At a Career Crossroads, a Gen X-er Ponders a Big Reallocation

By Markets

In this segment of the Sept. 19 MarketFoolery podcast,Chris Hill, Stock Advisor Canada's Taylor Muckerman, and Million Dollar Portfolio's Jason Moser consider whether Adam's plan to invest 50% of his portfolio in an index fund and 50% in individual stocks is a reasonable choice. They also discuss the important short-term fiscal issues of a layoff, diversification questions, and more.

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A full transcript follows the video.

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This podcast was recorded on Sept. 14, 2016

Chris Hill:Question from Adam Bartell, listener No. 41. Adam writes, "I'm forty-four years old and I'm about to be laid off from my job. I have saved about $400,000 in an index fund in my 401(k), which I may roll over into an IRA. If I do, I'm thinking that I would keep about 50% in the index fund and allocate 30% to individual Stock Advisor picks, and 20% to Motley Fool Options picks." Adam is a member of both those services. He concludes by saying, "If you were in my shoes, how would you treat this?"

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Let's back up out of the individual services and let's just treat this as... I think his core question is, "I'm thinking 50% index fund and 50% individual stocks." What do you think of that?

Jason Moser: I'm 44, or almost 44. I guess I can see where he's coming from. I hope I'm not getting ready to be laid off. I don't know that... I think the first thing I want to do is make sure that I've got enough money to deal with however long I would anticipate being unemployed. That would be my biggest concern. I'm not sure from Adam's situation here if it's just something that he'll get another job at some point soon, but my first goal would to be to make sure that I have what I need to deal with whatever amount of time I feel like I'm going to be without a job. At 44, you still have many, many, many years of productivity left, and you should be able to make a good amount of money during those years as well.

I like the idea of having half of that, if not even more, in an index fund, because that just gives you that instant diversity where you're not pegged to just one stock. Then from there I would just go very slowly. I would not feel compelled to get the other half of that money invested immediately in individual stocks or individual options. I like the idea of the strategy. I think at that age, you're still looking to grow your wealth versus protect it. Given the employment situation, you do have a dynamic where you do need to protect your wealth at least to a degree. I think the half in index funds is great. I would take that other half, the other half of that money, and invest it very slowly.

I would not feel compelled to get it all on the market at once. Stay liquid, keep some dry powder on hand, and going back to what we were talking about before with having that chunk of change where you can be opportunistic, and also having some liquid cash if you run into a situation where you really need it. Hopefully you're back on the employment side of things very soon and this is a non-issue, but just make sure that you get yourself with whatever liquid cash you need to get through this time without having to be a desperate seller in any case.

Taylor Muckerman: Even with the 50% for the index funds, I would edge into that, go back to the dollar-cost averaging question because you dump it all into the market right now, and you see numbers ticking up they're right around all time highs. Not saying that it's going to collapse, but at the same time, I wouldn't dump it all in there. If it's cash, I would still ease in.

Jason: Yeah, and I'm thinking looking at his email here, it sounds like he's $400,000 in an index fund in the 401(k), which means--

Taylor: Yeah, OK. It's already in the market.

Jason: He'd be able to roll that over into an IRA in that same index fund. Then it would be a matter of what do you do from there. Also understanding that any selling from that index fund, there are going to be tax implications there that you want to make sure you understand you may or may not be subject to. Again, when you roll over something like that, I don't think you would run into any tax problem if it's a 401(k) or an IRA, but just make sure you understand all of those dynamics that are played before you do anything like that.

Chris: To your point about how Adam's got many years of productivity ahead of him, also many years of compound interest.

Jason: Right.

Chris: That's the thing when you just think about... even if someone is just thinking, "I'm just going to keep it all in an index fund," you're looking at 20 to 30 years of compounding before you potentially need to tap that.

Jason: Yeah. It sounds like he's thinking, "OK, I'll roll all this over into an IRA and I've got all this money in an index fund," and then typically you would be able to sell off any bit of that index fund that you want to invest in other ways, and you wouldn't have any tax problems because of the fact that it's in an IRA. Again, I think making sure you understand all the dynamics at play, make sure that you have yourself set up for however long you think you're going to be without a job, and then proceed slowly. There's no need to rush into anything.

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