Need serious advice

D

drcha

This is not really an options question, but I respect the people on this forum more than any other, so here goes....

I have been asked for financial advice by a good friend. For some background, he is in reasonable shape financially. He invests in mutual funds-mostly balanced or equity/income funds. He says that since 2000, his portfolio has made 0%--not too bad, considering what has happened. He is retired and in his mid 60s, but his mom is in her mid 90s and he has no health problems at all, so I think he is likely to live a long time.

He is okay with investing the more aggressive portion of his portfolio in various stock funds and foreign funds, and is willing and able to wait out the rock and roll, but he wonders what to do with the conservative portion of his funds. He is talking a bit about treasury bond funds, which I would hate to see him do, with bond prices so high and probably falling soon. Even if he bought the bonds themselves and held them to maturity, he would likely be locking in a yield that won't look very good a couple of years from now.

We had this same conversation about four years ago, and after stewing about it for several months, he ended up buying some CDs --which turns out not to have been such a terrible choice. This time, though, I think it's going to be a bad idea.

And yes, I hear you saying that I should talk to him about options, and I have tried to interest him in the subject many, many times. Furthermore, I think that unlike many people, he has the temperament and intelligence to understand them and use them successfully, and his wife, also a dear friend but not financially savvy, is encouraging him to listen to me. But he realizes, correctly, that it will take a considerable investment of time and energy to learn to understand and trade them. He would rather go fishing, hiking, read his books, visit his kids, etc. And I don't blame him; actually there are several things I would rather be doing that being glued to my screen each morning at 6:30.

Basically, I think that how to invest conservative money is one of the hardest questions there is. There is always this trade-off between stability of principal and stability of income. You just can't have both.

I'm tempted to just suggest that he optimize his asset allocation via mutual funds: get him into some bonds, real estate funds, ag commodity funds, metals, currency funds, etc.--allocate to a bunch of stuff that does not correlate with the stock market and rebalance it every year or two.

He's a do-it-yourselfer, like most of us. Annuities or financial advisers are going to go over like a lead balloon, and I don't believe in those myself, anyway. Otherwise, I appreciate all responses.
 
Quote from drcha:
I have been asked for financial advice by a good friend.

...he wonders what to do with the conservative portion of his funds.

..And yes, I hear you saying that I should talk to him about options
More...
You feel that you should talk to him about options for the conservative portion of his funds? Sorry, I might be misreading you but reviewing your post, that's what you seem to be saying. Is that correct?
 
From your description, it sounds like most of his investments are beta positive (increases in value with the overall market). I am tempted to recommend some beta negative vehicles like short ETFs on indices, sectors, etc. To protect against short term market spikes, he can sell covered calls. Covered calls are lot easier to explain. That might also get him interested in options enough to maybe do it fulltime. Hope this helps.
 
Quote from nagaraj_h:

To protect against short term market spikes, he can sell covered calls. Covered calls are lot easier to explain. That might also get him interested in options enough to maybe do it fulltime. Hope this helps.
More...
Wow. I certainly would not have thought of selling covered calls (equivalent of short put position, I believe) in the conservative portion of his friend's portfolio!
 
Conservative funds is exactly what it sounds like. Stick that in a CD or related instrument. 1% of something is better than nothing.
 
I think before anything else, you and your friend will have to define "conservative".

To some people that means US debt no longer than 6 month out - to others it means doing inflation + 4%.
 
Makloda had a pretty decent port. in another thread
I'll copy and paste it for you



makloda


Registered: Mar 2006
Posts: 6045


10-17-09 12:18 PM

A long term "don't touch" portfolio IMO would be something like

20% bonds (government, corporate, emerging markets, some junk)
20% equities(US 5%, EFA 5%, Emerging markets 5%, 5% short/bear fund)
20% managed futures (fund of managed futures funds, alternative LSC or RYMFX)
10% long commodities
10% Master Limited Partnerships (a basket, or ETF e.g. http://seekingalpha.com/article/135...hes-new-mlp-etf)
10% REITs (e.g. IYR/RWX)
10% carry trade (DBV)

Also take a look at these:
vtsax - emulates wilshire 5000 broad domestic
vtmsx - emulates russell 2000 small cap
veusx - western europe, not true index but close
vpacx - pacific, again not true index but close
vbtlx - broad bond fund - 5% return, good for bond allocation
vwehx - corporate bond exposure
vnq - reit fund
vwo - good etf emerging markets

Over here in europe we have some good conservative funds called tak 21. Don't know if you have anything like that in the US. Basically they are funds with a lot of bonds in 'em but the companies that sell them guarantee a certain yield.
Good luck,
 
Probably not the advice you're looking for, but my best counsel is never to give your friends free financial advice. If you're right they won't remember. If you're wrong they'll hate you, and you'll feel awful.

The world's best financial minds can't agree whether the next big thing will be inflation or deflation. If it's deflation then being diversified won't help you a bit - everything except cash will get wiped out. If it's inflation, then holding cash will be a disaster.

Why on earth would you saddle yourself with responsibility for your friend's financial security? Better to point him to good sources of information and explain that investment decisions are very personal and a matter of comfort as much as being right or wrong, and let him make his own decisions.
 
a person in his mid 60s that does not already have years of option experience should not be speculating in options with his nest egg.
i find it interesting that he is thinking about investing in the market now after the biggest run in history. where was he this spring?
at this time i would say keep his conservative funds in cds and wait for the next substantial pullback to deploy funds.
 
Quote from traderNik:

You feel that you should talk to him about options for the conservative portion of his funds? Sorry, I might be misreading you but reviewing your post, that's what you seem to be saying. Is that correct?
More...

Yes, I think it is a reasonable thing to do with a part of one's conservative funds. For example, by writing far-month in the money covered calls on large cap dividend payers, one should be able to achieve 7-10% downside protection and 6-8% return. By diversifying over underlyings (in addition to stocks, use etfs that invest in commodities, bonds, etc.) and dollar cost averaging (don't write them all at once or at the same prices) and purchasing underlyings on dips (or ex-dividend times for the stocks) one can put together a reasonably conservative portfolio. It is definitely more conservative than what he has been doing--see my next paragraph.

In answer to someone else's question, he has essentially been almost 100% in the market for most of the 10 years that he has been retired. Over the last three years, he has held about 5% cash, 10% in a fairly aggressive international stock fund, and the rest in a 60/40 fund.

Also in answer to a question by another poster, maybe advice is not the right word. In this case, I don't think of advice as spoon feeding. This guy is pretty smart and financially informed. I think that my role is one of helping him think about things. He would not just take advice and run with it, nor would I want him to.

I fully agree that no matter how conservatively options are used, there is not a method that produces the stability of principal that ST bonds or money mkt do. However, inflation will eat him alive in those things, with a 30+ year time horizon. His wife is the same age and also in excellent health, so it is very likely that one of them is still going to be around in 30 years. So in the overall picture, are ST bonds and CDs really conservative?
 
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