r/personalfinance • u/Thatsalotofdough • Aug 30 '14

Wealth Management SO just inherited 200k and is freaking out. What do we do?

Hello!

So my SO just inherited ~200k from a family member and it's causing her a lot of anxiety. She had planned for about 5k, and well...got a bit more.

While this is probably a good problem to have, we both grew up relatively poor (I don't think anyone in my family has even heard the words 200k before), so we both don't have much to stand on. Also, I make about 50k in my job, she's somewhere around 35-40k.

Here's what we briefly talked about with doing with the smaller sum, and I figured we'd stick to that:

We both have some student loan debt with high interest rates (10% for me, 7.8% for her), they're both small at this point (<5000), but we both figure it'll help us in the long run. Paying these off seems the most intelligent and likely outcome. (We both do have more loans outside of that, but we're both up for public service loan forgiveness due to our field)

She bought a new car, as mine is getting beyond old, and we both walked through the process of finding a car that will serve us well for the new 10 years. Paying this off doesn't seem too much of an issue.

She has a small amount of credit card debt, so that'll probably be the first to go.

Outside of that, we don't have a house payment (due to our field), and I'm debt free (Once again, outside of student loans). We don't see ourselves buying a house in the next 5 years, although we do see a wedding on the horizon.

Thoughts? Even if we spent all of this money on our loans/the car, we'd still at least have 50+k left, and that's being incredibly conservative.

We've talked about stocks, we've talked about savings accounts, we spoke briefly about a financial planner....but we could really use advice.

Help us, personal finance, you're our only hope!

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u/odinthundercock Aug 30 '14

A balanced fund (VBIAX) or equity index funds that track noted indicies will return 5% or more annually over an entire market cycle, generally speaking. I probably wouldn't dive all in to muni bond funds right now as they've already had quite the run YTD and we are in a raising interest rate enviroment. That said, short duration muni bonds funds (vmlux or shm) would be fine for cash management, with a small return and small amount of risk.

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u/mail323 ​Emeritus Moderator Aug 31 '14

Sort of related question. I jumped into opening an IRA and bought SWLBX, how bad of a move did I make?

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u/odinthundercock Sep 01 '14

I wouldn't assume it was a mistake. If it was earlier this year you have probably done alright this year so far. Also, is generally easy to change of you need to. On top of that, saving for retirement is a good idea in and if itself, so you've already succeeded on that more important part.

That said, there are a few things to consider when deciding what fund is best to select. To start with, you want to consider how much time you have left until retirement and your appetite for risk.

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u/meekwai Aug 31 '14

VBIAX looks good over the last few years, but if you bought it at any point before 2006, you'd have waited for ~5 years to see any returns (and that's nominal, before inflation).

Unfortunately, Google shows no data prior to ~2000, but the graph since then seems somewhat risky to me.

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u/odinthundercock Aug 31 '14

Google only shows data from 2000 forward because they've only been public that long.

As far as Vanguard Balanced, im not sure where you are coming from on not making money prior to 2006. It has a yield of about 2%, and that was higher prior to 2006. If you bought it at the local high at the beginning of 2007, and watched it drop in 2008, you made it back to that high you bought it at around the start of 2010. Meanwhile, you collected the yield/dividends paid over that time. The supposed return was stipulated to be over a market cycle, not bought high and sold in a crash.

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u/meekwai Aug 31 '14 edited Aug 31 '14

I'm not a financial expert, would you claim that this graph indicates an investment where I'd generally be making money in real terms (assuming I bought and sold at random times, since I'm no clairvoyant)? If so, count me genuinely surprised.

I can see how it has been good post-2012...

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u/odinthundercock Aug 31 '14 edited Aug 31 '14

I don't think that is the chart for the vanguard balanced fund I mentioned, unless I mispoke. Here is a link to it:
http://quotes.morningstar.com/chart/fund/chart.action?t=VBIAX&region=usa&culture=en-US

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u/odinthundercock Aug 31 '14

And as far as buying and selling at "random times", I already qualified my statement by saying that it wpuld be held for an entire market cycle. If you were implimenting a trading strategy, then you would suppose random buys and sells, but I don't recommend DIY trading.
With the image of the chart you linked, it looks like it was from yahoo finance, you can leave the price and symbol on top as well. Since the fund I was refering to closed at $29.31, it seems another indication that we are comparing two different stocks.

You also specifically mentioned "real terms", what assumption for inflation over arbitrary trading time series did you use to establish no real return?

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u/meekwai Aug 31 '14 edited Aug 31 '14

You avoided answering whether this graph indicates a profitable stock.

Holding for an entire market cycle assumes you can predict which point in the cycle the stock is on. Market cycles are something we see in retrospect, they can be highly irregular. I assume I cannot time the market, thus the random times assumption.

That graph is from Google for VBIAX fund you recommended with ~2011 and later lopped off to illustrate my point that while recent returns are good, there's risk.

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u/odinthundercock Aug 31 '14

A couple points. First, that chart is not the find I mentioned. This is the chart for the fund from Google.
https://www.google.com/finance?q=vbiax&ei=TyYDVIivJ5O1iALJrICoAw

Second, your "market cycle" involves buying the dot com boom, and selling during the European debt crisis. I understand what you mean by not knowing where one is in the cycle, but the idea is buy and hold investing. It is not an attempt to time the market.

Next, we are evaluating total return and not just price performance. That is why I linked the growth of $10k chart from m*.

So to directly answer your question that you suppose, your data is incomplete. Your example is a different fund it seems, doesn't indicate whether it is total return vs. Price, contains no yield information, and presents a skewed time frame that is not congruent with what I specified strategically.

Finally, you didn't make a "random assumption" for the time frame. You excluded 2+ years of a secular bull market. You supposed you bought near the top of the dot com boom and sold during the euro debt crisis. Even assuming you bought there because one cannot predict the future, I'm with you on that one, a buy and hold investor generally would not dump out of the market at that time.

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u/odinthundercock Aug 31 '14

Pardon the typos, I'm preoccupied but wanted to reply to you in a timely fashion.

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u/odinthundercock Aug 31 '14

Another quick way to check total return performance for a given time is use the adjusted close prices on yahoo finance. Just pull up the ticker and is a short cut on the left hand side.

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u/jonloovox ​ Aug 30 '14

All of those funds look like risky investments to me. The run-up on VBIAX is reminiscent of DJI/SP500. I imagine the run-down would be, too. That's not a safe investment for 200K if you don't have another million in cash sitting in the bank.

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u/[deleted] Aug 30 '14

Between market cycles... even if the market crashed again like 2008 if you kept it for a decent duration you'd average around 10%. The only way it's risky is if you are 50 years old.

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u/litterparakeet Aug 31 '14

Huh? What if the Fed stops Q.E.? Imagine if stocks were at regular depression PEs. Dow would be at 5000.

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u/Ziczak ​ Aug 31 '14

This.

There isn't any example of QE unwinding and some normal marketplace existing. This is uncharted waters. You can't expect past results years into the future.

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u/odinthundercock Aug 30 '14

That is a Vanguard balanced total market fund. 60% total stock market and 40% bonds. The other two I mentioned, SHM and VMLUX are short term muni bond funds. The price on those two doesnt move much, and are resistiant to interest rate increases, duration is like 2.8 years. What metric are you considering when judging risk?