It's not like gravity. Stocks don't have to go up (in this case). There are long periods of time where bonds can outperform stocks. There are very good reasons for asset allocation. Having 100% of your money in one asset class is risky even for long periods.

Amount to invest: $600,000

Particulars: This money is currently spread across three bank accounts and is used, along with a trust that owns rental property, to support an 87 year old woman. I am still figuring out all of the particulars but I estimate that the trust generates $2k-$5k per month worth of income and that the remainder of her approximately $8k per month expenses are paid for from the $600,000.

It would be ideal if the money could be used to generate a return for the family that remains after she passes, but obviously it needs to be in secure enough investments so that, at minimum, it can be available to take care of her for the next 5-10 years.

Screw her if she lives to 98.

This is exactly right, and something I've been advocating for quite a while now. The facts are that of the 3 asset classes (stocks/bonds/cash) the return of stocks destroys the other two over time. There really is no comparison.

The issue that muddles it is risk tolerance, which is another concept I'm very much against. People worry about capital preservation, and a paper loss can be very stressful for them. The problem is that stress is unwarranted.

Let's take the great recession as an example. Stocks lost something like 45% of their value in 2009. If you were invested in the market during that time, you should have seen a dramatic decline in the value of your investments. This caused great concern and stress among the vast majority of investors, but it actually should have created the opposite effect. It should have been a time of excitement and eagerness to look for good opportunities. Even if the investor had no capital to invest in new investments but only their periodic investments (401k contributions), they should have been very happy to see that they were getting more shares of stock than previously.

If they were contributing 100 dollars every 2 weeks from their paycheck into a fund that was 100 dollars a share, they would get 1 share disregarding company match and all the other things we don't care about in this example. At the worst part of the recession assuming a 45% decrease, they are now getting 1.8 shares every two weeks. They are essentially getting double the investment than they were getting a short time previously. Assuming that the market would recover (which we know happened), they should actually be rooting for the market to stay at that level for as long as possible as it fits in their timeframe (obviously they wouldn't want it to stay at that level after they were going to withdraw it).

It is completely counterintuitive.

I just had this conversation with my best friend. He knows nothing about investments or how the market works, so he just asks me to do it all for him. I have him 100% in aggressive stock mutual funds, and that's it. Before the recession he had something like 50k in his 401k. During the recession he mentioned to me it was down to 35k in value and he was kinda worried. I assured him he was fine, to relax and if it bothered him a lot to stop looking at his quarterly statements. Every quarter he threw away the envelope. He did that for a few years. Just a few weeks ago he pulled me aside and thanked me, saying he now had 85k in his 401k and he's extremely happy and grateful for the reassurance during that time.

If I had a magic 8 ball that could tell us with 90% certainty when the market is going up and when it it going down would you still recommend to stay 100% in stocks 100% of the time? Or would you recommend something like 80/20 or 90/10 as a base w/ the plan of moving to more aggro when the 8 ball suggested the market was going up and more conservative when it predicts a downturn?

Of course this 8 ball doesn't exist, but the reason most people don't just do 100% stocks is because they believe they can read the market with a certain level of certainty. In your post you talk about taking advantage of a downturn by looking for investment opportunities when the market is down, which is one of the pros of not being 100/0.

So would you advise a single sector mutual fund like health care? From what I can tell it seems like you might want to have around 100k if you are going into stocks individually, so you can spread it around.

pretty sure he means indexing or something similar, not individual picking.

Before I answer anything, remember I do not advise you to do anything you aren't comfortable with. Everyone is different. You do what makes YOU comfortable. I'm simply saying that I think that risk tolerance is incorrect for almost all people. People in general are risk averse. I can show them every stat, every theory, every everything and they still will blurt out "yeah but I don't want to lose money dude".

And that's ok. Don't do what I do, do what makes you feel comfortable. I'm just explaining why I think the way I do, and if you don't agree that's obviously fine.

Well, we don't have that luxury. In general, if the timeframe is very long (20+ years) then just stay aggressive and don't worry or even look at it. If we had your magic 8 ball we'd obviously go 80/20 and fire in the 20 when things are down. The problem with your scenario is it's almost impossible for an investor to pick the absolute bottom or the top. So, don't worry about it and just fire in general stock funds. Besides, when the market does reach that bottom that you might miss, if you are 100% in that category you are gauranteed to get those shares at that good price.

When the DOW was at 6,700 I distinctly remember being at work and looking up at that number and saying "I'm putting in every dollar I have into the market" and it sparked a huge debate immediately with my friends at work. Every logical argument came out about how I'm stupid to take that kind of risk, that we're in a unique situation and we could be on the verge of financial collapse blah blah blah. I just said "Well, we are either going to have a financial collapse that will destroy this country and I"ll lose everything and have to grow my own food, or we'll recover in the next 5 or 10 years and I'll make an enormous profit, but I'm betting on us surviving and recovering". Of course, we know what happened. That's not a story to say I'm some sort of guru, but really it was a logical position to take and we know how that worked out. I got lucky to pick that exact moment, but it really was a logical move.

I remember another guy who maxed his 401k contribution when the market tanked and I asked him why, and he said "because I don't need the money paycheck to paycheck and I can get a lot more shares now and this opportunity won't last very long". Like I said, it's counter intuitive. He was absolutely right and it made me look at investing entirely differently.

There is no reason to bet on a single sector. If you really want to be passive, then simply invest into a general fund, something that mimics the overall market. Unless there is a specific reason for you to "bet" on a sector, I'd say don't bother. Over time, we expect the market to rise. That has held true. If you believe that will continue to hold true (and we have no reason to not believe that) then why take risk by investing in a single sector that you could be wrong about?

Most people get stressed the **** out when it come to investments. I'm not immune to that, but I know in the long run I'll be ok if I stick to my gameplan. In my general investments I feel great, I barely look at them. I just add up all my balances every 3-6 months and am very happy about my balances. In about 20% of my overall assets I have individual stocks that I picked and that portion stresses me out more than my general stock mutual funds. I never recommend stress, it sucks.

I'm unsure where you get the 100k number or why you even said that. The amount you have means nothing. You can have 10k, 100k, or 100 million. I'm just looking at it as percentage. There is no hard figure involved in any of this.


Exactly. Individual picking is great if you pick right, but it sucks if you don't. I never recommend individual picking unless you feel you have a distinct advantage over everyone else, and the vast majority of people have no reason to think they have an advantage.

Personally, I'd dump the entire thing into something like VFICX. Some sort of intermediate bond fund and hope you get a decent return. If you get 3-5% return a year it'll help offset expenses and the fund itself will lose value over time to cover her expenses because you'll withdrawal from it to make up the difference.

You'd have to do the math, but if she lives another 10 years she'll go through the money. If she lives 3-5 years there will easily be money left over. I don't want to sound callous, I'm simply looking at this from a numbers stance. If you did nothing and kept it in cash she'd take out 8k a month which is 960k in 10 years, which is more than you have. If you put it into some sort of bond fund that returned 4% a year it'll last a while longer, but you'd essentially be at zero or negative dependent on the return. Everything depends on the length of time obviously.

Capital preservation is the most important thing in this situation, because she needs the money to cover her costs. Get whatever decent return you can and hope the money lasts for as long as she lives.

Disclaimer : I have no actual experience in this type of scenario, I'm simply going by the investments and asset classes I'm familiar with and trying to give you some sort of option. End of life scenarios are tricky because there are so many variables involved.

They do. You don't have to trust me, or trust anyone. Just look up the history of stocks vs bonds and their historical returns. If you are really in a 35 year timeframe there is absolutely no reason to not be in stocks.

Don't be confused. The data is easily available, so much so that I won't even copy/paste anything to justify my statement and look like I'm trying to sway your decision. Look it up yourself and be satisfied you are making the correct decision.

I would, however, recommend that when you start getting close to needing the money you should move into less risky investments for capital preservation, but that's something like 25 years away.

Some of you may find this interesting.

http://www.nytimes.com/2011/11/27/yo...mes.html?_r=4&

Basically from 1926 to 2009 a 50/50 stock/bond allocation returned 7.75%. You basically 1.25% or so in returns from all stocks, but reduce volatility and variance dramatically. After all, people are significantly down playing the risk of being largely in stocks and then going into a 10-20 year period where stocks are relatively flat. That is catastrophic if you are only 10-20 years away from retirement.

I'm not even advocating a 50/50 or anything. In fact, I'm only 20% in bonds (I'm 37), but I am increasing my bond allocation 1% per year. But you guys are not recognizing that the stock market and its returns are dynamic. They don't have to go up. Ben Graham advocated 50/50. I think you shouldn't be so quick to dismiss bonds.

Agreed. I don't dismiss bonds, and I've routinely said that as you get closer to needing the money capital preservation becomes extremely important. You can be "right" your entire investing career and if the market takes a nasty turn 5 years before you need it you can get hurt immensely. In fact I knew a guy who was set to retire at 52 but had to to push that back after the last recession because he was totally in stock.

I'm vague about the years because everyone is different. I'd say 10 years out is a safe figure to start moving into something less risky, but that number is different for everyone. Personally, I'd start moving assets into bonds or cash at about 5-10 years out, but I would never say that someone who did that 15 or more years out was incorrect. There is no "incorrect" when it comes to a decision like that. Everyone is in a different situation in terms of family circumstances, life expectancy, emergencies, financial status. I'm only trying to maximize return with certain scenarios.

got out at $13.60. 'they' say it's going to 17, but i suck at this, so i got out when happy for once.

Don't you think right now if you are not in the market it is a good time to stay out as prices are at all time highs. It seems reasonable to think the market will take a decent dip in the next 1-3 years and would be able to buy at discount prices? Any thoughts?

My thought is that the vast majority of retail customers vastly under perform the market because of exactly this kind of thinking. Stay fully invested with an asset allocation that makes you comfortable. If a bear market would keep you from sleeping at night, then you have the wrong asset allocation.

Sure, but if he hadn't been 'totally in stock' previously, he probably would not have been set to retire at 52 the first time around, because he wouldn't have reaped those gains earlier in his investment 'life'.

thenextlevel1,

The consensus here is that trying to time the market is generally very poor thinking unless you have some information that the market does not have.

no. going by this logic you would've missed the bull run of the 1990's

Ok well I sold everything about 2 months ago, so I guess I will put in back into the market. I was in the Vanguard Health care fund since 2011 because I thought that Obama care would bring a lot more customers for the health care industry. I know this doesn't mean a lot by the fund has had a 16% return yearly since 1984 (40 years). I see no reason why the industry would preform any different unless the U.S. moved to single payer. Thoughts?

The better question is, why did you exit when your bull theory for this fund still remains in tact --Obamacare boosting the healthcare industry? If it still held true, price shouldn't alter your decision to exit. Trying to time an entry based on a thesis that never changed will either cause you to miss gains or choose to exit after losses when overall market weakness is preventing the theory for that specific time (which wasn't the case here of course.)

Yes leaving the market seems like a bad decision and makes no sense when really thinking about it.

What you're doing is speculation, not investing. Furthermore, you seem to be making decisions for rather flimsy reasons. You'd really be better off just putting your money in a target date fund and forgetting about it.

Just because you don't have the magic 8 ball (by 8 ball I no longer mean an actual 8-ball) doesn't mean others don't have one or access to one. You don't need to hit the exact top or bottom to make this strategy work.

Similar thought processes were used by FAs during that time too. However, they were mostly talking about moving clients investments from 80/20 to 60/40 or 70/30 while things were starting to get ugly then moving back to 80/20 or 90/10 right before and right after the bottom.

You would be surprised by how many FAs kicked the **** out of market returns during the past 5 and 10 years mainly because of this. The problem of course is that you don't have their foresight.

It looks like this has already been answered, but since you are far from the first or last person that thinks this or asks it ITT I'd like to expand on the answer.

People have been predicting a dip in the market since 2009. However, if the Indian refuses to stop doing the Indian Rain Dance one day he will be right and will let everyone know he is the reason the rain came, but lets not forget how many days (or in this case years) he was wrong.

A wise man once said, "The market climbs a wall of worry".

PS what if you are right and the market dips 10-15%, but the market climbs another 40% before it does?

Yea I get it. I will just buy back into the fund I had before and not to put to much worry into it.