About to receive funds from litigation,

[elleng]

looking for places to park/grow them, for the long term.

Would appreciate suggestions.

Thanks

[elleng]

1. Kick

[A HERETIC I AM]

2. Elleng.....that question is not really answered very easily.

Here's why;

What is your history regarding investing?
What is your tolerance for risk? Have you ever taken a "risk tolerance questionnaire"?...Its important you do so... (just google those words and you'll find several. Take a bunch of them to give you a baseline.)
How much are we talking about? A "1" followed by only 3 or 4 zeros is a shitload different from a 1 followed by 5 or 6 or seven zeros.

How long is "long term"? 5 years? 10? 20? The longer the time frame, the bigger the difference, and if you do some of those risk questionnaires, you'll see why I say that.

If what you are looking for is a perfectly safe place that has a perfectly safe rate of return, then the worldwide benchmark for such an investment is Ten Year US Treasury paper. Doesn't get much safer than that. Right now, recently auctioned ten year notes are paying a coupon of 2%. That means for every single $1000.00 face value note of these issues you buy, you will get $20.00 per year in interest payments and when the bonds mature, you will get $1000 back from the US Treasury. However...the yield as of this writing is 1.98% which means that if you went to a broker and bought ten year paper, you are going to pay just a bit more than a grand for a bond that will mature at a grand ($1000.00) OK?..

Bloombergs Bond page;

http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/
Bookmark it. Quick, easy to look at and updated several times a day. You just don't get the quote down the the 4th decimal place!

Presently, Certificates of Deposit seem to be really close to the rate for 5 year Treasury paper. So regardless of which bank you go to, you aren't going to get much more than 1% on a CD.

There are literally thousands of ways you could invest a sum of money for the long term. Some good, some bad, some mediocre, and some a total crap out. The key is to understand how you feel about taking risk, and invest accordingly.

If I won the Powerball this coming Saturday, the largest portion of it would go into a US Treasury bond portfolio, a large portion into a Municipal Bond portfolio and a significant section would go into a "growth" portfolio which might include individual stocks as well as Mutual Funds. That entire mix would change as things improve.

Hope that helps a little. Please take the quizzes I mentioned. They will help you a lot.

[elleng]

3. THANKS very much, HERETIC!

Medium - low risk, 150,000, long term, meaning rest of my life. (66 now.)

Have been thinking diverse mutual funds, maybe index funds; haven't thought of bonds. (Have invested in TRowe Mutual funds for 25+ years w husb, but separated now so this is all mine.)
Want modicum of liquidity, 'cause this is for my use, not just for way future/estate. Not day-to-day use, as have OK pension, but somewhat regular use - travel, special occasions/needs, etc. Don't want to be punished for or hampered from redeeming. Thinking of some fraction in interest-bearing savings acct for REAL liquidity.

THANKS again!!!

E

[A HERETIC I AM]

4. Okie doke...so we can assume this isn't "qualified" money.

By that I mean it isn't in a tax qualified account, such as an IRA, an annuity or a 401(k) or a 403(b).

If that is the case, then liquidity isn't a problem. You'll be able to get cash in 3 days, regardless of what you invest in - immediately if you were to buy Treasuries (they settle "same day" as opposed to the "trade plus 3" rule that most other securities abide by.) and 3 days from any sell order given to your broker. The only concern or punishment would be taxable gains - "Capital Gains" which is simply the difference in what you paid for a security and what you sell it for.

Some things to keep in mind about Index Funds;

The manager invests in the index, whatever that is, be it the S & P 500, the Russel 2000, The Wilshire 5000, the Dow 30....whatever. As a general rule, the manager will not trade in and out of positions, he just buys the issues represented in the index and holds them. So...they tend to have an Alpha of zero (or near zero, as the case may be) meaning that the fund will be just as volatile as the market.

(Another definition of Alpha; http://www.investopedia.com/terms/a/alpha.asp#axzz1g1lTmI2K )

Ideally in a bull market, one wants their portfolio to have a positive Alpha and in a Bear market, a negative Alpha. This obviously requires active participation, diligence and understanding of market trends. An index fund, as a general rule, will NOT do this. The alternative then, is to find a manager or a fund family that does this well, and has a history of doing it well over time.

THAT'S the rub. There are hundreds of Mutual Fund families out there. You mention one of the larger ones - T. Rowe Price.

Check out www.morningstar.com.

Enter in the 5 letter ticker symbol (Open End Mutual Fund Ticker Symbols always end in the letter "X") for a fund you have owned or one that you are interested in. Morningstar will give you a whole lot of information on any fund you search for. Compare long term performance. Look at manager tenure. Look at the portfolio for its makeup and its turnover. Take note of yield and dividend/capital gains payment history. Their reports can give you an indication as to how a given funds management have handled the last two downturns or indeed, how well they have performed over the decades.

Up WAAY too late, but I'll be happy to answer any further questions you might have in the coming days.

Congratulations on your windfall.

[elleng]

5. Thanks again, HERETIC.

No 'windfall,' exactly, as attorney's fees = 16,000, 'cost' to extract my due from 'husb,' who sold our house Jan. '09. Also don't get benefit of interest $ been earning since house sold, its in husb's TRowe accounts, as negotiated settlement agreement 13 months ago assumed immediate payment. Bastard playing games these years, its not 'qualified,' but free and clear, 50% supposed to arrive w/in 1-2 weeks, 50% in January.

Dealing w TRowe these years, I understand that funds essentially liquid, but not quite as much as in savings account attached to my checking account. As to tax consequences, if I 'take' nothing from TRowe or other brokerage accounts, no 'gain,' right(or whatever) immediately taxable? Not terribly concerned about this, as I'm in low end of tax rates, 11%?, being retired, on pension + small soc. sec., but do want to minimize exposure.

Index funds generally 'cheaper,' right, that is, little or no cost for 'management?'

Studying 'alpha!' WTF!?!?!?!

Don't understand Treauries AT ALL. I buy a $1000 bond, which says it earns/will earn some % so at the end I'd be entitled to 1000x the %. In the interim, I'm entitled to 'withdraw,' leaving principle less than the original 1000? And how, mechanically, would I 'withdraw?'

Thanks again! You were up later than I, but even so I arose only recently, so its coffee time!

E

[A HERETIC I AM]

6. Answers; (Edited)

As to tax consequences, if I 'take' nothing from TRowe or other brokerage accounts, no 'gain,' right(or whatever) immediately taxable?

Not necessarily. If the funds are held in an ordinary investment account, then any interest paid, dividends or capital gains are taxable. At the beginning of the year you will (or should) get a 1099 form from the broker detailing any and all gains.

With Mutual Funds, Capital Gains only happen when the manager sells a position for more than he paid for it, just as if you owned the stock individually - and he distributes that profit directly to the shareholders. It is possible there may be gains in a stock fund you may hold for 2011, as the Dow is up from where it started the year. If at any time during the year the fund manager sold a position for a gain, then you received it and it is taxable.

Not terribly concerned about this, as I'm in low end of tax rates, 11%?, being retired, on pension + small soc. sec., but do want to minimize exposure.

Without getting too specific, yeah, you're thinking correctly. There are several ways of going about liquidating to free up cash so that taxes are minimized. You want to talk to a qualified tax preparer or tax attorney for specifics in your case. Suffice to say, when selling, if you sell at or near the price you paid (or your "Cost Basis") then there will be little or no gain and therefore little or no tax owed.

Index funds generally 'cheaper,' right, that is, little or no cost for 'management?

For the most part, yes exactly. This was what John Bogle the founder of Vanguard was famous for. Thing is, one of the largest actively managed equity mutual funds in the world - American Funds Growth Fund of America - beats the shit out of the best Vanguard equity fund over the course of the last 30 years.

Studying 'alpha!' WTF!?!?!?!

LOL....Just remember, the higher the Alpha of a fund or portfolio, the more it will make in a bull market and the more it will lose in a bear market. High Alpha = aggressive/risky. Negative Alpha = conservative/lower risk.

Don't understand Treauries AT ALL. I buy a $1000 bond, which says it earns/will earn some % so at the end I'd be entitled to 1000x the %.

Not exactly. Take a look at the Bloomberg page I linked in the previous post. Note across the top of the Treasuries section it says "COUPON, MATURITY, PRICE/YIELD and PRICE/YIELD CHANGE. Note that under Coupon for the 3,6 & 12 month notes, the coupon rate is 0.00. That means these bonds pay no annual interest payments. They are "Zero Coupon Bonds". The way you make money on them is they are purchased at a discount to that $1000.00 par and mature at par. The difference is your yield. The rest all have a coupon percentage, from 0.250 on the 2 year to 3.125 on the 30 year. All of those pay interest payments to you. In the case of the 30 year, that sum amounts to $31.25 per year per bond and these payments are split into two payments of $15.625 each, paid 6 months apart. OK? Almost ALL bonds work in a similar fashion, be they Government, Corporate or Municipal. When a given bond matures, the issuer redeems them at their par, which is almost always $1,000.00.

In the interim, I'm entitled to 'withdraw,' leaving principle less than the original 1000? And how, mechanically, would I 'withdraw?'

Not really, no. Lets say you go to your broker and tell him you want to build a Treasury portfolio. You deposit ...oh lets just say twenty grand and you might say something like the following;

"I want 25% of the portfolio to be weighted in the long maturities, 50% in ten year paper and the last 25% laddered in a variety of the shorter maturities."

The Broker is going to buy you $5000 worth of 30 year bonds, $10,000 worth of 10 year bills and $5000 worth of the bonds maturing in 2 years or less and if he does it right, every 6 months you will have a bond mature out of the last portion. When one matures, you can either just keep it in cash or buy another bond. He might buy all ten grand of the ten year notes that mature on the same day. If that is the case, every 6 months you will receive $100.00 in interest payments. (2% coupon X 10 bonds = $200 per year divided by 2 = $100 every six mos.) If he does the same with the 30 year paper, at the coupon rate mentioned on the Bloomberg page, you would receive $156.20 per year in interest payments from them, again, divided into two payments of $78.125 each(5 X 31.25). (The brokerage will either round up or down so you won't get a half cent!) You can pocket that cash, buy dinner with it, buy another couple shares of your favorite mutual fund or wait till you have $1000 collected and buy another bond. Confused yet?...lol.

As far as withdrawing goes, you are free to sell such bonds at any time you care to, you just can't sell portions of individual bonds.. The thing is, US Treasuries represent just about the most liquid security in the world outside of cash, and they trade EXTENSIVELY. What happens each and every day is the price of a given bond of a given maturity and coupon will fluctuate, either up or down, depending on numerous factors in the overall market. When you hear Kai Ryssdal on NPR say "Bonds fell and the yield on the ten year rose to blah blah percent" he is talking about that exact thing. When bond prices fall, yields rise. When prices rise, yield falls. So if you buy a ten year at current market price - at this writing according to the Bloomberg page equals $994.375, and in a week you want to sell it, you take the risk that the price may fall from now till then and you would get less than you paid for it. They don't tend to swing very wildly however, so it might only be a few cents or perhaps a few bucks. The shorter term the paper, the less it fluctuates. The longer term the paper, the more it fluctuates.

I wrote a response to a similar question a while back that might give you some more information. It touches on how bond mutual funds work and I talked a little about Municipal Bonds as well;

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=439&topic_id=2149841&mesg_id=2158409

I made an error in that post. The paragraph that begins "BTW, all "Closed End" Mutual Funds have a 5 letter ticker symbol and it always ends in "X". You may want to bookmark that Morningstar page for future reference on funds you have in your own 401(k). If you come across a Mutual Fund with a 3 letter ticker, it is a "Closed End" fund (CEF)." should have read "BTW, all OPEN END" Mutual Funds have a 5 letter ticker." Your regular, run of the mill Mutual Fund is an Open End fund. That simply means the fund is free to issue as many shares as it has buyers for. A "Closed End Fund" is exactly that - closed, meaning they have issued all the shares they are going to. Also, Closed End funds trade on an exchange. Open End funds do not.

Edit; I want to make it perfectly clear that I am in NO WAY WHATSOEVER recommending you buy any specific security, be they Treasury Bonds or a specific Mutual Fund. Making specific investment recommendations on a forum such as this to essentially a perfect stranger is in bad form, in my opinion. I use Treasuries as an example because I understand them, they are recognized the world around as a safe investment and there is a ton of information available on them. I also mention American Funds because I am familiar with them as well, having owned several over the years.

Subsequent edits underlined

[elleng]

7. OMG, THIS is gonna take me a WHILE to understand!

:hi:

EDIT: Got your edit. Thanks. Didn't think you were recommending, but explaining. Will be in touch w my Dad's broker/whatever next week, to figure things out.

THANKS!