How do I (novice investor) invest Trust Fund money?

Submitted by AMDGandalf t3_yhnnwu in personalfinance

My mother recently made me trustee of a trust of $200K. The purpose of the trust is to assist my siblings and me with important life expenses (e.g. things like weddings, house down payments, tuition for going back to school, etc). Truthfully none of these things seem likely in the next five years, and none of us are in dire need of money right now, so while there might be some small withdrawals to help with car repairs or something, I expect the money to remain largely untouched. However, the money may eventually be needed to support my sister down the road, who has some mental health issues and may not ever be able to hold down any job that pays more than minimum wage (she's living with my dad for the foreseeable future).

I want to invest the money responsibly, but I know almost nothing about investing. I did use $20K to buy I-bonds with the 9% rate (hopefully that was prudent), but I'm looking for some advice about what to do with the leftover $180K. In principle, I don't like the idea of paying a regular fee to have a portfolio actively managed, and so I hope I can just dump the money in one place and then not think about it. My basic research tells me that buying index funds from Vanguard is what I'm looking for, but the website also mentions Mutual Funds and Exchange-Traded Funds. And for the life of me, I cannot make sense of how these products are related, how they're different, and what makes different types of each product unique. Do these distinctions matter? Does it matter which I choose?

In general, though, is this the best approach to take? I just want to make sure I don't do anything obviously stupid or ignorant with this large some of money.

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k_lena t1_iuf0e3p wrote

Re: ETF vs money market - investopedia has a good break down that may help answer some of your questions and help you decide which is best for your personal situation: https://www.investopedia.com/articles/investing/110314/key-differences-between-etfs-and-mutual-funds.asp

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AMDGandalf OP t1_iufuyty wrote

That was a good article. It's helped me realize that I think I'm looking for an index-tracking ETF. Thanks.

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misteloct t1_iuj1kdy wrote

A good reference for etf vs mutual fund: https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

My advice is start with a four fund Vanguard portfolio based on your age (use their target date retirement funds as a guideline, e.g. VFFVX). Probably don't want the target date fund in your brokerage for a few reasons, so buy the individual funds and rebalance yearly. Start with mutual funds because they can convert to ETFs, but not the other direction. And because they're easier to buy and sell, no bid ask spread.

If it's for your siblings, hard to say whether you should max out your retirement funds (401k, IRA, Roth) this year or leave it in the brokerage. Retirement funds can be pulled from via SEEP but it's very inflexible. The way the trust is written, possibly just leave it in a brokerage for now. Careful as a trust has legal implications. Might want a lawyer and CFP to review your case.

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micha8st t1_iuer3u8 wrote

Where is this money now? How has it been invested?

Why do you think you need to change anything?

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AMDGandalf OP t1_iuet63t wrote

The money is sitting in a checking account. It came from the sale of a house.

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micha8st t1_iueunq5 wrote

Gotcha.

Why you and not any of your siblings?

The wiki has some very good suggestions as to how to invest. Investing a trust is no different than investing a 401k or investing an IRA.

I suggest talking with Mom, and talking with the other trust beneficiaries...just to get their ideas.

There's no hurry to invest though. Let the money sit in the bank for a while. Probably a better interest rate than a checking account.

It was a bunch of years ago that we got a windfall. We ended up putting a bunch of the cash into CDs for just a little while - while we decided what to do. Not sure I'd recommend CDs today, but maybe that's not a bad place to start.

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AMDGandalf OP t1_iuf2ou2 wrote

I was made trusee because I'm sort of "the responsible one" among my siblings. I'm not sure any of other my siblings could be trusted to learn how to invest it responsibly or to distribute it prudently/equitably.

I've actually already been sitting on this for a little bit, so I'm ready to learn what I need to in order to invest it.

The wiki did indeed have some helpful advice, which is how I settled on index funds, but it's left me with the above questions regarding the differences between ETFs, index funds, mutual funds, etc...

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micha8st t1_iuf8rry wrote

Okay. There are really two choices here, not 3.

  • Mutual Funds
  • Exchange-Traded funds

The two are the same, except for how they're bought/sold.

  • Mutual Funds are bought by the dollar, based on a price calculated based on the value of all the components shortly after close of market.
  • Exchange Traded funds are bought by the share, and are traded like stock. In theory you can snag a lower price by using stock trading techniques. But you can only buy in units of shares... So If the ETF is trading at 151.66 and you have 200,000 to invest, then you can buy 1318 shares of the ETF, leaving behind $111.88.

Index funds are just a sub-speciality of Mutual Funds (or, frankly, of ETFs)

Funds can be:

  • actively managed.
    They hire smart people to research and watch and choose what to invest in. The manager might have heard of supply issues on Apple's part, and might be seeing that Toro's weed-eaters are selling extraordinarily well...and adjust their buying plans to match. But with that expertise comes extra cost. Expense ratios tend to be higher, and there's "loads" which are nothing more than trading fees.
  • indexed.
    These follow a pre-defined index, like the "Dow Industrials" or the S&P 500. But there's lots of different indexes out there. The advantage is that it's cheap and easy for the manager to manage. You put your 200,000 in, the index tells them exactly how much of Apple, how much of BP, and how much of Toro to buy.

Both can be indexed.

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