Gyroscopic Investing

Background:
My Godson who is in his late 20's was gravely injured (lucky to be alive) last year in a massive car wreck. His vehicle was broadsided by another vehicle on a semi-rural road. The other driver bailed and ran. My Godson had to be ripped out of the car (jaws of life) and helicoptered to the nearest trauma center where he had a smashed leg that needed a metal rod, a shattered wrist, and injuries to 5 vertebrae in his back. He was in a back brace for months after and racked up six figures in medical bills without insurance due to unemployment. Happily a lot of those bills were covered by the government because of his being near indigent and the hospital waived many of the others.

Subsequently the driver of the other vehicle was found and arrested, still drunk. Further, he had no drivers license, he was an illegal alien and he was driving his employer's vehicle. I am sure you are already thinking exactly the same thing... HUGE lawsuit.

As of this writing his lawyers believe he is likely to get a million in damages from the driver's employer (or more likely his insurance company). And because of a sweetheart deal (he knew people who knew people) his lawyers are only charging hourly fees for the case, which means he probably will not hand over anything close to the customary 1/3 of damages to his attorneys. Also as far as my research has lead me, both Federal and California largely exempt damages awarded as a consequence of injury and or illness from the income tax. All of which adds up to his being likely to walk away with something in the very high six figures.

Dilemma:
Now my Godson is a very bright young man who in various subjects is sharper than a straight edged razor. He has probably forgotten more about computers and tech stuff than I will ever know in my entire life. But for all of us there are subjects which are of little interest and our eyes tend to glaze over when the topic comes up. In his case that subject is money, economics and investing. His knowledge level of things money related extends to a pretty decent grasp of a bank account. Beyond which I think he is swimming in the deep end of the pool without a life jacket.

Over several conversations I believe I have impressed upon him the need to be careful with this money, to avoid spending the principal other than to pay off some debts and upgrade his transportation somewhat (his current car is old and not really reliable). Being a religious person he will tithe to charity (can't argue with that, and wouldn't if I could). But most of this is going to be invested.

I am in the process of trying to give him a crash course on money and asset management. I think I have a lot of the bases covered, like the need for heavy insurance, both medical and liability, and the fact that he is not going to be wealthy or financially independent with this money. Although if carefully invested it could lead to that and allow him to retire in his 40's instead of the usual 65-70.

The two books I am planning on handing him are The Bogleheads Guide To Investing and Harry Browne's Fail Safe Investing. I would put Craig's and MT's new book on that list but it's not out yet.

Until he reaches a point where he has a decent grasp of things financial though, he still needs to be invested and I am a big fan of the KISS rule (keep it simple stupid). The less moving parts or things he has to keep track of even annually the better. As of right now I am leaning heavily in favor of just advising him to set aside enough money to cover a couple years of very modest living expenses in the bank as a cash reserve, and putting the rest in PRPFX. I am also toying with PERM which looks more attractive than PRPFX on two points, its lower fees and expenses and its being very close to the 4 x 25% PP. But I am very leery of new products until I see how they work in reality and not just theory. Long term I would hope he will adopt the HB PP but that is of course his decision. For now I think simplicity is paramount and PRPFX is something that while perhaps not ideal, is still very good and probably the best choice for one stop shopping. This is even more true for financial novices. After he has read the two books he should be adequately equipped to make his own decisions. I have always liked PRPFX and if the fees ever dropped down into the 50 basis points range I would give at least a passing thought to using it myself just for its sheer convenience.

Am I overlooking anything or does anyone think I am making any really bad mistakes in my advice?

This seems like a pretty solid plan.  I would also recommend a couple of other books: The Millionaire Next Door (http://www.amazon.com/Millionaire-Next- ... 0671015206) and something by Dave Ramsey.  Actually, I would really recommend his Financial Peace University; the online version is pretty good.  (http://www.daveramsey.com/fpu/online/)  I'm not a huge fan of Dave's investing advice (I prefer the HBPP), but his personal finance advice, IMHO, is stellar.  He discusses everything from getting out of debt, to budgeting, to insurance, etc.

I'd be concerned about concentrating w/ PRPFX...seems like too much risk to have all eggs in one basket...kind of along the reasons for having funds at more than one brokerage house.

Overall sounds like a good plan. If he leaves the principal untouched for 10-15 years he could be set for life.

At one point I was a whiz software engineer who didn't know anything about investing. The subjects are similar enough -- mathematical theory meets many practical implementation details -- that he may "nerd out" like I did and become perfectly self sufficient.

"Fail Safe Investing" and Bogleheads are good choices. +1 on the suggestion for a Dave Ramsey book, especially "The Total Money Makeover". Ramsey's Christian perspective will probably resonate with your godson and may be where you should start. Just give a big disclaimer to ignore the horrendous investing advice.

Also consider "The Only Investment Guide You'll Ever Need" instead of the Bogleheads. I think the former covers personal finance issues such as insurance better and is a more entertaining read.

Also agreed that PRPFX is probably still the best set-and-forget option for uneducated family members. I will probably switch my recommendation to PERM if it gets a reasonable volume and solid no-drama year under its belt.

I would try to impress upon him that successful investing isn't about finding the right guru or commentator to follow.

Beyond that, I would encourage him to be conservative and remind him that most people who come into money like this have spent every penny within 5 years (if not a lot sooner).

The PRPFX idea is a good one.  You might suggest he set up the old PRPFX/EDV 90%/10% mix, or perhaps 80% PRPFX, 10% EDV and 10% cash across bank accunts, CDs and t-bills, rebalanced annually.

I hate to have to bring this up but....that money needs to be protected for some other very good reasons.  First, he may have future health problems from the injuries you describe - annoyances mainly, but problems nonetheless.  Second, he now has a pre-existing condition.  IMO this is Obamacare's best feature, but if it is overturned, he may have trouble getting private health insurance.  Or, he may be able to get coverage but will have many claims denied if the insurance company can somehow connect them to this accident.

Should he change jobs in future or desire to strike out on his own, he will need to consider these issues carefully.  In the meantime, definitely protect and invest as much of that money as possible, and regard it as a form of self-insurance. 

Sorry to hear about this tragedy.  I'm sure it wasn't worth the money.

sophie wrote: I hate to have to bring this up but....that money needs to be protected for some other very good reasons.  First, he may have future health problems from the injuries you describe - annoyances mainly, but problems nonetheless.  Second, he now has a pre-existing condition.   IMO this is Obamacare's best feature, but if it is overturned, he may have trouble getting private health insurance.  Or, he may be able to get coverage but will have many claims denied if the insurance company can somehow connect them to this accident.

Should he change jobs in future or desire to strike out on his own, he will need to consider these issues carefully.  In the meantime, definitely protect and invest as much of that money as possible, and regard it as a form of self-insurance.   

Sorry to hear about this tragedy.  I'm sure it wasn't worth the money.

Sophie
Thanks for the input. I completely agree and mentioned this at some length in my email to him. I hope that part of the settlement includes their insurance accepting responsibility for any future accident related medical expenses. As for medical insurance (and also liability insurance since he will soon have some assets) I have suggested high deductible and high coverage, i.e maxed out, car insurance with an umbrella policy on top of it and catastrophic health insurance. He will be able to handle routine or minor emergency bills. But he needs to be covered for the big stuff.

He still doesn't have insurance???  He needs to get a policy, urgently.  If something happens now and he is uninsured, he won't be able to protect that settlement money.

High deductible is fine, but ask a lot of questions about the pre-existing condition exclusions.  It could still leave coverage gaps you could drive a truck through.  There may be a state-run pool for people with pre-existing conditions.  Or, if he is still not working due to the accident, he may qualify for Medicaid or a Medicaid managed care plan even with his assets - a social work office should be able to advise on this.

Best of luck.