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I agree it's conservative...but the optimal asset allocation is the one you actually stick with.
Someone who is 100% in cash is probably not going to be able to psychologically handle being 90% in stocks, as you recommended.
It can't just be by the numbers, because humans are emotional creatures and they usually bail out of riskier strategies and then get back in at the worst possible times...which is why so many people underperform the published returns of most mutual funds and the stock/bond markets.
OP, the key for you is a little education about investing. A little education will help you avoid the big mistakes, such as being too aggressive (for you) and overreacting when the inevitable happens. Here is a great place to begin that education:
Don't be scared out of stocks. Understand that unless you're invested during the down times you'll miss the upturn (it's happened after every correction - the market is currently at all time highs a mere 5 years after the worst drop since the great depression).
Dollar cost average into an index fund through good times and bad. You'll be glad you did.
I didn't bother to read the entire thread but did read many people saying don't be afraid of stocks. I have to tell you they are right. Here's the most guaranteed strategy I have come up with in regards to investing:
1. Determine how much of your current total assets your able to live without for the next 20 years.
2. Invest that amount into an S&P 500 index fund (vanguard is the best in my opinion).
3. Invest monthly into that index fund, making sure to only invest what your not going to need to touch for at least 20 years. For example, if you invest 10K in 2010, you can't touch that 10K till 2030. Next year if you invest 15K in 2011 you can't touch that until 2031. And just keep following that rule.
In the ENTIRE history of the stock market, not a single individual who has done the above has EVER made less then a 5% return. So unless something extraordinarily bad happens that has never happened in the history of the S&P; your guaranteed not to lose any money.
Here's the breakdown for individuals who left their money in for at least 20 years and followed the above strategy:
97% of them made 8%+/yr (with an average range of 8%-12% depending on the year they got into the market.
3% of them made between 5-7%/yr
I agree it's conservative...but the optimal asset allocation is the one you actually stick with.
Someone who is 100% in cash is probably not going to be able to psychologically handle being 90% in stocks, as you recommended.
It can't just be by the numbers, because humans are emotional creatures and they usually bail out of riskier strategies and then get back in at the worst possible times...which is why so many people underperform the published returns of most mutual funds and the stock/bond markets.
I think you are absolutely right about the bold, but I think the OP is kind of a blank slate when it comes to investing, and going for a solid allocation now is a good idea. Whether you are buying mutual funds that are primarily bonds or stocks, those funds are a far cry from keeping cash in a bank account that shows that balance every time you draw money from an ATM or check your monthly statement.
Bond fund or stock fund, the OP needs to park money in investments and forget about it until the money is ready for use. Obsessively buying and selling and monitoring these funds is not going to be a prudent use of the OP's time or money. I think the big psychological step here is investing the money in the first place. Because of the OP's age, why not make those investments appropriate to the likely time horizon? Buying stock mutual funds is not like buying individual stocks--you can just invest and forget.
I personally like to take a look every quarter or so to see what has happened, but I don't make changes based on the returns.
Quote:
Originally Posted by griffon652
I didn't bother to read the entire thread but did read many people saying don't be afraid of stocks. I have to tell you they are right. Here's the most guaranteed strategy I have come up with in regards to investing:
1. Determine how much of your current total assets your able to live without for the next 20 years.
2. Invest that amount into an S&P 500 index fund (vanguard is the best in my opinion).
3. Invest monthly into that index fund, making sure to only invest what your not going to need to touch for at least 20 years. For example, if you invest 10K in 2010, you can't touch that 10K till 2030. Next year if you invest 15K in 2011 you can't touch that until 2031. And just keep following that rule.
In the ENTIRE history of the stock market, not a single individual who has done the above has EVER made less then a 5% return. So unless something extraordinarily bad happens that has never happened in the history of the S&P; your guaranteed not to lose any money.
Here's the breakdown for individuals who left their money in for at least 20 years and followed the above strategy:
97% of them made 8%+/yr (with an average range of 8%-12% depending on the year they got into the market.
3% of them made between 5-7%/yr
Looks like pretty damn good odds to me.
This strategy would be better than bond funds, in my view. I don't think it is diverse enough, but OP could do much worse (and is doing worse by keeping their money in cash).
I think you are absolutely right about the bold, but I think the OP is kind of a blank slate when it comes to investing, and going for a solid allocation now is a good idea.
I guess this is the crux of our disagreement. I don't think the OP is a blank slate, given his past behavior. I think the OP is scared. That fear is somewhat reasonable, but also blown out of proportion.
I also think the OP doesn't actually NEED to be super aggressive. He and his wife are saving 3K per month. He has the luxury of being a little too conservative.
Of course, neither of us can really get into the mind of the OP. The OP has to learn to know himself and his situation and learn to take his emotions into account without letting them run wild.
Quote:
Originally Posted by TheCityTheBridge
Whether you are buying mutual funds that are primarily bonds or stocks, those funds are a far cry from keeping cash in a bank account that shows that balance every time you draw money from an ATM or check your monthly statement.
Yes, they are certainly not savings account substitutes, but I think we both agree the OP needs to get away from having 100% in savings/MM accounts. It's just your approach is more aggressive than mine.
Quote:
Originally Posted by TheCityTheBridge
Bond fund or stock fund, the OP needs to park money in investments and forget about it until the money is ready for use. Obsessively buying and selling and monitoring these funds is not going to be a prudent use of the OP's time or money. I think the big psychological step here is investing the money in the first place. Because of the OP's age, why not make those investments appropriate to the likely time horizon? Buying stock mutual funds is not like buying individual stocks--you can just invest and forget.
Yep, I agree with all of that.
Quote:
Originally Posted by TheCityTheBridge
I personally like to take a look every quarter or so to see what has happened, but I don't make changes based on the returns.
I am similar. I admit to checking my balances too often, but I rarely make changes. I set up my 401K to automatically rebalance every quarter.
Quote:
Originally Posted by TheCityTheBridge
This strategy would be better than bond funds, in my view. I don't think it is diverse enough, but OP could do much worse (and is doing worse by keeping their money in cash).
Well I didn't advocate 100% bonds, The stock allocation I recommended was in the 40% to 50% range, with the rest in bonds/stable value/cash. I get that's too conservative for YOU. But like I said, for someone who's a bit of a chicken they're more likely to stick with something for the long term if it doesn't have dramatic swings in value. And like I said, if you're saving $3K per month and live a low cost lifestyle (as appears to be the case for the OP, although perhaps I'm wrong), you don't need to be as aggressive.
I guess this is the crux of our disagreement. I don't think the OP is a blank slate, given his past behavior. I think the OP is scared. That fear is somewhat reasonable, but also blown out of proportion.
I also think the OP doesn't actually NEED to be super aggressive. He and his wife are saving 3K per month. He has the luxury of being a little too conservative.
Of course, neither of us can really get into the mind of the OP. The OP has to learn to know himself and his situation and learn to take his emotions into account without letting them run wild.
Yes, they are certainly not savings account substitutes, but I think we both agree the OP needs to get away from having 100% in savings/MM accounts. It's just your approach is more aggressive than mine.
Yep, I agree with all of that.
I am similar. I admit to checking my balances too often, but I rarely make changes. I set up my 401K to automatically rebalance every quarter.
Well I didn't advocate 100% bonds, The stock allocation I recommended was in the 40% to 50% range, with the rest in bonds/stable value/cash. I get that's too conservative for YOU. But like I said, for someone who's a bit of a chicken they're more likely to stick with something for the long term if it doesn't have dramatic swings in value. And like I said, if you're saving $3K per month and live a low cost lifestyle (as appears to be the case for the OP, although perhaps I'm wrong), you don't need to be as aggressive.
I definitely think our disagreements are on the margins, but we have the same basic idea for the OP--stop letting your cash and money market funds inflate away! I don't mean to suggest that you advocated 100% bonds, but I'm sure you recognize the point I'm trying to make--at age 32, OP should allocate funds into a diverse, but aggressive set of mutual funds. I think that the approach you suggested would be an excellent allocation for someone in their mid-50s.
I definitely think our disagreements are on the margins, but we have the same basic idea for the OP--stop letting your cash and money market funds inflate away!
Yes, correct.
Quote:
Originally Posted by TheCityTheBridge
I don't mean to suggest that you advocated 100% bonds
Ok, thanks for clarifying. It sorta sounded like that, but I wasn't sure.
Quote:
Originally Posted by TheCityTheBridge
but I'm sure you recognize the point I'm trying to make--at age 32, OP should allocate funds into a diverse, but aggressive set of mutual funds. I think that the approach you suggested would be an excellent allocation for someone in their mid-50s.
Yes, I recognize your point. To put our difference another way--You are suggesting an age based method of asset allocation. I'm suggesting a psychology based asset allocation. Because, IMO, human psychology trumps what you "should" do based on your age in almost every instance. You disagree, and I respect that. Your allocation suggestion is likely to be more optimal in terms of absolute returns, but only IF the OP sticks with it. I tend to think humans are really bad at sticking with aggressive allocations for long periods of time. But we can't know the mind of the OP. We can only guess.
Of course, the OP could split the difference between the two of us and go about 70% stocks and 30% bonds. A fund like Vanguard Wellington would get him close to that allocation, and it has actually beaten the S&P 500 Stock Index over the last 20 years with less volatility.
This strategy would be better than bond funds, in my view. I don't think it is diverse enough, but OP could do much worse (and is doing worse by keeping their money in cash).
The reason diversity is touted to the typical investor is because that strategy is accounting for the fact that human emotions may scare someone to sell if the market tanked using a 100% mutual fund strategy. If you go by pure math and are disciplined enough not to let emotions effect your investment decisions, the strategy I outlined is by far one of the most solid ones to follow for guaranteed returns over the long term.
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