Help for an Economics Idiot

[DallasDad]

I've talked to various financial advisors, but since each one wants to sell me something, I'm somewhat unenthusiastic about taking their advice.

I have about $250,000 to invest on behalf of my kids. A small portion is cash, a slightly larger portion is in eTrade accounts, and the remainder is in a variety of mutual funds. I'm 51, a single father, and in rather poor health. The cars are owned free and clear, and the recently-refinanced house will be paid off in the next 10 years. We have no month-to-month debt. I anticipate being able to add $20-30,000 to their combined total each year during the next 10.

My kids are tweens, so I'm thinking the money is mostly for them to use for first cars, college, and getting started in life, esp. if I'm no longer around to help out. I don't want to hand them checks on their 21st birthdays and watch my decades of hard work disappear into a sports car, but on the other hand, I don't want to restrict the money too much. I have a guardian appointed for them, and also a living will.

I need advice for the best way to manage it so the funds aren't eaten up by inflation, and -- if possible -- grow to a reasonable amount in the next 10-20 years.

Is $250K sufficient to start a trust? If so, what kind and what advantages? Their guardian is willing to become their trustee if that's the way I go (and I have full confidence in this person's integrity).

Am I better off continuing with my diversified portfolio? What kind of hurry am I in?

I really don't understand finance much beyond balancing my checkbook, and am ill-equipped to guage what the salesmen tell me. Load, No load, ETF, bonds, back-end, service fees, amortization, effective return, etc., are all things that I can understand invidually, but I lack the overall comprehension of how it all works together.

I'm a typical entrepreneur -- I think big, take risks, sometimes scrape by, sometimes wade in cash. For the past 15 years, I've owned and operated a C corp without borrowing a dime, and have managed to sock away money. Deep down, I'm petrified that I'll lose everything and have to go back to work. The company will sink or swim on its own when I'm gone (I hope it swims, because my boys will inherit 100% of the stock), but my family personal welfare is my primary concern.

How can I best take care of them without spoiling them?

[oddball]

http://www.youtube.com/watch?v=U71-KsDArFM

[marplots]

I'm not a financial expert, but I have kids and I think I understand that end.

Your goal seems to be to provide for your kids long-term without crippling them with a teat to suck on. There's a balance to be struck. For this part, I'd do a twice yearly disbursement -- just figure out what dollar amount would equal "basic needs" and stick with that. It gives them the buffer you would give them if you were still alive to do it -- the backup and support that keeps them out of true poverty.

Once you have a figure, take that and see how long that actually lasts. If it lasts at that rate for your 10 year target -- wonderful. If you still have leftovers, do a lump sum with the difference at age of majority. They can blow that and still have the bi-annual stipend to count on.

As far as investment vehicle, this shouldn't be your main concern. Anything solid will do. Inflation that ruins an investment over 10 years is something that you can't fight -- all bets are off anyhow.

I know how it is with a pile of money. A pile of money gets its own gravity and there's this idea that it has needs. But forget all that and think of it from your kids' point of view. A certain amount, every 6 months for however long it lasts. If you maximize your investment, you extend that for an additional year -- so what? They will have to make it on their own at some point.

Another advantage of my plan is clarity. You get to lay this all out and be happy that you've decided. It's easy to explain and easy to manage. There's value in that.

[DallasDad]

Sensible, Marplots. Thanks.

Oddball, I'm still absorbing that video.

[Startz]

First thing, talk to fee-only advisors. They generally don't want to sell you anything since you're the one paying them.

Second, you're talking about $250,000. The difference between returns among different sensible investments is a few thousand dollars a year. You're probably better off doing something reasonable rather than something absolutely perfect, and spending the time you save on your business--or playing ball with your kids.

Third, look into your state's college tuition investment program. They're often a good investment.

Fourth, life insurance.

[drkitten]

Your goal seems to be to provide for your kids long-term without crippling them with a teat to suck on. There's a balance to be struck. For this part, I'd do a twice yearly disbursement -- just figure out what dollar amount would equal "basic needs" and stick with that. It gives them the buffer you would give them if you were still alive to do it -- the backup and support that keeps them out of true poverty.

Once you have a figure, take that and see how long that actually lasts. If it lasts at that rate for your 10 year target -- wonderful. If you still have leftovers, do a lump sum with the difference at age of majority. They can blow that and still have the bi-annual stipend to count on.

This makes sense, although a lot of people are going the other way and putting the lump sum to be turned over to the kids at the ripe old age of 25, of 35, 45, whatever. The idea being that the kids can learn about the importance of jobs and careers for a few years and THEN get the huge sum to play with.

If college is an issue, I second the idea of setting up a 529 plan (or an educational IRA, which I think is formally called a Coverdell account) (http://www.irs.gov/newsroom/article/0,,id=107636,00.html). You'll save a bit on taxes and the money can only be spent on college education, not on a new sports car.

[oddball]

Oddball, I'm still absorbing that video.

Whatever you decide to do, remember that hyperinflation is likely in the very near future. A little understanding of the history of the Western monetary system helps one to see the inevitable outcome of the current debt-based economy. Still's solution is unlikely to be adopted in time to stave it off. People are too ignorant to demand it.

Thus a safe bet in the short term will be commodities (not on paper) that are easily bartered or converted into currency because they will be the only way to even keep wealth from evaporating. What is the use of a 10% APY if inflation is at 30% or more and heading for the moon?

Think it can't happen here? That's what the citizens of the Weimar Republic (http://en.wikipedia.org/wiki/File:GermanyHyperChart.jpg) believed! And the Argentinians....

Check out the following video as well: MELTUP (http://www.youtube.com/watch?v=eb1n1X0Oqdw)

[timhau]

Whatever you decide to do, remember that hyperinflation is likely in the very near future. A little understanding of the history of the Western monetary system helps one to see the inevitable outcome of the current debt-based economy.

:rolleyes:

DallasDad, whatever you do, do not take financial advice from YouTube.

[DallasDad]

Not planning to take anything on YouTube at face value, but thanks for the warning.

And thanks, everyone, for the opinions. I've located an advisor to help with estate planning (which is what this really is, since I probably won't live to see the boys fully grown, and they're both special needs).

[psionl0]

http://www.youtube.com/watch?v=U71-KsDArFM
A video that condemns Fractional Reserve Banking? I bet drkitten won't watch it.

[drkitten]

Whatever you decide to do, remember that hyperinflation is likely in the very near future.

No, it isn't.

A little understanding of the history of the Western monetary system helps one to see the inevitable outcome of the current debt-based economy.

Which is why it's never been seen in the history of the United States. Mmmm-hmmm.

Feel free to ignore the well-named "oddball," DD. The internet is unfortunately filled with economic know-nothings who are nevertheless prepared to advise you on how best to avoid falling bits of sky, or trolls who will advise you to invest in fur-bearing trout ranches simply for the lols.

You really shouldn't be asking the internet for investment advice in the first place. But if you are willing to do a little legwork for yourself, you should be able to nail this particular coffin shut. The people who have the most skin in the game of predicting inflation are, of course, the people who set long-term interest rates. If I want to borrow $250,000 for a house, the bank needs to know that it will make money off what it lends me. If the bankers expect 8% inflation, there's no way they'd offer me a loan at less than that, because they know that even if I pay it off, they still lose money. But a simple phone call to your banker will confirm that you can get fixed-rate mortgages at less than 4%.

Similarly, the yields on ten-year Treasuries are less than 4%. Someone -- a lot of people, enough to fill up the auction even at today's deficit rates -- think they can make money lending to the government for 2.6% for ten years, or at 4.00% for thirty (http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml). If people expected "inflation [to be]at 30% or more and heading for the moon," the Fed couldn't give long-term bonds away. The bonds couldn't be given away if people expected that even to be be a realistic possibility. (Why risk locking your money away at a guaranteed 25% loss?)

And, of course, the idea that the best economic argument for a particular investment is a YouTube video is ludicrous....

[drkitten]

A video that condemns Fractional Reserve Banking? I bet drkitten won't watch it.

I got to the point where L. Frank Baum was cited as an expert in economics based on the movie he wrote for MGM.

If you think the video has anything useful to say after that particular burst of factual exactitude, feel free to summarize.

[drkitten]

Double post for some reason

[Dr. Keith]

I've located an advisor to help with estate planning (which is what this really is, since I probably won't live to see the boys fully grown, and they're both special needs).

Good on finding an advisor. A good trusts and estates attorney may be worth talking to as well.

If they have special needs then a recurring payment is probably ideal. My great grandfather invested in a range of dividend paying companies quite some time ago. Most of those companies failed, but one has been paying dividends every quarter for some time. It has given me the freedom to take risks while not putting my family's comfort at risk. Otherwise I would still be at my first job instead of my second career.

I have never thought of selling the stock as I know my kids will appreciate the safety net when they have families.

[Loss Leader]

I've talked to various financial advisors, but since each one wants to sell me something, I'm somewhat unenthusiastic about taking their advice.


Dallas - as a family law and elder care attorney, I advise people regarding financial planning for a living. My first and most important piece of advice is to consolidate all your accounts with one broker. That way, one person has access to all your information and creates a strategy that takes your entire financial situation into account.

Second, there's probably no reason to create an irrevocable living trust unless you are actually dying within the next few months. You do, however, need to see an elder law attorney in your area to write a will (with a trust built into it for your children). You need a Health Care Proxy/Living Will so your loved ones can make medical decisions instead of politicians and bureaucrats. You need a General Durable Power of Attorney (with major gifts authority) so your family can conduct your business if you are not able.

These estate planning documents, I would say, are as important as your investments.

I sent you a PM with more information. Hope it helps.

[Loss Leader]

And thanks, everyone, for the opinions. I've located an advisor to help with estate planning (which is what this really is, since I probably won't live to see the boys fully grown, and they're both special needs).


You'll probably need two separate Special Needs Trusts that should be funded mainly from the proceeds of your will and not earlier. I wouldn't keep actual stocks or securities in the trusts during your life.

You'll still need a financial manager to help consolidate your investments.

[Startz]

You'll probably need two separate Special Needs Trusts that should be funded mainly from the proceeds of your will and not earlier. I wouldn't keep actual stocks or securities in the trusts during your life.

You'll still need a financial manager to help consolidate your investments.

To followup on Loss Leader (who obviously knows more about this than I do), be sure to look at a Special Needs Trust. A properly written document preserves eligibility for certain government benefits without having to run down the trust assets. Getting this done right is probably more important than where you invest your money.

[oddball]

If people expected "inflation [to be]at 30% or more and heading for the moon," the Fed couldn't give long-term bonds away. The bonds couldn't be given away if people expected that even to be be a realistic possibility.

Some people do.... and the Fed is having to buy its own "bonds" now (http://online.wsj.com/article/SB123739788518173569.html).

the idea that the best economic argument for a particular investment is a YouTube video is ludicrous....

The idea that simply because a video ends up on YouTube the information it contains is worthless or false, is what is ludicrous.

[CatOfGrey]

I've talked to various financial advisors, but since each one wants to sell me something, I'm somewhat unenthusiastic about taking their advice.

Your instincts serve you well.

I have about $250,000 to invest on behalf of my kids. I'm 51, a single father, and in rather poor health. The cars are owned free and clear, and the recently-refinanced house will be paid off in the next 10 years. We have no month-to-month debt. I anticipate being able to add $20-30,000 to their combined total each year during the next 10.

If you are in poor health, this suggests a low risk environment.

My kids are tweens, so I'm thinking the money is mostly for them to use for first cars, college, and getting started in life, esp. if I'm no longer around to help out. I don't want to hand them checks on their 21st birthdays and watch my decades of hard work disappear into a sports car, but on the other hand, I don't want to restrict the money too much. I have a guardian appointed for them, and also a living will.

Random thought: any distributions could be tied to earned income, or personal savings. They don't get $$ until they show financial responsibility. Perhaps with some bonus if they decide to do something with real responsibility that doesn't involve real money (for example, they work for a non-profit, or become a social worker)

And if they don't get it together, then you can donate to a charitable organization of your choice.

I need advice for the best way to manage it so the funds aren't eaten up by inflation, and -- if possible -- grow to a reasonable amount in the next 10-20 years.

Your eTrade account is sufficient for you to do this. I would use Exchange Traded Funds, specifically index funds as you are minimizing fees, and keeping things simple. I would search for tax-free funds, as well. A fee-based financial advisor can help here.

Is $250K sufficient to start a trust? If so, what kind and what advantages? Their guardian is willing to become their trustee if that's the way I go (and I have full confidence in this person's integrity).

I would think so - although it might cost $1000 to prepare documents, more if you are in an urban area. A relative of mine had a lawyer prepare his for about $500, in a rural area, in 1993.

Am I better off continuing with my diversified portfolio? What kind of hurry am I in?

I really don't understand finance much beyond balancing my checkbook, and am ill-equipped to guage what the salesmen tell me. Load, No load, ETF, bonds, back-end, service fees, amortization, effective return, etc., are all things that I can understand invidually, but I lack the overall comprehension of how it all works together.

Depends on what your diversified portfolio is currently invested in. Without selling you something, I work for a company that gives investment research. Again, a fee-based advisor should be able to help you 'tighten up' that eTrade account, making sure your investments each have a place and purpose.

I'm a typical entrepreneur -- I think big, take risks, sometimes scrape by, sometimes wade in cash. For the past 15 years, I've owned and operated a C corp without borrowing a dime, and have managed to sock away money. Deep down, I'm petrified that I'll lose everything and have to go back to work. The company will sink or swim on its own when I'm gone (I hope it swims, because my boys will inherit 100% of the stock), but my family personal welfare is my primary concern.

Random thoughts: How much does your business depend on YOU? If you are a lawyer, in a "one-guy" office, then your business lives and dies with you. If you have employees, a manager, etc., then your business can be passed on to your kids, assuming they can run it.

Your fear at having to return to work needs to be communicated to your financial advisor. That's an important question. In addition, as a former actuary, I am concerned about your health. Your life expectancy is a critical piece of this puzzle: if you are pretty certain that you will not see 80 years of age (or 70, or 60) then that is a big factor, too.

How can I best take care of them without spoiling them?

Teach them what you know: It's not about getting something, it's about giving something valuable. That's how you built your business, right? You avoided debt because that gave you more power and ownership, gave you more choices. And your choices brought you to the financial state you have today.

[Almo]

marplots and drkitten make sense. ignore the youtube stuff.

That's my opinion, anyway.

[oddball]

ignore the youtube stuff.

Right. Better to get your financial advice on a public forum.

QE2 is on the way (http://www.bloomberg.com/news/2010-11-01/fed-likely-to-announce-500-billion-of-purchases-survey-shows.html)!

[ThermionicScott]

Check out the Bogleheads forum.

[stevea]

Yes get a fee based financial adviser involved, yes look into the trust situation (kudos to Loss Leader).

OTOH several points in the investment aspect require rebuttal. You should never take the attitude "Oh it's only $250k so I can afford to lose a few $k/yr to ineffective investment". That's a loser attitude. The rational approach is to consider what a reasonably optimal return is (say 7% might be reasonable over time) and then ask yourself what personal efforts are worth the return of ~$17.5k/yr vs a money market return that may average ~2% or $5k over time.. The goal is always to make cost effective decisions. So for example you shouldn't pay $1.2k for investment advise or management fees when the incremental return is perhaps $12k/yr, 10% is far too high a fee.

There has been a period of about 15 years now where the popular investment theme has been "pro investors can't beat the averages, therefore you should invest in a broad market zero-load index or ETF" (a buy and forget fad), and like all investment fads, it works very well right up to the point where it becomes a popular de facto truth, and then it ceases to work. The reasons for fad failure are apparent on reflection. If everyone is investing according to X paattern, then no one can make much profit doing X, and the -X contrarians have opportunities. There are lots of old fads left in the dust - "dogs of the dow", "closed-end cycles", and so on. Having said that - yes most managed funds don't beat the averages and especially not in the long run, tho' there are exceptions. So the rule is - don't follow any fixed rule. Be an active manager to the extent you care about the ~$12k/yr delta.

Inflation. We are NOT looking at hyperinflation. I would argue (and I have a lot more that $250k on the line) that we are likely to see real inflation track at several times growth for several years to come. Perhaps comparable to the post-Vietnam era inflation (peaked ~15% in early 1980). Kitty makes an easily disproven argument - she claims the brilliant mortgage originators are only charging 4% so they anticipate less inflation. The problem with that argument is that observing historic mortgage rates vs inflation rates makes clear that mortgage rates are not predictive of inflation; in fact they lag very slightly. Mortgage originators are not able to predict inflation, and further they are constrained to offer competitive rates against their least circumspect competitors. They can mitigate their risk by offering longer term CDs and comparable lock-in investments. Looking at mortgage rates offers no insight into future inflation.

So the chances of substantial inflation must be considered as a realistic threat to savings, but you should ignore the "hyperinflation is coming, buy a gun" types and the "inflation isn't currently happening, therefore it can't happen" fools with equal vigor.

To control for inflation you DO NOT need to horde gold or only buy commodities; that is extremely simplisitc. Inflation occurs when the velocity of money (similar to in index of activity) or the supply of money increase occurs, or else when ther is a shortage of goods. My expectation is that the supply of money will increase (the quantitative easing is part of that) and the velocity will eventually increase when economy recovers.

As an investor, if you anticipate inflation, you want to have little or no money invested in things denominated in dollars (or euro's for that matter) - so bonds, no money-markets, no bills under the mattress. Long term bonds are particularly problematic right now, as the rates ha

[stevea]

(Sorry - the previous is an incomplete draft - unclear how it was posted, unedittable now).

Yes get a fee based financial adviser involved, yes look into the trust situation (kudos to Loss Leader).

Several points in the investment aspect require rebuttal. You should never take the attitude "Oh it's only $250k so I can afford to lose a few $k/yr to ineffective investment". That's a loser attitude, and ignoring risks and volatility can result in catastrophic losses. If you care about value (not just the number of dollars) you have to constantly consider risks and inflation. You also have to do this in a cost effective manner. A well managed $250k might throw off 4% or 5% above inflation, but if poorly managed can easily lose as much beneath the inflation rate, but you must ask how much time and effort it's worth to move from say a modest effort "match inflation" investment to gain say 4%($10k pre-tax).

There has been a period of about 15 years now where the popular investment theme has been "pro investors can't beat the averages, therefore you should invest in a broad market zero-load index or ETF" (a buy and forget fad). This is even taught at very famous business schools. Like all investment fads, it works very well right up to the point where it ceases to work. The reasons for fad failure are apparent on reflection. If everyone is investing according to X pattern, then no one can make much profit doing X, and it creates -X contrarian opportunities. There are lots of old fads left in the dust - "dogs of the dow", "closed-end cycles", "portfolio balance" and so on. Having said that - yes most actively managed funds don't beat the averages and especially not in the long run, tho' there are credible (non-luck) exceptions. Yes, diversify, but adjust the diversification to reflect current risk estimates, not formulas. Be an active manager to the extent you care about a ~$10k/yr delta and also care about avoiding a -30% crater. All formulaic methods are eventually wrong and the more simplistic and popular ones become wrong faster and harder. The rule is - don't follow any fixed investment rules. If someone checks your age and tells you you should have N% of investment in bonds you should write that person off as a fool. Read a few issues of "Money" magazine or "Fortune" to see how all the sheeple will get sheared next time (then consider how you can do some of the shearing).

Inflation. We are NOT looking at hyperinflation. I would argue that we are likely to see real inflation track at several times growth for several years. [The government has control over the parameters of the inflation index and they will be greatly tempted to underestimate inflation in the future. Consider some better proxy for inflation]. Perhaps rates comparable to the post-Vietnam era inflation (peaked ~15% in early 1980), but that's about the upper range IMO.

Kitty makes an easily disproven argument - she claims the brilliant mortgage originators are only charging 4% so that caps future inflation. Observing historic mortgage rates vs inflation rates makes clear that mortgage rates are not predictive of inflation; in fact they lag very slightly. Mortgage originators are not able to predict inflation, and further they are constrained to offer competitive rates against their least circumspect competitors. Mortgage rates offers no insight into future inflation. OTOH bond yield spreads have been shown in academic papers to be predictive of inflation and we see that the current spread (highest in decades) indicates that inflation worries are realistic ....
http://www.businessweek.com/news/2010-10-13/treasury-10-to-30-year-yield-spread-at-record-on-fed-outlook.html

So the chances of substantial inflation must be considered as a realistic risk to savings, but you should ignore the both the "hyperinflation is coming, buy a guns & gold" types and also the "inflation isn't currently happening, therefore it can't happen" head-in-the-sand fools with equal vigor. My expectation is that the supply of money will increase (the QE quantitative easing is part of that) and the velocity of money must eventually increase when/as economy recovers.

To control for inflation you DO NOT need to horde gold or only buy commodities; that is extremely simplistic thinking from late night TV ads. As an investor, if you anticipate inflation, you want to have little money invested in things denominated in dollars (euro's too IMO) - no bonds, no money-markets, no CDs, no bills under the mattress, minimize your checking & savings account balances. Long term bonds are particularly problematic right now, as the rates have little chance of declining and a high probability of increasing. Yes you can invest in commodities, or real estate or stocks of companies that are unlikely to be hurt by inflation. These stocks would include non-cyclicals - people still need toilet paper, soup and bread. Also stocks that export, particularly to the non-inflating nations would have an advantage. Stocks prices generally are immune to inflation, except to the extent the inflation damages the specific business growth. Consider investment in economies which are not structurally defective, but still politically stable and with transparent markets, Canada or Australia for example; but if you buy foreign bonds make sure they are paid in their currency and not USD.

Listen to the long interview here. Not specific to inflation, but it discusses how far into the weeds the Bernanke is taking us,
http://www.businessinsider.com/henry-blodget-jim-grant-2010-10

ETFs vs Mutual Funds vs stocks - If you don't have enough investment money to diversify then you want to consider ETF, and MFunds primarily (closed-end funds work too). With $250k it's borderline decision. The primary difference between Mutual funds vs ETFs is that the mutual fund controls when you see CG & dividend taxable event and with an ETF you generally control this (similar to a stock). There are many detailed differences, and you really have to evaluate the costs and charters for each.

[ServiceSoon]

Wills (Last Will and Testament) allow attorneys' to charge fees (3-66%) that are generally unnecessary during the probate process. The only will you want without further research is a Living Will.

As far as the dispersement of your assets, I'd recommend a Revocable Living Trust. You place all your assets in the RLT with instructions. When you are alive you are in complete control so you can make changes at any time.

After you die or become incapacitated an executor(s) that you appoint will manage your assets as written in the trust.

Article of pros/cons between wills/trust. (http://www.mobar.org/9c8206ad-c515-4114-806a-a3531d9297a9.aspx)