Author Topic: Brand New - Help us make smart investment choices  (Read 1017 times)

mbshaw297

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Brand New - Help us make smart investment choices
« on: September 05, 2017, 06:00:53 PM »
Hi Mustachians.  New to the concept of FI, and trying to figure out where and how to start.  There is so many topics on this forum, I apologize for repetitiveness...I have newborn twins so my time to research is limited.

1 - On FI podcasts (MMM, MADFIENTIST, etc), why aren't more #'s thrown around to give perspective?  (Just curious)

2 - We have been savings for years in a regular savings account earning 1%.  Obviously this is not what we should have been doing and we are looking to rectify.  Would you advise a lump sum investment (100k) in the Vanguard MF, or small investments here and there over time?  Depositing a lump sum of that magnitude is hard for us to part with.

3 - If I move all of our savings into a mutual fund, and I decide to purchase a home.  How does this work?  Can I safely withdrawal?

Thanks a bunch!


 

somers515

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Re: Brand New - Help us make smart investment choices
« Reply #1 on: September 05, 2017, 06:29:54 PM »
Welcome!  Sounds like you are just starting the ball rolling - that's awesome.  I'm sure others will respond but I'll chime in to get it started.

1 - Not sure about podcasts but MMM provides his spending breakdown every year.
2- Over the long term the market usually goes up and therefore it's sound advice to avoid trying to time the market.  Therefore most will say put it all in at once.  However, some people can be uncomfortable with putting that much money in all at once and so dollar cost averaging could be the way to go for you.  Basically instead of putting all 100k in at once, you might come up with a plan to put in 20k per month until it's all invested - that's just an example.  I would also encourage you to come up with an investment plan for yourself that you are comfortable with.
3- Yes but if you have a short time frame for using the money then you have to consider that the market could certainly go down in the short term causing a loss when you go to sell and therefore you might want to be more conservative with your money that you plan on using in the short-term.

Good luck!

MDM

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Re: Brand New - Help us make smart investment choices
« Reply #2 on: September 05, 2017, 09:14:16 PM »
mbshaw297, welcome to the forum.

Some reading material that may be useful:
Investment Order
Stock Series
Getting started - Bogleheads
www.etf.com/docs/IfYouCan.pdf

SeattleCPA

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Re: Brand New - Help us make smart investment choices
« Reply #3 on: September 06, 2017, 07:59:14 AM »
I also like the Bogleheads investment philosophy though I think you need to be alert to fact that it suffers from some blindspots and holes:

https://evergreensmallbusiness.com/bogleheads-investment-philosophy-flaws/

P.S. There's a link in my sig that leads you to a page where you can download a free copy of my little ebook "Thirteen Word Retirement Plan."
My blog Evergreen Small Business
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MDM

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Re: Brand New - Help us make smart investment choices
« Reply #4 on: September 06, 2017, 09:05:30 AM »
I also like the Bogleheads investment philosophy though I think you need to be alert to fact that it suffers from some blindspots and holes

"suffers from" seems an exaggeration.  Some examples:

- "But here’s the problem. Relatively few people save the money needed to run the Bogleheads plan."  Denigrating a philosophy because people choose not to use it?

- "Maybe the first steps someone needs to take are getting spending under control following the strategies and tactics promoted by Mr. Money Mustache and Dave Ramsey."  Won't argue against that.  Neither, however, do Bogleheads (emphasis added): "Bogleheads emphasize starting early, living below one's means, regular saving, broad diversification, and sticking to one's investment plan. "

- "The Bogleheads investment philosophy and similar strategies basically assume you’ll earn a median return over the decades you save and invest." Actually they claim the Bogleheads® investment philosophy has "been shown over time to produce risk-adjusted returns far greater than those achieved by the average investor."

For anyone unfamiliar with Bogleheads, see Getting started - Bogleheads.  Just as MMM isn't for everyone, neither is Bogleheads, but for many the sites are complementary and both worth using.  One might give the nod to MMM for those getting started and to Bogleheads for those further along, but there is much overlap.

SeattleCPA

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Re: Brand New - Help us make smart investment choices
« Reply #5 on: September 06, 2017, 10:17:32 AM »
- "But here’s the problem. Relatively few people save the money needed to run the Bogleheads plan."  Denigrating a philosophy because people choose not to use it?

Well, we see this differently. But I think the fact that the plan assumes people can save over decades when most people can't is really a big issue. And my point in saying this isn't to denigrate the philosophy--I've recommended it myself in books for maybe twenty years longer than Bogleheads has existed, My point is to emphasize the critically important requirement to get the savings thing working right.

...Neither, however, do Bogleheads (emphasis added): "Bogleheads emphasize starting early, living below one's means, regular saving, broad diversification, and sticking to one's investment plan. "

Isn't it fairer to say Bogleheads emphasizes do-it-yourself passive investing using tax deferred and tax advantaged accounts, inexpensive index funds and simple asset allocation formulas? That's what i see as the groups emphases. All really good things, I agree (and as I said so several times).

But my reading leads me to think they emphasize the saving part way less than, for example, MMM. And actually I the savings part is more important. Gosh, as noted in the post, half of people at the doorstep of retirement have no retirement savings... and the average balance of the half that do have savings is pretty modest.


- "The Bogleheads investment philosophy and similar strategies basically assume you’ll earn a median return over the decades you save and invest." Actually they claim the Bogleheads® investment philosophy has "been shown over time to produce risk-adjusted returns far greater than those achieved by the average investor."

Yes, I agree with this. And this might be rephrased into an actionable recommendation: Passive investing using inexpensive index funds and a common sent asset allocation formula works well. Totally agree.

But my point is--and I think many people miss this--the average annual returns enjoyed by current retirees over the, say, three or four decades they saved has been either average or more likely above average.

You can see this in a couple of places. First, if you look at the heat maps provided for common popular portfolios at https://portfoliocharts.com/portfolios/ you'll see that returns have been average or above average on an annual basis for pretty much anyone who used any cookie cutter asset allocation.

A second place to get an even better view into this reality is with http://cfiresim.com/ and more specifically the spreadsheet you can download and use to see the average annual portfolio returns for a representative asset allocation since right after the civil war. What you see when you do this is that pretty much anyone who actually ran the plan got an average or above average annual return.

I think this is a big important insight. And a big important insight many people miss.


For anyone unfamiliar with Bogleheads, see Getting started - Bogleheads.  Just as MMM isn't for everyone, neither is Bogleheads, but for many the sites are complementary and both worth using.  One might give the nod to MMM for those getting started and to Bogleheads for those further along, but there is much overlap.

We absolutely agree here.  Here were my ending remarks:

Two final quick comments in closing.

First, let me again say that the basic theory of the Bogleheads approach works really well. Low-cost index funds and a common sense asset allocation formula work better than most new investors realize. As a result, if you can run a savings and investment plan based on the Bogleheads investment philosophy, well, I don’t think there’s any simpler or surer way to invest successfully in traditional asset class investments. (I’ve used such a strategy myself for decades and have no plan to stop. Ever.)

Second, though that basic theory works well, reality shows the philosophy is impractical for many… and then incomplete. To get to the point where the theory can work its magic, for example, you and I must get the savings thing going right. And then even after that, we need to recognize that the orthodoxy of the Bogleheads investment philosophy means there are holes and blindspots in the strategy.


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MDM

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Re: Brand New - Help us make smart investment choices
« Reply #6 on: September 06, 2017, 11:43:00 AM »
It's certainly possible we are "in violent agreement" and it is the limited bandwidth of internet discussions masking that. :)

...I think the fact that the plan assumes people can save over decades when most people can't is really a big issue.
...
My point is to emphasize the critically important requirement to get the savings thing working right.
I'd agree with "...when most people don't is really...."  Yes, for some things are hand-to-mouth and significant saving is practically impossible.  For many, it's a choice.

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...Neither, however, do Bogleheads (emphasis added): "Bogleheads emphasize starting early, living below one's means, regular saving, broad diversification, and sticking to one's investment plan. "
Isn't it fairer to say Bogleheads emphasizes do-it-yourself passive investing using tax deferred and tax advantaged accounts, inexpensive index funds and simple asset allocation formulas? That's what i see as the groups emphases. All really good things, I agree (and as I said so several times).

But my reading leads me to think they emphasize the saving part way less than, for example, MMM.
Yes, shades of gray in the emphasis, and perhaps in the eye of the beholder.  And yes, I agree (e.g., compare How To: Write a "Case Study" Topic vs. Asking Portfolio Questions - Bogleheads.org) the MMM forums skew more toward analyzing spending details.  But there are plenty of threads on Bogleheads in which "reduce spending" is suggested - just as the MMM forums offer plenty of investment advice.

This may also take us into the metaphysical question of "Who is MMM/Bogleheads - the respective founders, or the forum/wiki contributors, or...?"

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But my point is--and I think many people miss this--the average annual returns enjoyed by current retirees over the, say, three or four decades they saved has been either average or more likely above average.
I think I understand the point, but that does read somewhat funny. ;)

This is a question of predicting the future, and I freely admit no expertise whatsoever in that field.  If I understand correctly, you are suggesting that people be conservative in their projected investment returns.  Much the same as most Boglehead and MMM posters suggest Dave Ramsey's 12% is too high and one should use something lower, except you're suggesting quite a bit lower than 12% - correct?  Agrees that some amount of conservatism is appropriate - just need to find the Goldilocks amount (not too much, not too little, ...).

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For anyone unfamiliar with Bogleheads, see Getting started - Bogleheads.  Just as MMM isn't for everyone, neither is Bogleheads, but for many the sites are complementary and both worth using.  One might give the nod to MMM for those getting started and to Bogleheads for those further along, but there is much overlap.
We absolutely agree here.
Always good to end on a positive note!  Thanks for the discussion (and in advance for more if that comes).

SeattleCPA

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Re: Brand New - Help us make smart investment choices
« Reply #7 on: September 06, 2017, 02:01:00 PM »
It's certainly possible we are "in violent agreement" and it is the limited bandwidth of internet discussions masking that. :)

Oh gosh, I hope not. Sorry if I am either coming across that way or fueling the fires.


This is a question of predicting the future, and I freely admit no expertise whatsoever in that field.  If I understand correctly, you are suggesting that people be conservative in their projected investment returns.  Much the same as most Boglehead and MMM posters suggest Dave Ramsey's 12% is too high and one should use something lower, except you're suggesting quite a bit lower than 12% - correct?  Agrees that some amount of conservatism is appropriate - just need to find the Goldilocks amount (not too much, not too little, ...).

I fear I'm doing a poor job of explaining myself. Sorry. But here's another way to say the same thing...

In recent history, the Bogleheads three funds approach (and many other asset allocation formulas including the one I use)  averaged a little over 6% real return according to Portfolio Charts.

Of course, these portfolios are obviously risky in any given year (as we all either know or need to learn). The worst year since I've been saving is maybe -22%... the best year supposedly 27%-ish. But then what we also know is that if you look longer term, the band tightens. I.e., over thirty years, the average is still 6% annually or whatever. But the range from high to low is maybe 4% to 7%.

I.e., the average maybe is 6% but you or I could have earned 4% a year for 30 years or we could have earned 7% for 30 years...  (Again numbers from Portfolio Charts.)

And so here's the rub. We have (I think) a tendency to plan as if we get the average 6% return. And this has been a historically safe assumption because for basically the last three decades people haven't been disappointed when they use this assumption. They've earned the average or they've beat the average.

But we've been lucky. And we could  just as easily have earned 4% or 5%. And that would have meant we end up a very different place.

One final postscript. I love www.portfoliocharts.com but as I've remarked to Tyler the creator I wish the data available to him went back further.  And if it did, I think the tightness of the band he shows in his charts would widen and go from, like, 2% to 8% or whatever... I.e., in modern times they have been thirty year periods where people earned average real returns outside of the relatively tight 4% to 7% band. And this variability in outcomes becomes an even bigger issue.
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MDM

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Re: Brand New - Help us make smart investment choices
« Reply #8 on: September 06, 2017, 03:03:11 PM »
It's certainly possible we are "in violent agreement" and it is the limited bandwidth of internet discussions masking that. :)
Oh gosh, I hope not. Sorry if I am either coming across that way or fueling the fires.
Hah - it's not a bad thing. :)

That phrase comes from discussions (often teleconferences with poor audio and no video) in which persons A and B would have the same opinion but, due to mishearing a word, not seeing body language, not recognizing sarcasm, etc., think they were arguing opposite sides.  Someone else would then observe, "hey, A & B, do you two realize you are 'in violent agreement' here?"  All would have a good laugh, things would settle down, and life would go on.

SeattleCPA

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Re: Brand New - Help us make smart investment choices
« Reply #9 on: September 06, 2017, 05:42:12 PM »
It's certainly possible we are "in violent agreement" and it is the limited bandwidth of internet discussions masking that. :)
Oh gosh, I hope not. Sorry if I am either coming across that way or fueling the fires.
Hah - it's not a bad thing. :)

That phrase comes from discussions (often teleconferences with poor audio and no video) in which persons A and B would have the same opinion but, due to mishearing a word, not seeing body language, not recognizing sarcasm, etc., think they were arguing opposite sides.  Someone else would then observe, "hey, A & B, do you two realize you are 'in violent agreement' here?"  All would have a good laugh, things would settle down, and life would go on.

Oh-oh. I only now just realized you said "violent agreement"... I misread originally as "violent disagreement." Ugh.

My blog Evergreen Small Business
My free downloadable ebook: Thirteen Word Retirement Plan

mbshaw297

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Re: Brand New - Help us make smart investment choices
« Reply #10 on: September 06, 2017, 08:42:31 PM »
Thanks everyon!!  Love this forum - quick responses that even I can understand!

Appreciate everything have a nice week!