Author Topic: What to do when you lack the nerve ??  (Read 9219 times)

pka222

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What to do when you lack the nerve ??
« on: March 29, 2012, 06:53:28 PM »
I have a bit of a problem. First the positive side. I have cash, Iím making more, I save between 60 and 70% of my income per month and I am dedicated to early FI, anti-consumerism and the lot.  The negative is I canít seem to pull the trigger on any stock purchases. Iím in a situation where rental properties are not available (expats canít buy land where I work) and my other investment (a new business) has not borne fruit yet. 
I have about 15k invested in 2 vanguard indexes and two dividend stocks, but I canít seem to get up the nerve to invest the 100K + I have sitting in a boring savings account, and itís been sitting and growing for while now (years) .  Jacob, over at ERE, has convincingly argued Ė at least to me- that index funds are not the best way to go, but for all the time invested studying different investment methods I still lack the confidence to pick stocks.
About my situation:
Iím in the capital accumulation phase, and figure I need 3 to 5 years more of solid savings to reach my FI goals. My savings are way more important than investment income but I feel I need to see that income start rolling in or I will never feel confident to step out of the working world, and also to get my SO on board with the idea.

Also my only debt about 16k of student loan debt at 4.25% - over the next 7 years it will be gone at the current rate.

What does the forum suggest? Index funds and forget about it for a while? Stick with savings until the Eurozone crashes? Pay  off the student debt? My hope is that in 3 or 4 years I will have a minimum of 7% ROI so I will feel able to start living off my investment returns (3-4%) and can quit the cubical life.
I posted a similar note over at ERE but I wanted to get mustachian input as well.
Thanks all

Bakari

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Re: What to do when you lack the nerve ??
« Reply #1 on: March 29, 2012, 07:06:55 PM »
first part is easy.
pay the loan in full, immediately.
Guaranteed 4.25% return, with plenty left over to invest.

The standard investment for the timid is bonds.  Low interest, but still better than a savings account, and basically guaranteed.

As far as stocks, there is plenty of middle ground between an all-market index fund and picking individual stocks, like ETFs or specialty indexs.  Indexes that focus on dividend paying stocks will grow regardless of whether the market goes up or down.

And you don't have to pick one.  Diversity lowers risk.

One thing to keep in mind is that a savings account doesn't really protect you from losing money.  At current rates you are losing money, in the form of inflation / loss of purchasing power.  So there is no way to avoid all risk.
But that doesn't necessarily mean go out and invest it all - keep an eye on the market (and world politics).  It has dipped below its trend line plenty of times in the past decade, and there is no reason not to think it won't again.  When everyone is in a panic over whatever happens next, that's the time to buy.

gangr

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Re: What to do when you lack the nerve ??
« Reply #2 on: March 29, 2012, 07:42:12 PM »
I agree - I would start by paying off your student loans. I just did that and my wife and I are happy and feel a weight off of our shoulders.

I would tack on to Bakari's statement that if you go into bond funds, stay short or intermediate term. It will provide less return, but may hopefully shield a decent portion of your assets from interest rate risk.

I would invest your unproductive cash in a diverse and tax efficient manner by exploring a "tax efficient lazy portfolio." While your money grows you can gain the knowledge and understanding necessary to escape both stock and bond mutual funds and purchase the securities directly. Low cost index funds have a purpose, and when that purpose is no longer valid, you will probably know it and already be investing directly into securities.

arebelspy

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Re: What to do when you lack the nerve ??
« Reply #3 on: March 29, 2012, 08:47:07 PM »
I personally wouldn't pay off the loans, assuming you actually invest your savings.

Getting 4.25% is better than the 0-1% you're getting now, so if you continue the analysis paralysis, pay them off.  If you invest in the next few months, pay the minimums.  IMO.

That aside, pick something.

Figure out an Asset Allocation that works for you (whether it's index funds, using 120-your age in bonds, or something like that), Permanent Portfolio, whatever.  Then implement.

Also just because you can't do real estate locally doesn't mean you can't find a real estate investor elsewhere in the country that is worth lending to, and get a good return based on their work.  Becoming a private lender is an option.
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smedleyb

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Re: What to do when you lack the nerve ??
« Reply #4 on: March 29, 2012, 09:35:23 PM »
I can't in good conscience tell you to buy stocks after the market has doubled over the past couple years and the underlying economic imbalances which caused the great recession have not been addressed, only deferred.

The time to buy is when there is blood on the streets, not now, not when everyone is gushing over their Apple profits.

Cash is an asset too.

pka222

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Re: What to do when you lack the nerve ??
« Reply #5 on: March 29, 2012, 09:38:15 PM »
Thanks for the suggestions Bakari. I will force myself to buy something.  I was thinking of a way to get more return on my student loan payment by opening a rewards CC and get the cash back when I pay it off, then pay off the CC immediately.  I've been reading a ton on dividend investing, growth and value stocks and have list of 45 or so I've been following for over a year, and can see which ones I wish I had bought and which ones I'm glad I didn't. The trouble is I know I should just buy individual stocks- 20-30 and wait but it drives me nuts to lose money.

Gangr- I feel like I'm almost ready to invest directly but I just lack the solid plan to do it.

Arebelspy- how does one become a private lender? I like the concept of tangible assets for some reason.  I've been looking REITs like NLY but that seems more risky than actually owning a house.

Darn it Smedleyb- its posts like yours that keep me from acting - that is how my mind works as well- but when push comes to shove- I still can't see when to avoid the falling knife and when to jump in with both feet.


billc

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Re: What to do when you lack the nerve ??
« Reply #6 on: March 29, 2012, 09:52:19 PM »

Ben

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Re: What to do when you lack the nerve ??
« Reply #7 on: March 30, 2012, 07:00:26 AM »
Set up a plan to gradually increase your portion in the market over the next couple of years. Pick up Bill Bernstein's book The Intelligent Asset Allocator and look at some of his sample portfolios- there's an example of someone with a large lump-sum like yourself that wants to climb into the market over the next couple of years.

re: the fear that keeps people from investing... that's tough. In retrospect, it becomes abundantly clear when you should and should not have invested. Overall, bond/equity investments have a positive slope, so staying out of market will cost you money more often than it saves you money.

Get yourself a broad exposure (e.g. total stock market funds) and accept that sometimes you will pay 'full price' for your stocks, and sometimes you will get them on sale, but the crucial thing is to 'stay the course' and not panic when the sticker price drops or rises after you own it. Just keep buying, and the dips and rises will take care of themself. You don't get to beat yourself up over stocks you did or didn't pick, and can spend less or no time watching the market in general. which would probably leave you happier and more content.

Ben

P.S. The average investor does much worse than index funds over long time periods.
http://assetbuilder.com/blogs/scott_burns/archive/2009/01/30/if-you-play-the-odds-it-s-time-to-buy.aspx

Some people do better, and there may be some element of skill driving those gains, but a lot of it is a) luck, and b) not making stupid mistakes. Low-cost, broad stock indexes basically eliminates (b) and substantially reduces the effect of (a). Accepting 'average' gains from index funds actually puts you above average compared to most investors.

arebelspy

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Re: What to do when you lack the nerve ??
« Reply #8 on: March 30, 2012, 08:53:16 AM »
Arebelspy- how does one become a private lender? I like the concept of tangible assets for some reason.  I've been looking REITs like NLY but that seems more risky than actually owning a house.


Find an experienced real estate investor to lend money to.  Lots of ones want private money.  Find a trustworthy, successful one.  Do your due diligence on the property that will back the investment, then have them do the boots on the ground work.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

James

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Re: What to do when you lack the nerve ??
« Reply #9 on: March 30, 2012, 11:35:53 AM »
Figure out an Asset Allocation that works for you (whether it's index funds, using 120-your age in bonds, or something like that), Permanent Portfolio, whatever.  Then implement.

My suggestion is the the same, but paying of the student loan first.

Mactrader

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Re: What to do when you lack the nerve ??
« Reply #10 on: March 30, 2012, 12:42:10 PM »
I'm a real fan of keeping things simple. Get to a clean slate (no debts), then invest in something that's predictable and easy to maintain. Sure, you may eek out a little extra return by picking stocks/etc instead of just having a strong asset allocation of index funds. But on the other hand, you could seriously jeopardize your FI by picking the wrong investments. Save on fees, invest in the index, and rebalance annual. Enjoy the dividends and income it produces and go focus on your life. You've won.

Don't outsmart the system when you're already ahead.

sol

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Re: What to do when you lack the nerve ??
« Reply #11 on: March 30, 2012, 05:02:53 PM »
For the equities portion of that 100k, I'd start with something simple like $100 per week on an automatic investment into a broad index fund.  Most weeks it will go up a little and you'll be reassured.  On weeks when it drops, consider that a sign to invest a little more.  If the market really tanks, start moving in larger sums.

Mr Mark

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Re: What to do when you lack the nerve ??
« Reply #12 on: March 30, 2012, 08:38:23 PM »
For the equities portion of that 100k, I'd start with something simple like $100 per week on an automatic investment into a broad index fund.  Most weeks it will go up a little and you'll be reassured.  On weeks when it drops, consider that a sign to invest a little more.  If the market really tanks, start moving in larger sums.

And keep the rest in a mix of short-medium term bond funds, as you ease into a long term asset allocation. I'd buy the equity portion a bit quicker than over 2 years tho.  Say 6 months, and then (more important) rebalance 12 months after that.

chamboo

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Re: What to do when you lack the nerve ??
« Reply #13 on: March 30, 2012, 08:40:31 PM »
Don't feel like there's something wrong with you.  I know people who have 10's and 100's of millions of dollars (personally) who claim to be sophisticated investors, yet they still make impulse buys based on surface research and what some guy said in a message board.  If you're not comfortable investing, and you feel that you don't have an edge, then don't.  By having your money in a Vanguard fund, you're already ahead of the game and investing, which is an advantage because you don't need to be desperate.  Good luck.

MEJG

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Re: What to do when you lack the nerve ??
« Reply #14 on: March 31, 2012, 07:52:20 AM »
I find that when I am hesitating to do something I know I should be doing (financial or otherwise) it's because I haven't found a plan that I am confident in.

So my first piece of advice is to find an investing tactic that you feel confident in.  Then just do it.

If I were you I would work my current plan.  Pay off debts with interest rates over 4%.  Put my investment money into this allocation http://www.marketwatch.com/lazyportfolio/portfolio/yale-u-portfolio  in either weekly or monthly installments until 100% was in the market in 1 year or so.  Rebalance everything quarterly.

And I would continue to learn about DRIPS.... because that's my current interest. If I come to a point where I want to focus on DRIPS I probably will not pull out of my vanguard lazy portfolio, I will probably just start DRIPing actively and stop investing actively in DRIPs.

Make a decision, go with it!  then learn more and make changes AFTER - but right now find something you can believe in and just do it.

pka222

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Re: What to do when you lack the nerve ??
« Reply #15 on: March 31, 2012, 10:46:00 PM »
Hey All,
 I do appreciate the advice. I think what I will do is allocate 75% of my portfolio to a mix of vanguard index funds and use 25% to invest in equities that I feel I can make the call on.  I think I'll try to do this by the end of 2012. What I am unclear on is this idea of automatic investment- would that be something along the lines of - transfer 10K to Vanguard and instruct them to by 100$ worth of X index every week? There would be some fees I'd assume?
 I'm going to get rid of the debt, I just need to find a good rewards card to use to bump the return up to 7 or 8%.
MEJG- can you tell me more about DRIPS - from my reading Vanguard is already doing this with my dividend stocks?
Chamboo- thats amazing- when I have 10mil you can be sure I'll be fully informed, but I also will care a lot less about growth and lot more about protection.
RightO Mr Mark, I've waited too long already- I'll speed it up!
Sol- thats what has kept me out- waiting for it to tank and then getting cold feet ;(
arebelspy- Is there a good source, web site, list or something you can share about private real estate investors? I'd be keen to give it a shot but remote research is still some what challenging
Thanks for the input again

MEJG

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Re: What to do when you lack the nerve ??
« Reply #16 on: April 01, 2012, 05:51:24 AM »
Hi pka222 :-)
      I'm learning about drips myself!  here's a site i've found particularly helpful in my research mode http://dripinvesting.org/Tools/Tools.asp

sol

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Re: What to do when you lack the nerve ??
« Reply #17 on: April 01, 2012, 08:11:12 AM »
What I am unclear on is this idea of automatic investment- would that be something along the lines of - transfer 10K to Vanguard and instruct them to by 100$ worth of X index every week? There would be some fees I'd assume?

Vanguard will make an investment directly from your savings account, so there is no need to move any money to Vanguard other than the $100 per week, or whatever recurring amount you decide on. 

Last I checked the Vanguard fund fees were $20 per fund per year if you have less than $10k in that fund.  That's assuming you sign up for electronic statements, because otherwise they charge you to send paper copies.  Most of the funds have a $3k minimum initial investment, so you may have to swallow hard and just pick a day to do it even though you might lose $30 the very next day if the market drops by 1%.  With an additional $100/week going in, you would pay that 20/year fee for another 18 months or so

pka222

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Re: What to do when you lack the nerve ??
« Reply #18 on: April 01, 2012, 07:57:05 PM »
Sol- understood- will work on that- I wonder, if I am going to make 400USD investments every month - why not at least wait for some dip - say any point during the month it drops 2% or more to buy? is that a reason that I wouldn't want to do that?
I want to make smart choices and my inaction in and of itself is dumb- I've taken some advice and divided the portfolio of cash in to 2 pots- 25% for individual stocks that I want a stake in and 75% for vanguard indexes that I can use to diversify.  I've got 9K in funds and 12K in individual stocks now so I'm starting to make some progress. I just need to pick the right 4 or so indexes to make the initial 3K purchase and then I can drip feed them monthly on whatever dips occur.
cheers

sol

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Re: What to do when you lack the nerve ??
« Reply #19 on: April 01, 2012, 08:11:05 PM »
Sol- understood- will work on that- I wonder, if I am going to make 400USD investments every month - why not at least wait for some dip - say any point during the month it drops 2% or more to buy?

Sure, if you think the market will dip 2% in the next month.  You can't possibly know that, though.  What if the market goes on a six month tear and is up 20% by Halloween?  You will have missed out.

The whole point of dollar cost averaging is that you move regular amounts in regardless of what the market does.  In up weeks, your fixed dollar amount buys fewer shares.  In down weeks, you end up buying more shares.  Over time, you get more bang for your buck by investing fixed amounts.  Your strategy of buying nothing on up weeks and all on down weeks is vulnerable to perpetual inaction, if no dips come.  Better to start it off now, I think, unless you think you know something about the future of the stock market that the rest of us don't.

Mr Mark

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Re: What to do when you lack the nerve ??
« Reply #20 on: April 02, 2012, 11:02:44 AM »
Sol- understood- will work on that- I wonder, if I am going to make 400USD investments every month - why not at least wait for some dip - say any point during the month it drops 2% or more to buy?

Sure, if you think the market will dip 2% in the next month.  You can't possibly know that, though.  What if the market goes on a six month tear and is up 20% by Halloween?  You will have missed out.

If you just look at the S&P500 over the past 6 months, each minor 'dip' has been - at it's lowest - significantly above the previous high following the earlier 'dip'.  I think it's just as likely we could have a monster bull run for the next 18 months, and you'll really be kicking yourself later!

The real 'trick' is not market timing speculation, but regular 'rebalancing' of your chosen asset allocation. This forces some long-term 'sell high/buy low' activity by definition.

pka222

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Re: What to do when you lack the nerve ??
« Reply #21 on: April 02, 2012, 01:28:16 PM »
Good point Mr Mark, Sol
It seems the challenge still lies in my head and not with the plan.
Cheers

sol

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Re: What to do when you lack the nerve ??
« Reply #22 on: April 04, 2012, 09:28:03 AM »
As of this moment, the market is down about two percent in two days.  Is that enough of a dip to motivate you to start buying in?

Down two percent means I've probably lost many thousands of dollars, but I don't sweat it. I have several years left before I would consider drawing down my investments, and I'm confident values will rebound by then. In the meantime it's just paper losses. Or at least that's what I keep telling myself.

smedleyb

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Re: What to do when you lack the nerve ??
« Reply #23 on: April 04, 2012, 09:47:40 AM »
People need to think about what happens to the markets when the Fed turns off the liquidity spigot.  The government is propping up the markets in the hopes of giving birth to a legitimate, self-sustaining economic recovery.  Yet every time they cut back on the liquidity, the averages fall.  The recent Fed minutes show growing "hawkish" component of the Fed clamoring for higher rates and less quantitative easing.  Does this portent something ominous for infinite QE?

Also see at what is happening in Spain, whose debt load is substantially greater than Greece's.  Can Europe bail them out, too?  Also, don't these bailouts demand cost cutting and austerity, which are clearly anti-growth policies?

Which raises the question, "should I buy the fucking dip?"

http://www.youtube.com/watch?v=lQvPV68lggg

Buying the dip always works -- until it doesn't. 



vwDavid

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Re: What to do when you lack the nerve ??
« Reply #24 on: April 04, 2012, 02:28:48 PM »
People need to think about what happens to the markets when the Fed turns off the liquidity spigot.  The government is propping up the markets in the hopes of giving birth to a legitimate, self-sustaining economic recovery.  Yet every time they cut back on the liquidity, the averages fall.  The recent Fed minutes show growing "hawkish" component of the Fed clamoring for higher rates and less quantitative easing.  Does this portent something ominous for infinite QE?

Also see at what is happening in Spain, whose debt load is substantially greater than Greece's.  Can Europe bail them out, too?  Also, don't these bailouts demand cost cutting and austerity, which are clearly anti-growth policies?

Which raises the question, "should I buy the fucking dip?"

http://www.youtube.com/watch?v=lQvPV68lggg

Buying the dip always works -- until it doesn't.

smedleyb's comment above is the same reason that I currently lack the nerve to go all in too. We have a large stash that is not earning its keep at the moment (2% cash account) and we are looking at a sustainable dividend program. But whether you necessary evil is index funds, dividends, or bonds its hard to escape that we are in a new financial paradigm that is quite possibly not like the guaranteed growth of our parents generation.

I even thought about buying on the 2-3% dip this week (FWIW the dividend stock I wanted to buy was down 4% and the yield up to 6.6%!) and I didn't have the nerve (also the cash hadn't transferred yet so I couldn't).

But the line buy on the dip is indeed a nice one, until it doesn't work. What works now-a-days? Even MMM admits his index funds haven't produced the 7% target for the past decade...


« Last Edit: April 04, 2012, 02:42:43 PM by vwDavid »

judgemebymyusername

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Re: What to do when you lack the nerve ??
« Reply #25 on: April 04, 2012, 02:34:28 PM »
Anyone who is nervous about investing in the market really should read some of John Bogle's books. He's the founder of Vanguard. Even if you would have started investing in stocks before the great depression, there has never been a ten year period of time where you would have lost money. The naysayers will always say "well this time it's different!" Well, it hasn't been different yet for nearly 100 years. For what it's worth, the S&P 500 has already risen 13% this year. Those who weren't invested missed out.

If you really are scared of stocks, and you think inflation is going to shoot up in the future then the least you can do is invest in I-bonds or Inflation Protected Securities. These are government treasuries which are indexed to keep up with inflation plus a little extra on top. VIPSX is the Vanguard Fund.  Even better than cash, I-bonds won't lose purchasing power over time.

Here's a chart of VIPSX compared to the total stock market index fund.  If you would have invested $10k on 6/29/2000 into each fund, you would now have $23k in VIPSX and $13k in the total stock market. This, even during "the lost decade".

« Last Edit: April 04, 2012, 02:41:33 PM by B »

vwDavid

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Re: What to do when you lack the nerve ??
« Reply #26 on: April 04, 2012, 02:45:10 PM »
Anyone who is nervous about investing in the market really should read some of John Bogle's books. He's the founder of Vanguard. Even if you would have started investing in stocks before the great depression, there has never been a ten year period of time where you would have lost money. The naysayers will always say "well this time it's different!" Well, it hasn't been different yet for nearly 100 years. For what it's worth, the S&P 500 has already risen 13% this year. Those who weren't invested missed out.

If you really are scared of stocks, and you think inflation is going to shoot up in the future then the least you can do is invest in I-bonds or Inflation Protected Securities. These are government treasuries which are indexed to keep up with inflation plus a little extra on top. VIPSX is the Vanguard Fund.  Even better than cash, I-bonds won't lose purchasing power over time.

Here's a chart of VIPSX compared to the total stock market index fund.  If you would have invested $10k on 6/29/2000 into each fund, you would now have $23k in VIPSX and $13k in the total stock market. This, even during "the lost decade".


Thank you for the rebuttal, it is a good one and I accept it.