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Recently Became Guardian - Warning Long Post!

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Greetings All - Sorry that it has been some time since posting.  Over the last couple of years I have 1. Retired from teaching and then 2. Immediately became guardian for a relative with mental illness.  Long story short we went from 1. Emergency Detention to 2. Hospitalization to 3. Guardianship to 4. Assistive Care.  It was quite a process.  There has been so much - More than could be imagined.

Those that know me know that I contributed the maximum to a diversified mix of Guaranteed Account and Vanguard Index Funds in my 403b for over 35 years, stayed the course, and re-balanced annually.  I have been rewarded due to this discipline - AND all the GREAT ADVICE and ENCOURAGEMENT from this blog.

As part of the Guardianship, I am responsible for all of my relative's health/medical and financial decisions and well being.  I am his only relative, and visit him weekly at the assistive care facility.   During his working years, my relative was an accountant for his state, and extremely frugal.  He lived very simply in a small apartment.  I was shocked, surprised, and more than a little scared to learn that he had a portfolio of over $5M!  His entire portfolio was invested in just 3, dividend producing, utility stocks.  Originally, I figured I would just "let sleeping dogs lie" as he must have known what he was doing.  All of that was great, and his dividend income easily covered all of his expenses.

Yesterday, I was notified that one of the 3 companies he owned stock in was involved in a buyout, and that he would receive $2M for his stock in that company.  What do I do with this $2M in cash???  My comfort level is with index investing, and I could continue to do that through his online account.  He was successful investing in utility stocks - Continue doing that?  We could invest it in the company that bought out his stock. 

Sorry that this is not exactly a 403b query.  Please weigh in - As I highly value and respect your ideas and perspective.  Many thanks in advance.

Bill

 

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Owning just three stocks (all in the same industry no less!) is giving me anxiety just reading about it. As a general rule of thumb, total market index funds are the objectively superior option.

You’re in an interesting moral dilemma. On one hand this money belongs to your relative and they ought to have autonomy over their money. On the other hand their mental illness apparently prevents them from making sound decisions, you’re charged with making the best decisions for them, and I don’t know about the rules, but maybe you’re even financially responsible for your relative if their wealth is exhausted.

In my opinion, the responsibility you’ve assumed outweighs respecting your relative’s preference (if it even was a preference, it may have been sheer ignorance) for an unnecessarily dangerous investment strategy. In my opinion, you’d be acting in their best interest by transitioning to a fully diversified, low cost portfolio. If your relative’s mental illness didn’t deprive them of their ability to make sound decisions, then my opinion would be different.

From a practical standpoint, I’ve never owned individual stocks. My first question is, what are the tax consequences from getting two million in cash due to an aqusition? Are there ways to mitigate what would appear to be a massive tax bill? When it comes to the remaining investments, are the capital gains so substantial that it would be prohibitively expensive to exchange those shares for a total market fund? I assume it is in a taxable account, but maybe not? At the very least the dividends could be redirected to total market funds.

...I’m sure there is a lot more to say, consider, and learn, but these were my first thoughts.

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The word that comes to my mind is “fiduciary”, which is the relationship you have with your relative. What is in the best interest of your relative with respect to the 2M cash? There’s no doubt in my mind that investing the 2M in another utility would not be in his best interest.

I think an asset allocation of the 2M should be very conservative, perhaps 30% stock funds, 70% bond funds, maybe even 20/80. If this is this a taxable account, the bond funds should probably be muni bond funds. I would use Total Stock Market and Total International Stock Market Index funds for the stock funds.

It would be reasonable to talk to Vanguard about this account. Using their advisory service for 0.3% per year, for a least a year, would make sense from a fiduciary point of view. I believe you can have an initial conversation with a CFP without cost.   

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First of all, BK10s, I feel for you.  I've also found myself with unexpected responsibilities for family members--my situation hasn't yet gone so far as yours, but I've experienced some of the emotional and mental weight that comes with those circumstances. 

You are responsible for managing his finances (it's great that he has such resources, even though at the moment the decision making may be nerve-wracking), so I advise you to ignore what he did with his investments under different circumstances years ago--that's not relevant.  You'll be doing a great job for him if you put the money in some version of the three-fund index portfolio.  You may want some professional help, though, to make decisions about tax management (if this $2 million is in a taxable account, you'll probably have a six-figure tax bill, unless there's some way to defer the capital gain by reinvesting in the "new" outfit) and to decide whether and how to replace the ongoing dividend income that the utility shares provided.  If you qualify for a free CFP consultation with Vanguard (I think that depends on the amount of Vanguard funds and ETFs in your linked Vanguard accounts), that would be a great place to start.  Otherwise, you could either pay Vanguard the 0.3% for as long as it takes to get this situation settled (then say thank you and end that fee), or look for a local fee-only fiduciary financial planner who will review the situation with you as needed, for an hourly fee.  There are networks of the latter, some of the folks here might be able to supply referrals.

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Hi bk,

Nothing more I can add. As you probably know, you got excellent advice and what an honor (and responsibility) to help your relative. For what its worth, constructing a $100, $100,000 or a ten million dollar portfolio should not be much different with regard to choice of asset classes and the stock-bond split, and rebalance when needed. I agree with krow about making it conservative with the three fund portfolio and talk to Vanguard. 

Good luck,

Steve

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Thank you for all of the re-assurance.  Does anyone have an opinion on the Vanguard High Yield Tax Exempt Fund (VWALX) as part of a portfolio? 

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It's considered a junk bond fund and behaves more like an equity fund than a bond fund when the stock market does a dive. I stick to the Intermediate-term Tax-exempt Bond fund in by taxable account. 

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I have no experience with that fund (or any tax exempt fund), but I believe krow36 is mistaken to consider it a junk bond fund, as roughly 83% of the holdings are "investment grade,"  (BBB or better), about 7% are at the higher end of "junk" (B or BB) and about 10% are not rated.  Compared to an intermediate-term fund VWALX has much longer-term bonds and a bit of that riskier "junk," hence it would indeed be expected to be the more volatile of two, but unlikely to match stock-market price swings.  

The name of the fund promotes confusion, I think.  Vanguard's taxable junk bond fund (VWEAX--almost everything it holds is rated BB or below) is also called "High-Yield."

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whyme, thanks for the correction. I was thinking of VWEAX (Vanguard High-Yield Corporate Bond Fund Admiral), which I owned in the past. I sold it after being advised by a Vanguard CFP that it behaved like an equity fund in a market downturn.

I don’t have any experience with the Vanguard High-Yield Tax-Exempt Fund Admiral Shares (VWALX) fund that bk10s asked about. It does look like mostly investment-grade bonds but because it’s classified as a long-term bond fund, I avoid it myself. I want to avoid its increased sensitivity to increases in interest rates, compared to Intermediate-term Tax-exempt Bond fund (VWIUX). 

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Thank you for the great ideas.  One more question.  The account is presently with Etrade.  I intend to diversify  this portfolio now with some low cost funds (including VWIUX).  Many funds, including Vanguard, can be purchased through the Etrade account.  Would it be suggested that I make the transactions through the Etrade account?  Or, open a separate account at Vanguard?  Etrade charges $19.99/trade.  Etrade told me that there are no other annual fees besides what Vanguard charges.

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I haven’t followed this thread too closely so I apologize if I’m missing key details, but I’d be willing to pay up to $0 to buy and sell mutual funds 😀

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3 minutes ago, EdLaFave said:

I haven’t followed this thread too closely so I apologize if I’m missing key details, but I’d be willing to pay up to $0 to buy and sell mutual funds 😀

Ed - Great minds think alike!

 

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My 2¢: bring your cash to Vanguard and make new purchases there.  Eventually, you'll probably want to consolidate everything at Vanguard.  They'll charge $0 to buy or sell Vanguard mutual funds or etfs (including non-Vanguard etfs), and if you have a substantial balance held at Vanguard, the cost of buying or selling individual stocks becomes negligible (at 500K+ total in Vanguard accounts, stock transactions are $2, at one million plus, the first 25 transactions are $0).  The only downside I can see to moving assets "in-kind" from ETrade (that is, transferring assets without selling anything) is that Etrade slaps a fee on you for transferring the account out.  I think it is $75 if you transfer out the entire account. Given the dollar amounts you've described, I personally think it would be worth that small hit to make the transfer and handle everything at Vanguard in the future.  

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14 hours ago, bk10s said:

Oh my gosh!  I just checked and VWIUX is NOT available through Etrade! 

Why in the world do you want to use Etrade? $19.99 a trade is horrific! Vanguard has a brokerage department too. When I do my rebalancing, Vanguard does not charge. Using Etrade to manage Vanguard funds adds unnecessary costs and increases complexity. Keep this simple. 

Vanguard ETFs brokerage information: https://investor.vanguard.com/investing/transaction-fees-commissions/etfs 

Vanguard Mutual fund brokerage info:  https://investor.vanguard.com/investing/transaction-fees-commissions/mutual-funds 

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