Need Investment Advice - $200k

[Chris T]

I'm a 40 year old freelancer in the film business. My gross annual income averages $150,000 (though since I'm self-employed, work can be sometimes volatile and inconsistent). My wife and I own a house (purchased for $800,000, 5 years ago. Now estimated worth over $1.3M). We have $590,000 left on the mortgage = 30yr fixed at 4.0%

I have $220,000 in cash savings and $34,000 in 401k. My wife has $19,000 in her 401k. She works for me (i.e. also self-employed).

Currently my cash is in an online savings account(!!), and is gaining a terrible 0.6% interest or thereabouts. Obviously I need to invest it more aggressively.

I was advised by my accountant that if I'm going to invest on the stock market, that I should consider paying off a chunk (say $50k) of our mortgage at the same time (as a way of 'diversifying' our investing by reducing our mortgage burden).

If I were to do that, and also keep about $50,000 in savings (rainy day), that leaves me with $120,000 to invest in the stock market.

I'm considering Robo-investors (Wealthfront, Betterment etc) vs a human financial manager. Can you advise on the pros/cons of robo-investors vs humans, and also the mortgage payoff etc. Thanks!

[disneysteve]

You earn 150K. How much does your wife earn? I'm trying to figure out how you swung buying an 800K house on your income. You shouldn't have spent more than 450K based on your income alone.

Since you got lucky and the house has appreciated nicely, I'd be seriously looking at selling it and moving to something that fits your budget.

As for the 200K, what are your monthly expenses? Keep an emergency fund of at least 6 months worth of expenses. Since you are both dependent on the success of your personal business, 8-12 months would be even better.

At 40, you're rather behind on retirement savings. Since you are both self-employed, there's no employer match on the 401k since you are the employer. In that case, you should both be funding a Roth. You still have time to each but $5,500 into Roths for 2015. Then you can do another $5,500 for 2016 as long as you don't anticipate your income topping 184K this year. If you might be over that, hold off until the end of the year when you know your actual income. Put whatever amount constitutes the balance of 15% of gross into the 401k.

I would not do a robo-investor or a human manager. Do it yourself. Open an account with a good low cost mutual fund company like Vanguard, Fidelity, or T. Rowe Price and don't waste money paying someone else to do the work for you.

[Singuy]

Also some pro tips

1. Open up an account with ALLY bank online and at least gain 1% from your sitting cash

2. Look into Merrill Lynch Edge as your stock broker. If you have at least 25k invested, trading will be free for the first 30 trades/month.

3. Look into index funds if you want a diversify portfolio with very little fees. Another option is to invest into something like Berkshire Hathaway B stocks, which is Warren Buffett's portfolio with no fees.

4. Since you are 40, people generally tell you to invest 40% of your available funds in bonds. Treasury Bonds are yielding crap % right now so I would probably look into municipal bonds which carries a higher yield and it's generally tax free.

5. Make sure you take advantage of any Capital Gaines and not have your earnings be taxed at ordinary income rate.

6. A mortgage payoff is a guaranteed 4% yield so it's not some small change. I probably would do this over bonds.

Anyone with more experience can correct anything I said above. This is from a few weeks of hardcore research since I am looking to invest hardcore with my sitting cash.

[disneysteve]

2. Look into Merrill Lynch Edge as your stock broker. If you have at least 50k invested, trading will be free for the first 50 trades/month.

I would disagree. Not because free trades is a bad thing but because trading in general is a bad thing. You don't need free trades to invest in low cost mutual funds. Those already have no trading costs.

[bjl584]

How do you have a 401K if you are an independent contractor? Is it from a former job? I'd think that you get a 1099 and aren't eligible to participate in an employer sponsored 401K plan.

[snafu]

I'd look at your mortgage figure details. How much of each payment goes to interest, how much to principal and how much to municipal tax, HOA fees, insurance etc? Can you get a better interest rate without incurring that whole passel of fees that silently transfers money from your pocket to theirs?

I'd check online to see if you can get a better rate on savings from an electronic bank. With the stock market so bumpy in an election year with international terrorists adding insecurity and oil prices roller-coastering, I'd suggest Dollar Cost Averaging [DCA] to begin your self employed retirement fund or ROTH. It means once you and DW have set up accounts with the initial, required investment, the remaining annual, allowable sum will be withdrawn automatically at a set sum over the remaining months of 2016.

This can be modified depending on conditions and circumstances. Please understand that stock market/index funds will fluctuate in value, some months the sum transferred will by more units, some months less depending on valuation. This is explained in detail in an easy read book The Automatic Millionaire [Bach] or 'The Millionaire Next Door.'

[feh]

I'm considering Robo-investors (Wealthfront, Betterment etc) vs a human financial manager. Can you advise on the pros/cons of robo-investors vs humans, and also the mortgage payoff etc. Thanks!

I suggest you manage your investments yourself. It's not that difficult.

Start here: https://www.bogleheads.org/wiki/Bogl...g_start-up_kit

Please take the small amount of time necessary to educate yourself. It's definitely worth it.

[Jluke]

I was advised by my accountant that if I'm going to invest on the stock market, that I should consider paying off a chunk (say $50k) of our mortgage at the same time (as a way of 'diversifying' our investing by reducing our mortgage burden).

There could be another way to interpret this advice on putting 50k on the mortgage. Yes, you will be diversifying, but as Snafu pointed out, you may want to see how much in interest savings this additional 50k would represent on your 30-yr mortgage.

Keep the investing simple, do it yourself. A crowd favorite are the vanguard funds (ETFs or mutual funds). I agree with Singuy - look into BRK.B (Berkshire Hathaway) as it is a tax friendly investment (no dividends, no capital gains, but a good track record of increasing stock price). I own it.

[autoxer]

I was advised by my accountant that if I'm going to invest on the stock market, that I should consider paying off a chunk (say $50k) of our mortgage at the same time (as a way of 'diversifying' our investing by reducing our mortgage burden).

Not that it is bad advice, but I wouldn't consider that diversifying your investment.

Regarding a robo-advisor vs. human financial manager... don't use a broker that provides investment advice. They make money by moving your money around and skimming fees, so they don't have your best interests in mind. It is certainly okay to hire someone to provide advice to you, but anyone selling products is going to be biased.

I was also considering one of the robo advisory firms, but after reading a few books about investing and asset allocation, I didn't feel that they added much value over my own portfolio selection. I have a basic (2) index fund portfolio. No trading, just weekly contributions.

[autoxer]

You shouldn't have spent more than 450K based on your income alone.

Since you got lucky and the house has appreciated nicely, I'd be seriously looking at selling it and moving to something that fits your budget.

I understand where you are coming from, because I wouldn't be comfortable spending that much, but just because they don't fit your rule of thumb, doesn't mean they should go sell their house. Everybody has different values. OP came hear asking about investing, so if you start by attacking their values, then they aren't likely to consider the part of your post where you answered the question.

[tripods68]

My wife and I own a house (purchased for $800,000, 5 years ago. Now estimated worth over $1.3M). We have $590,000 left on the mortgage = 30yr fixed at 4.0%

I'd look for a 15-year REFI @ 3% (FICO score 780)
Balance 540K after 50K extra mortgage.
New Mortgage $3729.14 a month.

Take home of $12,500 a month--that's roughly 30% of income towards mortgage. A range of 30% to 37% is doable--assuming you no other debt. By the time you turn 55, the house is completely paid off.

Other have said, sell your home. I wouldn't sell it. If you love your house and you can afford the payment keep it. Create a monthly budget (income minus outgoing expenses), use a zero-based budgeting and stick to it.

If you have not done your taxes this year, I'd suggest open a ROTH IRA for you and your wife. Married couple can contribution max 11K a year, or $5500 each, if you AGI less than 184K.

2015 11K
2016 11K
22K you can put towards ROTH from 120K in investment.

This gives you $98K in taxable investments splits among these funds. This can mirror your ROTH IRA investment. Just a suggestions that we follow.

Most of us here own Vanguard (low cost index fund). Do your own research but here's what we own now that covers 4 core Investment style. Some people like bonds like TIPS. I sold all my bond funds last year.

1. Growth,
2. Growth & Income,
3. International,
4. Aggressive

Vanguard 500 Index Fund (VFINX)
Vanguard Growth and Income Fund VQNPX
Vanguard Total International Stock Index VGTSX

AGGRESSIVE Funds:
Vanguard REIT INDEX VGSIX
Vanguard Emerging Markets Stock Index VEMAX


Some people may not like Vanguard funds, but I like these funds because of their track record and low cost/expense ratio.

[Nutria]

I was advised by my accountant that if I'm going to invest on the stock market, that I should consider paying off a chunk (say $50k) of our mortgage at the same time (as a way of 'diversifying' our investing by reducing our mortgage burden).

+1 on that advice. Since it's early in the mortgage, a large bulk pay-down now will save lots in interest payments.

If I were to do that, and also keep about $50,000 in savings (rainy day),

How many months of expenses is that?

that leaves me with $120,000 to invest in the stock market.

I like the Vanguard VDIGX Dividend Growth Fund (large cap stocks which pay healthy dividends, didn't drop as far in 2008 and has climbed more since then) and VBIIX Intermediate-Term Bond Index Fund.

[FrankFacts]

I would just use TDAmeritrade for a basic S&P 500 Indexed ETF.