Author Topic: Real Estate vs Stocks, Bonds, Commodities, Cash  (Read 2263 times)

Imanuels

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Real Estate vs Stocks, Bonds, Commodities, Cash
« on: March 16, 2019, 09:10:13 AM »
Hi everyone.

I've been destructively stuck with important financial decisions recently and would like to ask for advice.

1. Description of the situation.
I'm 31, married, no kids, live in Germany. Working full time (science&engineering) and enjoining great mustachian lifestyle - going everywhere (work, groceries etc.) by bike, making stuff by myself, intentional buying of things that add value, happiness, efficient, minimalist lifestyle. Consequently, I do not manage to spend more than approx. 35% of my income.

2. Description of the problem.
I love what I'm doing professionally and get so much consumed by all kinds of other creative projects that as a result have been utterly ignorant about finances. Thus, my savings have been simply piling up in my bank account all these years. Meaning, they have actually been part by part eaten up by inflation + haven't generated any interest, return of investment. Which I now find really annoying and ignorant from my 'past me'.

3. The question.
I would like to finally put my savings to work with a know that (i) they will not be lost (no gambling, stock picking), (ii) they will generate additional income and gradually compound our family closer to financial freedom ("If you don't find a way to make money while you sleep, you will work until you die", to quote Warren Buffet).

But how to rationally solve this problem? Where exactly to invest? I've been doing some research and come to following conclusions:
- For an average person it appears reasonable to invest in an index fund, such as VTSAX and just get back to work, sleep well at night. Here the Simple Path to Wealth by Collins, as well as other great resources have been very helpful.
- My problem with this approach however is the moment in time, economy now. Namely, by reading several pieces about market cycles from people like Ray Dalio or Howard Marks, they seem to anticipate an economic downturn coming. I have also read that no one can time the market, but if this is really true, perhaps putting my savings into stocks is not such a good idea?

Alternatively, I'm considering bonds, commodities or real estate. I was close to buying an apartment (we're renting currently), but reading Why your house is a terrible investment by Collins has changed my view on this. Especially, considering that we might move elsewhere after roughly 3 years.
Commodities seem to be priced relatively low (GSCI), but I have no fundamental reasons to think that they should rise.

So, the hard part is that I can't really understand and calculate the outcomes of all these stock, bond etc. scenarios. It seems rather random and unpredictable to me (I guess because I'm not an investor, economist etc.). Therefore, I'm completely stuck and simply sitting on cash which of course results in a huge opportunity cost.
Any advice on how to proceed here would be highly appreciated!

Many thanks!
« Last Edit: March 16, 2019, 09:31:16 AM by Imanuels »

davisgang90

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Re: Real Estate vs Socks, Bonds, Commodities, Cash
« Reply #1 on: March 16, 2019, 09:23:18 AM »
I'm all in for socks!  Or maybe you meant stocks?

Imanuels

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #2 on: March 16, 2019, 09:30:02 AM »
Oops typo.
And for whatever reason the post appeared 3x and I can't remove it.

TomTX

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #3 on: March 16, 2019, 10:06:01 AM »
This has been covered a LOT in this forum. I suggest reading through other threads thoroughly, then come back with specific questions.

Perhaps start with the sticky threads.

MustacheAndaHalf

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #4 on: March 16, 2019, 10:25:34 AM »
You could pick an average mutual fund - even that will beat cash.  A bad mutual fund usually beats cash.

Do you like reading enough to get through "A Random Walk Down Wall Street"?  Any of it's 11 editions should be fine - I'd guess there's probably a copy at a nearby library.  That will get you up to speed, and past most banks (who seek to make a profit, after all).

Imanuels

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #5 on: March 16, 2019, 11:22:46 AM »
Thanks a lot for the advice, I will start with the sticky threads then.
Concerning reading "A Random Walk Down Wall Street". My struggle is that I'm not really interested in trading or investing as such. There are too many other great things I can do with my time, which will create much more value. Generally, I completely agree with what Buffet replied to Tim Ferris when was asked for investment advice for a case quite similar to mine: “I’d put it all in a low-cost index fund that tracks the S&P 500 and get back to work…”
The only problem is the timing - based on the opinions mentioned above, S&P 500 doesn't seem to be 'safe'. Maybe that's just a cognitive bias producing fear..

Kalergie

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #6 on: March 16, 2019, 01:03:46 PM »
For Germans, I recommend: https://www.finanzwesir.com/

MustacheAndaHalf

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #7 on: March 17, 2019, 12:26:32 AM »
Okay, in that case there's a very small book called "The Investment Answer" that's only 96 pages.  And it's a smaller book, so even the pages are small.

The problem is that when you invest without confidence, anything can shake your confidence.  When a correction hurts your investments, why should you stay invested?  Even now, you're worried about losing money - as everyone is, but experience and knowledge helps overcome that fear and stay invested.  That's why doing some reading is important.

The U.S. stock market is actually larger than the rest of the world's stock markets, combined.  If you look at a total world ETF like "Vanguard Total World ETF" (VT), you'll see over 50% of it is invested in U.S. stocks.  So avoiding the S&P 500 might not be a good idea.
https://investor.vanguard.com/etf/profile/portfolio/vt

Warren Buffet also says to buy when others are fearful, and avoid buying when others are greedy.  After all the dramatic losses in December, the fear came out... and anyone too scared to invest missed a +12% return so far in 2019.

What if you just take a fraction of your savings, 1/5th or 1/8th... whatever you feel comfortable investing, and invest it.  Maybe half in S&P 500, and half in the rest of the world.  You may lose money this year, but the more time you spend investing, the more the stock market tends to beat bonds and savings accounts.  Pick a fraction of your savings and decide to invest that amount.
« Last Edit: March 17, 2019, 12:28:12 AM by MustacheAndaHalf »

flipboard

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #8 on: March 17, 2019, 01:07:04 AM »
But how to rationally solve this problem? Where exactly to invest? I've been doing some research and come to following conclusions:
- For an average person it appears reasonable to invest in an index fund, such as VTSAX and just get back to work, sleep well at night. Here the Simple Path to Wealth by Collins, as well as other great resources have been very helpful.
- My problem with this approach however is the moment in time, economy now. Namely, by reading several pieces about market cycles from people like Ray Dalio or Howard Marks, they seem to anticipate an economic downturn coming. I have also read that no one can time the market, but if this is really true, perhaps putting my savings into stocks is not such a good idea?

Alternatively, I'm considering bonds, commodities or real estate. I was close to buying an apartment (we're renting currently), but reading Why your house is a terrible investment by Collins has changed my view on this. Especially, considering that we might move elsewhere after roughly 3 years.
Commodities seem to be priced relatively low (GSCI), but I have no fundamental reasons to think that they should rise.
There is no good reason not to go for stocks. Don't forget: even if you put _all_ your money into stocks now, you'll be earning more money in future. So if you go all in and the market goes down, your future incomes lets you buy more cheaply. (Personal recommendation: don't go all in, but start investing more and more as you gain confidence. That worked for me, and within 6 months most of my savings were invested.)

When it comes to advice on what to invest in, you need to be careful on this forum, because most people are very USA-biased. As a European, on the stock side, I'd go for either a total-world index (VWRL/VWRD or equivalent), or 50% US  + 50% rest of world. Depending on age/proximity to retirement you will want bonds too, I'm less knowledgeable on that part because I'm too young to want bonds yet (plus current interest rates where I live are such that you'd want to keep cash instead of bonds).

Imanuels

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #9 on: March 18, 2019, 03:25:27 PM »
Thanks MustacheAndaHalf, I read the "The Investment Answer". A very brief, but useful book.

I have to say, there's still something I find hard to swallow. Namely:
1. Markets work in cycles. What if Dalio and Marks are right, we are late in the cycle, and this extended bull market comes to an end within say the next 2 years?
2. Previous time (2008), it took about 6 years for S&P500 to recover. Again, if Dalio is right and the next financial crisis 'will be more severe', this could take even longer?

Accordingly, if I put my money into stocks now, and 1., 2 happen, perhaps it takes 10 years afterwards to simply brake even.
It seems to make sense, what am I missing?

In principle what flipboard said sounds better - your future incomes lets you buy more cheaply. Maybe going for dollar-cost averaging would psychologically release some stress for the start.

Okay, in that case there's a very small book called "The Investment Answer" that's only 96 pages.  And it's a smaller book, so even the pages are small.

The problem is that when you invest without confidence, anything can shake your confidence.  When a correction hurts your investments, why should you stay invested?  Even now, you're worried about losing money - as everyone is, but experience and knowledge helps overcome that fear and stay invested.  That's why doing some reading is important.

The U.S. stock market is actually larger than the rest of the world's stock markets, combined.  If you look at a total world ETF like "Vanguard Total World ETF" (VT), you'll see over 50% of it is invested in U.S. stocks.  So avoiding the S&P 500 might not be a good idea.
https://investor.vanguard.com/etf/profile/portfolio/vt

Warren Buffet also says to buy when others are fearful, and avoid buying when others are greedy.  After all the dramatic losses in December, the fear came out... and anyone too scared to invest missed a +12% return so far in 2019.

What if you just take a fraction of your savings, 1/5th or 1/8th... whatever you feel comfortable investing, and invest it.  Maybe half in S&P 500, and half in the rest of the world.  You may lose money this year, but the more time you spend investing, the more the stock market tends to beat bonds and savings accounts.  Pick a fraction of your savings and decide to invest that amount.

TomTX

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #10 on: March 19, 2019, 06:33:17 AM »
Fearmongering sells books.

Simple, stay-the-course advice which actually works gets boring.

Fearmongering sells financial magazines

Simple, stay-the-course advice which actually works gets boring

Fearmongering gets TV viewers

Simple, stay-the-course advice which actually works gets boring.

Fearmongering sells newspapers

Simple, stay-the-course advice which actually works gets boring.

Fearmongering gets clickthroughs

Simple, stay-the-course advice which actually works gets boring.

Fearmongering gets investors to use high-fee "professionally managed funds"

Simple, stay-the-course advice which actually works gets boring.

Fearmongering gets financial management clients @ 1-2% of assets per year.

Simple, stay-the-course advice which actually works gets boring.

See what I'm getting at?

The incentives for most financial professionals do not align with the investors's best interests.

harvestbook

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #11 on: March 19, 2019, 08:27:55 AM »
You're doing a LOT of thinking about not thinking about investments. At 31, a total world stock index is great. 80 percent stocks/20 percent bonds is fine. 60 percent stocks/40 percent bonds will work.

From the sound of it, you don't want the hassle of real estate. Sounds like you have a full life, so why waste time tinkering at the edges? Just pick a decent AA and go for it. Avoiding behavioral mistakes (such as sitting in cash for years and years or pulling out because you "think you know" or "everybody says") is much more important than whatever AA you choose. Set it and forget it.

bisimpson

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #12 on: March 19, 2019, 09:00:25 AM »
Fearmongering sells books.

Simple, stay-the-course advice which actually works gets boring.

Fearmongering sells financial magazines

Simple, stay-the-course advice which actually works gets boring

Fearmongering gets TV viewers

Simple, stay-the-course advice which actually works gets boring.

Fearmongering sells newspapers

Simple, stay-the-course advice which actually works gets boring.

Fearmongering gets clickthroughs

Simple, stay-the-course advice which actually works gets boring.

Fearmongering gets investors to use high-fee "professionally managed funds"

Simple, stay-the-course advice which actually works gets boring.

Fearmongering gets financial management clients @ 1-2% of assets per year.

Simple, stay-the-course advice which actually works gets boring.

See what I'm getting at?

The incentives for most financial professionals do not align with the investors's best interests.

This is great—such a simple lesson, but a hard one to learn.

Imanuels

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #13 on: March 20, 2019, 03:51:51 PM »
So well said, thank you TomTX!

I will decide about the allocations (looking at Ray Dalio’s All Weather Portfolio at the moment vs the simple recommendation from harvestbook) and finally get invested.
 

Fearmongering sells books.

Simple, stay-the-course advice which actually works gets boring.

Fearmongering sells financial magazines

Simple, stay-the-course advice which actually works gets boring

Fearmongering gets TV viewers

Simple, stay-the-course advice which actually works gets boring.

Fearmongering sells newspapers

Simple, stay-the-course advice which actually works gets boring.

Fearmongering gets clickthroughs

Simple, stay-the-course advice which actually works gets boring.

Fearmongering gets investors to use high-fee "professionally managed funds"

Simple, stay-the-course advice which actually works gets boring.

Fearmongering gets financial management clients @ 1-2% of assets per year.

Simple, stay-the-course advice which actually works gets boring.

See what I'm getting at?

The incentives for most financial professionals do not align with the investors's best interests.

ChpBstrd

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #14 on: March 20, 2019, 04:19:59 PM »
If you are not willing to risk any loss, a bank account is your only available choice. To earn anything in business or investing requires the acceptance of risk. Being FI requires accepting risk. Risk is unavoidable for the financially independent. Even long term government bonds will lose much of their market value if rates rise.

That said, there are strategies to put a floor on your losses. For example:

1) Stop loss orders - go to cash if the investment drops X%. Not recommended, because you need a disciplined re-entry strategy and the market to cooperate with that strategy or else the market just goes back up and leaves you behind. Then you've bought high and sold low, but maybe at least slept at night.

2) Protective puts or collars - these risk hedging strategies involve options contracts that will go up if stocks go down. It is my preferred strategy, but requires significant education to understand. During the last correction, my puts went up as my stocks fell. I sold most of my puts for a few thousand in profits, then sat in stocks as they went up. Now that volatility went back down (as it always does) I am buying back the insurance for much cheaper than I sold it and stock prices are back where we started. Yay for cycles!

I would not recommend any hedging strategies if you have less than €250k at stake or 10+ years to retirement. Hedging, like any form of insurance, usually costs more than its expected value. I only do it because it allows me to increase my stock allocation. Also, I've worked to increase my emotional tolerance for losses so that I could watch my puts lose thousands of dollars in value for months or years, until the correction maybe comes and they skyrocket...

TomTX

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #15 on: March 20, 2019, 04:24:56 PM »
I'm glad folks liked my little writeup. Is it worth making its own thread to possibly get more notice? It's the same (boring) advice, just repackaged in my own blunt fashion.

Imanuels

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #16 on: March 24, 2019, 08:12:25 AM »
Thanks ChpBstrd for sharing.
I was considering options after reading Fooled by Randomness by Nassim Nicholas Taleb. Will do some math, perhaps an S&P500 or alternative put option could release some pressure during the next stock meltdown :-).

 

If you are not willing to risk any loss, a bank account is your only available choice. To earn anything in business or investing requires the acceptance of risk. Being FI requires accepting risk. Risk is unavoidable for the financially independent. Even long term government bonds will lose much of their market value if rates rise.

That said, there are strategies to put a floor on your losses. For example:

1) Stop loss orders - go to cash if the investment drops X%. Not recommended, because you need a disciplined re-entry strategy and the market to cooperate with that strategy or else the market just goes back up and leaves you behind. Then you've bought high and sold low, but maybe at least slept at night.

2) Protective puts or collars - these risk hedging strategies involve options contracts that will go up if stocks go down. It is my preferred strategy, but requires significant education to understand. During the last correction, my puts went up as my stocks fell. I sold most of my puts for a few thousand in profits, then sat in stocks as they went up. Now that volatility went back down (as it always does) I am buying back the insurance for much cheaper than I sold it and stock prices are back where we started. Yay for cycles!

I would not recommend any hedging strategies if you have less than €250k at stake or 10+ years to retirement. Hedging, like any form of insurance, usually costs more than its expected value. I only do it because it allows me to increase my stock allocation. Also, I've worked to increase my emotional tolerance for losses so that I could watch my puts lose thousands of dollars in value for months or years, until the correction maybe comes and they skyrocket...

BicycleB

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #17 on: March 24, 2019, 09:50:28 AM »
I have read that many people are more averse to "losses" than to lost opportunities. But you lose more over time by not investing than you do by investing.

How about this. Calculate the loss to inflation you've already suffered. Assume that the stock market will drop that much the day after you invest. Most stock market drops aren't much more than that anyway. So go ahead and invest.

Remember, you don't lose money when stocks go down. You only lose money when you sell stocks. If you're 31, you're not going to sell stock for years anyway. Or at least, you shouldn't. When is your FIRE date in the event you don't invest? You have until then before you need to sell any stock. At that point, you only have to sell a tiny fraction of portfolio at the low price anyway, even if your first year of not working is part of a down market. A few percent of your portfolio will cover the year's expenses after dividends. In the other years, you'll sell at a good price. (Actually, you logically wouldn't sell any stock at the low price. You'd live off dividends, bond interest and a few bond sales. You'd also sell a few more bonds to buy some cheap stock in order to maintain your portfolio allocation.) Down stock markets are just rainy weather. They soak the unprepared, but renew the gardens of the thoughtful. You are guaranteed to win if you are patient.

Tracking your portfolio values is just a way to approximate the financial "potential energy" you have stored in the metal spring called your investments. It's a measurement technique full of what engineers call noise. Ignore the noise. As long as you release that energy slowly in the future, rather than all at once in a panic, values at a particular point don't really matter. It's value over decades that counts, and those values are reliably better in portfolios with a substantial stock component.
« Last Edit: March 24, 2019, 10:13:52 AM by BicycleB »

HBFIRE

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #18 on: March 24, 2019, 11:24:25 AM »
Hi everyone.


- My problem with this approach however is the moment in time, economy now. Namely, by reading several pieces about market cycles from people like Ray Dalio or Howard Marks, they seem to anticipate an economic downturn coming. I have also read that no one can time the market, but if this is really true, perhaps putting my savings into stocks is not such a good idea?


Meet Bob, the worst market timer ever.  https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

Radagast

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #19 on: March 24, 2019, 12:24:39 PM »
Thanks ChpBstrd for sharing.
I was considering options after reading Fooled by Randomness by Nassim Nicholas Taleb. Will do some math, perhaps an S&P500 or alternative put option could release some pressure during the next stock meltdown :-).

 

If you are not willing to risk any loss, a bank account is your only available choice. To earn anything in business or investing requires the acceptance of risk. Being FI requires accepting risk. Risk is unavoidable for the financially independent. Even long term government bonds will lose much of their market value if rates rise.

That said, there are strategies to put a floor on your losses. For example:

1) Stop loss orders - go to cash if the investment drops X%. Not recommended, because you need a disciplined re-entry strategy and the market to cooperate with that strategy or else the market just goes back up and leaves you behind. Then you've bought high and sold low, but maybe at least slept at night.

2) Protective puts or collars - these risk hedging strategies involve options contracts that will go up if stocks go down. It is my preferred strategy, but requires significant education to understand. During the last correction, my puts went up as my stocks fell. I sold most of my puts for a few thousand in profits, then sat in stocks as they went up. Now that volatility went back down (as it always does) I am buying back the insurance for much cheaper than I sold it and stock prices are back where we started. Yay for cycles!

I would not recommend any hedging strategies if you have less than €250k at stake or 10+ years to retirement. Hedging, like any form of insurance, usually costs more than its expected value. I only do it because it allows me to increase my stock allocation. Also, I've worked to increase my emotional tolerance for losses so that I could watch my puts lose thousands of dollars in value for months or years, until the correction maybe comes and they skyrocket...
I'm partway through Taleb's books. I finished Fooled by Randomness and The Black Swan, still have the others to go. My takeaways from Taleb have been:
-Beware over-adaptation of companies and other entities that have been doing best recently, because when circumstances change they are worst adapted to the new circumstances
-Avoid noise, almost everything you ever hear about anything contains no useful information. It will take months, years, or decades to learn which tiny fraction was the truth. That means timeless advice is usually best. It also means that the world is full of surprises, so expect them.
-Beware of good stories about why things are the way they are, your mind loves a good story regardless of whether it is relevant.
-Do not add unnecessary complexity to investments, because the world and especially the world of finance is already extremely complex.
-Redundancy is good. Parallel investments that seem pointless in good times can help recover from unexpected bad times. Having two unrelated job skills is safer than having one concentrated job skill.

For a Euro investor it seems like a buy and hold strategy of 25% eurozone stock, 25% US stock, 25% other parts of the world stock, 25% Euro bonds or bank deposits seems good, depending on availability. Of course using 75% world weighted stock is also good. Don't place too much emphasis on the recent out-performance of the S&P500, it may or may not continue. There are lots of good stories about why it has done best and will always do best, but they are just stories. It may also be overadapted to the past decade or three. Either way, it is in a foreign currency which adds extra volatility.

Imanuels

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #20 on: April 06, 2019, 03:35:11 PM »
I would really like to thank everyone for the insightful answers!

After some thinking and calculations I've come to an idea that at the current ECB monetary policy, actually taking a lone and buying a real estate makes sense. I can get a loan with 1.43% fixed interest rate for 20 years. That is less than inflation, let alone the money saved from rent. In such case, I can freely invest my savings in stocks where even the dividend yield is higher than the interest rate. Any thoughts on this?

Concerning asset allocation. I would like to ask, what is the reason for adding '25% Euro bonds' to the portfolio. If I understand it correctly, Vanguard EUR Eurozone Government Bond UCITS ETF yields about 0.6% in dividends in which case even a bank deposit could be more profitable. And when interest rates rise, bond prices are expected to fall, right?

For stocks I'm planning to choose Vanguard Eurozone Stock Index Fund, Vanguard U.S.500 Stock Index Fund and Vanguard Emerging Markets Fund.

MustacheAndaHalf

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #21 on: April 06, 2019, 10:39:53 PM »
Thanks MustacheAndaHalf, I read the "The Investment Answer". A very brief, but useful book.

I have to say, there's still something I find hard to swallow. Namely:
1. Markets work in cycles. What if Dalio and Marks are right, we are late in the cycle, and this extended bull market comes to an end within say the next 2 years?
2. Previous time (2008), it took about 6 years for S&P500 to recover. Again, if Dalio is right and the next financial crisis 'will be more severe', this could take even longer?

Accordingly, if I put my money into stocks now, and 1., 2 happen, perhaps it takes 10 years afterwards to simply brake even.
If you visit portfoliovisualizer.com, you can plug in 2005-2019 to see how that performed.  The data I see is this:
https://www.portfoliovisualizer.com/backtest-asset-class-allocation#analysisResults

U.S. large caps, "max drawdown: -51% (Nov 2007 - Feb 2009), drawdown recovery by Aug 2012"
U.S. total stock, "max drawdown: -51% (Nov 2007- Feb 2009), drawdown recovery by May 2012"

But maybe there's a mix of international that involves a larger drawdown?
International (ex-U.S.), "max drawdown: -59% (Nov 2007 - Feb 2009), drawdown recovery by May 2017 (!)

You can also combine U.S. and international, giving either 20% international or 40% international and rebalancing every year:
80% U.S. / 20% int'l : -52% max, Nov 2007-Feb 2009, recovery by Dec 2012
60% U.S. / 40% int'l : -54% max, Nov 2007-Feb 2009, recovery by Mar 2013

It's also worth noting a human bias (which I share), focusing too much on big recent events.  It's much more likely something else takes place next, not a repeat of 2008.  But since 2008 is familiar and dramatic, we give it more weight than it deserves.  Most recoveries are much faster than the above - you can take a look in portfoliovisualizer.

Radagast

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #22 on: April 07, 2019, 01:10:11 PM »
Concerning asset allocation. I would like to ask, what is the reason for adding '25% Euro bonds' to the portfolio. If I understand it correctly, Vanguard EUR Eurozone Government Bond UCITS ETF yields about 0.6% in dividends in which case even a bank deposit could be more profitable. And when interest rates rise, bond prices are expected to fall, right?
"25% Euro bonds or bank deposits" whichever gives you a better rate. That amount is of course up to you. Stocks will nearly certainly do better than bonds or bank accounts over a decade or three, but sometimes they crash. You need enough in bonds or bank deposits to both get through the crash, and to also feel like you will get through the crash. 25% is the center of my recommended range of 10%-40%. 10% is the smallest recommended bond allocation of any guru, in this case Warren Buffet. You can find very many people recommending larger bond allocations, but we can show that throughout history and around the world your odds of success declined dramatically as your bond allocation exceeded 40%.

Tyler's PortfolioCharts has a number of tools you can play around with, and lets you choose Germany as your base for currency and stock returns. https://portfoliocharts.com/calculators/
Remember there are many biases that show up even for PortfolioCharts which tries to be agnostic. For example, I imagine West German Bunds started the 1970's at very high rates, and kept rolling down to now be in the negatives. If the calculator shows that historically a German should have had 50% bonds, well that is obviously an historical flaw. Similar for gold, and I am sure for many others that are less obvious. Generally I would test an allocation across many countries to get a feel for the possible outcomes, and even then there are far more possible outcomes than that.

Imanuels

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #23 on: May 11, 2019, 08:49:57 AM »
Thanks a lot, Radagast. I have simulated a wast number of possible portfolios at https://portfoliocharts.com (it's a really great tool!) and their 'Golden Butterfly' seems to be the best in terms of returns/volatility. Perhaps I'm overly cautious for my age and consequently in long run will loose 1.4% compared to stocks, but at least my sleep will hopefully be better :-).
 


sideHustler

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #24 on: May 11, 2019, 10:54:46 AM »
The simplest thing you can do is invest in Index funds. Even Warren Buffet's The Intelligent Investor says this. If you don't have the time or patience to do the research required to be a "hands-on" investor then investing in index funds for the long-term is going to get better returns than most money managers.

Radagast

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #25 on: May 12, 2019, 12:52:24 PM »
Thanks a lot, Radagast. I have simulated a wast number of possible portfolios at https://portfoliocharts.com (it's a really great tool!) and their 'Golden Butterfly' seems to be the best in terms of returns/volatility. Perhaps I'm overly cautious for my age and consequently in long run will loose 1.4% compared to stocks, but at least my sleep will hopefully be better :-).
Right, but remember what I said about biases.
Long term bonds: These are probably yielding around 0.5% now right? How many years covered by the calculator did that happen in? I guess that for the first 40 years of the backtest, long term bond yields averaged 10% higher than they are now. Can you expect the same results for long term bonds starting now as in any of the years 1970-2010?
Cash: Probably realistic.
Gold: There are some serious issues with this at exactly the wrong time as far as PortolioCharts is concerned, because the government held the price of gold to its lowest value in perhaps thousands of years and then let it go just before the most significant market crash of the period 1970-2019. To get an idea of what it "may" have done without the government intervention, try swapping it with real estate or commodities. Good, but not as good. How would you buy it? Walk around with shiny metal coins? 100% proton-free gold?
Stocks: German? European? Or global?
Small cap value stocks: What fund will you use for these? Alternately, the whole European stock market looks like "small cap value" relative to the (US dominated) ex-Europe markets. Maybe 100% European stock index is all you need for both slices? Are you doing a European-only portfolio and ignoring 3/4 of the world's market capitalization? The "golden butterfly" is a lot more straight forward to implement in the US.

Another test: Using portfoliocharts, try entering 20% into every sixth box. Then move them all down 1 box. Repeat until you have cycled through every box. Repeat the experiment using a 10 in every third box, and place any leftovers randomly or in cash. Nice results, eh? What are the odds that the "golden butterfly" or any "expert portfolio" were better in the past by more than chance? Are they reliable in the future? To me diversification is most important, predicting the exact right allocation is a lot more difficult.

While I am OK with the assets in the GB, I would recommend increasing the stock allocation to at least 50% and spreading it around the world. Perhaps have three equally weighted stock slices Europe, US, and "other" which will give a reasonable approximation of a "total market" plus a "small cap value" allocation. Then lower your expectations for long term bonds especially.

Buffalo Chip

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #26 on: May 12, 2019, 06:15:27 PM »
Thanks a lot, Radagast. I have simulated a wast number of possible portfolios at https://portfoliocharts.com (it's a really great tool!) and their 'Golden Butterfly' seems to be the best in terms of returns/volatility. Perhaps I'm overly cautious for my age and consequently in long run will loose 1.4% compared to stocks, but at least my sleep will hopefully be better :-).

The GB seems to be a good jumping off point, but the cool thing about portfoliocharts.com in my opinion is the ability to take those “good” portfolios and optimize them using your own variations.

vand

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #27 on: May 15, 2019, 05:02:56 AM »
Hi everyone.


- My problem with this approach however is the moment in time, economy now. Namely, by reading several pieces about market cycles from people like Ray Dalio or Howard Marks, they seem to anticipate an economic downturn coming. I have also read that no one can time the market, but if this is really true, perhaps putting my savings into stocks is not such a good idea?


Meet Bob, the worst market timer ever.  https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

Be careful of these "time in the market" arguments, for they only discuss one side of the coin.

If Bob really is the world's worst market timer, he should have both bought at stock market tops AND sold at bear market bottoms, not just done one or the other. In light of this your homework for today is to calculate Mr Bob's total and annualised performance from the highest peak to the lowest trough over a 20 year holding period..

TomTX

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #28 on: May 17, 2019, 05:23:24 PM »
Hi everyone.


- My problem with this approach however is the moment in time, economy now. Namely, by reading several pieces about market cycles from people like Ray Dalio or Howard Marks, they seem to anticipate an economic downturn coming. I have also read that no one can time the market, but if this is really true, perhaps putting my savings into stocks is not such a good idea?


Meet Bob, the worst market timer ever.  https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

Be careful of these "time in the market" arguments, for they only discuss one side of the coin.

If Bob really is the world's worst market timer, he should have both bought at stock market tops AND sold at bear market bottoms, not just done one or the other. In light of this your homework for today is to calculate Mr Bob's total and annualised performance from the highest peak to the lowest trough over a 20 year holding period..

You have missed the entire point of the Bob argument.

HBFIRE

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #29 on: May 18, 2019, 09:32:14 AM »

You have missed the entire point of the Bob argument.

Indeed.  The point is, don't fret too much about when to buy.  As long as you're disciplined and don't sell in a panic, you'll do just fine.

Imanuels

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #30 on: May 18, 2019, 02:59:25 PM »
I guess the point vand simply wanted to make was that in principle it is possible to be even worse than 'Bob, the worst market timer ever' :-). I.e., by compounding buying at highs with selling at lows.
 
Hi everyone.


- My problem with this approach however is the moment in time, economy now. Namely, by reading several pieces about market cycles from people like Ray Dalio or Howard Marks, they seem to anticipate an economic downturn coming. I have also read that no one can time the market, but if this is really true, perhaps putting my savings into stocks is not such a good idea?


Meet Bob, the worst market timer ever.  https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

Be careful of these "time in the market" arguments, for they only discuss one side of the coin.

If Bob really is the world's worst market timer, he should have both bought at stock market tops AND sold at bear market bottoms, not just done one or the other. In light of this your homework for today is to calculate Mr Bob's total and annualised performance from the highest peak to the lowest trough over a 20 year holding period..

You have missed the entire point of the Bob argument.

efree

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #31 on: May 19, 2019, 03:28:02 AM »
Have you considered P2P lending platforms? There are many of them in the Baltic states and most of them even have the option to display the whole site in German because that's where most of the investors come from. If you haven't heard about these platforms, you should do a Google search, you will find lots of blogs about them.

PDXTabs

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #32 on: May 19, 2019, 11:15:51 AM »
I'm 31, married, no kids, live in Germany. Working full time (science&engineering) and enjoining great mustachian lifestyle - going everywhere (work, groceries etc.) by bike, making stuff by myself, intentional buying of things that add value, happiness, efficient, minimalist lifestyle. Consequently, I do not manage to spend more than approx. 35% of my income.

Personally, I'd just put it all in VT (or equivalent) and go back to living your minimalist lifestyle.