It's the last week of the month, which fans of Rule Breaker Investing know means they're due for a mailbag episode filled with both useful advice and humor.
In this segment, Motley Fool co-founder David Gardner has invited analyst Emily Flippen and Rule Your Retirement and Total Income advisor Robert Brokamp to assist him in answering Stephanie, a Rule Breaker subscriber preparing to make a major change in her asset allocation. She'll be selling company stock from her former employer valued at five times her last salary and investing the proceeds. Her question: How should a now-self-employed investor deploy this cash? The trio reflect on a number of useful strategies.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on May 29, 2019.
David Gardner: Well, let's stick with the theme of selling here as we go to Stephanie Zenos' question next, Rule Breaker mailbag item No. 5. "I'm a longtime Rule Breaker subscriber. I've been listening to your podcast since episode one." Thanks! "I'm a big fan and have shared your podcast with many people who asked me how I learned to invest. I'm very happy with my Rule Breaker annual returns of almost 20% per year the last nine years. I have a BIG financial event coming up. I'm about to cash out my company's stock and I want to know how to invest it Rule-Breaker-style. Now when I say big, this chunk of stock is worth, after taxes, roughly five times my last full-time salary, or 12 times my annual expenses." Very helpful context. Thank you, Stephanie!
"No pressure, right? It's also about three times the amount of my Roth IRA, which is where the bulk of my investments live as a 33-year-old woman. One final tidbit: I work for myself these days, so my investment account types are limited."
I'm once again looking closer to Robert for this one than Emily initially because Robert, you're looking at this all the time. Let me just finish out her note here. "Where can I invest this money? Just a brokerage account? How should I go about investing it, since even spreading it out over, let's say, 20 stock picks would allocate more than 3X what I ever had before to a single stock. What a doozy. Thanks again for all you do at The Motley Fool. Any help would be much appreciated. Most sincerely, Stephanie."
Robert Brokamp: Stephanie, my first piece of advice is to see a financial professional for a couple of reasons. No. 1: When you take possession of a company's stock, there are a few ways to do it. Some ways are easier on your tax bill than others. So you definitely want to get expert help on that, No. 1. No. 2: If you're self-employed, you can create your own retirement plan. It might be a solo 401(k). It might be what's called a SEP. Depending on your situation, one might be better than the other. You can even create your own employer match because you employ yourself. You might be able to get some more money in a tax-advantaged account than you think. Those are my first couple of pieces of advice.
My other standard piece of financial advice that we give at the Fool is, any of this money that you expect to spend in the next two to four years, for me, that's better just kept in cash, CDs, short-term bonds. I'll leave it at that for your expert opinions.
Gardner: Good. I will note that Stephanie, in her note, wrote a postscript, saying, "I know this may be more of an Answers podcast question." Indeed it is, Stephanie. You went on to say, "But I really appreciate the Rule Breakers spin on things."
Emily, I'm not going to put you on the spot here, but can you add a little Rule Breakers spin here? Stephanie would like that!
Emily Flippen: Sure. Coming from a Rule Breakers mindset, I think everyone's first instinct, especially if you've been a long-term investor, is to take that money and put it into a lot of companies that you really love. We've seen a lot of new recommendations coming out on the service. There's a lot of companies that if I had a ton of extra money, 12 times my annual spending, I would love to buy.
At the same time, our willingness does not always match our need. Sometimes it's OK to take your time investing that money. I agree with Bro's analysis that the best thing to invest in immediately would probably be a fee-only financial planner who can provide that tailored advice.
Beyond that, it's OK to invest it in a broad-based index fund if you're not sure what you want to do in the meantime. There's nothing wrong with that. Maybe what you do is invest it temporarily, and then as you see opportunities, slowly draw down on it. That type of investing, a lot of times it doesn't produce the same returns as if you had just invested all that money immediately, but it does provide a little bit of peace of mind as you roll money from maybe an index fund into a lot of these growth-style companies that we invest in in Rule Breakers.
Gardner: Awesome! Thank you, Robert! Thank you, Emily! I'll just add that I'm a big fan of patience as well. Stephanie, I think it's natural, when you get a whole bunch of money, maybe more than you've ever seen all at once, to think that you have to do something. But I think I'm backing up my teammates here when I say that you really don't have to do anything. Emily just said you could put a portion of it in an index fund. You in your own note said, "If I put it in 20 stocks, it would be a lot in every stock, more than I've done before." Well, I would say, why 20? Why not 30 or 40 or 50? And you don't have to do 30 or 40 or 50 all at once.
Certainly, The Motley Fool does have some services that are helpful. In December of last year, we did a Blast Off service where we blasted at you 20 stocks that you could buy. And those stocks have done wonderfully. That was 20 all at once. So, for somebody with a need like yours, you might be interested in services like that. Navigator, which is a Supernova service which is being marketed right now on our fool.com website, if you're a member of Rule Breakers and Stock Advisor, I'm pretty sure you're hearing about it, that would be another way to build a portfolio right now with a lump sum, the situation that you're in.
But we're the first to say, make sure that you understand what you're doing. Do not rush yourself. And if you took that big lump sum and decided, "I'm going to divvy it up into 24 pieces, and each of the next 24 months, I'm patiently going to 1/24th of it in something that I understand and believe in," I think you'll feel great about it whether the market goes up or down over that time. If the market goes down over the next two years, you'll be glad you didn't do it all at once. You'll be glad you spread it. If the market goes up over the next two years, you'll be glad you started right away. A lot of people get paralyzed by their lump sum. By making it a dollar-cost averaging exercise, Robert, I think in a lot of cases, we've helped Fools remind themselves that it's not about binary buy or sell, yes or no; it's about being incremental.
Brokamp: Yes, I totally agree. And we've often talked about the thirds strategy as well. You buy into a position in thirds and gradually move in. At your age, you've got time. You're at a life stage also where you might be making decisions about cars and houses and kids and families, and you'll be happy to have some of that cash on the sidelines. So really, I would say there's just no rush on it.
Gardner: Stephanie, thanks for listening! Thanks for writing in! Fool on! Congratulations to you, at a great stage of your life! It sounds like something really special that you've earned. That makes us all happy.