Yesterday’s Net Worth update is the source of inspiration for today’s blog post. Not because of anything I did, but because of the comments you all left. They were made in regards to investment strategies, particularly heavily investing in the stock market. One commenter was all for it, the other wasn’t the biggest fan. I love when peeps leave opinionated comments as it allows for some great conversation.
The first comment reads…
I think your “100% stock” strategy is pretty good for your age – historically, the stock market has always outperformed other investment instruments and it’s a good bet that will still be the case, in spite of the market’s natural volatility (including huge psychological swings, but you majored in psychology, right?). If you happen to need your stock-invested money at the wrong time, then you are indeed hosed. But you seem to have picked up on that and have a nice amount of cash on hand to see you through an emergency.
And a completely different view…
I sold my last stock before the crash. Very happy about that. Now I just have one more mutual fund to get rid of and I’ll finally achieve my goal of all cash! Be careful of the buy and hold mentality, it’s quite dangerous. Do you have any time frame of when to sell? When is a good time to sell? How about re-balancing your investments towards less risky stuff in the future? Tough questions but crucial for retirement planning, usually neglected until it’s too late.
As you can see, Lola and StackingCash (SC) hold pretty different opinions on the safety of investing in the market. As you already know, I side with Lola. I’m a huge proponent of the long term investing strategy, particularly in diversified mutual funds.
So who is right? Lola or SC? I think you already know the answer….they both are. For someone like Lola, who is willing to take on some risk to reap a large return, the volatility of the market is nothing to worry about. For SC, however, cash is king. Who needs to take on risk, if you can find comfort in liquidity?
I personally believe in the US economy. Sure, the last couple years have been no fun, but I don’t think that negates the overall growth of the market. In fact, the Dow Jones has grown over 1,340% in the last 39 years. No, that’s not a typo. It really has grown over a thousand percent. Now call me crazy, but if you don’t think that’s sexy, I don’t know what is. If someone out there can find me a non-stock investment strategy that trumps this please let me know below so I can get in on that action.
I’d never tell someone to invest in the market, just like I would never tell someone to get out of it. That is a decision each person has to make for themselves. What are their goals? What’s their emotional attachment to their money? How much time do they have? What if their nipples turn in to Eggo waffles (just wanted to make sure you are still paying attention:))?
The phrase “Different strokes for different folks” is totally applicable with respect to investment strategies. My plan, may not be your plan, and you know what? That’s okay.
So I ask you fellow PFers… What’s your investment strategy? Are you a risk taker? Is liquidity your best friend? Why do you invest the way you do, or in other words, who do you get your advice from?
It does depend on each person and what they are comfortable with. I personally like Mark Cuban’s strategy the best. He says that buy and hold is a silly game; keep all your money in cash so that you can seize the opportunity when it arrives. If you held $100,000 in cash and invested it when the stock market crashed for 5 minutes, then you could have made off with legal 50% returns in a matter of minutes. I like to listen from advice from guys who sold their companies to Yahoo! for more than 5 billion. 🙂
I’ve gotten more conservative as I’ve aged. That’s what you’re supposed to do anyway right?
But I think the bigger driver was that it’s a lot easier to weather the storms when you have $40K to your name vs $400K. Losing a few thousand in the market isn’t that big a deal..Losing $50 or $100K feels downright painful. I still do my 401K in stocks, but all the extra goes into more conservative investements..paying down mortgage, savings bonds, cash.
I’m more of a risk taker. Mainly because I’m young, I’m willing to take the risk to reap the reward. My 401k is completely invested in small cap stocks because I see that over time they have a better chance to grow more. However, as I age I’m sure I’ll diversify more but for now I’ll let the dice fall where they may.
I have a 100% equity portfolio and will stay that way until I’m 55. The questions that StackingCash asks are right on. You should have your own answers to all of those quesitons if you are fully invested in equity.
That said, if you can handle a lot of risk, but go with safer investments, don’t complain to me that your returns are weak.
A lot of people, when talking about the ups and downs of the market and buy and hold, fail to take into account that when the market is down you are still buying (and hopefully increasing your contributions)! So when the market goes back up… and it will (if it doesn’t, we all have much bigger problems)… you will be well above where you were before. It may take a few years, but equities are not for the short term.
SC points out – correctly – that stocks are risky. But there is risk with all money. Cash is risky too, primarily because of inflation. One dollar in 2009 buys what 18 cents bought in 1970.
I am just over 60 now, but in the past 15 years I have tended to put more into equities rather than the reverse. But now’s the time to start reducing my percentage in stocks and increasing bonds over the next 5 years or so, because the biggest danger is retiring when the market is low.
– Keep fees low by investing only in no-load, low-fee index funds. No individual stocks or bonds. No actively managed funds.
– Diversify as much as possible by having a broad selection of stocks (domestic/international) and bonds. I also overweight slightly to small cap/value and real estate, keep a small position in precious metals, and have a small art collection.
– Shift allocation percentages more towards bonds the closer you get to retirement. Right now my stock/bond ratio is 60/40; by age 70 I want to be more like 40/60.
– Buy and hold, but also rebalance annually to keep to my target percentages. This forces you to sell high and buy low.
– I have a Roth IRA, 401(k), and traditional IRA. I keep contributing as much as possible to the 401(k) and Roth IRA.
– I keep about 4 months of expenses in cash.
Hey Larry, where were you 20 years ago when I was starting to invest? Anyhow, right now I’m comfortable losing money to inflation as long as I don’t lose my principle. To me, my base amount is more important than trying to gamble to get more. Maybe because I feel I have a significant base to lose? I got burned pretty hard from the dot com days, and I account that experience from saving me from the housing bubble bust. Granted I might have missed some good runs in the market but nothing gives me more solace in looking at my bank account seeing it safe and sound. Me thinks I’m not savvy enough to invest also.
Hey SC. Twenty years ago I was “investing” with a thief from Merrill-Lynch who put me all into loaded growth stock funds that made him a bundle on commissions but put my IRA into the toilet during the dot-com bust. Fortunately I also had some money in the basic TIAA-CREF stock fund and I met some good people who understood how to get into index funds and save on fees. I cut my losses with Merrill, transferred all my money into Vanguard and I’ve done far better with them.
I think there is some good advice out there on investing, such as Mike Piper’s The Oblivious Investor web site, and the Bogleheads forum – where a lot of very well-informed people will evaluate anybody’s portfolio and give useful advice.
We’re equity heavy.
– My 401k is in the Vanguard 2035 target date mutual fund, which is currently at least 90% in equities and gets more conservative every 5 years.
– Our Roth IRA is in the Fidelity 2040 target date mutual fund and is in the same boat as the 401k.
– Our Scottrade money is in high dividend yield stocks that are stable and have grown for 20 or more years consistently (Johnson & Johnson, Pepsi, etc)
– My husband is a teacher and his pension is handled by the state (yeah, I don’t like it either).
– Our emergency fund and opportunity fund are in ING right now since we’re paying off our car, but we’ll be starting again with Smarty Pig as we build back up our cash reserves.
– We overpay our mortgage every month and are getting rid of our car loan this month. We’ll be completely debt free no later than 2017.
Yep, we’re equity heavy. I’m okay with that since we have 25 years before we want to retire. We’ll get more conservative as we head towards that target date, but for a couple in their mid-twenties, I think the stocks right now are terrific investments. We poured another $5000 into the market in the last month to take advantage of low prices on really awesome and stable stocks…I’m excited.
My financial advice comes from Ninja. From mint.com to TSP to no debt but a mortgage… conversations with Ninja is where most of my financial advice comes from (please try to not get a big head about this).
I’m very confident that the U.S. economy will get better, but for how long is TBD. I don’t think America can be the powerhouse as end times approach…. I’m just sayin.
DH and I are probably more diversified in terms of risk than I would like. I would go all in for stocks, figuring that we have another 25 years before he retires. He is much more conservative than I am, and as a result, we have about 20% of our investments in stable value funds that are bond heavy. It lets him feel more comfortable, and that is worth the potential growth loss as far as I am concerned.
We’re also on track to pay off our mortgage before the kids start college, and for me, that would be the ultimate safety net. To be in our 40s, no debt, fat 401k… oh what a life!
Umm… Lola’s right. Keeping investments in cash is a bad idea. How does cash grow? High interest savings accounts that don’t even keep up with inflation?
If someone is nervous about the market, then they can balance their portfolio to include more bonds. It’s hardly rocket science.
Do all bonds survive a companies bankruptcy?
No! that’s why you gotta be careful investing in individual corporate bonds. If the company defaults, bondholders are paid before shareholders, but still, default risk is one possible risk with bonds. That’s why it’s better IMHO to go with a bond fund like Vanguard Total Bond, or short/intermediate-term US treasuries.
company’s not companies 🙂
Thanks for showing my point of view regarding investing. I cannot stand it when most of the information out there tells you to invest for retirement but stops there. The specifics are too important to leave out! That is why I respect Larry’s strategy because he tells you exactly what he does. Too bad he wasn’t my financial planner 20 years ago. I had an insurance agent telling me what to do, DOH! Just be careful out there is all I’m saying. And probably don’t be as paranoid as I am 🙂
We are very heavy in equities, except in my two oldest kid’s college funds, as they will need them relatively soon. The way I see it, our 401ks may not be killing it right now, but we are buyers at the moment, so the market being low has its advantages. I do think I probably need to get into some more bonds soon as retirement is hopefully less than 15 years away. For now though, I am an equity hog.
I certainly appreciate StackingCash’s point of view – 08/09 were very painful periods for most investors. But loss of principal isn’t the biggest risk one faces in investing today – it’s longevity risk. In conjunction with inflation, the risk that you run out of money is far more likely than you might think.
I think you’ve hit the nail on the head here. People are living longer, they are facing increasing health costs, pension programs are being eradicated, and funding for Social Security and other entitlements is facing deep trouble. When FDR instituted Social Security in the 30s, people could expect to live only a few years after they stopped working; now everyone wants to retire early (or sometimes they’re forced to retire early) and they could be living 30 years past retirement. And all this is coupled with the low rate of savings typical of many Americans. I just read that 43% of Americans have less than $10K saved. This makes me fear that mass poverty could be the rule in a decade or two for retirees who have not planned well ahead.
For many years, we used mostly mutual funds for investing. We occasionally bought individual stocks, which mostly did not work out well, and bought a good amount of stock over the years through my husband’s employee purchase plan, which worked out extremely well.
For the last 10 years or so, my husband has used techniques of Quantitative Investing (it’s also known as Mechanical Investing. The hubs follows and posts every now and then on the Motley Fool MI board). It’s very math/computer programming intensive, but basically, he’s developed a mathematical algorithm that plugs in stock data (garnered from Value Line and Yahoo data bases). His computer model cranks it all through and “tells” us which stocks to trade each month in our various portfolios (IRA’s, 401K that has been converted into an IRA, and two taxable portfolios). We use two different online brokerage firms and trade each month. Even factoring in the tax bite on the short term capital gains on the taxable portfolios (and it is STIFF, kiddos), our rate of return has consistently been higher than the index funds. For the tax-deferred accounts, the system is especially sweet.
The model is still subject to some of the rising/falling tide effect, but the hubs continues to work on tightening things up. I keep telling him that if he can come even close to predicting the big swings in the market, he could win the Nobel Prize for Economics. He doesn’t like that, for some reason.
It really is the NUT SIZE now. If you have a $1million nut, you aren’t willing to lose $100,000 or 10%. But if you only have a $100,000 nut.. .$10 K ain’t bad. $1 mil generates $40k/yr in interest income.
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