Author Topic: Advise me on where to invest 100k.  (Read 2364 times)

goosefraba1

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Advise me on where to invest 100k.
« on: October 01, 2018, 07:44:06 AM »
Hello,

I have been using these forums and mostly lurking for several years. Current salary is $130k, wife is about $55 to $60k. We are both 31 years old. My wife and I have saved up 40k in our checking account since purchasing our home a few years ago. Wife's student loans are near paid off. Mine will be forgiven in 6 more years of paying the minimum through service loan forgiveness. My 401k is maxed ($18,500 a year). Should be receiving a bonus in the next few weeks between $50k and $70k. Planning on putting a considerable amount into a mutual fund (likely in Vanguard) until we are ready to purchase land and build a home, or buy a nice home with a considerable amount of land. Currently have about $50k in equity or more in our current home (purchase price was $165k). 

Not looking to jump right into purchasing land/home in the next year as the Mrs is pregnant with our second :)

So, we are looking at storing away some eggs in the meantime.

Any advice is much appreciated.

TheHardenedInvestor

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Re: Advise me on where to invest 100k.
« Reply #1 on: October 01, 2018, 07:46:51 AM »
The best performing asset class in history is VFIAX or VTSAX. Those are Vanguard index funds. So that’s what I would do. If you need this money in the short term, then probably not.

I'm a red panda

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Re: Advise me on where to invest 100k.
« Reply #2 on: October 01, 2018, 07:47:43 AM »
I'd spread it in Vanguard Total Stock Index, Total Bond; and the international equivalents. 

I do 80/20 stock/bonds and 90/10 domestic/international, personally.

Still Being

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Re: Advise me on where to invest 100k.
« Reply #3 on: October 01, 2018, 08:46:11 AM »
I'd spread it in Vanguard Total Stock Index, Total Bond; and the international equivalents. 

I do 80/20 stock/bonds and 90/10 domestic/international, personally.

To clarify - 72 VTSAX / 8 VTIAX / 18 VBTLX / 2 VTIBX?

I'm a red panda

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Re: Advise me on where to invest 100k.
« Reply #4 on: October 01, 2018, 08:48:17 AM »
I'd spread it in Vanguard Total Stock Index, Total Bond; and the international equivalents. 

I do 80/20 stock/bonds and 90/10 domestic/international, personally.

To clarify - 72 VTSAX / 8 VTIAX / 18 VBTLX / 2 VTIBX?

Yep.

goosefraba1

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Re: Advise me on where to invest 100k.
« Reply #5 on: October 01, 2018, 09:00:07 AM »
And how quickly would I be able to withdrawal from the funds? Is there a penalty?

Is there a percent charge for initial buyin?

I am trying to find exact info from their website, but not seeing the actual costs.

Thanks again yall!

TheHardenedInvestor

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Re: Advise me on where to invest 100k.
« Reply #6 on: October 01, 2018, 09:03:23 AM »
And how quickly would I be able to withdrawal from the funds? Is there a penalty?

Is there a percent charge for initial buyin?

I am trying to find exact info from their website, but not seeing the actual costs.

Thanks again yall!

If you hold the fund in a taxable account like a normal brokerage account you can withdrawal (ie sell the funds) at any time during market hours and have the money once it executes after close. There is no fee to buy or sell those funds. Any gains will be subject to taxes.

terran

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Re: Advise me on where to invest 100k.
« Reply #7 on: October 01, 2018, 09:39:09 AM »
What about your wife's workplace retirement plans - also maxed? IRAs maxed? Do you have an HSA?

As far as actual investments I agree with other posters about a total international or total US market fund, and maybe a bond fund if that's part of your asset allocation (you should develop one if you don't have one). But ONLY IF you don't "need" this money in the next five years. You can "want" the money to buy some land and build a house in that time as long as you're ok waiting and holding off on buying it if the markets go in the crapper for awhile. If you won't be willing to wait if the situation warrants it, then you fall into the bucket of "needing" the money in the next 5 years and it shouldn't be invested in which case you should stick in in a high yield savings account.

erutio

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Re: Advise me on where to invest 100k.
« Reply #8 on: October 01, 2018, 09:43:01 AM »
You need to come up with your own personal Investment Policy Statement, where you take you own risk tolerance, investment horizon, asset allocation, and other factors and put it all together for what works best for you.

MustacheAndaHalf

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Re: Advise me on where to invest 100k.
« Reply #9 on: October 01, 2018, 10:11:32 AM »
Buying Vanguard funds at Vanguard costs $0/trade.  You buy or sell without being charged for it.  Most mutual funds have expense ratios of about 1%, which means the fund consumes 1% of your money each year, but hopefully has a higher return.  Index funds are much cheaper, which is why Vanguard Total Stock Market (VTSAX) only costs 0.04% per year.  You won't see the expense ratio in action, though, as it's removed silently.

I'm a red panda

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Re: Advise me on where to invest 100k.
« Reply #10 on: October 01, 2018, 10:33:23 AM »
What about your wife's workplace retirement plans - also maxed? IRAs maxed? Do you have an HSA?

As far as actual investments I agree with other posters about a total international or total US market fund, and maybe a bond fund if that's part of your asset allocation (you should develop one if you don't have one). But ONLY IF you don't "need" this money in the next five years. You can "want" the money to buy some land and build a house in that time as long as you're ok waiting and holding off on buying it if the markets go in the crapper for awhile. If you won't be willing to wait if the situation warrants it, then you fall into the bucket of "needing" the money in the next 5 years and it shouldn't be invested in which case you should stick in in a high yield savings account.

I wouldn't put money that is needed in the mid-term into any sort of retirement plan.
Holding money that is needed for a house/land purchase in a taxable investment account is somewhat risky, but since it sounds like the purchase is still on the 'future' and not immediate horizon, I'd still do that- as opposed to a savings account. If the market happens to be down in 5 or so years, you just don't make the purchase.  I'd only use a savings account for 1-2 years.  Even "high yield" is a crap rate right now.

terran

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Re: Advise me on where to invest 100k.
« Reply #11 on: October 01, 2018, 10:48:20 AM »
What about your wife's workplace retirement plans - also maxed? IRAs maxed? Do you have an HSA?

As far as actual investments I agree with other posters about a total international or total US market fund, and maybe a bond fund if that's part of your asset allocation (you should develop one if you don't have one). But ONLY IF you don't "need" this money in the next five years. You can "want" the money to buy some land and build a house in that time as long as you're ok waiting and holding off on buying it if the markets go in the crapper for awhile. If you won't be willing to wait if the situation warrants it, then you fall into the bucket of "needing" the money in the next 5 years and it shouldn't be invested in which case you should stick in in a high yield savings account.
I wouldn't put money that is needed in the mid-term into any sort of retirement plan.
Holding money that is needed for a house/land purchase in a taxable investment account is somewhat risky, but since it sounds like the purchase is still on the 'future' and not immediate horizon, I'd still do that- as opposed to a savings account. If the market happens to be down in 5 or so years, you just don't make the purchase.  I'd only use a savings account for 1-2 years.  Even "high yield" is a crap rate right now.

Fair enough. Although one might argue that buying land and building a house is a luxury good that comes after maxing retirement accounts.

*edited to fix messed up quoting
« Last Edit: October 01, 2018, 12:00:55 PM by terran »

mountain dentist

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Re: Advise me on where to invest 100k.
« Reply #12 on: October 01, 2018, 11:11:50 AM »
what are the interest rates on your student loans?

PDXTabs

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Re: Advise me on where to invest 100k.
« Reply #13 on: October 01, 2018, 01:32:10 PM »
I'm a big fan of VT/VTWSX.

COEE

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Re: Advise me on where to invest 100k.
« Reply #14 on: October 01, 2018, 08:51:06 PM »
If you want to see the money in the short term do NOT invest it in index fund/bonds funds/equity/single or otherwise).  They are MUCH too volatile for short to intermediate term purchases (read within 1-2 years - sometimes even three years).  The likelihood of a significant amount of the money not being there when you need it is very high.

You want to preserve your stash in the time frame you're talking about.   This means you want to maximize your returns, but minimize your risk.

In your situation you really have three options
  • Several banks offer savings accounts returning ~1.85%.  Pros: FDIC insured.  Money is available in 2-3 days usually.  Cons: Taxable at all levels.  $250k Max per account is FDIC insured.
  • Money Market Funds through many brokers are returning around 2%.  Pros: Pre- and post-federal-tax options.  Some funds specific to individual states also help avoid state tax.  Cons: Not FDIC insured so slightly more risk, but generally considered "safe".
  • T-bills: Available in 4 (2.133%), 13 (2.235%), 26 (2.410%), and 52 (2.563%) week increments.  Pros: Backed by the US government.  No state tax.  Can be bought and sold on the open market if you need your money out right away or are looking for a specific maturity date.  Can be bought directly from the US Government (Treasury Direct) or through a Broker.  Minimum $100 investment through Treasury Direct.  No realistic maximum.  Cons:  If selling before maturity, it is possible you could sell at a loss.  Money is tied up if purchased from Treasury Direct.
  • I typically discourage CD's and 2.5%+ savings/checking accounts.. There are just too many hoops to jump through and if you don't follow all of them your return is 0%.  It's important to share they are out there, but they are investments with limited totals, introductory rates, complex rules, etc that are used to attract money but discourage payment.  It's better to keep investments simple IMHO, but you can chase rates if you'd like

Personally I like Tbills for short-term investments, assuming you can do without the money for the time period you buy.

Mighty-Dollar

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Re: Advise me on where to invest 100k.
« Reply #15 on: October 01, 2018, 11:34:21 PM »
We are both 31 years old. Wife's student loans are near paid off. Mine will be forgiven in 6 more years of paying the minimum through service loan forgiveness.
Pay off the loans. Then with what's left, invest 10% to 20% in a total bond market index fund like BND or AGG. Put the rest in a total stock market index fund like ITOT. You're long term investors so just ride the ups and downs. Rebalance as your allocation ratio changes. The older you get the more you invest on the bond side.
« Last Edit: October 01, 2018, 11:35:54 PM by Mighty-Dollar »

wheezle

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Re: Advise me on where to invest 100k.
« Reply #16 on: October 02, 2018, 12:15:06 PM »
I believe that people are right that you should mostly be invested in the S&P 500, but totally wrong that you should maintain a consistent allocation like 80/20 or 50/50. No professional fund, ever, would do something like this, because it's stupid. Risks change and the portfolio needs to change with them.

I reallocate once a month according to the math that a service spits out (IT/programmer colleague turned me on it, called safer401k), which takes into account my risk appetite and market probabilities. I used to check positions daily if not more, and I really hated myself for it. Time drain, emotional drain. Now I know exactly the risks that I'm taking, I only check once a month to reallocate, and I'm rather confident that this is way better than anything else I could be doing.

DO NOT fall for the real-estate investment stuff. That's a full-time job with risk that's likely to return as much as the market. DO NOT pick stocks (I used to).

People here are saying you shouldn't do index funds because you could lose your money, but that's 100% laziness. If you can only afford to lose 5% of your money, then pick that as your risk preference and invest a smaller amount of the total into the indexes. It is STILL a better investment than the other stuff.

I'm a red panda

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Re: Advise me on where to invest 100k.
« Reply #17 on: October 02, 2018, 12:20:25 PM »
I believe that people are right that you should mostly be invested in the S&P 500, but totally wrong that you should maintain a consistent allocation like 80/20 or 50/50. No professional fund, ever, would do something like this, because it's stupid. Risks change and the portfolio needs to change with them.


I really don't think my needs change monthly that keeping an 80/20 split is a problem.  Over the long term, yes- I'll eventually go 70/30, 60/40 etc. 

But reallocating monthly is way more than I'm interested in doing with a buy and hold investment strategy. 

wheezle

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Re: Advise me on where to invest 100k.
« Reply #18 on: October 02, 2018, 12:43:52 PM »
But reallocating monthly is way more than I'm interested in doing with a buy and hold investment strategy.
I get that, but it costs me nothing to do it, and it results in enormously better outcomes in the long run.

I'm willing to log in to my account 12 times a year for 5 minutes (an hour of work) to have a much better PnL and better compounding.

erutio

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Re: Advise me on where to invest 100k.
« Reply #19 on: October 02, 2018, 12:52:18 PM »
But reallocating monthly is way more than I'm interested in doing with a buy and hold investment strategy.
I get that, but it costs me nothing to do it, and it results in enormously better outcomes in the long run.

I'm willing to log in to my account 12 times a year for 5 minutes (an hour of work) to have a much better PnL and better compounding.

Or never log in if your AA is 100% stocks (except to make contributions).

wheezle

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Re: Advise me on where to invest 100k.
« Reply #20 on: October 02, 2018, 01:22:41 PM »
Or never log in if your AA is 100% stocks (except to make contributions).
But I don't want my AA to be 100% stocks when it's possible to lose >50% of my portfolio. And so when recession risks and volatility combine, I would be stupid to hold through it.

erutio

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Re: Advise me on where to invest 100k.
« Reply #21 on: October 02, 2018, 01:27:51 PM »
Or never log in if your AA is 100% stocks (except to make contributions).
But I don't want my AA to be 100% stocks when it's possible to lose >50% of my portfolio. And so when recession risks and volatility combine, I would be stupid to hold through it.

You only lose >50% if you sell. 

wheezle

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Re: Advise me on where to invest 100k.
« Reply #22 on: October 02, 2018, 01:41:02 PM »
You only lose >50% if you sell.
This is where buy&holdism becomes self-deceptive hokum. If I'm holding a 40% stock allocation when the market drops by half, I am >2x better off than you, holding 100% against all reason.

If we're trying to compound our wealth over time instead of needlessly losing it, then I will do vastly better by using some simple math and refusing to deceive myself like this.

Look at the performance of the 50% risk account against the S&P 500: https://safer401k.com/how-it-works/performance-since-2000/

erutio

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Re: Advise me on where to invest 100k.
« Reply #23 on: October 02, 2018, 02:20:41 PM »
I just clicked on your link.  I don't know what proprietary system they are using, but it just seems like a lot of market timing. 

wheezle

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Re: Advise me on where to invest 100k.
« Reply #24 on: October 02, 2018, 02:25:31 PM »
The way my colleague explained it to me, they revise down the allocation when risk of recession is high (based on bond spreads), and revise down the allocation when stock market volatility is high (so that you don't lose much money). Both very simple, replicable, and testable back to the '70s.

Call it "market timing" if you like (apparently that's a bad thing?). But being 100% invested all the time is sometimes akin to knowing you're playing a losing game, but sticking to it out of spite.

goosefraba1

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Re: Advise me on where to invest 100k.
« Reply #25 on: October 02, 2018, 02:43:46 PM »
Thank you all for the discussion. I just heard back about a majority of the bonus. As of now, I have 45k coming to me guaranteed (after tax). I have one more bonus that I am waiting to hear back about that should be another 10-15k (after tax).

I will need to sit down with the Mrs to fully discuss our intentions. Likely, we will go ahead and pay off the remainder of her school loans. Mine, I will continue to pay the minimum for the next 6 years until Public Service Loan Forgiveness, as I have calculated that it saves me $60k to do it this way.

I hadn't really considered bonds or just a savings account, but that does make a lot of sense if we are going to make a large purchase in the next year or two.

One thing that I didn't mention is that I will likely have the same or greater bonus next year. So, we will likely try to pay down as much on the home as we can when it comes time.

Still Being

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Re: Advise me on where to invest 100k.
« Reply #26 on: October 02, 2018, 02:45:39 PM »
Or never log in if your AA is 100% stocks (except to make contributions).
But I don't want my AA to be 100% stocks when it's possible to lose >50% of my portfolio. And so when recession risks and volatility combine, I would be stupid to hold through it.

Why would it be stupid to hold? It'd be stupid to sell. Are you in retirement?

wheezle

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Re: Advise me on where to invest 100k.
« Reply #27 on: October 02, 2018, 02:57:56 PM »
Why would it be stupid to hold? It'd be stupid to sell. Are you in retirement?
27 y.o., currently 100% in S&P 500 via TSP C Fund.

But if volatility in the S&P 500 goes up along with classic recession indicators (real ones from the bond market, not the garbage that people peddle), then that allocation to the S&P 500 will go down and I will move into the G Fund (no loss of principal with long-term gov't bond rate).

I've chosen 50% to be the "most money I'm willing to lose at any time" for use with this formula, and historically that means I'll lose something like 30% or less, while all the people who stubbornly hold onto stock through the worst of it will lose 60%. This means I compound gains faster by avoiding crippling losses (and yes, those are still crippling losses, even when you don't sell out of the position and "realize" the loss).

I totally agree that people need to expose themselves to stock indexes if they want to actually grow wealth -- no question. But the same people usually think that this is some sort of religious observance, to be 100% invested in the S&P 500. It's nonsense. The signals to lower your exposure are very clear, and heeding them is much better for compounding in the long term.

Still Being

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Re: Advise me on where to invest 100k.
« Reply #28 on: October 02, 2018, 03:08:09 PM »
Why would it be stupid to hold? It'd be stupid to sell. Are you in retirement?
27 y.o., currently 100% in S&P 500 via TSP C Fund.

But if volatility in the S&P 500 goes up along with classic recession indicators (real ones from the bond market, not the garbage that people peddle), then that allocation to the S&P 500 will go down and I will move into the G Fund (no loss of principal with long-term gov't bond rate).

I've chosen 50% to be the "most money I'm willing to lose at any time" for use with this formula, and historically that means I'll lose something like 30% or less, while all the people who stubbornly hold onto stock through the worst of it will lose 60%. This means I compound gains faster by avoiding crippling losses (and yes, those are still crippling losses, even when you don't sell out of the position and "realize" the loss).

I totally agree that people need to expose themselves to stock indexes if they want to actually grow wealth -- no question. But the same people usually think that this is some sort of religious observance, to be 100% invested in the S&P 500. It's nonsense. The signals to lower your exposure are very clear, and heeding them is much better for compounding in the long term.

Make sure to post an update for us all here when the real indicators tell us a recession is about to hit: https://forum.mrmoneymustache.com/investor-alley/top-is-in/msg2155406/?topicseen#new

wheezle

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Re: Advise me on where to invest 100k.
« Reply #29 on: October 02, 2018, 03:21:21 PM »
Make sure to post an update for us all here when the real indicators tell us a recession is about to hit: https://forum.mrmoneymustache.com/investor-alley/top-is-in/msg2155406/?topicseen#new
There's no such thing as "recession is about to hit," as I'm sure you well know. But bond spreads reliably demonstrate when risk is present, and risk means taking money off the table. People have a hard time quantifying exactly how much ought to be invested when these risks arise, since they're hard to turn into numbers, but smart people do it to great success -- this isn't anything weird.

This guy writes good articles on it: https://seekingalpha.com/author/jason-cawley/articles#regular_articles

And you can see for yourself that the 50% risk portfolio is currently beating a buy&hold allocation in the link I posted above... the performance spread will only widen as we reach the next recession.

dougules

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Re: Advise me on where to invest 100k.
« Reply #30 on: October 02, 2018, 03:54:07 PM »
Max out Roth IRAs for both you and your wife if you are under the income limit. 

I'm a big fan of VT/VTWSX.

I like VTWSX, too, but the expense ratio is higher than VTSAX or VTIAX.  We buy VTSAX and VTIAX to get the better expense ratios, then mimic the balance in VTWSX. 

Realistically, though, there are a lot of options that are realistically that will all work well.  It just needs to be broad, passive, and cheap (low expense ratios).  I think it's good to diversify into non-US stocks, but it probably doesn't make a whole lot of difference really. 


The way my colleague explained it to me, they revise down the allocation when risk of recession is high (based on bond spreads), and revise down the allocation when stock market volatility is high (so that you don't lose much money). Both very simple, replicable, and testable back to the '70s.

Call it "market timing" if you like (apparently that's a bad thing?). But being 100% invested all the time is sometimes akin to knowing you're playing a losing game, but sticking to it out of spite.

Not being 100% invested is a losing game.  You're saying you'd rather hold inflation-prone cash than own profitable businesses.  What you're describing is market timing.  Of course we'd all like to only own stock when it's going up.  If you think you know when that is, though, you're implying that you're smarter than every other investor.  If you really could predict the market reliably there would be a lot of very wealthy people who would pay you heaps of money to manage theirs. 

The companies in those mutual funds are earning profit every day.  Ever dollar you hold out of the market is missing out on those profits.

wheezle

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Re: Advise me on where to invest 100k.
« Reply #31 on: October 02, 2018, 06:46:09 PM »
Not being 100% invested is a losing game.  You're saying you'd rather hold inflation-prone cash than own profitable businesses.  What you're describing is market timing.  Of course we'd all like to only own stock when it's going up.  If you think you know when that is, though, you're implying that you're smarter than every other investor.  If you really could predict the market reliably there would be a lot of very wealthy people who would pay you heaps of money to manage theirs. 
No, the stock market is pari-mutuel betting. It's more like that bear joke -- I don't have to outrun the bear, I just have to outrun you. You'll make a bit less money than me because I have a better risk-management system. I guess that DOES make me smarter than you.

Example: In literally every strategic betting game where you have control over how much you can stake, smart bettors stake according to how much can be lost. When the S&P 500 is crashing, the U.S. in officially in recession, and the Volatility Index is at 50, you KNOW that the S&P 500 could lose 5% in a single day. It would NOT be unlikely. This is mathematical fact. And in literally every other field of risk-management from betting to business decisions to financial risk departments, people would say, "Ah, that means we should stake less on this outcome."

For whatever reason, buy&holders didn't get this memo. There's nothing to be lost from having smart risk-management.

ILikeDividends

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Re: Advise me on where to invest 100k.
« Reply #32 on: October 02, 2018, 07:17:54 PM »
For whatever reason, buy&holders didn't get this memo.
If it wouldn't be too much trouble, perhaps you could post the memo here.

Oh, and you might want to send a copy to Berkshire Hathaway's address.  I don't think Warren Buffet got the memo either:

Warren Buffet
C/O Berkshire Hathaway
3555 Farnam St.
Omaha, NE 68131

Be sure to warn him about the bear that's about to eat him.  He's old, and he can't really run all that fast.  I imagine he's downright exhausted just trying to catch up with you.
« Last Edit: October 02, 2018, 07:48:18 PM by ILikeDividends »

wheezle

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Re: Advise me on where to invest 100k.
« Reply #33 on: October 02, 2018, 07:48:01 PM »
If it wouldn't be too much trouble, perhaps you could post the memo here.

Oh, and you might want to send a copy to Berkshire Hathaway's address.  I don't think Warren Buffet got the memo either:

Warren Buffet
C/O Berkshire Hathaway
3555 Farnam St.
Omaha, NE 68131

Be sure to warn him about the bear that's about to eat him.  He's old, and he can't really run all that fast.
Warren Buffet manages a huge conglomerate and makes money by getting favorable terms on debt and equity because is who he is and  can provide so much liquidity to people who need it. Including the US Government.

You don't do that. How does Warren Buffett have anything to do with this conversation?

ILikeDividends

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Re: Advise me on where to invest 100k.
« Reply #34 on: October 02, 2018, 08:05:01 PM »
If it wouldn't be too much trouble, perhaps you could post the memo here.

Oh, and you might want to send a copy to Berkshire Hathaway's address.  I don't think Warren Buffet got the memo either:

Warren Buffet
C/O Berkshire Hathaway
3555 Farnam St.
Omaha, NE 68131

Be sure to warn him about the bear that's about to eat him.  He's old, and he can't really run all that fast.
Warren Buffet manages a huge conglomerate and makes money by getting favorable terms on debt and equity because is who he is and  can provide so much liquidity to people who need it. Including the US Government.

You don't do that.

No I don't.  And neither did the fifteen year old Warren Buffet when he started to grow his $6,000 stash into a $70+ billion conglomerate.  Or are you suggesting he just sprang on to the scene being treated like the financial mogul he has become since then?

How does Warren Buffett have anything to do with this conversation?
Oh, I don't know.  Maybe it was your inference that clueless "buy&holders" are somehow missing some obviously superior timing strategy enclosed in some mysterious memo that you are now willfully withholding from us.

https://www.brainyquote.com/quotes/warren_buffett_129835
"Our favorite holding period is forever." Warren Buffett
« Last Edit: October 02, 2018, 08:15:18 PM by ILikeDividends »

wheezle

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Re: Advise me on where to invest 100k.
« Reply #35 on: October 02, 2018, 08:20:41 PM »
No I don't.  And neither did the fifteen year old Warren Buffet when he started to grow his $6,000 stash into a $70+ billion conglomerate.
...
Oh, I don't know.  Maybe it was your inference that clueless "buy&holders" are somehow missing some obviously superior timing strategy enclosed in some mysterious memo that you are now willfully withholding from us.

https://www.brainyquote.com/quotes/warren_buffett_129835
"Our favorite holding period is forever." Warren Buffett
OK, first of all, we're not talking about $70+ billion conglomerates here. We're talking about retiring a bit early by being smart. So again, Mr. Buffett is about as relevant as Dale Earnhardt Jr. to this conversation.

Second, I'm not "witholding" anything. I explained how I came to the conclusion that I wanted a defined-risk strategy that revolved around the S&P 500, and how a colleague pointed me to a service with a fairly industry-standard algorithm that takes into account risk appetite, recession indicators, and volatility. I also posted a link to the performance of my 50% risk portfolio above.

So, in conclusion:
1. Warren Buffett still has nothing to do with this conversation.
2. I'm literally on this forum to talk about my TSP/IRA plans, follow through on them, and share the process. Which I'm doing, rather openly.

Andy R

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Re: Advise me on where to invest 100k.
« Reply #36 on: October 02, 2018, 08:34:59 PM »
In the last couple of days, I saw the second of 2 people on the bogleheads forum who took all their money out in 2014-2015 because "a crash was coming". They now have missed out on 40% gains. One is in deep regret since it was quite a lot of money, and wondering how to get back in. The other continues to wait for the big crash and if the crash is less than 40% then they would have been better just not assuming they could predict the future.
I have not been investing long enough to know what a bear market feels like, but it makes sense to me to find an asset allocation that you can withstand and not sell down in a bear market and just stick to it and cut out the idea of trying to predict the future "because the market is so high". There is no difference to being worried about the all time high that it is now compared to the all time high that it was in 2014-15. None. No reason why it could not rise another 50% before a correction from now.

The one caveat that makes sense to me is that if you are close to retirement, then it would be worth learning about a bond tent and considering readjusting your asset allocation, but this is fundamentally a change in your asset allocation and not a market timing or predicting-the-future issue.

wheezle

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Re: Advise me on where to invest 100k.
« Reply #37 on: October 02, 2018, 08:45:11 PM »
In the last couple of days, I saw the second of 2 people on the bogleheads forum who took all their money out in 2014-2015 because "a crash was coming". They now have missed out on 40% gains. One is in deep regret since it was quite a lot of money, and wondering how to get back in. The other continues to wait for the big crash and if the crash is less than 40% then they would have been better just not assuming they could predict the future.
I have not been investing long enough to know what a bear market feels like, but it makes sense to me to find an asset allocation that you can withstand and not sell down in a bear market and just stick to it and cut out the idea of trying to predict the future "because the market is so high". There is no difference to being worried about the all time high that it is now compared to the all time high that it was in 2014-15. None. No reason why it could not rise another 50% before a correction from now.
Those people are silly. "The market is high" is never a reason to sell anything.

I am 100% in the S&P 500 right now, and I would absolutely believe that the market could return another 30-50% from here before anything changes. But that's because risk of recession has been very low, and so has volatility. Eventually, it will be unwise to be 100% in the market -- that's just not now.

It's not about telling the future. It's about responding to obvious risks. I will never sell out of the S&P 500 completely. The MINIMUM that this strategy has been in the S&P was ~30%, and that's when volatility is VERY high and we're objectively in the middle of a GDP recession.

Andy R

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Re: Advise me on where to invest 100k.
« Reply #38 on: October 02, 2018, 09:59:29 PM »
May I ask what precisely is your metric for when to reduce your allocation, and what metric for how much to reduce it to?

ILikeDividends

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Re: Advise me on where to invest 100k.
« Reply #39 on: October 02, 2018, 10:19:28 PM »
OK, first of all, we're not talking about $70+ billion conglomerates here. We're talking about retiring a bit early by being smart.
Oh, I think I see.  You're saying Mr Buffet is an unqualified source to cite in a discussion "about retiring a bit early by being smart," merely because he has built a $70+ billion conglomerate by excelling in his "buy&holders" approach to investing.  That achievement makes him what?  Not smart?  Not an investor?

I'm a little bit confused by your anxious dismissal of any ideas of Mr Buffet cited here.

So again, Mr. Buffett is about as relevant as Dale Earnhardt Jr. to this conversation.
Ah, I think I've got it.  You're saying that you think Warren Buffet got rich as a race car driver.  I suppose I can understand your confusion about Mr Buffet's relevance to the discussion now.

Second, I'm not "witholding" anything. I explained how I came to the conclusion that I wanted a defined-risk strategy that revolved around the S&P 500, and how a colleague pointed me to a service with a fairly industry-standard algorithm that takes into account risk appetite, recession indicators, and volatility. I also posted a link to the performance of my 50% risk portfolio above.
Uh huh.  And is your "colleague" a race car driver too?  Or does he now run a multi-billion dollar conglomerate that would make him irrelevant?  What are your colleague's credentials for being made relevant to this discussion?

Geez, your colleague must be way smarter than Warren Buffet or Dale Earnhardt Jr., in order for you to give him a free pass on relevance.  All those two idiots ever did was win races or amass a fortune by investing.  I wonder if they know each other.

So, in conclusion:
1. Warren Buffett still has nothing to do with this conversation.
Keep repeating that, if it brings you comfort.  I will have to respectfully disagree.
« Last Edit: October 02, 2018, 11:08:07 PM by ILikeDividends »

wheezle

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Re: Advise me on where to invest 100k.
« Reply #40 on: October 02, 2018, 11:03:42 PM »
May I ask what precisely is your metric for when to reduce your allocation, and what metric for how much to reduce it to?
As best I understand, there are three factors:

1. Volatility. What is the current S&P 500 volatility? This can be measured using historical numbers or forward-looking numbers. Either way, it tells you how much the market is moving up and down. Sometimes it's 0.5% per day on average, sometimes it's 3% per day on average. Usually, bigger moves happen to the downside.

2. Recession Risk. Bond spreads (most popular is 10-year to 2-year Treasury) predict recessions and healthy market periods. Flattening yield curves raise recession risk. The spreads are turned into a predictive indicator by seeing exactly how they affected the market in the past (I linked above to a guy who wrote articles about this and has been very successful with using the approach. He's definitely smarter than most, but also clearly not the only one doing this.)

3. How much am I willing to lose? In my case, it's 50% of my portfolio.

So what you do is simulate all stock market history since the early '70s to see if, given CURRENT volatility and recession risk, you could have EVER lost more than 50% of your money by investing X% in the S&P 500. Ultimately, the answer is that I absolutely cannot lose 50% of my money right now by being 100% invested, so it's optimal for me to stay all-in. According to my colleague, this is a very common way to gauge investment risk and to optimize portfolios, especially among sophisticated fund managers who use "volatility targeting" approaches. You want to limit exposure to volatile things, because volatility means you can, CONCEIVABLY, lose more money than you're willing to lose, which is unacceptable. That exact limit where you could lose more than your risk tolerance is where your "correct" allocation is.

I don't know if this is exactly a Monte Carlo simulation, but it's at least a very similar approach. I don't know how to get a screengrab of the PDF document on here (and that is probably against the terms of service anyway), but suffice it to say that over the past 10 years, the S&P 500 is up 150% and the 50% risk portfolio is up 148.9%. But the limited risk portfolio only had a FRACTION of the losses in '09.

On a longer timeframe, you can really start to see why avoiding the worst of recessions ends up being better for compounding. Posted this performance link above already, but here it is again: https://safer401k.com/how-it-works/performance-since-2000/

Quote
Thanks to more aggressive allocation, the 50% Risk Profile returned 134.98% quite a bit more than the S&P 500s 97.5%.

Is this cherry-picking a pretty lousy period in the market? Maybe, sort of? I don't know. But fear of getting in at the "wrong time" has always gotten to me. And it never helped that people tell me that no time is the wrong time... because that's absolutely not true if you're hoping for gains from 2000 to 2013.

I find this whole thing convincing not least of all because my IT/programmer colleague is much more informed than I am about trading and portfolio management (and gambling) and he uses this method exclusively for his TSP account. It's literally the best of all worlds -- keep me in the market all the time but step off the pedal when potential losses are higher than I can stomach (a number I provide).

Sorry if it seems like I'm proselytizing. I just think that some of the more rigid buy-and-hold dogmas fly in the face of logic.

P.S. If we're going to keep on bringing up Buffett, here's my pick:

Quote
Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.

talltexan

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Re: Advise me on where to invest 100k.
« Reply #41 on: October 03, 2018, 09:39:15 AM »
I'd like to thank Wheezle for so patient explaining this market timing system.

I think he deserves credit for discovering it. One of the big issues with market timing is that most people are not able to stick with the plan because they doubt the system at the wrong times. By having a service perform the management, this problem gets addressed.

I should add that there are also a lot of buy/hold'ers who probably fail to stick with the plan, making the mistake of locking in losses at the worst possible times.

Personally, I tend to be a buy-holder, and that has probably been re-inforced by the culture of this site. When having the debate between the two philosophies, I think it's important that each side argues against the proper thing. Many buy/holders argue against market timing buy characterizing it as "based on feelz", which does not sound like what Wheezle is describing.

wheezle

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Re: Advise me on where to invest 100k.
« Reply #42 on: October 03, 2018, 10:24:19 AM »
One of the big issues with market timing is that most people are not able to stick with the plan because they doubt the system at the wrong times. By having a service perform the management, this problem gets addressed.
I think this is an important part of it -- if I feel like I'm going to have a gentler ride down when recession hits, I'm more likely to not panic, and to commit to sticking with the plan.

I should add that there are also a lot of buy/hold'ers who probably fail to stick with the plan, making the mistake of locking in losses at the worst possible times.
And as for myself, I'd be very afraid that I'd become one of these people. I don't trust myself. In '08-'09, I saw such clever, rational people cutting half of their stock positions as the S&P 500 plowed past 800. Without a horse in that race, I don't know what I would have done, but it's scary.

Personally, I tend to be a buy-holder, and that has probably been re-inforced by the culture of this site. When having the debate between the two philosophies, I think it's important that each side argues against the proper thing. Many buy/holders argue against market timing buy characterizing it as "based on feelz", which does not sound like what Wheezle is describing.
"The feelz" is exactly what I'm trying to avoid here. I really like the prospect of a rigid mathematical solution that saves me from a loss limit that would be emotionally painful, because I don't want to trigger those feelz. Upon self-examination, I know that I simply don't have the cojones to weather a '08-'09 with a 100% allocation... but I know that I want it the rest of the time.

Thanks, Texan. I wasn't describing "the feelz" aspect well enough -- and it's a really important part of why I chose to do this.

dougules

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Re: Advise me on where to invest 100k.
« Reply #43 on: October 03, 2018, 11:18:57 AM »
Not being 100% invested is a losing game.  You're saying you'd rather hold inflation-prone cash than own profitable businesses.  What you're describing is market timing.  Of course we'd all like to only own stock when it's going up.  If you think you know when that is, though, you're implying that you're smarter than every other investor.  If you really could predict the market reliably there would be a lot of very wealthy people who would pay you heaps of money to manage theirs. 
No, the stock market is pari-mutuel betting. It's more like that bear joke -- I don't have to outrun the bear, I just have to outrun you. You'll make a bit less money than me because I have a better risk-management system. I guess that DOES make me smarter than you.

Example: In literally every strategic betting game where you have control over how much you can stake, smart bettors stake according to how much can be lost. When the S&P 500 is crashing, the U.S. in officially in recession, and the Volatility Index is at 50, you KNOW that the S&P 500 could lose 5% in a single day. It would NOT be unlikely. This is mathematical fact. And in literally every other field of risk-management from betting to business decisions to financial risk departments, people would say, "Ah, that means we should stake less on this outcome."

For whatever reason, buy&holders didn't get this memo. There's nothing to be lost from having smart risk-management.

Yes, but in this analogy you don't know when the bear is coming or what direction she's coming from. 

Warren Buffett is very much relevant because he's one of the few people that actually have reliably beat the market average.  Yes, he has a huge conglomerate that gets favorable terms on debt.  His conglomerate also has top talent delving into all the details of each company they want to buy, pouring over their books, meeting their execs, and comparing them to their competitors.  That's the point.  If you don't have those, you can't do what he does.  Anyway, he made a wager against a hedge fund manager that passive index funds could beat any choice of hedge funds.  It wasn't even a contest.  Yes, that's an anecdote, but most empirical studies show that hedge fund managers can't reliably beat the market average.  You're not only claiming to be smarter than me, but significantly smarter than the average hedge fund manager who does it for a living. 

If you're viewing the stock market as zero-sum betting, you're neglecting the fact that the real money is coming from the profits made by the companies in the mutual funds.  If you're betting, there are pretty good odds that Wal-Mart, Apple, Mastercard, etc. will make a profit.  There are also pretty good odds that cash sitting on the sidelines will miss out on those profits and get eroded by inflation. 

« Last Edit: October 03, 2018, 11:20:39 AM by dougules »

wheezle

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Re: Advise me on where to invest 100k.
« Reply #44 on: October 03, 2018, 12:13:14 PM »
Empirical studies show that hedge fund managers can't reliably beat the market average.

You're not only claiming to be smarter than me, but significantly smarter than the average hedge fund manager who does it for a living. 
So, which is it? Am I silly for thinking I can beat hedge fund managers, or is it trivial to beat hedge fund managers? It can't be both.

Also, I think it may be helpful to realize that most "hedge funds" aren't trying to get absolute returns, and that Warren Buffett's "bet" was, in fact, rather facetious. (You'll know from his letters that he likes making cutesy jokes like this. This was just a PR stunt cum charitable giving.) Once again, Warren Buffett has nothing to do with this conversation (as you amply demonstrated in describing his business), and neither do hedge fund managers.

If you're viewing the stock market as zero-sum betting ...
Obviously, I do not believe this is a zero-sum game, or else my chosen strategy wouldn't have been 100% invested in stocks for the past 8 years... you cannot possibly be reading what I'm saying charitably, because you're misunderstanding literally everything.

wheezle

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Re: Advise me on where to invest 100k.
« Reply #45 on: October 03, 2018, 02:31:05 PM »
@goosefraba1 Sorry we've sort of hijacked this thread. It's probably gone too far OT.

I started a new thread about the risk-adjusted S&P 500 idea: https://forum.mrmoneymustache.com/investor-alley/risk-adjusted-exposure-to-sp-500/

Will stop polluting this thread now. :|

ILikeDividends

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Re: Advise me on where to invest 100k.
« Reply #46 on: October 03, 2018, 02:32:11 PM »
Empirical studies show that hedge fund managers can't reliably beat the market average.

You're not only claiming to be smarter than me, but significantly smarter than the average hedge fund manager who does it for a living. 
So, which is it? Am I silly for thinking I can beat hedge fund managers, or is it trivial to beat hedge fund managers? It can't be both.

Also, I think it may be helpful to realize that most "hedge funds" aren't trying to get absolute returns, and that Warren Buffett's "bet" was, in fact, rather facetious. (You'll know from his letters that he likes making cutesy jokes like this. This was just a PR stunt cum charitable giving.)
It wasn't a cutesy joke.  It was a real money bet for a million dollars:

https://www.businessinsider.com/warren-buffett-wins-million-dollar-bet-against-hedge-funds-2018-1

And he wasn't betting that he, or his massive corporate brain-trust, could out-perform a hedge fund manager.  No one in their right mind would have taken that bet.  The bet was that the hedge funds couldn't even beat the S&P500 over a period of 10 years.

So, yeah, it's trivial for just about any dummy on the street to beat the hedge funds simply by buying and holding the S&P500.  If you over-think the approach to investing too much, you're not likely to even beat the dummies. 

Setting a goal of beating hedge funds doesn't set a very high bar.  Just about anyone can do that, so you're not silly for thinking you can too.  The only real question that matters is, do you think you can beat the S&P500?

If you don't think you can beat the S&P500, then it begs the question, why are you working so hard to under perform the S&P500? 

If you do think you can beat the S&P500, then whether you are silly or not can only be answered by you, if and when you get to retirement.

In all sincerity, here's a little gift for you:

https://jlcollinsnh.com/stock-series/

Don't read it now, but do bookmark it, and don't lose it.  I would have given my left arm for this link when I was your age.  Of course, I would have had to wait a couple of decades for the internet to be invented before I could read it, but that's kind of beside the point.

You'll know when it's time for you to read it.  Your future self will thank me. 
« Last Edit: October 03, 2018, 02:58:02 PM by ILikeDividends »