Where do we Invest in 2012 and beyond????

[Ghost of Cutten]

Quote from oldtime:

I agree, especially the part about taxes, that's why almost all my funds are indexed, but just keep in mind, there will come a time when cash is king.

Yes but one should not choose an investment strategy that sucks, just because 5-10% of the time it will perform best. What matters is to get the best long-term return, whilst keeping max drawdown withing your risk-tolerance limits.

If you can tolerate > a 1% drawdown, then it is almost always wrong to be in cash. You can be 90% in cash, or 70%, or 50%, but being 100% in cash is virtually always a mistake.

What is the optimal portfolio for maximising returns and keeping drawdowns within acceptable limits? Probably at least 30% long stocks, probably <30% in cash.

 

[Ghost of Cutten]

Quote from Bob111:

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.

Wrong - go through the performance numbers in major bear markets and crashes like 1929-32, 1937, 1973-74, 1987, 2000-2002, 2007-2008. You will see that a diversified portfolio like I suggested (especially the conservative version) recovers to its old highs pretty quickly, even if you invested at the exact high of the previous bull market. And bear in mind, this is the performance if you invested at the worst possible time every 25 years or so.

Remember, just like I suggested, you can dial down the risk simply by reducing the stocks/foreign stocks/REITS portion and increasing the bonds/cash portion (a split between 5 year Treasuries, 5 year AAA corps, and CDs is very low risk, albeit low return nowadays).

There will always be a variant of the portfolio I suggested that is superior to being 100% in cash. Therefore it is almost always a huge blunder to remain in cash.

 

[Ghost of Cutten]

That is a very conservative portfolio, but for your purposes (capital preservation) it may work. I would recommend either increasing gold to 10%, or adding some TIPS - you don't have much inflation protection as it stands. I don't like crude, it's not an investment, gold is a FAR superior crisis and inflation hedge (check the data and you'll be convinced - if you search my post history I explained this some time in the last year on another thread).

For your goals I would do:

15% US stocks (7.5% S&P, 7.5% Russell)
10% MSCI world ex-US
5% Emerging markets
5% REITs
5% ex-US REITs
10% gold
15% TIPS
20% bond ETFs (e.g. 5 year treasuries, and AAA corps)
15% CDs

Rebalance once a year, or (if you feel daring) whenever there is a stock market panic.

IMO having too much in bonds/cash will harm your long-term returns, which will erode your real capital. Don't underestimate the benefits of dividends from stocks and REITs, compared to the pathetic yields on bonds and cash at the moment. With 40% in stocks/REITs, even a 50% bear market will not kill you, and you can then rebalance and add more risk at dirt-cheap valuations when everyone else panics. And if no huge bear market occurs, your stocks will be delivering decent returns with modest volatility. I really think <35% stocks is just too conservative and unbalanced.

Quote from hayman:

OK, for all of those interested, I am in the process of developing (and forever tweaking) an EXCEL-based model for my investment allocations moving forward over the next 10 years. My primary objective is Capital preservation. Given my objective and the information I have put forth about myself in prior posts on this thread, my current allocation moving forward will be:

- 7.5 % in US Equity Index Fund or ETF
- 7.5 % in Global Stock 100 Index Fund or ETF
- 7.5 % in an US-based REIT Index Fund or ETF
- 5.0 % in a Gold Index Fund or ETF
- 2.5 % in an Crude Oil Index Fund or ETF
- 20.0 % spread evenly into Short-term, Interm, & Long-term
Bond Index Funds or ETF's
- 50.0 % in Cash (CD's) evenly split between 6 Mos, 1 year, 3 year,
5 year, and 10 year CD's

Now, here's the kicker (and perhaps I will get kicked around for it) - I adjust the above %'s initially (and every 6 months for re-balancing purposes), based on how the Index Fund (or ETF) PRICE is relative to its 52-week Hi/Lo's and the 5-year Hi/Lo's. The closer the price is to these highs, the more risk adjustment I do, and the lower the allocation to that particular asset class. Any downward risk adjustment % for an asset class gets swept into increasing allocation to Cash. My premise here is that the closer we are to HIGHS, the closer we are to correction (spelled, Bubble) for a given asset class. The converse of all of the above is true, when we are closer to LOWS - i.e., get more aggressive with asset allocations, and take away from Cash.

This strategy can certainly miss a case where new Highs are continuously made; however, the re-balancing analysis that is performed every 6 months, can certainly allocate to an asset class that has made new highs in a prior period, but retraced a bit.

So, without crucifying me outright, whaddya all think???? This is not final by any stretch, and is a working model at this point.

 

[Ghost of Cutten]

Quote from oldtime:

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.

DCA is mathematically provable as inferior. If you have timing ability enough to know that today is a bad time to invest, then you should be totally flat and wait for the bottom. But if you had that ability, you wouldn't be passively indexing, you'd be making millions as a speculator. And if you don't have any timing insight, then DCA makes no sense - it just means you earn lower expected returns during the period you are underinvested.

DCA does not reduce risk in any meaningful sense. After all, once your DCA period ends, you are 100% exposed just like someone who went fully invested on day 1. All it does is reduce your exposure during the DCA period - but that also reduces your expected returns during the DCA period.

Think about it logically - if DCA was beneficial, then it would make sense to DCA, wait to be fully invested after the DCA was finished...and then sell and go 100% cash, then start DCA-ing again. Since this is clearly irrational, then DCA is also clearly irrational. DCA is just something that gives psychological comfort to those who haven't fully thought through the implications.

 

[Ghost of Cutten]

Quote from fullblotter:

diversification is dead. for the last decade we have been in the "everything is one market" phenomenon. it's either 'risk on' or 'risk off'. it's just that simple. and right now "risk on" is at absurdly high levels.

everyone is now a speculator, whether they want to be or not.

Wrong. For example, foreign stocks did nicely in the last decade due to the weakness of the dollar. Gold did superbly. Bonds did well.

The only people who got hosed are those who were exposed mainly to stocks (or real estate) i.e. those following a 'one market' philosophy. Those following a 4 or 5 asset-class diversification policy earned quite acceptable returns with moderate risk (e.g. 15-30% DD during 2007-2008, compared to 60% for the S&P and REITs). In the recent years 2010 and 2011, bonds performed inversely to stocks, showing the benefits of diversification again.

Yes you can't diversify away all risk. But you can diversify away a lot of risk, and that is a huge bonus - a veritable free lunch at minimal cost or effort.

 

[Ghost of Cutten]

Quote from hayman:

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!

Check out www.bogleheads.org, it should be right up your street - mostly conservative middle-aged and older investors who like low-risk moderate returns with minimal expense and hassle. There are some excellent posters and articles there, as well as book recommendations (i recommend the 2 Boglehead books on Investing and Retirement planning). There are also good discussions on portfolio construction, some of which is aimed at very conservative investors at your kind of age - just post asking what to do and I'm sure they will give sound advice.

 

[oldtime]

Quote from Ghost of Cutten:

DCA is mathematically provable as inferior. If you have timing ability enough to know that today is a bad time to invest, then you should be totally flat and wait for the bottom. But if you had that ability, you wouldn't be passively indexing, you'd be making millions as a speculator. And if you don't have any timing insight, then DCA makes no sense - it just means you earn lower expected returns during the period you are underinvested.

DCA does not reduce risk in any meaningful sense. After all, once your DCA period ends, you are 100% exposed just like someone who went fully invested on day 1. All it does is reduce your exposure during the DCA period - but that also reduces your expected returns during the DCA period.

Think about it logically - if DCA was beneficial, then it would make sense to DCA, wait to be fully invested after the DCA was finished...and then sell and go 100% cash, then start DCA-ing again. Since this is clearly irrational, then DCA is also clearly irrational. DCA is just something that gives psychological comfort to those who haven't fully thought through the implications.

there's a time to DCA and a time to go all in, and no math formula can determine how good your timing will be, but if your first installment is at a top and you buy all the way down and then go all in at the bottom that will not be inferior, to going all in at the top.

index funds are often used for market timing.

it's extrememly difficult to beat the index, but that does not gurantee the index will turn you a profit

there are times when it's just no good to be in stocks and those times are usually preceded by excessive growth, unrealistic p/e's priced to perfection and irrational exuberance, and rampant speculation on margin or borrowed money

hardly what we see today, but it's been a long time since we've had a decent correction so I would DCA for now and go all in IF a correction comes. If no correction comes then my DCA will as you say be inferior.

 

[cdcaveman]

Quote from oldtime:

there's a time to DCA and a time to go all in, and no math formula can determine how good your timing will be, but if your first installment is at a top and you buy all the way down and then go all in at the bottom that will not be inferior, to going all in at the top.

index funds are often used for market timing.

it's extrememly difficult to beat the index, but that does not gurantee the index will turn you a profit

there are times when it's just no good to be in stocks and those times are usually preceded by excessive growth, unrealistic p/e's priced to perfection and irrational exuberance, and rampant speculation on margin or borrowed money

hardly what we see today, but it's been a long time since we've had a decent correction so I would DCA for now and go all in IF a correction comes. If no correction comes then my DCA will as you say be inferior.

as we kick the can down the street.. the day of wreaking we seem to forget...

The gov speculating on inflation and GDP growth to pay back bonds on debt they bought the bottom out of the market with... i can just picture the lords of academia "just turn the interest rate adjustment knob, such that there is growth without inflation"
i feel like it looks more like they are shooting off cannons into the clouds hoping they do something relevant to help.. or as they say.. throw enough shit on the wall something will stick.. fucking delusional.. i think you can't buy your way out of debt problems as we have seen in Europe.. And our fat american population things we have it so tough.. they can't go to some cush job where they take 4 hour liquid lunches and have to do very little to justify their overinflated pay.. now the fuckers are like "oh we can't find a job" yea that kind of job! we have lost our depression era influence! nobody in america knows what its like to be hungry

 

[hayman]

Quote from Ghost of Cutten:

That is a very conservative portfolio, but for your purposes (capital preservation) it may work. I would recommend either increasing gold to 10%, or adding some TIPS - you don't have much inflation protection as it stands. I don't like crude, it's not an investment, gold is a FAR superior crisis and inflation hedge (check the data and you'll be convinced - if you search my post history I explained this some time in the last year on another thread).

For your goals I would do:

15% US stocks (7.5% S&P, 7.5% Russell)
10% MSCI world ex-US
5% Emerging markets
5% REITs
5% ex-US REITs
10% gold
15% TIPS
20% bond ETFs (e.g. 5 year treasuries, and AAA corps)
15% CDs

Rebalance once a year, or (if you feel daring) whenever there is a stock market panic.

IMO having too much in bonds/cash will harm your long-term returns, which will erode your real capital. Don't underestimate the benefits of dividends from stocks and REITs, compared to the pathetic yields on bonds and cash at the moment. With 40% in stocks/REITs, even a 50% bear market will not kill you, and you can then rebalance and add more risk at dirt-cheap valuations when everyone else panics. And if no huge bear market occurs, your stocks will be delivering decent returns with modest volatility. I really think <35% stocks is just too conservative and unbalanced.

Thanks again, Cutten. I appreciate the advice. I'll look into this further, and I do agree with you, diversification is very important. I still have an eye out, however, for the fact that most Asset Classes are at Bubble levels. I may increase diversification, yet ratchet down on allocation #'s, given my extremely conservative approach.

 

[hayman]

Quote from Ghost of Cutten:

Check out www.bogleheads.org, it should be right up your street - mostly conservative middle-aged and older investors who like low-risk moderate returns with minimal expense and hassle. There are some excellent posters and articles there, as well as book recommendations (i recommend the 2 Boglehead books on Investing and Retirement planning). There are also good discussions on portfolio construction, some of which is aimed at very conservative investors at your kind of age - just post asking what to do and I'm sure they will give sound advice.

Funny that you should mention this website. I discovered it this week, since I was looking into tax implications of rolling one of my 401K accounts over to another one of my 401K accounts. It is a great site, and lots for me to sink my teeth into. Thanks for the heads up.