

Indeed, the Trump administration rolled-back an Obama era rule that financial advisors must be fiduciaries. I'm not sure most people realized that happened.

[arcticbull]

Sorry if that came off as political, I mentioned the leadership at the time as epoch markers as I didn't recall off-hand the specific dates. I suspect people didn't realize that the fiduciary rule wasn't a thing prior to 2015, let alone that it was over by 2018, and it is my understanding the Trump administration was looking at resurrecting the rule.

[1] https://www.nytimes.com/2018/06/22/your-money/fiduciary-rule...

[imakwana]

Vanguard also offers "Tax-managed" funds which have significantly less yield/distributions compared to corresponding index funds [1].

[1] https://www.bogleheads.org/wiki/Tax-managed_fund_comparison

[_skel]

The choice between regular and tax-managed funds, and also the choice between regular and tax-exempt bonds, is not straightforward.

There are quite a few caveats in that wiki article, e.g. stuff like this:

> Your actual tax cost will be higher if you owe state taxes (add your state tax rate on the dividend yield, reduced by your federal tax rate if you itemize deductions and are not over the limit for deducting state taxes) or are in the phase-out range for some tax benefit such as the child tax credit (add 5% to all tax rates) or the personal exemption phase-out for the Alternative Minimum Tax (add 7% to all tax rates, but your overall tax on non-qualified dividends is 28%).

That's a bit complicated. I would still recommend paying for at least a one-time consultation with a financial and/or tax advisor before choosing where to put $450k.

[sokoloff]

Given the current tax rates vs reasonably projected future tax rates, I'd be quite inclined to put money into a Roth 401(k)/IRA than a traditional. I'd rather lock in today's rates than take exposure to 2040, 2050, or 2060 rates.

[ryandrake]

I'd expand upon the emergency fund. I always feel when someone just says "put X in an emergency fund" and leaves it at that, they're missing the big picture of emergency planning. Emergencies can be long, slow burns, they can be short and acute, they can involve lack of access to financial institutions. I like to keep different tranches of emergency assets set aside for different kinds emergencies:

1. Something like Series I bonds for long-term future economic downturns or inflation

2. A CD ladder or money market for temporary job loss

3. Cash in a mattress and food/water for natural disasters

4. Guns, ammo, and containers of gasoline for the zombie apocalypse.

Weight each tranche by your assessment of each event's probability. You diversify the rest of your portfolio, why not diversify your emergency fund?

[fotta]

I would add that if your employer allows for mega-backdoor, do that too.

[exlurker]

Looking over the wiki so far, looks like a great resource. Thank you!