What the hell should I do now?

Usual disclaimer (I am not an investment advisor, tax advisor, or legal advisor, consult your own for specific information to apply to your situation, information presented here for entertainment purposes only) applies here.

1. I hope you have not liquidated your 401K without rolling it over into an IRA or keeping it with your former employer. To withdraw it is to risk tax disaster. Consult your accountant.

2. $200K in your 401K at an anaemic 6% return for 20 years yields $660K at retirement age of 65. That's about $3750 monthly pretax for 20 years (to age 85).
Worried about outliving your money? Buy a fixed annuity at age 65 on $300,000 and keep the rest in investments which you can draw down as you need. Social security income should provide the rest - not a guaranteed amount, but you will still get something (be realistic). Are you going to make a killing on this? No. Will you be able to live comfortably? You should if you planned correctly. Especially if you didn't blow the other $300,000.

3. You might want to consider a combination of floating rate funds, tax free munis, TIPS/I bonds to juice up your cash/money market funds. Your goal should be not to lose this windfall. Figure about 40-60%? Split the rest between US equities (you might want to dollar cost average in a these levels) and foreign equities and bonds. Something like VGTSX might fulfill your desire to be out of the dollar, but I would add some sort of foreign bond fund too (like pimco's unheged PFDBX). As you add money to the fund, you can preferentially select equities, if you want.

4. Is it logical to be bearish on the stock market? Why - just because P/E ratios are historically high and that tends to limit investment returns? If you buy here fully and market declines to 9000 you wait 2 years for it to come back to your purchase price and lose that amount of income. If you don't buy in at all, and market goes straight up, you lose opportunity cost. Perhaps a middle road is more appropriate? You can pick and choose your instruments - that's the benefit to being a trader, you know!

5. Long term dollar fundamentals, er, *suck*, but rising short term rates favor dollar bulls for the meantime. Look at it as your opportunity to pick up foreign assets for the long term more cheaply, but don't expect an immediate return.

6. If for 3% they can guarantee you a 10% return, great, go for it. If not, perhaps you would like to target a more reasonable 7% return on your own and save the fees. Percentage based fees are great, but reduce your alpha. Put your money in cash at 4% and now you are down to 1%. In days of expected double digit returns, it would be fine. Now, its hard to justify, isn't it?

Again, consult appropriate people for appropriate advice. This is just for fun.


:D
 
Quote from flier6:

Hey all,

I need some advice. I've just sold my house in Orange County and am wondering what to do with the cash. I have about $300,000 from the house and $200,000 in my 401k. Right now I have the entire $500,000 in the money market because I'm bearish on the mkt.

I've also been reading a lot of Peter Schiff's writings and am starting to become very bearish on the dollar. I'm an airline pilot for a bankrupt carrier and have been HAMMERED from every direction as far as my net worth.

I feel a bit foolish getting on here and whining about "only" having a 1/2 million. I know I'm very lucky to have even that. But I also know that it isn't enough to retire on. I'm still only 45 so I have time to save more and let this money grow, but I don't feel like the mkt is going anywhere anytime soon.

I thought I'd seek help here because I know there are some DAMN smart people on this board. If you have time, I'd like your thoughts on the following:

1. There is no doubt in my mind that the real estate market is about to absolutely MELT DOWN here in Orange County (probably elsewhere too). In fact, it's already started. But is it logical to be bearish on the stock mkt right now as well? Should I just dump all the $ in the S&P, max out my 401k each year and stop worrying about it?

2. Is it logical to be concerned about the dollar resuming its 4 year plunge? If so, what should I do about it?

3. I like Peter Schiff's strategy at EuroPacific.net (foreign stocks, mostly utilities and materials companies) but they charge 3% to tell you where to put your money. I thought about giving them maybe $50,000 to manage and then managing the rest of my $ myself in accordance with their strategies. 3% seems outrageous to me for a stock brokerage.

Anyway, I think you can see my "conundrum." I feel like a dumbass for not knowing more about this stuff by now but over the years, the guys I knew that seemed to do the best were the ones who kept it simple and just rode the S&P up so I didn't get anymore "sophisticated" than that.

Thanks a lot for any insight you can offer.
More...

I'd just make a few points.

Firstly, you are not in a position of making a living trading, rather you are a wage-earner with reasonable savings who wants to grow them for retirement without taking excessive risk. As such, the right advice for you is totally different than for most people on these boards.

Now onto what to do with your cash. To begin with, there is one and only one reason to ever be 100% in cash with your investment pool, and that is when the odds are strongly in favour of a major bear market (i.e. 20%+ decline), with very little chance of a substantial move up. Just being "bearish" is not enough to be 100% in cash. You have to have massive conviction that we are going to see a repeat of 2000-2002, or 1987, 1973-74, 1929-32 etc, otherwise your full cash position does not really make sense. Remember you have multiple risks by being in cash - you could be wrong and the market soars 20%, 30%. You could be initially right, but then not reinvest and miss the subsequent bounce. Or the market could just inch up gradually, while you sit in cash losing money to inflation when you could have been collecting dividends and moderate price appreciation.

The real risk for all long-term savers is not a 10-20% correction in any given year. It is being in cash whilst the market + dividends goes up 30, 40, 50, 100% over the years. The only time you should go to cash is when we have a secular bear market or massive crash in prospect. Those happen very rarely - there have only been a few in the last 100 years. We last had one only a few years ago, and we have nothing like the insane bubble that we had back then, so the chance of another secular bear is IMHO almost zero. A correction of 15-25% off the highs is certainly possible, but we are already down somewhat, and when you consider you will never buy the exact bottom, even if you are 100% correct in your view, you might save 10-15% at most if you are lucky.

Also, if you look at equity valuations relative to bond and cash yields, shares are still attractively priced. The earnings yield on shares is far superior to bonds or cash deposits. For a long-term investor, IMO they should be substantially exposed to the market right now. Maybe keep some cash reserve, like 20-30% of their stock allocation, but look to invest that by the end of the year at the latest (the correction has started, and non-secular bear markets rarely last more than 9 months).

However, I do think that foreign stocks (G7) look better than US or emerging markets right now. The stocks/bonds yield gap in Europe and Japan is huge. Japan in particular had a 13 year equity bear market. Whilst no longer at the lows, prices are where they were 20 years ago. It's like US stocks in the early 80s, you are likely to have a 10 year+ consistent bull run punctuated by a couple of sharp but short-lived corrections. I would strongly consider putting a good chunk of your cash into a balanced G7 stock portfolio. Places like UK, France, Germany, Japan (I would overweight Japan).

Real estate in the US looks a bit tricky right now, especially where you are, so I think it's wise to avoid it for the moment. If you have the time & inclination, I would recommend looking at real estate in Germany - it is the cheapest in the industrialised world, relative to local incomes, it has had a 15 year bear market, and the new government is more reform minded than its predecessors. Yields are attractive and capital values very cheap by international standards. Purchases made now could show 300%+ gains over the next 15 years, not including rental income. Property rights are generally secure. It would be some hassle but could make a lot of money for a patient investor.

Alternatively if you don't fancy direct ownership in a foreign country (it's a hassle), then just sit out the US real estate bust and then go bargain hunting in 2-3 years time.

To conclude, I would just repeat one thing: for long-term investors with a stable income, being significantly in cash makes sense maybe once every 15 years. Your biggest risk is being out of the market for a substantial time, racking up high costs and quite possible losses by trading in and out trying to time the market, and losing value to inflation and taxes. The vast majority of the time, the best investment position is to be 100% long in stocks and/or real estate.
 
Quote from flier6:

Samson77,

The combination of Tbills, Charity work and continuing my trading education is very close to what I've come up with as a solution to my current confusion. I'm also trying to lower my family's expectation of what an "acceptable" lifestyle is (pretty tough in Orange County).

I still can't decide what's sensible as far as my concern about the future of the US economy. AFter seeing the economic behavior of people around here for the last few years, there isn't any part of me that believes this debt-financed consumption binge can continue. Most of what I'm referring to is anectodal but it's supported by the data as well.

The runup in housing is unprecedented AND not supported by any legitimate economic fundamentals. Job growth in California has been dismal and concentrated in low-wage service jobs or jobs directly created by the housing boom itself (those are already starting to disappear as prices start down). Wage "growth" hasn't even kept up with inflation. Not only is there a net ouflow migration but the people leaving are people with money and they're being replaced by illegals for the most part. The majority of economic "growth" (sorry so many quotes) is just people borrowing against their house and using it to consume. Even though there has been a HUGE runup in prices, equity in housing is lower than it was 10 years ago.

Maybe I'm being unduly bleak about the country's prospects because things are so bleak out here in CA. Although many national trends start here first so I don't know.

Anyway, thanks to everybody for the input.
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Ok. Transport yourself back to 1991, or 1981 for that matter. Things were bad then, many people were very bearish. Oil got stuffed in the early 80s, banks got stuffed in the early 90s. This time it is likely to be real estate. Now look at what happened to stock prices 5 years on from this economic "meltdown" that everyone was anticipating. The meltdown happened, the market cleared, growth resumed, stock prices went up.

Whenever there's a possible bubble, just stay out of the bubble sector and everything related to it. That doesn't mean you should stay in cash and ignore everything else. In 1981 there were great opportunities to make money (e.g. going long Japanese stocks or real estate). In 1991 there were great opportunities (US stocks, techs especially). You have to avoid the blunder of becoming a permabear just because there is some economic dislocation somewhere. Just identify stuff that offers i) reasonable value ii) good long-term growth prospects iii) reasonable security of capital. There are several such assets right here, right now, that you can invest in.

Finally, get back into the job market. Things are 10 times harder if you don't have any money coming in.
 
Quote from flier6:

Hey all,

Anyway, I think you can see my "conundrum." I feel like a dumbass for not knowing more about this stuff by now but over the years, the guys I knew that seemed to do the best were the ones who kept it simple and just rode the S&P up so I didn't get anymore "sophisticated" than that.
More...

OK, first a little history.

Most stock markets of countries in the developed world have over the past 100 years gone up.

In the less developed world circa 1900 stock markets in a handful of countries have gone to zero (either by losing wars or adopting communism), most have gone up somewhat and a few have been big winners.

If you are 45 and you plan to retire at 60, your investment horizon is 15 years of capital appreciation mode before going into income generation mode of perhaps another 20 years.

Over 35 years, you might see 2 or 3 real bears in each market.

Given the above facts, what can we learn and apply :

1. You only need to make 2 or 3 exit decisions per market over the rest of your natural life. Sure, you might shift some weight here and there, but a full exit should only occur occasionally.

2. Buy a few countries - not too many that you lose track. Read the news about those countries. If they start to do silly things like turn socialist or get involved in major wars, shift your weight. Unless you can predict the outcome of wars, don't invest in warring countries - you don't need the risk.

3. Forget about individual stocks. Your job is not to pick stocks, your job is to fly planes and sock away what you don't spend. There are lots of great ETF/funds today to help you accomplish your task cheaply - pick one that has a good record of tracking the major index for the country.

4. Don't look at your portfolio all the time. Ignore it most of the time. History has shown that is the best course.

Finally, this is not related to the above facts but since you mentioned it:

5. Don't try to actively manage your money yourself. Unless you are going to make it your job or you consider yourself extremely astute, the odds are greatly against you.

Hire a manager if you know your limits - the 3% he costs you will be nothing if he is good, and if he is not good, you got more serious problems to worry about than 3%. Don't try to give a manager $50,000 and copy him on the remaining $450,000 - you will *never* had the discipline to do it. You will not be able to hold on to your positions and you will start doing destructive things to your portfolio and go crazy while you are doing it. You may think this is a clever move to save you some fees but it will cost you more than you can imagine.

It may seem like anyone can manage their portfolio and that only fools pay a manager 2% to do it for them. This reality is only true within the confines of a TV commercial. If you are not convinced by this, there are good academic papers by Odean that will help you change your mind.
 
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