What's the Best Passive Investment Approach? (IRA, mutual fund, margin, calls)
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I also feel that nobody should just "set it and forget it". different sectors & asset classes may not do so well over time.
This exactly why you should buy a low-cost total market index fund. Different sectors do well over time, and it's a gamble to say which sector will do well next. I have over 3,000 companies in Vanguard Total Stock Market Index. Some may go up and some down, but as long as the market goes up over the long term, my balance will go up. If you're invested in a single sector, that sector could go down over the long term. It's not diversified.
my view is through out your day you have only an outcome not a statistic. you have no idea what side of the statistic you are on. someone has to be on that opposing side and it can be you just as easily.
that is why we plan to 90 or 95 in retirement. statistically most of us will not be around but not knowing who will live and who will die makes the planning the same for everyone unless ill.
Why 90 or 95 and not 120? Or even 650? Ultimately you are using statistics. You have some threshold probability - say 95%. You accept a strategy because it has a 95% chance of success. This is why I am saying you use statistics. If you didn't it makes as much sense to choose age 120 as 90 or 95.
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Originally Posted by mathjak107
insurers can tell us how many of us will die each year. but they can't tell us who so statistics mean crap.
as i said earlier statistics mean very little to humans. for us things either work out the way we planned or they don't.
You are entirely missing the point. You cannot withhold all judgment until you know everything - otherwise you never would have gotten out of bed or even out of a cave. You never know, a meteor might hit you tomorrow so why not live in a cave? The reason you don't do it is that you know the meteor strike is statistically unlikely. Whether you want to admit it or not you use statistics just like everyone else.
Just a few years into retirement. Why does that matter?
I thought we were in the same situation. We have a time threshold dictated by life expectancy realities. If the trend for the market is at best slower movement up with a greater risk of movement down is it worth it? A high CAPE may to some of us suggest the downside risk in relation to the up side possibilitilities might dictate a not as high allocation in equities. A much lower CAPE might suggest the upside potential is higher and the downside risk not as great. I can leave my asset allocation the same and just modify the allocation within the allocation. By this I mean tamping down volatility considering the streaky nature of small caps over the extended time period they could suffer a considerably long down period at some point soon. Might be easier to minimize my small cap exposure and volatility and move money to my total market fund or another less volatile class.
.. If the trend for the market is at best slower movement up with a greater risk of movement down is it worth it? A high CAPE may to some of us suggest the downside risk in relation to the up side possibilitilities might dictate a not as high allocation in equities....
First I think there is a high risk in being overly cautious. The future could bring us high costs, high inflation, high taxes, or decreased Medicare/healthcare benefits with increased costs or any combination of the above. Those of us who are retired and live on a fixed income need a cushion. I retired 4 years. I expected to move out of State to a lower cost area. That did not happen and my expenses are now considerably higher than I planned for. That is actually not much of an issue because I have also had a whopping increase in my portfolio and my net worth due almost entirely to the performance of the stock market. I also traveled fulltime for 50,000 miles and for two years in an RV. Expenses during that period of time were very low compared with the normal cost of living in a house on Long Island.
If I had been highly cautious with my investments over the past several years my financial position would be pretty tight right now. If I stay the course and the market continues to stay strong I should have a substantial financial cushion in another couple of years.
At this time, I really do not believe the CAPE or other measures of P/E or the overall level of the stock market are at all worrisome. There seems a high probability that the economy in general and the stock market will continue to grow at or near the same rate as they have over the past 5 years or so. Obviously if I felt otherwise I would pull back on my stock allocation. I am actually fairly conservative. My managed portfolio is at 60% but my self directed is closer to 50%.
I am not sure what indicators are worrisome. The Fed is of concern but I think the Fed will telegraph their moves and the initial tightening in rates will be small. At worst the market will have a little temper tantrum and then recover. It is possible that the economy and market will cool due to difficulties in Europe, Japan and/or China. Cooling is ok but I cannot see any sudden drops due to those economies.
My big concern as for everyone else is that there will be some hidden bubble or issue that causes another sudden drop in the market. More than enough folks have been expecting the other shoe to drop. At this point I still believe that to be very unlikely. I am keeping my eyes open but I think we are safe at least for a couple of years.
First I think there is a high risk in being overly cautious. The future could bring us high costs, high inflation, high taxes, or decreased Medicare/healthcare benefits with increased costs or any combination of the above. Those of us who are retired and live on a fixed income need a cushion. I retired 4 years. I expected to move out of State to a lower cost area. That did not happen and my expenses are now considerably higher than I planned for. That is actually not much of an issue because I have also had a whopping increase in my portfolio and my net worth due almost entirely to the performance of the stock market. I also traveled fulltime for 50,000 miles and for two years in an RV. Expenses during that period of time were very low compared with the normal cost of living in a house on Long Island.
If I had been highly cautious with my investments over the past several years my financial position would be pretty tight right now. If I stay the course and the market continues to stay strong I should have a substantial financial cushion in another couple of years.
At this time, I really do not believe the CAPE or other measures of P/E or the overall level of the stock market are at all worrisome. There seems a high probability that the economy in general and the stock market will continue to grow at or near the same rate as they have over the past 5 years or so. Obviously if I felt otherwise I would pull back on my stock allocation. I am actually fairly conservative. My managed portfolio is at 60% but my self directed is closer to 50%.
I am not sure what indicators are worrisome. The Fed is of concern but I think the Fed will telegraph their moves and the initial tightening in rates will be small. At worst the market will have a little temper tantrum and then recover. It is possible that the economy and market will cool due to difficulties in Europe, Japan and/or China. Cooling is ok but I cannot see any sudden drops due to those economies.
My big concern as for everyone else is that there will be some hidden bubble or issue that causes another sudden drop in the market. More than enough folks have been expecting the other shoe to drop. At this point I still believe that to be very unlikely. I am keeping my eyes open but I think we are safe at least for a couple of years.
Not overly cautious at all. Tilting is a common Boglehead strategy and that means what to add beyond the normal index fund portfolio to tilt year portfolio more towards large, small, growth, dividend equities etc. If you accept that dividend stocks are over valued to you continue to add them to accounts? Does it make a difference if you add them to taxable or non taxable accounts? You can stay 75/25 equity v bonds but what constitutes that 75 percent equities or 25 percent bonds? What length and duration of bonds? Corporate or High Yield? Clearly many have moved in recent months from high yield to a more conservative bond selection etc etc. MathJak would tell you that the Fidelity Insight newsletter clearly considers valuation and market factors in constructing their portfolios. A few months ago they took out small cap funds and replaced them with mid cap and growth funds or a higher weight of within some of their portfolios. For reasons related to Shiller and other factors I have stopped adding to small caps. Haven't sold yet but since no new money is going in the ratio of is declining in the aggregate. In the big picture the changes are small since old money far exceeds new money but they are different portfolios. So how I weigh different portfolios while adding money changes within fund families. Again I am talking about how you construct your equity or bond portfolio more than how you decide the percentage of bonds and equities. Also on the back burner regarding the big picture is the game over mind set which is starting to become more important to me.
TurborgP, Your strategy is much more advanced than mine. In keeping with the ideas of passive investment and an efficient market, I do not concern myself with fine tuning investment choices. I keep with low cost funds, but I let the fund managers decide on small, mid or large caps and which individual stocks to choose. For bonds, I have intermediate or short term funds. I culled out any funds with long duration bonds. I don't do commodities or gold. I already have more than enough exposure to real estate based on one of my legacy stocks and my home ownership.
My issue is strictly one of stock allocation. Now I am toward my high end of about 60%. Before the next major recession or correction, if you prefer that term, I want to be at a low allocation, probably about 30-40%. Of course if I truly had a crystal ball I would drop to 0%. I do not want to be caught unprepared and overly allocated but at this time I am not even rebalancing and I have been letting my allocation increase.
I am also looking toward the game over mind set. I figure I am only going to play the game for another cycle or so. Like many others, if interest rates go up, I will move toward longer term and high allocations of bonds and maybe even annuities. I am not expecting to have that opportunity for a long time, possibly a decade or more.
one doesn't need anything else else except an education .
the problem with one size fits all internet advice is it rarely fits anyone correctly.
flinging out words like buy index funds or anything else for that matter is not the way to put a plan together.
buying one fund is never an investment plan even if a total market fund and you should not buy anything you do not understand as far as what it is you are buying and why despite folks telling you to blindly just act .
learn your basics , get your feet wet as far as your tolerance and then put together a well diversified plan that fits your goals and the big picture .
blindly buying funds whether index or otherwise can be a recipe for failure if the mix is not within your tolerance of pain in a downturn or if it does not match your goals and time frames..
Problem with the simple method is IT WORKS..................lol.
Hedge funds? where are the customers yachts.....................hahahaha!
TurborgP, Your strategy is much more advanced than mine. In keeping with the ideas of passive investment and an efficient market, I do not concern myself with fine tuning investment choices. I keep with low cost funds, but I let the fund managers decide on small, mid or large caps and which individual stocks to choose. For bonds, I have intermediate or short term funds. I culled out any funds with long duration bonds. I don't do commodities or gold. I already have more than enough exposure to real estate based on one of my legacy stocks and my home ownership.
My issue is strictly one of stock allocation. Now I am toward my high end of about 60%. Before the next major recession or correction, if you prefer that term, I want to be at a low allocation, probably about 30-40%. Of course if I truly had a crystal ball I would drop to 0%. I do not want to be caught unprepared and overly allocated but at this time I am not even rebalancing and I have been letting my allocation increase.
I am also looking toward the game over mind set. I figure I am only going to play the game for another cycle or so. Like many others, if interest rates go up, I will move toward longer term and high allocations of bonds and maybe even annuities. I am not expecting to have that opportunity for a long time, possibly a decade or more.
It really isn't that advanced. I have read a number of Bogle and Boglehead Guru books and there is a lot more to passive investing other than just what is on the surface. There are the theories on efficient markets and market behavior and how the simplicity of a three fund portfolio helps to manage much of the market dynamics. You can progress from that to 4,5,6 fund portfolios to allow a more personal capture of the market with index funds. On the other hand using the Fidelity Insight newsletter and reading the weekly updates and monthly newsletter gives you another perspective on market variables and how to capture them in a portfolio. What I think is critical in portfolio construction and comfort level is the volatility of that portfolio as defined by standard metrics
. Understanding Volatility Measurements
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Optimal Portfolio Theory and Mutual Funds
One examination of the relationship between portfolio returns and risk is the efficient frontier, a curve that is a part of the modern portfolio theory. The curve forms from a graph plotting return and risk indicated by volatility, which is represented by standard deviation. According to the modern portfolio theory, funds lying on the curve are yielding the maximum return possible given the amount of volatility.
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If, for example, a fund has a beta of 1.05 in relation to the S&P 500, the fund has been moving 5% more than the index. Therefore, if the S&P 500 increased 15%, the fund would be expected to increase 15.75%. On the other hand, a fund with a beta of 2.4 would be expected to move 2.4 times more than its corresponding index. So if the S&P 500 moved 10%, the fund would be expected to rise 24%, and, if the S&P 500 declined 10%, the fund would be expected to lose 24%.
Investors expecting the market to be bullish may choose funds exhibiting high betas, which increase investors' chances of beating the market. If an investor expects the market to be bearish in the near future, the funds that have betas less than one are a good choice because they would be expected to decline less in value than the index. For example, if a fund had a beta of 0.5 and the S&P 500 declined 6%, the fund would be expected to decline only 3%.
Be aware of the fact that beta by itself is limited and can be skewed due to factors other than the market risk affecting the fund's volatility. (Learn more about beta in Build Diversity Through Beta.)
While this may seem confusing to some it really isn't. In fact one of the beauties of the Fidelity Insight newsletter is that it does all of the calculations for you and gives you the overall portfolio volatility along with each individual fund. It does it for other non portfolio included funds. Index funds that capture the entire S&P market are offering you basically a 1.0 Beta fund. Feel like the market is undervalued with lots more upside potential than downside risk you can tilt with a higher beta index fund. Same way if you feel the market is top heavy. Wanna do both index and passive investing? Go with correlating beta in your index fund and use active funds to increase or decrease your overall Volatility. Increasing could be small cap, growth funds, sector specific etc etc etc. You can use your tax sheltered funds to modify your overall portfolio and minimize tax consequences for making changes. Wanna go more bonds to lower risk you use your tax sheltered for that also. These would all be within your 60 equity allocation which wouldn't change. Would you do it monthly no not at all. Perhaps a yearly review or most importantly in the case of newsletter followers when they make or recommend a move away from certain sectors which they have and will continue to do. This includes value funds at times. Within Taxable funds and Vanguard for some Wellington or Wellesley can be good overall go to default funds along with your 3/4 index fund portfolio for new money.
There are a lot of roads to Rome and this is just one of them. Everyone should use a map they understand and that works for them as Rome in retirement is sweet.
Maybe I need to meet with a Fidelity advisor. I have a smallish portfolio with them and they keep calling to set up a meeting.
Anyway your approach may seem reasonable to you but to me it sounds complicated with lots more choices that I want to make. Beta, sector, index, overall volatility, tax optimized, etc, etc. All of that is way beyond my time and interest.
I have diversified stock funds which are largely classed as growth/value and are primarily large cap. My bond funds are short, intermediate. My sole concern is allocation. I want to be at a maximum stock allocation when the market grows. For me, I feel comfortable at a maximum allocation of about 60%. Before the next major downturn, I want to be largely out of the market, at 40% or less. All I need to do is decide when to change my allocation. Getting that right (or wrong) will have major consequences. I do not want to be in the large majority group that makes the wrong allocation moves.
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