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The age-old debate between growth and safety is one that every investor struggles with at some point in their investing journey.
The choice between growth and safety often comes down to an investor’s risk tolerance, financial goals and time horizon. However, with $2.5 million already in the bank, the stakes are high and the margin for error is very slim.
For a 36-year-old sitting on this type of cash, the debate between growth and safety is particularly pressing: Should he take on additional risk for the prospect of higher returns, or should he play it safe to keep his fortune?
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The 36-year-old found himself in an enviable position after a windfall from an employee stock ownership plan at his previous employer.
“It’s pretty wild and completely unexpected—before the buyout, my shares were worth around $300,000; I had been with the company my entire career (12 years), so this is insane. I lost my job in the process but landed a new one the same week I was let go at 90% of my previous pay, and it seems like a much, much, much better company, so it all worked out,” the investor shared on Reddit.
Now, with the $2.5 million sitting in a Fidelity rollover IRA, the poster is faced with the daunting task of deciding how to invest it. His goal is to retire in 20 to 25 years, but he isn’t sure whether he needs to take a more aggressive approach to grow the money or focus on stability.
The post sparked a lively discussion on Reddit, with both experts and amateurs weighing in on the best course of action. Let’s dive deeper into the post’s comments.
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Go Heavy on ETFs and Index Funds
Many Reddit members suggested a growth-focused approach, emphasizing the power of certain low-cost index funds or ETFs.
“Low-cost index funds and chill. Invest it slowly or lump sum, congrats! I'm like 80% in [Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)], but I have a government pension and real estate so I hold no investment bonds,” one Reddit member suggested.
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One Redditor suggested two different ETFs that he also holds, mentioning they have tax advantages.
“My IRA is mostly [Vanguard Total Stock Market ETF (NYSE: VTI)] and [Vanguard Total International Stock ETF (NASDAQ: VXUS)]. Since it's an IRA, you probably don't have to worry about taxes. I'd buy VTI and VXUS and call it a day,” he wrote.
Replying to this comment, one Redditor asked, “Why VTI+VXUS when you can [Vanguard Total World Stock ETF (NYSE: VT)]?”
“Lower expense ratio. Opportunity to split across tax-advantaged and taxable, if you’re into that sort of thing. Opportunity to pick a different U.S./ex-U.S. ratio than VT, if you’re into that sort of thing,” a commenter explained.
“[Vanguard S&P 500 ETF (NYSE: VOO)] would be reasonable for the stock index (or [Fidelity 500 Index Fund (FXAIX)] with Fidelity),” another comment reads.
One Redditor commented on the time frame for retirement the poster mentioned and suggested he invest all his money in index funds.
“20-25 years is too long unless you absolutely love what you do. You could go 100% into index funds and tell yourself that you're retiring at 50 or when the account hits $10 million... whichever comes first,” he said.
“Research what are the top ETFs and just throw everything in it. Example: VOO, [Vanguard Information Technology ETF (NYSE: VGT)], VTI, [Schwab U.S. Large-Cap Growth ETF (NYSE: SCHG)], [Schwab U.S. Dividend Equity ETF (NYSE: SCHD)], [Invesco Nasdaq 100 ETF (NASDAQ: QQQM)]... since you are planning to retire in 25 years, I would suggest don't put any money in bonds,” one comment says.
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Balance the Investment
Several Reddit members of the r/Bogleheads community recommended the poster go for a balanced approach, combining both growth and safety.
One Redditor suggested a split where the majority of the funds are allocated to growth-focused assets and a portion is dedicated to fixed income to provide stability.
“80% in the stock index, 20% in fixed income. Forget about it till retirement,” he said.
A commenter recommended a slightly more conservative allocation, with 70% in U.S. stocks, 10% in international stocks, and 20% in cash or cash equivalents.
“70% in the total U.S. stock market index fund (and/or the S&P 500 index fund). 10% in the total international stock index. 20% in cash,” the user wrote.
“Allocation-wise, I would go simple, but since it’s already a large chunk of money, you may want to protect it. I would suggest at least 20%-30% into a stable bond fund, 50% S&P 500 fund or total market fund, and the final 20%-30% into an international fund,” another Redditor suggested.
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This article 36-Year-Old Sitting On $2.5M IRA Asks Reddit: 'Do I Risk It For Growth Or Settle For Safety?' Experts And Amateurs Clash originally appeared on Benzinga.com
