Author Topic: Advice  (Read 1455 times)

Simpleton

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Advice
« on: April 24, 2021, 01:06:46 PM »
Hi,

I am looking for advice.

Every year for about a decade now I get a sizeable bonus. In most years my bonus exceeds my earnings in the rest of the year. It is significant money for me.

Once that bonus hits my brokerage account I am paralyzed. I know statistically the best thing is to invest it all immediately, but every year for a decade now, the market is at all time highs when I get my bonus, and it never feels right. I know even in hindsight for the last decade that is what I should do, but it still feels wrong and the gist of it is that I am uncomfortable doing that

What I have been doing for the past few years is dollar cost averaging 1/12th of it into the market every month - this works for me.

What I have been doing wrong is keeping that amount in cash through the year.

All I am looking for is a liquid etf that yields some sort of interest and is not subject to market fluctuations. I would essentially like to buy a bond that I could sell any time without the risk of interest rates increasing and destroying its value.

I am just looking for the most stable capital-preserving, interest bearing investment that you can recommend which also allows me to sell 1/12th of it each month to move into my index funds.

The ticker NEAR seems to be essentially what I am looking for I suppose, but I guess I am just looking to see if anyone has a smarter idea.


Thanks,
« Last Edit: April 24, 2021, 01:22:45 PM by Simpleton »

deborah

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Re: Advice
« Reply #1 on: April 24, 2021, 03:02:40 PM »
Generally, most companies give their dividends at the same time of the year. After they have given shareholders those dividends, the market value of shares goes down (probably by the value of the dividend) since the company has slightly less money. If you get your bonus at the same time, share prices would be higher than they will be a week or so later. You can decide to buy before or after dividends are accounted for in the share price.

RWD

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Re: Advice
« Reply #2 on: April 24, 2021, 03:04:16 PM »
Essentially what you are saying is that during certain times of the year you want your portfolio to be aggressive and other times conservative. Why not just pick an asset allocation somewhere in the middle that you are happy with and stick with it?


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« Last Edit: June 13, 2021, 09:55:15 AM by RWD »

Rob_bob

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Re: Advice
« Reply #3 on: April 24, 2021, 03:30:32 PM »
You are not going to find an ETF that doesn't have some market volatility.

But if NEAR appeals to you then check out the Vanguard short term bond fund BSV.

BicycleB

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Re: Advice
« Reply #4 on: April 24, 2021, 06:05:16 PM »
(ptf)

Do what RWD said. Or invest early for a decade and call it a balance to what you did last time!

Jokes/notjoking aside, how long are you planning to work? If you're getting close to FI and stock prices scare you, read Early Retirement Now and prepare a bond tent or something so you are protected in your overall portfolio, not just this year's purchases. If you're going to work another decade, low prices just mean the stocks you're buying finally went on sale, what's the problem?

https://earlyretirementnow.com/

Simpleton

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Re: Advice
« Reply #5 on: April 25, 2021, 06:21:04 AM »
Essentially what you are saying is that during certain times of the year you want your portfolio to be aggressive and other times conservative. Why not just pick an asset allocation somewhere in the middle that you are happy with and stick with it?


No, my portfolio is just in a group of index funds. What I am looking for is a non-volatile instrument to hold my cash in while still getting some interest. This cash is then slowly dollar cost averaged into my investment account/index funds. Just looking to get SOME return on it over the year.

(ptf)

Do what RWD said. Or invest early for a decade and call it a balance to what you did last time!

Jokes/notjoking aside, how long are you planning to work? If you're getting close to FI and stock prices scare you, read Early Retirement Now and prepare a bond tent or something so you are protected in your overall portfolio, not just this year's purchases. If you're going to work another decade, low prices just mean the stocks you're buying finally went on sale, what's the problem?

https://earlyretirementnow.com/

If the 4% rule holds up, I am at FI now. I am personally targetting a 2% SWR which I am not at yet (specifically my goal is to get to FI on dividend income alone). This will give me added safety/peace of mind, and also room introduce a little more room for lifestyle inflation - I have young kids and am unsure how much more expensive they will get in the future. With average 6% market returns I can be there in a few years if I keep working. My job is also in healthcare and to be honest I would not feel right leaving now with everything going on.

cool7hand

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Re: Advice
« Reply #6 on: April 25, 2021, 07:05:13 AM »
Why don't you trust the 4% rule?

jeroly

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Re: Advice
« Reply #7 on: April 25, 2021, 07:59:49 AM »
Something worth looking into is whether your company offers a non-qualified deferred compensation plan.  These often offer great rates of return which are not secured - i.e. you won't get your deferred compensation if the company goes under.  However, if you work for a large stable company it could be a great way to invest part or all of your bonus.  For example, my GF has the opportunity to defer part of her comp and/or her bonus at a 7% return (she hasn't done it due to procrastination etc. but that's another story ;-)    ).

RWD

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Re: Advice
« Reply #8 on: April 25, 2021, 08:33:43 AM »
Essentially what you are saying is that during certain times of the year you want your portfolio to be aggressive and other times conservative. Why not just pick an asset allocation somewhere in the middle that you are happy with and stick with it?


No, my portfolio is just in a group of index funds. What I am looking for is a non-volatile instrument to hold my cash in while still getting some interest. This cash is then slowly dollar cost averaged into my investment account/index funds. Just looking to get SOME return on it over the year.
No, you aren't understanding the effect this has on your overall portfolio's asset allocation. Let's say in December you have $900k in stocks and nothing else, your asset allocation is 100% stocks. Then in January you get a $100k bonus and decide to be conservative with it (e.g. bonds). Now your asset allocation is 90% stocks, 10% bonds. See, your overall portfolio is now more conservative than it was the previous month. And this will be true for any starting asset allocation if you don't immediately invest a windfall/bonus in matching proportions. If you were happy with whatever allocation you had in December why would you not continue to follow that in January? With your strategy you will slowly increase the relative aggressiveness of your portfolio over the next 12 months until the next bonus and start over again.

You could also do this thought experiment: Imagine the bonus was automatically invested. Would you immediately sell it and then dollar-cost-average it back in? If so, why wouldn't you sell your entire portfolio and dollar-cost-average it over the next year?


If the 4% rule holds up, I am at FI now. I am personally targetting a 2% SWR which I am not at yet (specifically my goal is to get to FI on dividend income alone).
https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/

BicycleB

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Re: Advice
« Reply #9 on: April 25, 2021, 10:11:09 AM »


Jokes/notjoking aside, how long are you planning to work? If you're getting close to FI and stock prices scare you, read Early Retirement Now and prepare a bond tent or something so you are protected in your overall portfolio, not just this year's purchases. If you're going to work another decade, low prices just mean the stocks you're buying finally went on sale, what's the problem?

https://earlyretirementnow.com/

If the 4% rule holds up, I am at FI now. I am personally targetting a 2% SWR which I am not at yet (specifically my goal is to get to FI on dividend income alone). This will give me added safety/peace of mind, and also room introduce a little more room for lifestyle inflation - I have young kids and am unsure how much more expensive they will get in the future. With average 6% market returns I can be there in a few years if I keep working. My job is also in healthcare and to be honest I would not feel right leaving now with everything going on.

Ah, I see. In the big picture, you have cost uncertainty due to children. Plus, emotionally, you want nice solid safety cushion. Very understandable.

Glad you're taking other factors into account re continuing to work - seems to me like an important step towards well rounded self determination. You sound like you're likely to be financially independent from now until the day you die, so learning how to live on nonfinancial motivations is a big deal and I congratulate you. Anyway, when it comes to details like whether to feel guilty leaving work, whether to accept 4% as the ultimate line making you safe, etc. - you are the boss. Other people will comment legitimately about these issues because getting people over their fears is a big and valuable part of this forum's culture, but your decision is the important one. Fwiw, IMHO both kids and temporary skepticism about 4% at current prices are perfectly reasonable, therefore a safety margin is reasonable too. Full respect from me.

With the above paragraph as context, it's a judgment call whether in your overall portfolio you should seek more bonds/cash, other diversification, or simply more stock. In my view, still the important thing is to make the monthly/ annual contributions fit the bigger picture, fulfilling whatever overall allocation you think is best. Compared to the simple fact of reaching investments = 25x expenses, the allocation of this year's income is minor - not just in the sense that it's a small part of the whole, but also in that diversification has safety value, so any choice is reasonably effective in protecting you! Forgive us the portfolio analysis - context is important in trying to find the best answer to your question.

So here's an answer!! :) 

VMFXX offers extra stability by focusing on US govt securities, but seeks to provide income too. If I understand correctly, because this is a "money market" ETF, its returns are low but safety (lack of volatility) high because it focuses on very short term securities. I think that's as close to "no market fluctuations" as you're going to get in timeframes of less than a year. https://personal.vanguard.com/us/funds/snapshot?TTVETF=VETFCNTRL&FundId=0033&FundIntExt=INT

Unfortunately, I think what you'll find is that in today's low interest rate environment, there isn't much interest available in any passive investments like ETFs unless you are willing to accept the risk of market fluctuations.

If you want to put in some effort, there are threads by people who use their cash to open new bank accounts at banks that offer signup bonuses. The effect is similar to getting high temporary interest. Risk of market fluctuation is zero! You do have to beware of account minimums later, and generally conform to the terms of the accounts, but if you're careful, you can open (and if appropriate close) accounts in just a few months and keep the bonus without paying any fees. You can't do an infinite number of these, but a few is easy money if you're comfortable following up on details, apparently. That's as close to a free lunch (riskless interest) that I know of.

https://forum.mrmoneymustache.com/share-your-badassity/bank-account-churning-how-to-make-$1600-in-a-year-by-being-organized/800/
https://forum.mrmoneymustache.com/reader-recommendations/two-easy-bank-bonuses/

Fwiw, I think a lot of the reason you're getting so many comments on broader issues is that you're asking for something - riskless interest - that doesn't exist. In good faith, respondents are assuming that behind that possibly uninformed request, you have legitimate needs and we want to help you meet them. 

Best wishes in the future - it sounds like yours is quite bright! And congrats on technically reaching FI. :)
« Last Edit: April 25, 2021, 10:54:48 AM by BicycleB »

Simpleton

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Re: Advice
« Reply #10 on: April 25, 2021, 11:14:33 AM »
Essentially what you are saying is that during certain times of the year you want your portfolio to be aggressive and other times conservative. Why not just pick an asset allocation somewhere in the middle that you are happy with and stick with it?


No, my portfolio is just in a group of index funds. What I am looking for is a non-volatile instrument to hold my cash in while still getting some interest. This cash is then slowly dollar cost averaged into my investment account/index funds. Just looking to get SOME return on it over the year.
No, you aren't understanding the effect this has on your overall portfolio's asset allocation. Let's say in December you have $900k in stocks and nothing else, your asset allocation is 100% stocks. Then in January you get a $100k bonus and decide to be conservative with it (e.g. bonds). Now your asset allocation is 90% stocks, 10% bonds. See, your overall portfolio is now more conservative than it was the previous month. And this will be true for any starting asset allocation if you don't immediately invest a windfall/bonus in matching proportions. If you were happy with whatever allocation you had in December why would you not continue to follow that in January? With your strategy you will slowly increase the relative aggressiveness of your portfolio over the next 12 months until the next bonus and start over again.

You could also do this thought experiment: Imagine the bonus was automatically invested. Would you immediately sell it and then dollar-cost-average it back in? If so, why wouldn't you sell your entire portfolio and dollar-cost-average it over the next year?


If the 4% rule holds up, I am at FI now. I am personally targetting a 2% SWR which I am not at yet (specifically my goal is to get to FI on dividend income alone).
https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/

This is a very interesting perspective. I hadn't thought of it like that before.

Simpleton

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Re: Advice
« Reply #11 on: April 25, 2021, 05:47:33 PM »
Why don't you trust the 4% rule?

It is not that I do not trust the 4% rule, it is that the 4% rule is just an arbitrary number with a roughly 83% chance of success based on past experiences.

From a risk perspective, I think we are very obviously heading into a period of hightened inflation after all the money printing which has taken place, and I also think that the political climate is heading toward one which will challenge corporate profitability through much higher taxation/regulation. The current political climate suggest to me that actions will be taken to reduce return on capital and benefit return on labor in the coming years.

From a personal perspective, I do live well below my means now, but I am only mid-30's. Over the next 50+ years lots can happen and I may desire a bigger house, more travel etc. Even something as common as a divorce (hopefully never) could put a serious wrench in the plans without significant cushion.

Finally, I am kind of in my peak-earnings for my career right now - leaving is a one way ticket so I would want to be sure there is lots of room for error - the worst that happens is I end up with some extra money.


jeroly

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Re: Advice
« Reply #12 on: April 26, 2021, 05:30:36 AM »


If the 4% rule holds up, I am at FI now. I am personally targetting a 2% SWR which I am not at yet (specifically my goal is to get to FI on dividend income alone). This will give me added safety/peace of mind, and also room introduce a little more room for lifestyle inflation - I have young kids and am unsure how much more expensive they will get in the future. With average 6% market returns I can be there in a few years if I keep working. My job is also in healthcare and to be honest I would not feel right leaving now with everything going on.
If you have enough assets to target a 2% WR, then (assuming you have less than a 50 year retirement) you can make those withdrawals completely inflation-proof and risk-free by putting everything into TIPs.  End of story.  Seems excessively conservative to me but YMMV.

MustacheAndaHalf

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Re: Advice
« Reply #13 on: April 26, 2021, 09:15:54 AM »
When you hold an individual bond, and then yields go up, that bond loses market value.  The same is true of a bond fund you hold, if yields later go up - it drops in value.  So you could buy individual bonds or a bond fund, but there will be risk there as well.  If you want to avoid that, there's bank certificates of deposit (CDs), that pay very low interest.

Speaking of CDs, if you leave a CD alone, do you know how often it hits a new record high?  Every time they post interest.  It grows and grows, and never drops.  Investing in the stock market has historically worked well because of the returns stocks have provided.  Most of the time, the stock market is hitting new records - because it mostly goes higher (at least historically).

BicycleB

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Re: Advice
« Reply #14 on: April 26, 2021, 03:10:38 PM »


If the 4% rule holds up, I am at FI now. I am personally targetting a 2% SWR which I am not at yet (specifically my goal is to get to FI on dividend income alone). This will give me added safety/peace of mind, and also room introduce a little more room for lifestyle inflation - I have young kids and am unsure how much more expensive they will get in the future. With average 6% market returns I can be there in a few years if I keep working. My job is also in healthcare and to be honest I would not feel right leaving now with everything going on.
If you have enough assets to target a 2% WR, then (assuming you have less than a 50 year retirement) you can make those withdrawals completely inflation-proof and risk-free by putting everything into TIPs.  End of story.  Seems excessively conservative to me but YMMV.

This assumes her primary objective is to achieve precisely her current spending level. She's explicitly said she wants a bigger stash in case of rising expenses due to a future child.
« Last Edit: April 26, 2021, 03:13:16 PM by BicycleB »

RWD

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Re: Advice
« Reply #15 on: April 26, 2021, 03:17:52 PM »
If the 4% rule holds up, I am at FI now. I am personally targetting a 2% SWR which I am not at yet (specifically my goal is to get to FI on dividend income alone). This will give me added safety/peace of mind, and also room introduce a little more room for lifestyle inflation - I have young kids and am unsure how much more expensive they will get in the future. With average 6% market returns I can be there in a few years if I keep working. My job is also in healthcare and to be honest I would not feel right leaving now with everything going on.
If you have enough assets to target a 2% WR, then (assuming you have less than a 50 year retirement) you can make those withdrawals completely inflation-proof and risk-free by putting everything into TIPs.  End of story.  Seems excessively conservative to me but YMMV.

This assumes her primary objective is to achieve precisely her current spending level. She's explicitly said she wants a bigger stash in case of rising expenses due to a future child.

Of course, that is not a problem with the 4% rule, it's about determining the expenses side of the equation. If you are spending $40k now and targeting $2 million invested it's still the 4% rule (not 2%) if your planned retirement expenses are actually going to be $80k.

yachi

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Re: Advice
« Reply #16 on: April 26, 2021, 04:03:27 PM »
Hi,

I am looking for advice.

Every year for about a decade now I get a sizeable bonus. In most years my bonus exceeds my earnings in the rest of the year. It is significant money for me.

Once that bonus hits my brokerage account I am paralyzed. I know statistically the best thing is to invest it all immediately, but every year for a decade now, the market is at all time highs when I get my bonus, and it never feels right. I know even in hindsight for the last decade that is what I should do, but it still feels wrong and the gist of it is that I am uncomfortable doing that

What I have been doing for the past few years is dollar cost averaging 1/12th of it into the market every month - this works for me.

What I have been doing wrong is keeping that amount in cash through the year.

All I am looking for is a liquid etf that yields some sort of interest and is not subject to market fluctuations. I would essentially like to buy a bond that I could sell any time without the risk of interest rates increasing and destroying its value.

I am just looking for the most stable capital-preserving, interest bearing investment that you can recommend which also allows me to sell 1/12th of it each month to move into my index funds.

The ticker NEAR seems to be essentially what I am looking for I suppose, but I guess I am just looking to see if anyone has a smarter idea.


Thanks,

You would sell puts against a 10% SPY drop 1 month out.  That might make you 2.66%.  If SPY drops more than 10%, your options are called, and you buy in at 10% less than today's price.  But the more it drops below 10% the worse you'll be compared to holding cash.

ChpBstrd

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Re: Advice
« Reply #17 on: April 26, 2021, 04:24:11 PM »
IMO, you are only looking at one half of the risk equation: The risk that you buy assets that then go down in price for a while. The other half of the risk is that you fail to buy assets that go up in price, and then have to pay the higher price to get them later. Because stocks go up in about 8 out of every 10 years, the later risk can be expected to occur more frequently. However, the loss years tend to be big ones.

You can use options to avoid both buyer's remorse and FOMO. Check out the collar strategy for example, where you can't lose (or gain) more than an amount you determine: https://www.optionseducation.org/strategies/all-strategies/collar-protective-collar This is the strategy that got me into 90+% stocks and kept me in stocks when the headlines periodically turned scary over the past several years. Except I played the strategy with durations of 2+ years instead of the usually-cited few months, because I was hedging big events that take a long time to resolve.

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From a risk perspective, I think we are very obviously heading into a period of hightened inflation after all the money printing which has taken place, and I also think that the political climate is heading toward one which will challenge corporate profitability through much higher taxation/regulation. The current political climate suggest to me that actions will be taken to reduce return on capital and benefit return on labor in the coming years.

If you are very certain that inflation "very obviously" will rise, you should trade options and purchase a bear put spread or sell a bear call spread on TLT. If you bet boldly and win, the return on these can be about 50% per bet across whatever timeframe you are willing to bet. If that sounds like wild gambling, that's because it is! So is making any specific market prediction based on a narrative that incorporates some information and not other info, as all narratives do.

I used to read Seeking Alpha over the course of the last decade, and there are tons of people who write "this is the year the US dollar collapses and gold goes to $1M an ounce." and they have all these reasons and rationales - and none if it has changed for many years. Meanwhile the USD remained fairly stable and the stock market made millionaires out of those with the stomach to watch a chart zig zag. 

I also watched people flip out when Obama was elected that taxes were going up to 99%, the currency would be debased, government agents would be seizing investors' assets, and we'd all be forced laborers on communes by 2014. Actually the bottom was in around the date of his inauguration, and a once-in-a-lifetime buying opportunity came thereafter thanks to the then-scary-and-new strategy of QE. The following decade was a good time to buy, but only in hindsight.

After watching many dozens of would-be prophets fail - just like the vast majority of active fund managers - I have accepted that we cannot predict the future. Still the odds are in my favor because I'm betting on millions of employees working every day to make more money for themselves and for freeloading shareholders like me. I've learned to BEWARE NARRATIVES at all cost, because these are inevitably the dumb-money consensus no matter how hard I try to not let them be. My losses from 15 years of believing my own due diligence are in at least the hundreds of thousands vs. just buying the indexes. Had I thought less about short-term investing and simply chose what assets usually go up on the scale of decades, I'd have done much better.

TL;DR: Either hit buy or use options to buy insurance on your portfolio. Do not market time. Do not make up narratives about what's going to happen next. Nobody knows shit.

Car Jack

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Re: Advice
« Reply #18 on: April 27, 2021, 09:26:20 AM »
You're being too emotional and too un-necessarily analytical about this.  Get your bonus.  Buy at your asset allocation.  The end.

The market on average hits a new all time high every 18 days.  If you can't handle buying at near all time highs, you really don't have much choice.  Take out a CD at 0.5%?  Just buy.

I look at SCHB, which I've bought into in one of my taxable accounts since I opened it.  I have tons of shares at $52.  How could I possibly buy today at (goes to look at the price) $101.94?  Well, how I do it is Trade Stocks ---> Buy --> Limit --> # of shares --> price $102 (just for safety) --> place order --> confirm order.

Just do it and get it out of the way.  In a year, the price will be higher.  Do you not agree?

bacchi

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Re: Advice
« Reply #19 on: April 27, 2021, 09:49:57 AM »
Why don't you trust the 4% rule?

It is not that I do not trust the 4% rule, it is that the 4% rule is just an arbitrary number with a roughly 83% chance of success based on past experiences.

The 4% rule is not arbitrary. It's mathematically calculated.

Where is 83% from? The success rate is 98% with a 75/25 mix, per Trinity (over 30 years, historically, in the US).

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From a risk perspective, I think we are very obviously heading into a period of hightened inflation after all the money printing which has taken place,

Inflation and cash do not go together. Never hold cash in a high inflationary environment.