Where do we Invest in 2012 and beyond????
- Thread starter hayman
- Start date
You invest the same as every other year - construct a low-cost, tax-efficient portfolio of index funds diversified across several asset classes. Rebalance each year back to your target allocation. If any asset class gets into a clear bubble (arguably Treasuries right now), underweight it. Do not attempt to time the market or make speculative bets.
Example:
20% domestic stocks
20% foreign stocks
20% REITs
20% bonds
20% gold
If you are more risk-averse:
15% domestic stocks
15% foreign stocks
15% REITS
40% bonds
15% gold
Example:
20% domestic stocks
20% foreign stocks
20% REITs
20% bonds
20% gold
If you are more risk-averse:
15% domestic stocks
15% foreign stocks
15% REITS
40% bonds
15% gold
well I hate to disagree with you Cutten, do it your way and everybody ends up the same. Don't get me wrong, I am the most diversified guy you will ever meet, I very rarely have more than 4% in any one stock, and all my mutual funds are broad based diversified, and I am diversified over several asset classes, but this idea you can just sit in that eternally is mistaken in my my point of view. Like I said, I don't take profits or losses, I just get in when it looks good and get out when it looks bad, and for me in the past that only happens about once a decade. otherwise, it's also important to be aware of the fallacy of diversification. I also have a concentrated account which very rarely has more than 4 ideas going, and it's only purpose is to make a lot of money and take on a lot of risk. Not going too good at the moment, but it has potential, a hell of a lot more than what I can reasonably expect in my well diversified conservative account.
It's verified and true, very few beat the index and almost nobody does it consistently, but that doesn't mean you should give up trying. My experience is when you are wrong it doesn't hurt that much, but when you are right it can make quite a difference, but buy and hold is just another word for complacency, I've been 100% long in my stock portfolio since 2006, so obviously I have endured some hard times. I see no reason to "take profits" or get out, nothing has changed. I have however made some decent purchases since then (and a few bad ones) but I don't plan on being here forever.
Don't underestimate the advantages of a diversified indexed approach. For example:
1. You are guaranteed to earn the market rate of return every single year.
2. It takes a few hours to set up, and about 1-2 hours a year to maintain.
3. Most years it outperforms cash, and in the long-run it massively outperforms cash.
4. If the portfolio is well-diversified, losses even in terrible years are manageable. E.g. the normal portfolio in 2008 would have lost about half what the overall market did, and would have been back into positive territory by 2010. The conservative portfolio would have lost only moderate amounts in 2008, the worst market for 75 years.
5. It is tax-efficient, and dealing costs are low.
Now consider the disadvantages of an active portfolio.
1. You have huge risk of underperforming the market, or even suffering large outright losses.
2. It takes a huge amount of time and effort, and a certain level of natural ability, to get to a level where you can hope to regularly outperform.
3. Your taxes and dealing costs are high.
4. The odds are that you will underperform the market.
5. A portfolio of 100% stocks (or shifting from 100% cash to 100% stocks via market timing) is far, far more risky than one that is split between stocks, bonds, real-estate, and gold.
6. To successfully time the market requires several difficult decisions to be made correctly: i) getting out at the right time ii) staying out until the bear market is over iii) getting back in at the right time iv) staying in until the bull market is over v) riding out the various corrections vi) selling again at the right time once the bull ends. The odds of getting all of those right, every market cycle, for years on end, are incredibly low for the average trader or investor. The net result is usually what our thread-starter has experienced - getting out, and then staying in cash for 5 years, and who knows how many more years he will stay in cash for. Meanwhile, each year corporations earn net profits and thus increase their net asset value, bonds throw off coupons, and REITs throw off generous cash yields.
Staying in cash does not reduce risk, it increases it. The risk comes in the form of failing to keep up with inflation over the long-term. This can be a far more costly mistake than suffering a 20-30% drawdown once every 10-20 years, which in each case is recovered within a year or two, occasionally 3-5 years in the case of a 1929-32 scenario. Far more money has been lost by sitting in cash earning a pittance for decades, than has been lost by participating in the economic returns earned by investment assets over the long-run, and in the vast majority of calendar years.
1. You are guaranteed to earn the market rate of return every single year.
2. It takes a few hours to set up, and about 1-2 hours a year to maintain.
3. Most years it outperforms cash, and in the long-run it massively outperforms cash.
4. If the portfolio is well-diversified, losses even in terrible years are manageable. E.g. the normal portfolio in 2008 would have lost about half what the overall market did, and would have been back into positive territory by 2010. The conservative portfolio would have lost only moderate amounts in 2008, the worst market for 75 years.
5. It is tax-efficient, and dealing costs are low.
Now consider the disadvantages of an active portfolio.
1. You have huge risk of underperforming the market, or even suffering large outright losses.
2. It takes a huge amount of time and effort, and a certain level of natural ability, to get to a level where you can hope to regularly outperform.
3. Your taxes and dealing costs are high.
4. The odds are that you will underperform the market.
5. A portfolio of 100% stocks (or shifting from 100% cash to 100% stocks via market timing) is far, far more risky than one that is split between stocks, bonds, real-estate, and gold.
6. To successfully time the market requires several difficult decisions to be made correctly: i) getting out at the right time ii) staying out until the bear market is over iii) getting back in at the right time iv) staying in until the bull market is over v) riding out the various corrections vi) selling again at the right time once the bull ends. The odds of getting all of those right, every market cycle, for years on end, are incredibly low for the average trader or investor. The net result is usually what our thread-starter has experienced - getting out, and then staying in cash for 5 years, and who knows how many more years he will stay in cash for. Meanwhile, each year corporations earn net profits and thus increase their net asset value, bonds throw off coupons, and REITs throw off generous cash yields.
Staying in cash does not reduce risk, it increases it. The risk comes in the form of failing to keep up with inflation over the long-term. This can be a far more costly mistake than suffering a 20-30% drawdown once every 10-20 years, which in each case is recovered within a year or two, occasionally 3-5 years in the case of a 1929-32 scenario. Far more money has been lost by sitting in cash earning a pittance for decades, than has been lost by participating in the economic returns earned by investment assets over the long-run, and in the vast majority of calendar years.
it's all good,but the problem is(and it's been mentioned by OP at the beginning)-all of them above are trading now at their highs. all of them. that's the problem. they might go far higher,but they might go far lower too..so if you buy this whole basket now and you wrong on your timing-it might take a decade or two for you to get even, after let say 20-30% drop.
----This can be a far more costly mistake than suffering a 20-30% draw down once every 10-20 years, which in each case is recovered within a year or two, occasionally 3-5 years in the case of a 1929-32 scenario.----
i think some folks,who bet their savings on tech stocks in 2000(i'm actually one of them,that's how i got into a trading..thru lousy 'investment advise from "pro" financial adviser) might disagree with you..
Bias in place!!!! GOOG at 100 was "too high" and could go "far lower".......AAPL could go "far lower" at every hundred.
plus just because there is a high on the chart, doesn't mean your mind should set the ceiling.
Prices can go to a billion, but only to zero.
"if wrong on timing".....we can say that about everything, everyday, every second, forever.........how about "if right on timing"......now we're talking!!!
Bob and Cutten,
You guys both make excellent, excellent points, and I appreciate your well though-out commentary. Given that I agree with you both on many points, perhaps my best bet is to take a hybrid approach between both of your philosophies. In other words, split across asset classes (as Cutten describes), and be fearful of these Universal bubbles currently (as Bob points out). Perhaps part of my portfolio (maybe 50%) should be spread across asset classes, and the remaining 50% in cash (CD's). Maybe that's the way to go. I have to crunch some #'s on my spreadsheet, to see what % should be non-cash, given my age (53) and my retirement age goals and $ requirements.
Thanks to you both for some excellent discussion points!
You guys both make excellent, excellent points, and I appreciate your well though-out commentary. Given that I agree with you both on many points, perhaps my best bet is to take a hybrid approach between both of your philosophies. In other words, split across asset classes (as Cutten describes), and be fearful of these Universal bubbles currently (as Bob points out). Perhaps part of my portfolio (maybe 50%) should be spread across asset classes, and the remaining 50% in cash (CD's). Maybe that's the way to go. I have to crunch some #'s on my spreadsheet, to see what % should be non-cash, given my age (53) and my retirement age goals and $ requirements.
Thanks to you both for some excellent discussion points!
that's why I said if you are 100% flat just DCA in, you can always go all in after a correction, but you have to admit you have made a huge miscalculation if you are flat after this runup. The idea is to be 100% in at the top, or better yet at the bottom. But no strategy can combat fear. And the wages of fear are deteriortation. A little of it is good, that's what self preserves us, but too much destroys the fruits of your labor that was achieved back when you had courage.
Courage
Patience
Flexibility
but all three in balance
never one overriding the other two
I don't think it really has too much to do with what's out there to invest in, it has more to do with what's inside your head.
Courage
Patience
Flexibility
but all three in balance
never one overriding the other two
I don't think it really has too much to do with what's out there to invest in, it has more to do with what's inside your head.