True Vine Investments
True Vine Investments is an independent Registered Investment Advisor (RIA) and the investment advisory business of Joshua S. Hall, ChFC. He is located in Williamsport, amongst the mountains of northern Pennsylvania.
Prior to starting True Vine Investments in 2010, Joshua worked for JPMorgan Asset Management for 10 years. He spent the last several years as Vice President and On-boarding Manager for the Global Liquidity business. He earned his Bachelor's of Science Degree in Finance from Susquehanna University in 1999 and his Chartered Financial Consultant (ChFC) designation in 2005.
Joshua writes The True Vine Letter, a blog focused on providing financial education and unique investing insight. He is the author of The Truth On Investing: From the Darkness of the Crowd to the Light, a book that provides a framework for people to invest the resources that God has given them—with Him—and precisely the way He has purposed.
Joshua values close relationships with his clients and understands that trustworthiness is the most important characteristic they are looking for in an investment manager. He is very happily married to his wife Michele and they have 3 children. He enjoys the outdoors and being far away from the crowd on Wall Street.
BS, Finance, Susquehanna University
Assets Under Management:
The information provided by Joshua Hall on Investopedia is general in nature and for educational purposes only. It is not to be used or considered as an offer or a solicitation to sell or an offer or solicitation to buy or subscribe for securities, investment products or other financial instruments, nor to constitute any advice or recommendation with respect to such securities, investment products or other financial instruments. It does not have regard to the specific investment objectives, financial situation, and the particular needs of any specific person who may read it. You should independently evaluate specific investments and consult a professional before making any investment decisions.
If you are saying that you have some investors wanting to take on more risk than others but they are all investing in the same company (start-up), then you would want to raise varying types of capital to compensate each type of investor accordingly. For example, the most conservative investors could provide capital through some type of preferred stock which may or not be convertible into shares of common stock. This preferred stock could pay them dividends and give them preferential treatment over any dividends to common stockholders. The preferred stock would also give them preferential treatment if the company were to go bankrupt. They would receive the payout from the liquidation of assets before common stockholders. The investors seeking more upside (with risk) could provide capital through a common stock. In general, the riskiest equity in a company is the common stock with other hybrid types of equity capital (e.g., preferred stock) being more conservative.
Alternatively, if my first paragraph did not properly answer your question and you are simply trying to compare a riskier investment to a less risky investment, then you could do so by using a different discount rate. To do this, you estimate the future cash flows from the company for a period of time (e.g., 20 years) and then discount those future cash flows at a certain rate (e.g., 10%, 15%, or 20%) to determine the Net Present Value (NPV) of the business. The higher the perceived risk for the business, the higher the discount rate you would want to use. Thus, 2 different businesses with the same projected cash flows could have a different NPV if one that was perceived to be riskier and had a higher discount rate applied to it. I use this technique when evaluating junior mining companies. I apply a higher discount rate to companies with riskier projects or those operating in riskier jurisdictions. These calculations can be performed by the formulas available in standard spreadsheet applications.
I hope one of these paragraphs was helpful!
Joshua Hall, ChFC
Before answering your question, it is worth taking a step back and considering the longer-term trends. After steadily declining for about 36 years, interest rates are now steadily rising. It is my view that we are now at the beginning of a long-term trend of rising interest rates. Given this, interest rates are likely to be higher next year. I am not intimately familiar with the Washington D.C. housing market, but, broadly speaking, the supply of houses for first-time homebuyers (entry level price range) in the U.S. is low and the economy is robust which means housing prices are likely to continue rising. The cost of materials, such as lumber, is rising so this will also put upward pressure on prices. The U.S. government is running a huge budget deficit which means they will have to borrow more and more to finance the government. This is likely to continue to put upward pressure on U.S. government bond interest rates which is very relevant to your situation because fixed-rate mortgages are priced off of the 10-year U.S. government bond. In other words, as the U.S. government is forced to pay more to borrow (higher government bond rates), the interest rate of fixed-rate mortgages will continue to increase. Between interest rates and housing prices, the change in interest rates is likely to have a greater impact on your mortgage payment. On a $300,000 30-year fixed rate mortgage, your initial annual interest expense would increase by $3,000 ($250 per month) if interest rates were to rise by 1% over the next 12 months—a scenario that I view as quite likely.
All in all, I think you should start shopping for a house now. At the very least, with time on your side, you can bid lower prices to try to get a better deal on a house you like. By pricing houses now, you can also begin to project how the amount of you put down and the house price will ultimately impact your monthly payment and budget. With time on your side, you are less likely to have buyers remorse. Use it to your advantage.
What you absolutely do not want to do is put money in the stock market that you intend to use toward the house. If you have an employer-provided retirement plan (e.g., 401k or 403b), make sure you are contributing at least the amount that your employer matches. If you do have such a retirement plan, you can allocate the investment options in it to stocks. By making sure you utilize this you can reduce income taxes (contributions are tax-deductible) and invest in the stock market to support your longer-term goals.
I hope you found this helpful!
Joshua Hall, ChFC
Congrats on the marriage!
If you have not done so, you will want to set up at least a basic budget. It is the only foundation to build upon. This way you will have a mechanism in place to see (beforehand) the potential effects of different decisions you could make. There are plenty of apps available for this. I use a regular spreadsheet because I like the quick flexibility.
Second, as much as possible, I would make sure the student debt is financed at a fixed rate. It is best to at least "lock in" your monthly payments so you are not facing a situation where they keep getting larger if interest rates continue to rise (which I expect they will).
Since you are both school teachers, you probably both have 403(b) or similar retirement plans where you can decide how much to contribute. If so, with your budget in hand, set an allocation that you can afford (e.g., 10%). This should be your first investment priority because you get a tax deduction for these contributions and your investments will grow tax-deferred. You will not have to pay any tax until you take distributions during retirement.
These first 3 action items will ensure you:
- have a clear view of your financial situation,
- have at least locked in your loan payments (as much as possible), and
- incorporated tax-advantaged long-term retirement savings into your finances.
Depending upon the outcome of these 3 items, you may have already answered your own question. I will assume you did not though.
If the student loans are not all fixed rate or you are unable to refinance them all at fixed rates, it may make sense to allocate a portion of the wedding present to paying off some of them. However, this depends upon your other financial goals, such as possibly owning a home? In general, it is a good idea to prioritize paying off variable rate student debt, but, to the extent that it is all fixed rate and your budget can easily handle the monthly payments, it may make sense to allocate more of the gift to investing. This is because of inflation. With fixed rate student debt, inflation makes the burden of your monthly payment decrease over time as your salaries increase and any investments you make (hopefully) grow over time. This is one way you can make inflation work to your advantage. It is typically advisable unless the size of the debt is emotionally burdensome to you. This is the power of having a clear budget. Some people suffer under financial stress simply because they have not taken the time to quantify their situation.
You said that you are both "pretty low earners," which implies that Roth IRAs may be a good option for one or both of you (each person has their own Roth IRA as IRA = Individual Retirement Account) should you decide to invest some of your gift. Given your ages, you could each contribute up to $5,500 for 2018 ($11,000 overall). The investments you put in a Roth IRA grow tax-deferred and once your Roth(s) become at least 5 years old your distributions in retirement will be totally tax-free. The main advantage with the Roth though is that you initial contributions can always be withdrawn penalty-free which is important because life throws curve balls at us. Roth IRAs are also great ways to save for future educational expenses for children.
I hope you found this helpful.
Joshua Hall, ChFC
One or more diversified short duration bond mutual funds or exchange-traded funds (ETF) are a good fit in this situation. Pay close attention to the credit quality of the fund's holdings and the duration to protect against credit and (rising) interest rate risk.
Regarding credity quality—if purchasing a fund that holds corporate bonds it is a good idea to make sure those holdings are at least rated BBB or higher (e.g., BBB+, A-, A, A on up to AAA). BBB or greater rated bonds are considered investment grade. Government agency bonds generally have less credit risk and treasury bills or notes are the safest.
Regarding duration—duration is a measure of how much the fund's value would decline for each 1% rise in interest rates. It would be a good idea to stick with a fund or funds that have a duration of 2 or less. In the current environment, these funds will tend to yield 2% to 3%. If we have an extreme move higher in interest rates (e.g., 2% in one year), then such a fund could lose 4% but you would be able to recover it through interest payments (fund dividends) in relatively short order.
A major advantage of a short duration bond fund is that dividend the fund pays will rise quickly to keep up with higher inflation. The shorter the duration, the faster the fund's dividend will rise in a rising rate environment.
If you follow my guidelines for minimizing credit and duration risk you will have a more conservative investment option that pays more interest than a savings account or a CD. You will also be able to access the funds within a few days generally without penalty (although some mutual funds charge you for taking money out within 60 or 90 days).
Be sure to read the fund's fact sheet or similar documentation that shows (1) the credit ratings of the holdings, (2) duration, (3) yield, and (4) whether or not there are any redemption fees (only with mutual funds; n/a for ETFs).
I have several that I currently use for my clients but am unable to share them in this forum.
I hope you found this information helpful.
Joshua Hall, ChFC
Assuming your mortgage is a fixed rate mortgage (which 30-year mortgages are), you would be better of investing the money. This is because with a fixed rate mortgage your monthly payment is "fixed," and thus inflation will make your payment decrease over time while your salary and/or investments continue to grow. By doing this, you are using inflation to your advantage—help you pay off your mortgage.
Depending upon your risk tolerance and broader financial situation, I am guessing that you probably do not want to take the full inheritance and just put it all in stocks (especially more aggressive stocks). The stock market could easily hit a 20% to 30% decline and you may suffer from regret. You want your money to work for you and not against you. With a valuable inheritance, you will want to be more strategic so that you can bless your heirs someday. It would be a good idea to keep a large portion of this inheritance in a portfolio of high-quality bonds with short maturities. We are in the early stages of what I expect to be a long-term environment of rising interest rates. As these bonds mature, they can be reinvested in higher yield bonds 1, 3, 5, years from now and so on. (All the while, your mortgage payment gets smaller and smaller.) These bonds can be supplemented in a broader portfolio with stocks to help your overall portfolio grow and also exceed inflation. Such a portfolio is also flexible and portions can be readily sold for various goals as life unravels. I recommend avoiding canned products that lock you into low rates and/or cannot be readily sold without you having to pay fees for doing so.
I hope you find this helpful.
Joshua Hall, ChFC