#762: Q&A: I’m the Executor of Dad’s $500K Portfolio. Should I Cash It Out?

John asks: I have a question about an executor’s responsibility during probate. My siblings and I are going through the estate process after losing our father. There are no family disputes, but the process will take months. The largest asset is a $500,000 brokerage account that’s mostly in S&P 500 index funds, representing over a third of the estate. For some of us, this money will be life-changing; for all of us, it’s important. I am the executor, and I’m agonizing over the decision of what to do with this account. On the one hand, it feels vulnerable to a major crash. On the other hand, moving it to cash could mean missing out on significant wealth creation during probate. Is liquidating to a money market fund in this moment prudent capital preservation for an executor, or is it improper market timing?

Anonymous (let’s call them “Susan”) asks: When would you choose a bond fund versus holding individual bonds? When I first started investing, I was under the impression that holding a bond fund is just as good as holding individual bonds. So when I built my portfolio, I chose a very low-fee, long-term government bond index fund, and over the last six years, I have watched my bond fund lose 38% of its value. Now is a great time to buy bonds since yields are so high, but it seems to me it is a great time to buy individual bonds. With bond funds, the yields are never locked in, and I could buy more shares while share prices are low. But the premise that a bond fund is good ballast in a portfolio was seriously brought into question during COVID when both stocks and bonds tanked. It’s nice that my bond fund is now getting a higher yield, but frustrating that it is on a smaller current value. The current value of my account is actually pretty close to the original principal from about 10 years ago, and it will take me close to 10 years at a 5% yield to make back the loss of value from the drop in NAV. Is the idea that the NAV will rebound when yields drop? I’ve read that if you’re using bonds as ballast, it is better to hold short-term bond funds because there is much less volatility in the NAV compared to long-term bond funds. Am I correct in thinking bond funds and holding individual bonds function very differently? And when, if ever, does it make more sense to own a bond fund versus individual bonds? I get that you don’t want to time the market with stocks, but since bond yields are locked in, it seems only buying individual bonds when yields are high makes a lot of sense as opposed to a fund where the yields and NAV can be variable. Or do I just need to be more patient with my bond funds? Am I missing something?

Cheryl asks: I love learning about finances, but from 23 years of running our retirement plan at work, I know that most people do not enjoy finances. Over the last 23 years, I’ve watched our 1,100 employees benefit significantly from legal changes that enabled us to default people into a Safe Harbor plan design that is best for the participant. Examples of this in recent years have been auto-enrollment, auto-escalation, and adjusting a default to something like a Vanguard target-date fund, which is our current age-appropriate default.

The vast majority of people do not take action to invest in their 401(k) plan or pay attention to how their investments are set up. Our ability as plan sponsors to set up target-date funds for people is a far better design than the old option of defaulting into a possibly inappropriately conservative fund that they would leave their money in and sub-optimize over the course of their working lives. For many people, company-sponsored 401(k) plans are their only investments, so having a low-fee Vanguard target-date fund as our default is a real benefit.

I think the target-date rant is misplaced for the vast majority of people who really just need auto-enrollment and auto-default mechanisms that are good for them in the long run. I agree with Joe that we can get into the details and become true experts at finances if we care to, but the truth is that the vast majority of people do not care to. I’m saying this based on the 1,100 people in our plan and having been the plan sponsor of a $370 million plan for three decades now. When someone new to the show hears the target-date rant—which I’ve heard on more than one episode—I think when you dig into the nuance, while there are bad target-date funds out there, plan sponsors like us who have done the research have an awesome age-appropriate lineup and achieve great defaulted outcomes. I’m definitely in Paula’s camp on this one and think behavioral economics needs to be taken into consideration in the big scheme of things.

• An inheritance’s time horizon resets at death: As the executor of an estate, you’re managing money for heirs whose time horizon may stretch out for decades. That’s why I argued that keeping a prudent, broad-market index fund invested can make more sense than moving everything to cash.
• Executors are fiduciaries for every beneficiary: Joe’s view: the executor of an estate doesn’t know every heir’s goals, so lock in what the estate is worth today and let each person decide how to invest. Many states’ prudent investor rules may protect you if the holdings are broad index funds (not legal advice).
• A hybrid approach splits the difference: Keep half in the original investments and move half to a money market fund, ideally with every beneficiary’s buy-in. Either way, set aside cash for final taxes, legal fees and debts. None of these choices count as market timing.
• Individual bonds lose value too, just quietly: When rates rise, an individual bond’s resale value drops, just like a bond fund’s NAV. The difference is that no statement rubs it in your face. Hold to maturity and you collect the coupon regardless.
• Check yield to maturity, not the coupon: Joe saw first-time bond buyers pay $1,200 for a $1,000 bond with a 6% coupon and earn far less than they expected. Yield to maturity, plus the issuer’s credit rating, tells you what you’re actually getting.
• Target date funds are a floor, not a ceiling: For people who won’t engage, I’m with Cheryl: a low-fee target date default beats cash. Joe agrees, but his point is that anyone willing to learn can build a simple three-fund portfolio and do better.

Outgrowing Your Target-Date Fund?
Here’s which account each new fund belongs in.
affordanything.com/assetlocation

Free Executor Checklist from Stacking Benjamins
A step-by-step PDF of everything the executor of an estate needs to handle. Tina at Stacking Benjamins made it after handling two estates herself, so if you’re the executor of an estate for the first time, start here.
stackingbenjamins.com/estate

Buy Treasury Bonds Directly from the Government
TreasuryDirect is where I bought 30-year Treasuries to hold to maturity.
treasurydirect.gov

Share Your Worst Investment Mistake
Joe and I want to hear about a bad investment you made and what it taught you. Leave a voicemail and it could be featured on a future episode.
affordanything.com/voicemail

Note: Timestamps are approximate and may vary across listening platforms due to dynamically inserted ads.