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Location: Was Midvalley Oregon; Now Eastside Seattle area
13,059 posts, read 7,493,946 times
Reputation: 9787
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OP, you are trying to accomplish a long straddle. At a minimum you are attempting a long call.
However, because options are complicated, Most simply do/try a hedging strategy in a stock vs bond ratio or diversification, as you have done. You distributed the your risk into diversication.
But hedging may not be enough in certain situations or to your needs. Others have used "insurance" options as in pensions, SS or deferred and immediate annuities. Here you bought insurance and sold off risk.
Some have different asset classes as commodities and property.
OP, in the original post you said that you are looking to protect future income by purchasing annuities. Expand your investigations along those lines.
OP, you are trying to accomplish a long straddle. At a minimum you are attempting a long call.
However, because options are complicated, Most simply do/try a hedging strategy in a stock vs bond ratio or diversification, as you have done. You distributed the your risk into diversication.
But hedging may not be enough in certain situations or to your needs. Others have used "insurance" options as in pensions, SS or deferred and immediate annuities. Here you bought insurance and sold off risk.
Some have different asset classes as commodities and property.
OP, in the original post you said that you are looking to protect future income by purchasing annuities. Expand your investigations along those lines.
I'm not really sure I understand this post, at least the first paragraph. Sounds like you are pushing annuities, which is the plan or at least to look at it seriously. But now is not that time, that will happen in 5 years. Now I'm trying to protect this money and be smart with it without being too conservative.
like we said , it is not as much the funds you buy as the over all portfolio strategy . cash instruments are a guaranteed loss right now as they have negative real returns so there may be less loss potential then bonds or stocks but no gain potential .
so if you are going to try to protect that money and grow it , that can only happen in more volatile investments- period . but there is no single asset class that can both protect you through all four economic outcomes yet let you profit and stay well ahead of inflation without switching assets regularly .
but through proper portfolio design you can allow for all 4 economic scenario's without trying to rule them out like conventional portfolio's do . a 60/40 conventional mix will never profit in a recession . it is like jumbo shrimp , pretty ugly and happily married . you have to take the loss years as part of the deal unless you switch actively to differnt types of funds .
but you can couple even the most volatile investments in a way that they produce more gain potential then loss potential yet never devastate you even if tomorrow is the next great depression or the soaring 70's style inflation . but even then you can have slight down years .
Could you be more specific? A lot of what you have posted is above my pay grade and I did not understand it. Would you suggest I move some money from equities and PIMCO to something like the Dodge and Cox fund suggested earlier? Other recommendations? Sorry to be so ignorant but as I said I really do not understand bonds as well as I should.
just look at what i wrote about utilizing defensive portfolio's like the permanent portfolio , the butter fly , the dessert portfolio
I just re-read the thread and don't see posts referencing these portfolios unless I missed it. As I said most of what you posted is over my head and confusing to me other than the recommendation of Fidelity Floating Rate.
Yes, the fund does mirror the stock market to some degree. Typically, in major market downturns this fund will also go down, but not nearly as much. I think the key is to reduce exposure. You don't have to eliminate it completely.
As far as corporate bond fund goes, that's an ok choice, but not different enough than what you have now. I think a more flexible "core" fund that stays with investment grade bonds and mixes in corporate bonds with mortgages, and treasury bonds would be better. Funds l like in the category: Dodge & Cox Income, Fidelity Total Bond, Baird Core Plus Bond. For some reason, Vanguard didn't have an actively managed core bond fund offering until recently. They now have Vanguard Core Bond. It is only about years old, so not much of a track record and so far its performance has been less than stellar. However, it's such a short time frame, it's hard to say whether or not it's worthwhile. Like all Vanguard funds, it's cheap.
I also am still wondering if you have a stable value fund in the 401k. I think moving 20%-50% out of the PIMCO fund into a stable value would work well.
I looked at a few stable bond funds and they appear to return 2% or so. Since it's money for 5 years why would I not simply buy a CD that pays closer to 3% for 3 years?
Location: Was Midvalley Oregon; Now Eastside Seattle area
13,059 posts, read 7,493,946 times
Reputation: 9787
Quote:
Originally Posted by DaveinMtAiry
I'm not really sure I understand this post, at least the first paragraph. Sounds like you are pushing annuities, which is the plan or at least to look at it seriously. But now is not that time, that will happen in 5 years. Now I'm trying to protect this money and be smart with it without being too conservative.
As you said, "I am trying to protect this money and be smart with it without being too conservative." You can hedge it but hedging is not protecting. Hedging is like spreading your bets around in hopes that something will win; But knowing that any hedge also has the possibility of losing in all the hedges. Options or variations to this them is "protect" in that you created a floor to the downside with the possibility of higher upsides.
As you said, "I am trying to protect this money and be smart with it without being too conservative." You can hedge it but hedging is not protecting. Hedging is like spreading your bets around in hopes that something will win; But knowing that any hedge also has the possibility of losing in all the hedges. Options or variations to this them is "protect" in that you created a floor to the downside with the possibility of higher upsides.
Let me re-phrase. I understand no money that is invested is "protected". I'm simply trying to do what most people our age look to do, dial back our exposure and try to be a bit more conservative in this unusual market. I was simply looking for suggestions, instead I got a lot of posts I frankly don't understand.
Can anyone dummy it down for me a bit? Offer specific suggestions such as "I would suggest selling X% of the equities, or PIMCO, and consider these investments" and then briefly explain why these may be better options?
Dave, I certainly understand your frustration with all the detailed recommendations. Lots of the models seem excessively complicated. Sure some are supported by past data but it is always easy to come up with models that are supported by past data. It is the future that we are concerned with.
I do think there are at least a few ideas that are well supported by the past and seem to make sense for the future. In the past stocks have typically done way better than commodities, real estate, precious metals, bonds, CDs and just about any other form of investment. We all understand the issues. Stocks can tumble and might take many years to recover. Panic and poor investor behaviors are often worse than the actual crash and eventual recovery.
Diversification has been used to smooth the ride. Unfortunately the more the diversification, the lower the long term returns. I had a great example of this. Many decades ago I started my first major job and had a bond and a stock retirement fund. The amounts were small and I paid no attention to them. When I eventually rolled them over, the stock fund was three times the size of the bond fund and that occurred during long periods of time when bonds did quite well. Cutting back on equities as Mathjak advocates will surely decrease returns and I am not sure how much safety is being bought with all of that cost. In any case most of us do want some diversification and we diversify even more as we grow older and are spending down our assets. I think your 60:40 makes sense for assets that are going to be spent over a period of say 10, 20 or even up to 30 years or more from now. Even with the 60% there will be some level of diversification with high value stocks, more speculative stocks, big cap, little cap, foreign stocks, etc. I trust the fund managers to make those decisions. Even then I select a number of index or managed funds so I do not have all those assets in one fund. Investors can get all wild about managed fund fees. There are plenty of managed funds with low fees that perhaps add a bit of diversification beyond just index funds. When it comes to bond funds, I do likewise. I select the bond funds and allow the managers to make their choices and hopefully adapt to changing conditions. Mathjak is all convinced TLT offers the best counter to a falling stock market. Perhaps but I still think diversification is the way to go. In the meantime some of those bonds funds actually make a bit of money. Returns on TLT are horrid. Another expensive insurance policy that might work.
Nor do I have any faith in gold. Lots of factors seem to affect the price including the strength of the dollar and demand from India and China. Many Indians and Chinese have horded gold. With more modern economies in both countries, it seems that sort of demand is starting to fall. Instead of gold, I would go with some diversification in REITs.
Personally I think we are largely just fooling ourselves if we think we can find some magic portfolio that will always do well, will provide good returns, and will protect against future changes. A little knowledge seems to be highly dangerous when it comes to making investment decisions.
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