Help pulling the trigger on index funds

[BryanR]

Hi all,

I'm not FIRE yet, but I own and run two businesses which I enjoy and which I don't work too many hours in. So, for me, I'm OK with all of my income not coming from passive investments. In that sense, you might call me FIRE, but it's actually not true because if my businesses died, I wouldn't be "independent" any more (the "I" in FIRE).

Anyway, because my businesses can be volatile, I've tried to develop a passive income stream, not just to FIRE, but to fill the gaps in business income. I will admit that I haven't followed the tried and true investing rules... I've invested most of my portfolio in things like hard money loans, individual stocks, preferred stocks, and other big "no-no's". OK, slap me on the wrist, maybe I deserve it. My returns have lagged the market (not surprisingly), but I'm not gonna beat myself up for it.

Also, I own one rental property which is a goldmine and has doubled in value, so that makes up for some of my other decisions.

So.................... now to my question. All the income from my investments keeps building up, as I feel less and less comfortable investing in my normal asset classes. I'm really hoarding way too much cash now, and really wanting to invest it. I'd like to move more toward a standard MMM approach of index funds BUT......

Isn't the market too friggin' high? What are people doing now with hoards of cash? Are people really content dumping giant chunks of money in index funds right now? Is the 4% rule still good, when the market is this high? I remember even MMM himself blogging recently about how the market is a "bit high". Some P/E ratio analysis even confirms this...

So, just looking for some investing ideas or inspiration on where to put large chunks of cash right now. With rates low, the stock market high, real estate prices in my area really high, seems like there are a lot of asset classes that are scary at the moment. I just wish we were back in the days of 7% savings rates, then I could let my money sit while I think about it.

OK, thoughts please....... thanks!

[Bicycle_B]

Yeah, break the ice. 

How about:
1. Invest new money in stocks as a matter of policy.  Or, invest all new money besides your living expenses.
2. Set aside a reserve amount of cash you feel comfortable living on - eg, 1 year of expenses.  Leave it in cash.
3. Set an investing policy for the rest, such as 2/3 stock and 1/3 bonds.  Either invest accordingly in one big rip-the-bandaid moment, or set yourself a timeline and invest systemically toward your policy.  For example, your cash pile is 100% cash now; each month, put 10% of that cash pile into your planned allocation of financial assets.

[Bicycle_B]

PS.  In the worst case, you join Bob, the world's worst market timer.

http://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

Fwiw, the 4% rule is supposed to make it 95% likely that investing it all at once will ensure you don't run out of money for 30 years.  Arguably if you invest at any time besides market peaks, you're likely to get more than 4% (but it's hard to tell when the peak is until afterwards, as you are noticing).

Studies have shown that long term safety generally comes from having a significant amount of stocks in the mix, as opposed to bonds or cash.  (page 2 of link, second column)

https://www.aicpa.org/interestareas/personalfinancialplanning/resources/retirementplanning/downloadabledocuments/kitcesreport-march2012.pdf

If nothing else, you could invest some of your cash (10%, maybe 50%) in a stock-based index fund and then settle in for a browse through some of the diversified portfolios on portfoliocharts.com, which has examples of more complex portfolios.  Then maybe try to match your asset allocation, including your other investment types, to one of the sort-of-proven examples.

https://portfoliocharts.com/

[Tyson]

Hi all,

I'm not FIRE yet, but I own and run two businesses which I enjoy and which I don't work too many hours in. So, for me, I'm OK with all of my income not coming from passive investments. In that sense, you might call me FIRE, but it's actually not true because if my businesses died, I wouldn't be "independent" any more (the "I" in FIRE).

Anyway, because my businesses can be volatile, I've tried to develop a passive income stream, not just to FIRE, but to fill the gaps in business income. I will admit that I haven't followed the tried and true investing rules... I've invested most of my portfolio in things like hard money loans, individual stocks, preferred stocks, and other big "no-no's". OK, slap me on the wrist, maybe I deserve it. My returns have lagged the market (not surprisingly), but I'm not gonna beat myself up for it.

Also, I own one rental property which is a goldmine and has doubled in value, so that makes up for some of my other decisions.

So.................... now to my question. All the income from my investments keeps building up, as I feel less and less comfortable investing in my normal asset classes. I'm really hoarding way too much cash now, and really wanting to invest it. I'd like to move more toward a standard MMM approach of index funds BUT......

Isn't the market too friggin' high? What are people doing now with hoards of cash? Are people really content dumping giant chunks of money in index funds right now? Is the 4% rule still good, when the market is this high? I remember even MMM himself blogging recently about how the market is a "bit high". Some P/E ratio analysis even confirms this...

So, just looking for some investing ideas or inspiration on where to put large chunks of cash right now. With rates low, the stock market high, real estate prices in my area really high, seems like there are a lot of asset classes that are scary at the moment. I just wish we were back in the days of 7% savings rates, then I could let my money sit while I think about it.

OK, thoughts please....... thanks!

Market is almost always at (or near) all time highs.  That's why we invest in it. 

[Guide2003]

I remember even MMM himself blogging recently about how the market is a "bit high". Some P/E ratio analysis even confirms this...

He also mentioned the extremely quick average recovery time since "most recessions last less than one year." Do you need your money that soon, or are you planning on a longer timeframe? Over a five or ten year period your chances of losing money decrease dramatically. Can you replicate your rental? If not, the market is as good as anywhere else.

[BryanR]

I can't duplicate the rental. It was a silly amazing investment. Once in a life time. I've tripled my money, and I'm getting about 15% cash on cash return, not even including amortization and tax benefits. I should have put my whole net worth in rentals in the 2012 crash when I bought this.

Good thoughts everyone, thanks.

One of the reasons I've gravitated toward preferred stocks and dividend payers is that my businesses are volatile, and I'm not just looking for money later when I "retire," but also a CURRENT passive income stream.

[triangle]

I don't consider individual stocks or preferred stocks to be a no-no. If you have not bought the recent high flyers then of course your individual picks may not be tracking the upside in market over the past 1-3 years, but if you are fairly diversified then you should be okay in the longer term.

Index funds are a good choice and if I had a bucket of cash to invest I would break it down and dollar cost average into the market. Given the relative out-performance of the market I would take a slow and steady approach and buy more slowly into the market over a multi-year period.

If you like preferred there are ETFs like the ticker PFF. I have been tempted but I thought conventional wisdom was that preferred and bonds should drop in a raising interest rate environment where instead the PFF has risen. Though I understand it is mainly made up of bank stocks which are expected to benefit from a raising rate environment.

[TomTX]

I can't duplicate the rental. It was a silly amazing investment. Once in a life time. I've tripled my money, and I'm getting about 15% cash on cash return, not even including amortization and tax benefits. I should have put my whole net worth in rentals in the 2012 crash when I bought this.

By "cash on cash return" you mean that you put in $100k, it is now worth $200k and you are getting $15k per year?

That would be a 7.5% return now.

[Bicycle_B]

I can't duplicate the rental. It was a silly amazing investment. Once in a life time. I've tripled my money, and I'm getting about 15% cash on cash return, not even including amortization and tax benefits. I should have put my whole net worth in rentals in the 2012 crash when I bought this.

Good thoughts everyone, thanks.

One of the reasons I've gravitated toward preferred stocks and dividend payers is that my businesses are volatile, and I'm not just looking for money later when I "retire," but also a CURRENT passive income stream.

The portfoliocharts.com link upthread shows examples of how you can do this.  Each portfolio chart has a Withdrawal Rate graph showing the safe withdrawal rate, based on decades of data, for many years (it's shown as a curve, giving the rate for each year).  For example, a simple 60% stock (Total Domestic Market fund) 40% bond portfolio called "Classic 60-40" has a safe rate of 8% for 10 years and about 4.2% for 40 years, meaning you could reasonably expect to draw 8% "CURRENT passive income stream" for 10 years even if investing today equalled the worst performance on record. 

[BryanR]

15% cash on cash is on my INITIAL down payment. My money has tripled on the property, so it would be more like 5% cash on cash now. Still, not too bad.

Regarding the portfoliocharts.com, how could I safely take out 8% per year for 10 years if we head into a prolonged bear market? Seems impossible.

[Bicycle_B]

Regarding the portfoliocharts.com, how could I safely take out 8% per year for 10 years if we head into a prolonged bear market? Seems impossible.

"Safely" means you would not run out of money during the defined time.

"If we head into a prolonged bear market" is speculative.  The calculations are based on the assumption that the future will be no worse than the past.  In the past, during the the years covered by the data underlying the charts, someone who withdrew 8% would not have run out of money in 10 years using the 60/40 allocation.  This includes the bear markets from the measured period.  No one can prove whether future bear markets will be worse than past ones. 

As illustrative math, suppose the market drops 30% one year while bonds stay flat, then everything stays the same without ever growing again.  The 60/40 portfolio drops by 18%.  Withdraw 8% of the original amount 10 years in a row, that's 80%.  There would be 2% left, so you didn't run out.  Presumably you would also have the investments made with your variable business income and your real estate, bought at cheap prices.

Or you could look at the charts. They're pretty informative. 

[Zariana]

The dollar is very strong right now, so my recent investments are weighted to foreign stock index funds. I was also one step ahead of the current blog post and have been paying my mortgage down a bit.

If I look at where I've put my savings this year, this is where it's gone:

Int'l Index Fund - 50%
Mortgage (above monthly payment) - 30%
S&P 500 Index Fund - 20%

[Dancin'Dog]

I recently took the plunge of putting a large pile of cash into VTSAX.  I'd wired it to Vanguard on the 6/13 and scratched my head & read and read here and finally decided to just go 100% into VTSAX with it. 

The more I read the more it sounded like the thing to do.  I bought on 6/23 and it's already made nice gains & collected a dividend too.   :)

[DarkandStormy]

https://www.thebalance.com/rolling-index-returns-1973-mid-2009-4061795

How long do you plan to leave it invested?  You can take a look back at the last ~40 years (and I'm sure there are examples all the way back to the 1920s) of the best and worst rolling averages.

http://www.businessinsider.com/30-year-sp-500-returns-impressive-2016-5

1926-1956: +10.77%
1956-1986: +9.63%
1986-2016: +9.99%

1926-1956: The Great Depression, a stock market crash of more than 80%, World War II, The Korean War and four recessions.

1956-1986: The Civil Rights Movement, the Vietnam War, a president was assassinated and another forced to resign, an oil price shock from the OPEC embargo, double digit inflation and interest rates and six recessions.

1986-2016: Black Monday in 1987, the Savings & Loan crisis, Desert Storm, 9/11, wars in Iraq and Afghanistan and three recessions.

If you are hesitant about buying at the top of the market, ask yourself what your realistic timeline is when you might start drawing down from this investment/s.  As others have mentioned, you could put a portion into bonds.  Another options is you could hold the shares, but not reinvest dividends if you are trying to create some income from the investments.