Not technically a fund question, but here goes. My grandson received an inheritance of three stocks, APPL, META, and NFLX, with a present value of $10,000, $4000, and $3000, with around $2000. capital gain since receiving. He is asking me if he should sell all and eliminate his balance on a school and car loan and move the now available dollars to a savings account in preparation for a future wedding or other emergency needs. He is making sufficient money that making the monthly payments on the loans is not burdensome, but he is averse to being in any kind of debt. Any suggestions? Are these three stocks, Buy Hold or Sell? His question is to sell them now something he will regret in the future.
Comments
His student loans may have low rates, so he can keep them if he is handling payments. Car loan depends - if low 1-3%, he should keep them.
He will have opportunities to save more for wedding, house, etc.
Hating any debt is fine philosophy/sentiment when he will have more money. So, that he can do later.
Finally, is the inherited money taxable or in Inherited IRAs?
Does he currently have any emergency cushion at all? Our number 1 child just spent 623 bucks on a car repair. She had the money in the bank. If your grandson hates debt, he won't want to be tacking things onto a credit card.
If he has a plan he's comfortable with, he is more likely to stick to it, and leave it alone. It's fiddling, and FOMO, that gets people in trouble.
Two different questions here: (1) the type of investments and (2) whether to pay off the loan.
The investments: Depends on one’s risk tolerance, but sounds as if grandson has limited experience as an investor. My advice would be (1) go slow in the beginning and (2) diversify into some other sectors (mid-cap / value / international). Above all else, do some intensive reading. Howard Marks is my favorite. John Bogle I find tedious (but relevant). John Templeton’s both intelligent and inspiring with an interesting life story.
The loan: While I’d pay it off for the logical reasons Lewis states, there may be a counterintuitive reason not to. That would be that staying invested might perk his appetite for investing and encourage him to read, study, diversify and contribute over time. Occasionally, psychology enters into such considerations.
(Just 1 non-expert’s take on a fascinating question.)
It is important at young ages to adapt responsible budgeting, a savings plan and to be able to swing emergency car repairs for example, but a new roof might be beyond that funds capacity.
I would agree with paying off student loan.
Having received similar equity inheritances, I would also suggest keeping a little bit of at least one position as a sentimental reminder of someone else’s largesse.
I have a few shares of Exxon that “were” originally my grandfathers in 1920s. They are only electrons but they are still a reminder of his life and career.
He could keep a 1000 bucks each, pay off the student loan, and still have some left over for the emergency fund/IRA/HSA account.
Coming late to this, but if it were my son well-employed I would sell those stocks and pay down what everyone has already said, and put remainder in 4.9% MM or definitely IRA as feasible.
I love the construction 'wedding or other emergency ...'
That was an expensive night at the bar.
A more typical bill for a car damaged in an accident is $5,000 today and $6,200 for an electric one, according to the article.
Per @LewisBraham on car repairs, those prices will get a lot of used cars totaled. We are still in the early 21'st century with our vehicles.
Drove the Acclaim and a Subaru until we could claim the 1000 dollar bounty from California for taking polluters off the streets.
OTOH, since covid, we have had a few people knock on the door about #1 child's 2003 Accord. And people regularly leave cards on the vehicle. The 2008 Fit and the 2002 Odyssey get no love at all.
+1
Nice NYT article posted by @LewisBraham
Some of these toy trucks are beginning to show up up in northern Mi. That 360 degree turn might be useful for military or law enforcement application. Difficult to see how it will help the average person get from point A to point B.
That said, any mechanical maintenance or body repair is becoming incredibly expensive. The technology is part of it. No, an iphone doesn’t really cost $1,000 to manufacture. But people are willing to pay for the latest technology. Same with autos. The other big component is greatly escalated labor costs the past couple years - an outgrowth of the pandemic + labor shortages. (As noted elsewhere on board, more immigration would help ease the labor shortages.)
My father saved EVERYTHING. I have his first income tax return the check book from the year I was born, and the original brokerage slips for the Exxon stock his father bought him in 1938. His father wrote a letter to the broker requesting he buy the shares.
Among other things, I have a hilarious series of letters between my grandfather and a lawyer in Fort Stockton, Texas about some railroad land grant property, and trying to collect the grazing rental fees when the price of beef was not so good. City slicker from St. Louis versus the wily frontier lawyer back in the teens of the last century.
But I wonder what to do with it when I get old. Leave it to my kids to figure out I suppose.
I have never been a saver like that.
The grandson is young and time is on his side. If those stocks drop, he can wait on them to bounce back.
The real strength of his financial position is a steady monthly income, sufficient to cover his expenses and loan payments. My advice would be to add to his portfolio by using dollar cost averaging -- select a dividend-paying stock or fund or ETF which is more value oriented than AAPL and META and initiate a purchase plan on automatic pilot with dividend reinvestment.
Watching something grow is a wonderful incentive to be interested in investing. That's how he'll gradually build knowledge or markets and investments.
I'd bet that if he divests now, it will be a long time before he makes the decision to step back into the market.
David
Not at all. Several people on this site have suggested 100% (or near 100%) equity portfolios for young people. But those recommendations came with the proviso that the person had an emergency fund, or perhaps that the income stream was dead certain. And that there wasn't an alternative investment available with a higher projected risk-adjusted return.
A lot to unpack there. If he had an inherited annuity paying a steady monthly income, that would be one thing. A job without more info is not a certain income. Right now, the economy is at surprisingly full employment (3.6% unemployment). When (not if) the economy goes through a recession, jobs will be at risk. Jobs are always at risk of becoming obsolete. Moving from job to job takes time, which is one of the points of having an emergency fund that will last a few months.
A three stock portfolio of leading names may look good now, but then again, so did the Nifty Fifty. (FWIW, well before my time.)
https://bridgeway.com/perspectives/party-like-its-1972-what-can-the-nifty-fifty-teach-us-about-todays-market/
Building a diversified equity portfolio is a good idea for someone starting out. That doesn't preclude him from first building an emergency fund. (That exercise alone has the benefit of forcing one to budget expenses, including health care if employer coverage is lost.)
Starting out with highly non-diversified portfolio is not a great idea. At the very least, he would be better off diversifying now - sell at least some of the stock (being inherited they likely don't have huge unrealized gains). That's not a buy/sell/hold recommendation on the individual stocks, but a suggestion for thoughtful portfolio management.
Moving on to the alternative: paying down debt. As others have said here, that's 7% return, certain. Many sources project lower returns than that for equity over the next decade. Here's Schwab's take as of nine months ago. Admittedly things so far have gone better than projected last year (inflation coming down, employment remaining high).
https://www.schwab.com/learn/story/schwabs-long-term-capital-market-expectations
(Vanguard and others offer similar projections, though similarly predicated on a 2023 recession.)
Something you didn't mention about the student loan is whether it might qualify for loan forgiveness (should that become a reality) and whether the amount he would pay down would cost him some of that "free" money. That might militate against paying down the loan.
As you said, this is a learning experience for your grandson. Even if the risk of a catastrophic failure is small, should it happen he might not return to investing for years. It would seem to be better to virtually eliminate that risk (diversify now, have a cash reserve), even at the cost of (possibly) reduced returns for now.
It just seemed to me that the overall tenor of the comments constituted a pretty conservative investing approach for a young college graduate.
I favor more of a three pronged barbell approach --- we own several value stocks that are good dividend payers (KO, SO, HSY, MO, XOM, ...), several consistent mutual funds (FXAIX, FLPSX, JORSX, BUFSX, ...), and some more adventurous holdings (FDGRX, AMZN, SBUX, FSELX, ...).
I really believe in science and technology and did very well for years with T Rowe Price Science & Technology Fund in my 403b account.
FSELX (Fidelity's Select semiconductor fund) has a Total Return of about 27% per year for the last ten years -- give something like that a chance in the young man's portfolio.
(Just be willing to endure some ups and downs.)
A question for Bobpa -- does the grandson have a prospective bride (and wedding date) in mind, or is he just hoping to find the perfect mate?
In conversation, I used to ask my students
"How did you decide to come to college here?"
Often the answer was "My boyfriend (or girlfriend) was coming here".
"Are you still dating?"
"No, we broke up freshman year".
So much for long term plans made by high school seniors/incoming freshmen.
David
That’s good sense if someone is working, contributing, dollar-cost averaging in. In the grandson’s case it’s a windfall from an inheritance. Lump-sum investing vs dollar-averaging. Much different. So, the conventional wisdom to be aggressive in the early stages is misplaced in this instance ISTM. Additionally, the grandson likely hasn’t had time to learn and experience the real world of investing. Can’t just pick up a book and know everything. Some of my best lessons came from losing money in the early going. Glad I didn’t have much to invest back than.
“Stodgy”? I don’t know … Some younger blood would be nice here if you know how to pull them in from Farcebook and the like - or even get them to stop texting for 10 minutes.
PS - One early lesson learned the hard way was that when all the media hype and freely rendered Mom & Pop “conventional wisdom” is leaning in one direction on a given asset … it’s time to move on.