Need serious advice
- Thread starter drcha
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Talk to him about risk, capital preservation, and concepts designed to keep his capital. The only advice I would give freely is help him compute the total overall beta of his portfolio, (imo he should not let his total beta exceed .5, that is 1/2 the markets movement) as the traditional overall asset allocation model has flaws.
Help him do his homework. Suggest 2 or 3 books, websites, etc. and help him in the direction of underatending the concepts, but they, like you, have to put in their own work.
Help him do his homework. Suggest 2 or 3 books, websites, etc. and help him in the direction of underatending the concepts, but they, like you, have to put in their own work.
I have some unusual suggestions but I need some information:
Is your best friend yourself? Where does your friend live? Does he live in China? Does he own hard physical assets or just paper?
Is your best friend yourself? Where does your friend live? Does he live in China? Does he own hard physical assets or just paper?
Explain to your friend how the market works. That its participants consist of liars, thieves and cheats all trying to steal from each other.
Show him a graph of the S&P in constant dollars with dividends removed, so he can see for himself that the return without dividends barely keeps you even with inflation, if that, and subjects you to great risk.
Explain to him why he should never rely on the media, brokers and especially market makers for advice. Tell him that going forward the U.S. is likely to experience high single to low double digit inflation, higher relative tax rates, and higher interest rates and declining bond values. Advise him that if his horizon is twenty to thirty years off he might be better off to convert any traditional IRAs to Roth in 2010 when the conversion rules will be favorable. The Roth will have the advantage of not requiring withdrawal at age 70 and 1/2.
Tell him that in inflationary environments, hard assets -- land, precious metals, and commodities traded on a world market are hedges against inflation. Explain that a perfect hedge makes no money but prevents loss.
Tell him that unless he wants to spend a great deal of time and study that he should avoid options (require to much monitoring and expertise) and ETF's (expenses to high), and especially leveraged ETF's (expenses and risks too high). Tell him to avoid index funds (too many non-dividend paying stocks). Then let him decide for himself what he should do with his money.
Teach him how to draw trend lines and determine simple support and resistance so that he may make purchases at advantageous times.
If he is wise he will conclude that he should put money needed in the short and intermediate time frame in money markets, CD's, and laddered short to intermediate term managed bond funds. And all longer term investments in nothing but a handful of dividend paying stocks of financially sound companies with reasonable prospects for capital appreciation and histories of paying and growing dividends. He will reinvest the dividends. He will have a current preference for stocks of commodity companies located in the stronger economies with greatest growth rates --e.g., Brazil, China, Chile -- but will make sure that that there is diversification via some non commodity stocks --liquor/beer, cigarettes.
If he decides to buy any financial stocks, suggest he buy the stocks of the most clever and successful cheaters with the best representation in the Treasury department.
You will have to remind him that nothing is for ever, and that he will have to review his portfolios at least annually and make changes from time to time. Explain to him that there is always risk and that when it is recognized that a mistake has been made it is critical to cut losses and move on.
Suggest he get a subscription to the Financial Times (not WSJ or Barrons) and read it once in awhile.
Advise him to relax and ignore day to day fluctuation in the market. Suggest he look at monthly charts (not daily or weekly) to follow the market and his portfolio.
When you have done these things, that's about all you should or can do for your friend. Then it is up to him to make the decisions.
(The advice of Tom1am above is excellent)
Show him a graph of the S&P in constant dollars with dividends removed, so he can see for himself that the return without dividends barely keeps you even with inflation, if that, and subjects you to great risk.
Explain to him why he should never rely on the media, brokers and especially market makers for advice. Tell him that going forward the U.S. is likely to experience high single to low double digit inflation, higher relative tax rates, and higher interest rates and declining bond values. Advise him that if his horizon is twenty to thirty years off he might be better off to convert any traditional IRAs to Roth in 2010 when the conversion rules will be favorable. The Roth will have the advantage of not requiring withdrawal at age 70 and 1/2.
Tell him that in inflationary environments, hard assets -- land, precious metals, and commodities traded on a world market are hedges against inflation. Explain that a perfect hedge makes no money but prevents loss.
Tell him that unless he wants to spend a great deal of time and study that he should avoid options (require to much monitoring and expertise) and ETF's (expenses to high), and especially leveraged ETF's (expenses and risks too high). Tell him to avoid index funds (too many non-dividend paying stocks). Then let him decide for himself what he should do with his money.
Teach him how to draw trend lines and determine simple support and resistance so that he may make purchases at advantageous times.
If he is wise he will conclude that he should put money needed in the short and intermediate time frame in money markets, CD's, and laddered short to intermediate term managed bond funds. And all longer term investments in nothing but a handful of dividend paying stocks of financially sound companies with reasonable prospects for capital appreciation and histories of paying and growing dividends. He will reinvest the dividends. He will have a current preference for stocks of commodity companies located in the stronger economies with greatest growth rates --e.g., Brazil, China, Chile -- but will make sure that that there is diversification via some non commodity stocks --liquor/beer, cigarettes.
If he decides to buy any financial stocks, suggest he buy the stocks of the most clever and successful cheaters with the best representation in the Treasury department.
You will have to remind him that nothing is for ever, and that he will have to review his portfolios at least annually and make changes from time to time. Explain to him that there is always risk and that when it is recognized that a mistake has been made it is critical to cut losses and move on.
Suggest he get a subscription to the Financial Times (not WSJ or Barrons) and read it once in awhile.
Advise him to relax and ignore day to day fluctuation in the market. Suggest he look at monthly charts (not daily or weekly) to follow the market and his portfolio.
When you have done these things, that's about all you should or can do for your friend. Then it is up to him to make the decisions.
(The advice of Tom1am above is excellent)
Enclosed are the information and stats for the famous Couch Potato which has been around for years.
If you want to advise your friend to do anything, I would recommend a portfolio allocation model like this one.
Classic Couch Potato Portfolio
Historical Performance Tables
***
Once again, always be careful when advising other people about their money. As has been stated on these Boards many times before, regardless of who things work out, they will always hold you responsible for the negative results while thinking the positive results are due to their own native genius and ingenuity.
If you want to advise your friend to do anything, I would recommend a portfolio allocation model like this one.
Classic Couch Potato Portfolio
Historical Performance Tables
***
Once again, always be careful when advising other people about their money. As has been stated on these Boards many times before, regardless of who things work out, they will always hold you responsible for the negative results while thinking the positive results are due to their own native genius and ingenuity.
Many thanks to all for your thoughts.
Look forward to your unusual suggestions. He's a friend, not really a best friend. No, it's not me. He lives in the US. He owns the paper stuff in his IRA. He has a pension also, and his wife is still working part time, so he has not really been withdrawing from the IRA, but that will change when she retires. He does not own anything else--no real estate either, except his principal residence.
To answer some other stuff above, he's pretty sophisticated. He does not need me to explain asset allocation or betas to him. I'll bet he knows the beta of his portfolio to two decimal places. I definitely agree that suggesting a couple of books about asset allocation would be a really good move here; even people who know what asset allocation is and have some inkling of how it works could benefit from additional knowledge in this area and from considering how hard assets could be beneficial in addition to the usual types of securities.
If he were almost anyone else I know, which includes a large proportion of people with very fuzzy and screwed-up financial thinking, I would basically ignore them and just say, sure, buy some CDs or ST bonds or whatever, and be done with it. It's because he's capable of more sophisticated thinking and is willing to take some small and understandable risks that I'm trying to help him come up with all possible answers, so that he can consider them (not so that I can pick one).
As for the options option, I think it is out. He does not want to do that much work.
Responses to more questions: Yes, it's a naked put. Yes, you make more using nearer month calls, but you give up some downside protection for it. No, this is not a way to use conservative money, but I think it would be a reasonable use of 10-15% of one's conservative money, especially for someone who is going to be long stock all the time anyway and who does not want to fiddle around with their portfolio on a daily basis. No, he's not going to be pissed off if he tries one or more of my suggestions and it doesn't work out. Anyway, I can't spend my time worrying about whether a friend will stop being a friend for some ridiculous reason. My objective where a friend is concerned is to help them, not possess them.
As others have pointed out, specific investment advice may come back to haunt you. There's nothing wrong with suggesting possible vehicles for investing but it's his responsibility to understand them, decide which ones are applicable and pull the trigger.
You indicated that your friend wonders what to do with the conservative portion of his funds yet he realizes that it will take a considerable investment of time and energy to learn but would rather go fishing, hiking, read his books, visit his kids, etc. Isn't that really the problem and the answer?
As for previous suggestions...
Options are not for him. They take a lot of effort to understand them and that's no guarantee that you'll get anywhere with them. An awful lot of people here can give you text and verse and probably a good many of them have no business using them. Understanding chess is a lot different than winning games.
As you noted, treasuries and CDs are not going to get him anywhere. And I doubt that a 20+ year commitment to TF munis for 3 pct is going to overwhelm anyone, let alone look good in a few years.
While you don't believe in them, I think that variable annuities with a guaranteed growth benefit (5-6% and a couple as high as 10%) is something worth looking at, particularly for someone like your friend who doesn't want to do much of the heavy lifting. Unfortunately, many insurers are cutting back on the annual income groth guarantee but thereare still some attractive ones. You have professional money management and many allow you to go to cash in times of market distress. Many allow an annual withdrawal of an amount equal to the annual growth guarantee and that can be stepped up by rolling the contracts. At worst, his heirs would receive the original principal, less withdrawals, no matter how bad the market tanked.
And if this was 6-9 months ago, I'd be pretending that I was at the UN, pounding the table with my shoe
And no, I'm not in the business.
You indicated that your friend wonders what to do with the conservative portion of his funds yet he realizes that it will take a considerable investment of time and energy to learn but would rather go fishing, hiking, read his books, visit his kids, etc. Isn't that really the problem and the answer?
As for previous suggestions...
Options are not for him. They take a lot of effort to understand them and that's no guarantee that you'll get anywhere with them. An awful lot of people here can give you text and verse and probably a good many of them have no business using them. Understanding chess is a lot different than winning games.
As you noted, treasuries and CDs are not going to get him anywhere. And I doubt that a 20+ year commitment to TF munis for 3 pct is going to overwhelm anyone, let alone look good in a few years.
While you don't believe in them, I think that variable annuities with a guaranteed growth benefit (5-6% and a couple as high as 10%) is something worth looking at, particularly for someone like your friend who doesn't want to do much of the heavy lifting. Unfortunately, many insurers are cutting back on the annual income groth guarantee but thereare still some attractive ones. You have professional money management and many allow you to go to cash in times of market distress. Many allow an annual withdrawal of an amount equal to the annual growth guarantee and that can be stepped up by rolling the contracts. At worst, his heirs would receive the original principal, less withdrawals, no matter how bad the market tanked.
And if this was 6-9 months ago, I'd be pretending that I was at the UN, pounding the table with my shoe
And no, I'm not in the business.
Sorry I did not visit this thread. It would take me more time to elaborate, so I thought to give something now instead of waiting for the time to elaborate. If I am to like to lend, and I am familiar with real things like your friend seems to, I would consider the followin:
I would for instance put money at work as hard money lender but not alone. I would lend via brokers to finance hard money loans. If I had 1M, I would put say 500K split into 20 pieces, and put money at work in 20 different loans each involving 20 other people commingling money to lend to savvy investors in real estate. Splitting and commingling is to help reduce risk.
One can get loans for 12% per year via a broker (12 is the net). The loan is first priority, the borrower puts 50% cash, no second loans, and I would stick to 12 to 24 months to reduce risk further. Worse come to worse, investors own the real estate at halve the price.
Once I get the loan done, I may even sell the cash flow, to earn more and faster, and pass the risk to someone else.
There is a similar model in other applications, one of them is the internet.
For money in stocks, I wrote in a thread on topic of about how to trade bonds and hold stocks. You can check it.
In stocks I would put money in sound preferred shares rather than common, and write calls on the common (double dividends?).
Using these simple strategies, one might be able to make some money and not be too exposed, and less work,
Your friend might need to open self directed ira account for tax reasons. There are some cheaps ones, not the ones on the internet. I would put a URL here.
Bye now
Most preferreds are issued at $25 and will not track the underlying quantitatively. Therefore, naked call writing on the common will not be backed by the preferred if the common soars (the risk just about as high with or w/o owning the preferred). Convertibles would be a different story.
And given what happened to preferred stocks over the past 2 years, it's hard to call any of them sound, particularly for the risk averse.