Capital Preservation Vs Buy Buy Buy

[SpiritualGangsta]

Going into this week, I was sporting an asset allocation as follows:

(6%) stocks
(9%) Precious Medals.. via etfs
(85%) Cash

I want to be fully invested.. however I just can't convince myself it is wise. The markets have been in a parabolic boom for half a decade.. interest rates are at 0%, emerging markets are slowing down, etc. etc. etc.

I'm searching for a reason to dip my toe into the market further.. however.. I can't find any reasons...

To clarify, I work in finance, I love it, however when it comes to the markets... I find them to be illogical. The market is tracing the Fed's balance sheet, not corporate valuations. How can you invest money into a market that is priced inaccurately due to external stimulus? When you go to buy a business (in the real world, not the b.s. paper world)... you pay its EBITA times a multiple, unless its bankrupt, then you buy its assets.. you don't buy its EBITA times a multiple and/or assets (+) a magical ink filled press, which vomits money into a picnic basket held by a Sports Illustrated model...
Regrettably, this is how I view the market..

Bottom line is, I want to be cured of my neuroses. I want to believe in the Model holding the picnic basket full of money.. who needs actual market-based valuations?? oh wait... I do.

The goal we are all seeking here is freedom.. and to have freedom you need capital.. to have capital you need to not lose it...

I feel like a bumbling idiot, but is it really so bad to look at the market and be like F that right now.. I'm fine with earning my 1% (HY savings) knowing that when I wake up a month from now.. my money will still be there?

To be honest I consider my career to be my largest investment.. I pull down $350k per year, and have a savings rate of about $200K per year... I also just turned 27. I would rather just lock up my after-tax savings, until the markets make sense to me, and retire early basically guaranteed... than to risk more grey hair chasing yield, which might enable me to retire earlier.. or might totally F me over..

Thoughts?

Namaste (sarc)

[College Stash]

Lol...

If you're so scared of the market and you make that kind of money....why not invest in real estate?

Either directly own properties or you could just buy reits in the future too (though suffer the immense taxes).

[mrpercentage]

Going into this week, I was sporting an asset allocation as follows:

(6%) stocks
(9%) Precious Medals.. via etfs
(85%) Cash

I want to be fully invested.. however I just can't convince myself it is wise. The markets have been in a parabolic boom for half a decade.. interest rates are at 0%, emerging markets are slowing down, etc. etc. etc.



I'm searching for a reason to dip my toe into the market further.. however.. I can't find any reasons...

To clarify, I work in finance, I love it, however when it comes to the markets... I find them to be illogical. The market is tracing the Fed's balance sheet, not corporate valuations. How can you invest money into a market that is priced inaccurately due to external stimulus? When you go to buy a business (in the real world, not the b.s. paper world)... you pay its EBITA times a multiple, unless its bankrupt, then you buy its assets.. you don't buy its EBITA times a multiple and/or assets (+) a magical ink filled press, which vomits money into a picnic basket held by a Sports Illustrated model...
Regrettably, this is how I view the market..

Bottom line is, I want to be cured of my neuroses. I want to believe in the Model holding the picnic basket full of money.. who needs actual market-based valuations?? oh wait... I do.

The goal we are all seeking here is freedom.. and to have freedom you need capital.. to have capital you need to not lose it...

I feel like a bumbling idiot, but is it really so bad to look at the market and be like F that right now.. I'm fine with earning my 1% (HY savings) knowing that when I wake up a month from now.. my money will still be there?

To be honest I consider my career to be my largest investment.. I pull down $350k per year, and have a savings rate of about $200K per year... I also just turned 27. I would rather just lock up my after-tax savings, until the markets make sense to me, and retire early basically guaranteed... than to risk more grey hair chasing yield, which might enable me to retire earlier.. or might totally F me over..

Thoughts?

Namaste (sarc)

Buy XOM. Not my first pick but you will get a fair price with a 4% yield and its almost bullet proof. People will not stop driving cars tomorrow and they are also heavy on Natural Gas and everyone is converting their coal power stations to that. It's honestly one of the highest quality stocks out there. You could probably live off the yield without ever selling anything and oil is out of favor right now and the stock market is down.

Remember you were told this today five years from now.
And God Bless You!

[mrpercentage]

I forgot to mention. Limit order 0.50 over its price. Don't market order. Ever

[SpiritualGangsta]

Thanks to the above two posters..

@collegestash... I would love to hop into real-estate but my job is in New Orleans and it's known to be underwater every few years.. by that I mean actual water, not financially. I like your REIT idea.. do you have any favorites? I traded REITS back in 08/09 (shorted them specifically) however I have been out of the game for awhile.

@mrpercentage.. thats great advice.. I say that from a biased perspective as my largest stock holding is currently XLE, which is the largest oil and gas ETF. It currently yields 3.36%. I should probably buy more, it's largest holding is XOM.

I'm adverse to individual stocks. Some friends and I went to an investment conference last year, where they PUMPED Chesapeake Energy (CHK). I averaged into 1000 shares.. which are now down 60% in 9 months.. I also subscribe to a few news letters.. Stansberry Research being one of them and although their overall market analysis is great, their last few picks tanked past their 25% stops within a few months... Needless to say I'm on a bit of a market losing streak.

[firewalker]

With a savings of 200K per year, don't worry about it. In your position, just get real good at what you do so raises and bonus money will push you well above the 7 pct the market will give you. You don't need to make friends with the S.I. model for now.

[mrpercentage]

I never use stops. I want to be in control of all selling and don't want to be caught at opening bell and have it swing right back up.

Im also changing my strategy to a longer view approach. I don't want to care quarter to quarter. I want high yield, highly unlikely to go out of business, or cut the dividend company. Im throwing equity appreciation out the window. Future stream of dividend payments for me.

That and Im holding Disney forever. Im not going to bother defending it. Call it a roll of the dice in a premium growth company. I was up over 20% now I'm down 5%-- or was at one point. Thats how growth is though, and the better the more amplified the swings so screw it-- Im never letting go. I will make more money and invest in other stuff.

Also, the longer you hold something the more dividends it pays you and the less you are taxed from capital gains. (the greater the return) That must be factored into the reward for holding with other key signals tell you to sell.

I have recently come to the conclusion that I shouldn't invest in something that I am not willing to watch go to zero. I shouldn't give a company money if I don't think they can pull through it. I should watch it succeed or burn in glory. Every investment I make is a newly planted tree. Some trees may die but the biggest Redwood is the oldest and it had a few bad years for sure. Im becoming buy an hold. I still might pick a trade from time to time. But not without a strong sense of certainty and a willingness to take a loss.

[tyir]

Spiritual, the general advice from this board is that most people shouldn't do active investing. It sounds like you've been burned on that in the  past as well.
Stick to a simple low fee index fund setup such as the boglehead 3 fund portfolio. Read a random walk down wall street for the theoretical basis behind this model. That's all there is to it.

[catccc]

Another vote for no frills index investing.  1% is nothing, inflation is eating away your stash.

Do you have a 401K?  I realized at some point that I felt differently about how that was invested vs. my after tax savings, which were, at the time, primarily cash.  I looked up and saw what i could have been earning with relatively low risk in an index fund, and felt foolish for holding that cash.  Also, interest income is taxed as ordinary income, and dividends and capital gains have lower tax rates.  I'd invest that cash, if I were you.

[SpiritualGangsta]

@mrpercentage good stuff. I really wish I could get my mindset closer to your train of though.. " Im throwing equity appreciation out the window. Future stream of dividend payments for me."

 I own some pretty good yielders (EWS, ENZL, NORW, XLE, CSX).. I am tempted to find some higher quality US focused index funds, that yield >2.75%, but it is hard to find any that are in the US, outside of oil & gas ETF's, which have been beaten down to reflect an artificially high yield.

If anyone has any good index fund/ETF picks, I would be happy to hear them. I did a lot of digging on the vanguard funds today, great stuff, but the valuations don't fit my current risk tolerance. VTSMX seems to have gotten a bit ahead of itself. I can't justify dumping capital in now, to only collect a 1.73% div. The risk of asset price deflation is too great.. I could be totally wrong, but in this case, I would rather sit on the sidelines collecting 1%, than jump int VTSMX (which has almost doubled in the past 5 years) to only collect .73% more, while I wait for it to hopefully appreciate more.. despite there being no tangible reasons for it to in the real economy... UNLESS the FED launches QE 4, then I would be game to get into the casino.

[dragoncar]

@mrpercentage good stuff. I really wish I could get my mindset closer to your train of though.. " Im throwing equity appreciation out the window. Future stream of dividend payments for me."

 I own some pretty good yielders (EWS, ENZL, NORW, XLE, CSX).. I am tempted to find some higher quality US focused index funds, that yield >2.75%, but it is hard to find any that are in the US, outside of oil & gas ETF's, which have been beaten down to reflect an artificially high yield.

If anyone has any good index fund/ETF picks, I would be happy to hear them. I did a lot of digging on the vanguard funds today, great stuff, but the valuations don't fit my current risk tolerance. VTSMX seems to have gotten a bit ahead of itself. I can't justify dumping capital in now, to only collect a 1.73% div. The risk of asset price deflation is too great.. I could be totally wrong, but in this case, I would rather sit on the sidelines collecting 1%, than jump int VTSMX (which has almost doubled in the past 5 years) to only collect .73% more, while I wait for it to hopefully appreciate more.. despite there being no tangible reasons for it to in the real economy... UNLESS the FED launches QE 4, then I would be game to get into the casino.

How about the Wellesley find?  It's active but low cost and conservative

[tyir]

@mrpercentage good stuff. I really wish I could get my mindset closer to your train of though.. " Im throwing equity appreciation out the window. Future stream of dividend payments for me."

 I own some pretty good yielders (EWS, ENZL, NORW, XLE, CSX).. I am tempted to find some higher quality US focused index funds, that yield >2.75%, but it is hard to find any that are in the US, outside of oil & gas ETF's, which have been beaten down to reflect an artificially high yield.

If anyone has any good index fund/ETF picks, I would be happy to hear them. I did a lot of digging on the vanguard funds today, great stuff, but the valuations don't fit my current risk tolerance. VTSMX seems to have gotten a bit ahead of itself. I can't justify dumping capital in now, to only collect a 1.73% div. The risk of asset price deflation is too great.. I could be totally wrong, but in this case, I would rather sit on the sidelines collecting 1%, than jump int VTSMX (which has almost doubled in the past 5 years) to only collect .73% more, while I wait for it to hopefully appreciate more.. despite there being no tangible reasons for it to in the real economy... UNLESS the FED launches QE 4, then I would be game to get into the casino.

Why are you interested in yield / dividend payments? They come out of the value of the stock itself - this isn't free money. in fact it is generally worse than capital appreciation since it is taxed much less favorably. If you don't need the steady stream of income (which you don't see you are young and working) - I don't see why chasing yield makes sense.
This topic comes up a lot here, for ex: http://forum.mrmoneymustache.com/investor-alley/investment-strategy-focus-on-dividend-or-capital-appreciation/

 

[mrpercentage]

@mrpercentage good stuff. I really wish I could get my mindset closer to your train of though.. " Im throwing equity appreciation out the window. Future stream of dividend payments for me."

 I own some pretty good yielders (EWS, ENZL, NORW, XLE, CSX).. I am tempted to find some higher quality US focused index funds, that yield >2.75%, but it is hard to find any that are in the US, outside of oil & gas ETF's, which have been beaten down to reflect an artificially high yield.

If anyone has any good index fund/ETF picks, I would be happy to hear them. I did a lot of digging on the vanguard funds today, great stuff, but the valuations don't fit my current risk tolerance. VTSMX seems to have gotten a bit ahead of itself. I can't justify dumping capital in now, to only collect a 1.73% div. The risk of asset price deflation is too great.. I could be totally wrong, but in this case, I would rather sit on the sidelines collecting 1%, than jump int VTSMX (which has almost doubled in the past 5 years) to only collect .73% more, while I wait for it to hopefully appreciate more.. despite there being no tangible reasons for it to in the real economy... UNLESS the FED launches QE 4, then I would be game to get into the casino.

Why are you interested in yield / dividend payments? They come out of the value of the stock itself - this isn't free money. in fact it is generally worse than capital appreciation since it is taxed much less favorably. If you don't need the steady stream of income (which you don't see you are young and working) - I don't see why chasing yield makes sense.
This topic comes up a lot here, for ex: http://forum.mrmoneymustache.com/investor-alley/investment-strategy-focus-on-dividend-or-capital-appreciation/

I know this is for spiritual but here are my thoughts.

I have been over this a lot. Its not related. It comes from earnings, and that is not an absolute anchor for price. Big difference between a company stock and a ETF. But I have no will to convince anyone else. I perfer dividends. They are more reliable. Disney just went from 122 to under 100. Do you know what happened to Cheveron's dividend since its share price got cut in half? Nothing. Still pays you $4.28 a year in dividends and those dividends will buy more stock since the share price is lower. Dividend investing makes you more money when the market goes up or down. Good companies dividends will also keep up with inflation. When you are collecting your dividends instead of the payment staying the same being eroded by inflation they will go up too while preserving the source because you are not selling shares. Thats why.

Show me an ETF that yields 4.2% like Exxon. Show me one the yields 6% like Cheveron. Granted Cheverons might get trimmed but even if it was cut in half until oil goes back to 50 it would still pay 3%. No chance of Exxons getting cut at all.

[SuperSecretName]

Show me an ETF that yields 4.2% like Exxon. Show me one the yields 6% like Cheveron. Granted Cheverons might get trimmed but even if it was cut in half until oil goes back to 50 it would still pay 3%. No chance of Exxons getting cut at all.

until it does.  or the raises slow.

past performance, yada yada yada.

by investing in something, you are missing the opportunity cost elsewhere.  There is no free lunch, and high dividends come at the expense of something else.

[SpiritualGangsta]

All the posters above are making valid points..

Given my age.. I should be focused on growth and not on yield.. however since I have been in a cave the past 3 years constructing my career, I am late to the party. If the S&P had a P/E of <16 I wouldn't even be posting.. I would be icing down my achey finger from buying as many shares as I could (not saying I would buy the SPY, just using hyperbole).

With market P/E's close to 20... and with growth stocks sporting P/Es upwards of 90 (think FB) things are pricey.. I can't turn to bonds.. I assume any bond-fund will depreciate in value as yields increase.. (I am naive to bond funds, however I can only assume this is how they work).

Overall, I think i am going to adjust my asset allocation as follows:
Initial:
(6%) stocks
(9%) Precious Medals.. via etfs
(85%) Cash

Revised:
(20%) stocks
(9%) Precious Medals.. via etfs
(71%) Cash

I plan to sit on the sidelines for the next few months and wait for this volatility to work itself out, before increasing the 20% allocated to stocks.

My FIRE number is high.. $2,000,000... however based on my current savings rate, plus my current stash.. I should hit it in 6-7 years..
I can live with these numbers, hence my aversion to enter the market.. sure it could cut off 1-2 years.. but if the market took an 08-09 like hit (which is when I was getting my finance degree, so this time-frame is seared into my brain) I could be pushed back to 10-12 years before FIRE..

Regardless. Once I approach FIRE I am going to need to get into the market to earn yield, to protect my stash from Inflation. 

[Lowerbills]

To clarify, I work in finance, I love it, however when it comes to the markets... I find them to be illogical. 

The goal we are all seeking here is freedom.. and to have freedom you need capital.. to have capital you need to not lose it...

You sound like a perfect candidate to invest in real estate.  Maybe outside of New Orleans?  You're knowledgeable enough to understand monetary policy "ink filled press", EBITDA, and inflation.. Take advantage of the opportunity to borrow at sub 4% FIXED for 30 YRS.

Oh, and save yourself a few bucks and drop the subscriptions.

[I'm a red panda]

To me, 85% cash seems like insanity.

If you are incredibly risk adverse and want to stay out of markets, at least set up some CDs, either laddered so you have a bit more liquidity, or in the "high yield" (lol) that require a larger capital.

[Patrick A]

Just a couple of thoughts. 

By sitting in 85% cash and 9% precious metal the only thing you are guaranteeing is that you will lose money over time to inflation.  The only way your investment mix beats a balanced portfolio over time is if hyperinflation and all other dooms day scenarios play out.  Up to you to decide how likely that is.  Yes, markets have been down lately and sentiment has been bad since 2009 -- but people are absolutely terrible at predicting what the market and economy will do.  When the markets go down people talk about the end of capitalism, and when they fly up everyone seems to be a genius investor.

Others have mentioned that stocks also pay dividends.  If you don't like equities, maybe look at muni bonds, TIPS, CD's, real estate, etc.

You mentioned that you would like to wait to change your investment mix until the volatility in the market plays itself out.  Does this mean you will start buying stocks once they start going up again?  Major indexes all just took a 10+% hit . . . so if you like things that are cheaper then now is probably a better time to buy. 

I don't normally advocate for this, but you seem like the perfect person to sit down with a financial advisor.  It seems to me that you are handling your money emotionally with incomplete information.

[beee]

read
this
http://jlcollinsnh.com/stock-series/

then reread it

then make a decision

[SpiritualGangsta]

I believe I have been misunderstood.

Why would I buy stocks when they are going up again? I have mentioned above, that I believe the PE of the market is too high.. thus I won't be touching the market, until PE's retrace to their historical.. non-QE inflated historical values.

You are right however, I do have incomplete information. I have no clue how all the QE's will effect the equity markets in the long term.. furthermore, I have no clue what the lack of any QE will have on the equity markets in the short term.

I don't see how I am handling my money emotionally. I am attempting to create a thesis upon which I can invest my stash... up to this point, I can't seem to make a good thesis for the US equity markets.
*to clarify the above, in the last 3 days I have acquired moderate size stakes (about $50k combined) in a few international index funds.. primarily focusing on Norway, New Zealand, Hong Kong, and Singapore.

In 2009 I made money hand over fist shorting the banks and homebuilders. I am not adverse to the market..
I started this thread to ask this:
What is the case for equities... they are expensive on a historical basis, however is there a reason to buy buy buy now vs holding my capital (preservation) until the markets move back to their historical mean?

Thanks for all the responses! I appreciate the time y'all take to respond.
 

[SpiritualGangsta]

Thanks ildar. I will check the link out this evening.

[Telecaster]

I believe I have been misunderstood.

Why would I buy stocks when they are going up again? I have mentioned above, that I believe the PE of the market is too high.. thus I won't be touching the market, until PE's retrace to their historical.. non-QE inflated historical values.

The PE is indeed high compared to historical averages.  That means one should expect lower than average returns in the future, that' s not the same as expecting no returns.    The correct question is where is the best place to deploy capital?  It sounds like you want to sit on the sidelines.   You could be there quite a while.   Half of the time the PE is above average.   

[jodelino]

Thanks to the above two posters..

@collegestash... I would love to hop into real-estate but my job is in New Orleans and it's known to be underwater every few years.. by that I mean actual water, not financially. I like your REIT idea.. do you have any favorites? I traded REITS back in 08/09 (shorted them specifically) however I have been out of the game for awhile.

I don't think I'm as sophisticated about the market as you are and as others are here, but you might want to check out NYRT, a publicly-traded REIT of mostly Manhattan properties, and some in the larger NYC area. It pays about 4% dividend, and it dropped in the past few days, is coming up, but still down. I invested in it before it went public and it's had a volatile year+ since going public, but I plan to hold it longterm. I like the dividend (I'm recently retired) and I expect the share price to go up.

[mrpercentage]

My only case is the high yielding dividend equities.

And a general suspicion that with everything headed toward 401k it will over inflate the market by nature. However the crux is many idiots just cash out their 401k jumping from job to job. Growth has a few challenges. Lucky for us most soon to be retirees are not loaded up on growth.

There are more people in the world and more of those are investing. I think that is the best case.

However, I am completely convinced that if you do invest you must be willing to let your investment do or die. If you can't. You will sell at maximum pain. I could show you 20 charts that would have convinced you you would lose everything when given a few years it made you a fortune.

Stansbury Research may be smart but that level of pessimism does not have a good track record for making money. Faith does. The belief of the businessman that he can succeed when putting it on the line. You have to work. You have to invest and budget wisely. You have to stay involved and informed but you must also have faith. In fact I would say it is the greatest component. Nothing is full proof and you can never fully side step the apocalypse.
 85% cash is over doing it. You know this. Lucky for you. You can be very selective. Foreclosed rental property might be for you.
Then again Disney is on sale. Mickey and ESPN. I suspect it will be back to 122 at the close of the year. There is always a good deal somewhere. Fear always surrounds good investments. With Disney it's cord cutting. With Oil it current oil supply. With dividends its interest rates.

[sol]

With that kind of income, who needs market investments?  Get your expenses down to a mustachian level and you can retire in no time without any market returns.

As your savings rate approaches 100%, the relative importance of your investment returns goes to zero.   1%, 10%, it shouldn't matter because your working career is so short.  And a 2% swr still lasts 50 years even at zero percent interest.

[brooklynguy]

And a 2% swr still lasts 50 years even at zero percent interest.

Assuming zero inflation, that is.  But otherwise sol is right.  If you massively oversave (which, at your income level, would be easy to do if you can get your expenses down to a mustachian level), you would be in a classic situation of having "already won the game," in which case it would make sense to "stop playing" and just stick all your funds in ibonds or something.  Of course, it would make just as much sense to throw it all in the stock market, because who cares if stocks are overvalued when even catastrophically bad returns would leave you with a portfolio more than big enough to sustain your living expenses?

[clifp]

 Bond guru (#2 guy at PIMCO) Mohamed A. El-Erian made essentially the same case you did on CNBC earlier this week. The massive liquidity inject by central bankers have propped up equities to levels which aren't at all supported by  their current value or their growth prospect in the future.  Pretty much all asset classes are overvalued.  I'd argue that in universe of 2% treasury yields stocks don't seem particularly expensive.

I believe the thing to keep in mind is that everybody in power from the Fed Governors,to the Goldman Sachs traders, the JP Morgan banker, European hedge fund manager, the folks in the IMF, and Chinese Politibureau officials, and Russia "businessman' has a vested interest in seeing this little charade continue as long as possible.  Nobody gets hurt more by collapsing stock and bond prices than rich folks. So I am believer in joining them.

But here is the most important thing, if you are 27 making $340K, work in finance and were smart enough to make money going short in 2009, then you are much closer to being part of the ruling class and not the peasant class.  I am sure at some we are going to see another  50-75% bear market in both stocks and  bonds.  The thing is just because there is no reason for stocks to go up, there is all no reason for them to go down.  I personally don't see anything on the horizon that is going cause a massive selloff this year.  Look at the reaction to Chinese market, and hell even  the prospect of President Trump doesn't seem to faze the market much.  So to me the big correction could be another 2,5,10,25, maybe even 50 years out  During that time we might see a 20,50%,200%, maybe even 500%   appreciation.
 
The cool thing about becoming a millionaire is you get this neat financial collapse warning app*.  Now its not perfect, I hear the one billionaires get is really good.  But as long as you are paying attention,and not super stubborn or really greedy you should be able to get out well before the bottom after losing say 25% of your money. Now if you feel confident that you already received the secret sell signal than stay out. But I think you are leaving a lot of money on the table.

*app not available for all platforms.

[Cathy]

...which, at your income level, would be easy to do if you can get your expenses down to a mustachian level...

If you are suggesting that OP's expenses are currently excessive, you might be forgetting about taxes. OP says his gross income is $350,000 per year. If we assume OP's taxable income is $290,000 (which is a conservative assumption), he can expect to pay, each year, roughly the following income tax amounts:

• $80,000 in federal income tax, exclusive of FICA;
• $7,347 in Social Security tax;
• $5,075 in Medicare tax;
• $1,350 in Additional Medicare tax; and
• $16,150 in Louisiana state tax.

That is a grand total of $109,922 in income taxes, leaving OP with only $240,078 in after-tax income (an average tax rate of over 31%, and it's still 5-10 percentage points less (i.e. 16-32% less) than residents of California would pay). And this is a pretty conservative calculation; the real tax rate is probably higher.

OP says that he saves $200,000 per year, meaning his total spending, including housing, is less than $40,000 per year. His savings rate expressed as a percentage is over 83%.

[mrpercentage]

Those are all really good points guys. I admit some of my attitude stems from having less to lose. Even on a percentage basis I can only say Im risking close to 20% of a years gross income in strait stocks. (not including passive investing). Its significant enough for me to certainly care but its not 80% of my income. I think in his shoes I would up it to that 20% though. Maybe I would buy a car wash. They get a lot of money doing absolutely nothing.

Im not going to lie. I would also invest in a Cessna, and I might not be able to resist that Ferrari

[hiddenace]

You make good money and you're risk averse. As others here have suggested, low cost index funds are a great way to go.  Considering that you are risk averse, and you're making enough money to not need to take as much market risk, you could consider a retiree-centric asset allocation.

30% stocks (just pick a total market fund)
60% intermediate term Treasuries fund
10% cash earning 1%

Go to https://www.portfoliovisualizer.com and take a look at that at asset allocation. You'll find that even in an extreme selloff like 2008, this allocation will face minimal disruption, which should help keep you from panic selling. Ofcourse the trade off is that you won't earn as much from your capital in the long run, but I get the feeling you're OK with that.

There's nothing wrong with being risk averse, just know what you should expect and don't deviate from your plan one you implement it.

*EDIT* it looks like you're just asking why invest in the US market when it's relatively expensive.  Well, many large cap companies actually make half their money overseas (consumer staples, restaurant chains, industrials software companies) so your already getting exposure overseas. Also the US isn't as exposed to the slowdown in China as overseas markets are (Canada, Australia, Russia, and South Africa are some examples of commodity heavy countries that are strongly corrallated to China's economy). The US market is more expensive for a good reason, it has the best growth prospects right now.

There's global deflation going on right now, so even if the US raises rates they won't raise them by much and it will be very very slow, for at least a few years. China was driving most of the global growth story over the past decade, but that appears to be slowing down now. There's little to suggest were heading into inflation right now.

Long story short. Invest in the total stock market - global that is. Go 50:50 US:the rest of the world. You could tilt to emerging markets considering how much they've routed this year, their valuation is better.

In my equity exposure, I am 25% US market, 25% Ex-US market, 25% US small caps, 25% emerging markets.

[clifp]

I don't think he is risk adverse.  Anybody who shorted bank stocks in 2009 at time when many of them had fallen 50% in a short period and were yielding 10-12% isn't a risk adverse. I was looking at the yields and buying them at the time, I was always curious who making money from my mistake at the time.   A person who is short a stock is responsible for  paying the dividend, and of course when you short a stock you have the potential for unlimited losses.

The OP is a bear and frankly making a compelling bull case for stocks right now is hard.

[Ozapftis]

If anyone has any good index fund/ETF picks, I would be happy to hear them. I did a lot of digging on the vanguard funds today, great stuff, but the valuations don't fit my current risk tolerance.

My personal favourite "index fund" is Berkshire Hathaway (BRK.B), Warren Buffet's investment vehicle. It is a collection of mostly excellent businesses with durable competitive advantages, charges no fees of any kind, and the man who has been running it is recognized as one of the best investors of all time. Over the past 50 years his annual rate of return has been around 19%, easily outperforming any major stock market index.

EDIT: typo.

[patrickza]

Can't believe you're holding so much cash!

Get into the market. It's time in the market, not timing the market. Jason from dividend mantra did a great article this month about the difference in returns today whether investing the day before black Monday, or the day after. Basically, investing after would return 10.12% annualized, the day before 9.42%. That 0.6% isn't much at all when you consider that it crashed 22.6% that day.

http://www.dividendmantra.com/2015/08/time-in-the-market-trumps-timing-the-market-for-the-long-term-investor/

[CorpRaider]

No wonder your FI amount is so high with a negative expected real return.  If you think US markets are pricey look abroad.  If you don't want to go into the EM eye of the storm, the CAPEs for the EAFE country markets are generally in the bottom 25% historically.  At least you could ladder treasuries or something.

[brooklynguy]

OP says that he saves $200,000 per year, meaning his total spending, including housing, is less than $40,000 per year. His savings rate expressed as a percentage is over 83%.

Good point.  I should have paid closer attention to the original post.  Sounds like the OP is already pretty much doing what my post suggested.

I would rather just lock up my after-tax savings, until the markets make sense to me, and retire early basically guaranteed... than to risk more grey hair chasing yield, which might enable me to retire earlier.. or might totally F me over..

My FIRE number is high.. $2,000,000... however based on my current savings rate, plus my current stash.. I should hit it in 6-7 years..
I can live with these numbers, hence my aversion to enter the market.

Ultimately, given an assumed expense level, the only point of using more aggressive investment options is to accelerate your time to financial independence.  If you are willing to accept the tradeoff of increased time to FI in exchange for a better guarantee of success, that makes total sense.  It's easier to understand the appeal of that bargain in the case a high income earner like yourself, whose price for the deal is adding a few short years to their working career, than it is for the average schmuck who may have to add a few decades.

[Dan_Breakfree]

@collegestash... I would love to hop into real-estate but my job is in New Orleans and it's known to be underwater every few years.. by that I mean actual water, not financially.

If you're just not interested in real estate investing, it's fine, but if you are, you might want to rethink this. We purchased a house in Uptown New Orleans in 2009, renovated and sold in 2013 for a $65k profit. The value of the same house has probably gone up another $50k at least since then.

Any where in the "older part" of New Orleans is a great investment (Uptown, Garden District, French Quarter, Marigny, etc) and most of those areas didn't (and don't) flood. All they've done is increase in value... and New Orleans doesn't have any more land to develop outside of the dangerous (due to flooding or crime) areas, so there's a good chance it will continue to go up.

[Sparty]

If you are looking for a REIT to invest in I would suggest taking a look at Realty Income Corp (ticker symbol O). They pay monthly dividends and have a strong history of dividend growth and stability. Definitely a good stock to hold in a ROTH IRA since the dividends count as ordinary income and are not qualified. I started a position last year and am currently reinvesting dividends and have been happy with the results. The stock might pull back with the fed raising interest rates, but the dividends will be rolling in regardless IMO.

[hiddenace]

I don't think he is risk adverse.  Anybody who shorted bank stocks in 2009 at time when many of them had fallen 50% in a short period and were yielding 10-12% isn't a risk adverse. I was looking at the yields and buying them at the time, I was always curious who making money from my mistake at the time.   A person who is short a stock is responsible for  paying the dividend, and of course when you short a stock you have the potential for unlimited losses.

The OP is a bear and frankly making a compelling bull case for stocks right now is hard.

Good point.

Honestly if he's 5-6 years from FIRE then I would be super conservative as well in a 6 year old bull market.  But I wouldn't hold 85% cash, I'd at least have more bonds, especially if I was pessimistic on the market. Even when bonds go down, they don't go down nearly as much as equities do. I'm speaking of intermediate term bonds.

I would still keep a small amount in equities for the long run though. Even if we get a bear market in the near term, historically speaking; in the long run, equities will come out ahead -- just keep the geography diverse.

Speaking of portfolio diversity, what is with the individual stock recommendations in this thread?  Unless they're a part of a larger more diversified portfolio, why would anyone dump all their retirement money in one stock, like XOM or O?  Maybe I'm just misinterpreting what's being said...

[sol]

Speaking of portfolio diversity, what is with the individual stock recommendations in this thread? 

New members, not enough kool-aid yet.

[aspiringnomad]

Speaking of portfolio diversity, what is with the individual stock recommendations in this thread? 

New members, not enough kool-aid yet.

Are you suggesting more BRK.B then?*

*Kool-Aid is owned by Kraft Foods, which just completed its merger with Heinz, which was arranged by its new owners: 3G Capital and Berkshire Hathaway.

[mrpercentage]

I can only speak for myself but when I mention one company I am talking about a good portion of ones money in that moment. Not forever dollar cost averaging into it. That's a "hey I have a few thousand what do I do."

For example numbers made up:
This year- hey I have ten thousand and Disney looks cheap put it there
Following year- Same thing only XOM looks great I will do that and still keep Disney ect
Hence planting a tree. One of the many in your future forest of money.

Focused portfolio. Concentrated investments during times that present the best deals and holding them.

I'm not Buffett but that's pretty much what he does.
Only time will tell. So far what I told him to buy was a sound choice that would have paid him very quickly. Honestly I expected a little more of a delay.
Focused portfolio investing. Combined with fill the gap dividend growth in investing is kind of what I'm doing. It's almost completely the opposite of the Bogle approach. My portfolio is volatile but I don't need to send out monthly statements to share holders so I don't care

[hiddenace]

Fair enough, it looked like people were giving single stock advice on a thread about whether or not the OP should increase exposure to equities.