The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: anothercanuck on March 28, 2015, 10:48:01 PM
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Hi All, first post but have read and absorbed a lot around here and it has really changed my outlook on things. I'm thankful for the like-minded community.
I have about $350k in investments and cash. Mainly cash. I'm a bit gun-shy after losing most of our savings a few years back first going long in September 2008 and then going short in March 2009. Then in cash since 2011/12. I've been reluctant to invest for the last few years expecting a pullback in the market.
All of what I have invested is in Canadian index etfs (and mutual funds through a work RRSP). I'm realizing I should be far more diversified and am aiming for a portfolio that is 40% US, 30% International, 10% Canadian, 5% Emerging, 5% small cap, 10% Cash. My plan is to transition from where I'm at today to that split over the next couple years. i.e. move slowly out of cash and Canadian index funds to a diversified portfolio.
I appreciate that history is on the side of those who go all-in stocks and buy to hold - regardless of when they do so. I fear doing that all at once now with the market where it is at will bite me as it did in 2008.
Any additional perspectives on the strategy of slowly transitioning over a couple years to an internationally diversified portfolio of stocks are appreciated. What I've been doing to date isn't working so feedback is welcome and appreciated.
We're in our mid 30s and hope to be FI by our early 40s.
Thank you,
AC
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I appreciate that history is on the side of those who go all-in stocks and buy to hold - regardless of when they do so. I fear doing that all at once now with the market where it is at will bite me as it did in 2008.
It will bite you - if - but only if - you then don't hold if there is a correction/drop/etc. along the way.
Don't worry about getting your asset allocation "correct" within single digit percents - it's not that exact a science.
Any chance the two of you - together - can resist the panic that causes "sell low"?
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My advice to you would be to not be invest in the market at all until you figure out why you want to be in the market in the first place. It would be better for you to stay in cash or fixed income and accept the lower returns then to go in the market high because you are missing out on the gains and then pull out in the bottom, which is what you have been doing the past 7 years. Maybe stocks are not just for you and that's OK, maybe you are more comfortable with assets that produce a steady cash flow so the fluctuations in market price won't affect you so much that you sell when it goes down. Look into real estate or shares in businesses. Invest in yourself until you figure out what type of other investments you really understand and are comfortable with that you don't jump ship at the first sign of turbulence.
If FI is your goal then increasing your savings rate by lowering your expenses and increasing your earning potential will get you there faster than increasing your rate of return on your investments.
If you insist on being in the market then this is a scenario where a financial planner would be worth the cost, fee only if possible, if they can prevent you from deviating from your financial plan and investment strategy.
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http://www.moneysense.ca/invest/do-you-need-bonds
http://canadiancouchpotato.com/2010/09/05/why-every-portfolio-needs-bonds/
http://canadiancouchpotato.com/2013/07/02/why-diversification-is-a-piece-of-cake/
http://www.bogleheads.org/wiki/Asset_allocation
Although you seem to have a handle on asset allocation, you might want to read up on risk and using fixed income to reduce it.
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I agree with you to move the majority into us based indexes because the economy is more diversified. Because you are young i would invest it all, reinvest the dividends so that if it drops you will be buying low and add to your investments over time. I'd invest the majority in the s and p 500. Of course I'm copying the advice of an old wise man in Omaha, perhaps you have heard of him, his name is warren buffet.
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Keep in mind that your cash holdings are LOSING purchasing power every year. If you've been in cash since 2011, that means you have lost about 8% of your purchasing power in the last 4 years. Given your $350K stash, that's like having lost $28,000. And that slow bleed won't stop.
So... you really need to work on your paralysis and overcome it. BUT please find a way to keep yourself from repeating the mistake of cashing out with the next correction (which will happen sometime).
Good luck.
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Any chance the two of you - together - can resist the panic that causes "sell low"?
Yes, and are hopeful to be on the other side of things buying on the way down and back up.
Thank you for your reply MDM.
AC
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Although you seem to have a handle on asset allocation, you might want to read up on risk and using fixed income to reduce it.
Thank you for the links, I'll have a look. In general I'm comfortable with the risk involved in equity index funds after learning around here how they compare to other approaches to investing over time.
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I'd invest the majority in the s and p 500.
One of the biases I've overcome lately is investing in CAD companies. If I wanted a portfolio that tracked global markets it would have only 4% CAD equity. Significantly less than where I am now.
In part I want to cost average the investments over time because buying international stocks at around their highs, coupled with a Canadian $ that has dropped by 20+% may be the equivalent of buying high.
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Keep in mind that your cash holdings are LOSING purchasing power every year. ... find a way to keep yourself from repeating the mistake of cashing out with the next correction (which will happen sometime).
Two good points. I am confident I'll overcome emotion during the next down cycle. Was hopeful I would be back in the market by now having saved to buy during the next correction but instead continue to lose to inflation. It is equally difficult to be disciplined when markets are on their way up. The only reason I'm considering what could be buying high that I'm learning buying high matters less that avoiding selling low (over the long run). And that buying high and buying low is a strategy that can generally work over time.
Thank you for sharing your thoughts.
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Look into real estate or shares in businesses. Invest in yourself until you figure out what type of other investments you really understand and are comfortable with that you don't jump ship at the first sign of turbulence.
Thanks for weighing in. I didn't jump ship at the first sign of turbulence - it would have been great if I did. Instead I invested at one of the worst times in history and rode the market down to the bottom. I am patient and disciplined (and contrarian). What I wasn't in 2009 was educated (financially) or experienced.
If FI is your goal then increasing your savings rate by lowering your expenses and increasing your earning potential will get you there faster than increasing your rate of return on your investments.
Yes, agree! Saving significantly more than you are spending as a ticket to early retirement has been one of the most liberating and eye opening ideas I've read. Before that I was saving roughly 50% anyway and on a path towards a more minimalist life. Now we are closer to 66% and plan to more than halve our spending in the next few years when we will be mortgage free and have the kids out of daycare (which will put our saving rate at around 80%).
Thanks again.
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Agree with other posters that you should figure out why you want to be invested. And that once you have a good strategy, you will have to stick with it, otherwise you are giving your money away to people who stick with their strategy.
If you are very risk adverse, investing in Vanguard's Total Bond or Intermediate Bond funds would be one option for a large portion of your funds. But keep in mind that if you are unwilling to have a substantial portion of your funds in equities, you are unlikely to be able to sustain a 4% SWR for 50 or 60 years. You will have to work and save longer if you want to avoid stocks. That's the tradeoff.
One option is a Vanguard Target Retirement Fund. It automatically sets your asset allocation for you, and holds about 9500 stocks and thousands of bonds from around the world--many US Treasuries. It's not ideal for early retirees because the allocation to bonds is so high. But if you're scared of equities, and willing to work extra years, then it's one option that takes care of the decisions for you.
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These are worth reading when thinking about putting your cash slowly over time vs. lump sum and dealing with a bull market:
http://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/
http://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
-- Vik
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Although you seem to have a handle on asset allocation, you might want to read up on risk and using fixed income to reduce it.
Thank you for the links, I'll have a look. In general I'm comfortable with the risk involved in equity index funds after learning around here how they compare to other approaches to investing over time.
You said you're gunshy paralyzed and holding cash. That says you're not comfortable with the 100% equity risk you've previously assumed, which is understandable.
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I can't give better advice than CCP
http://canadiancouchpotato.com/about/
http://canadiancouchpotato.com/model-portfolios-2/
http://canadiancouchpotato.com/wp-content/uploads/2015/01/CCP-Model-Portfolios-Vanguard.pdf
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Disclaimer: I'm fully invested in CCP 2014 now.
http://canadiancouchpotato.com/2014/01/06/remodelled-portfolios-for-2014/
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Here is the easiest way to pick your asset allocation. Look at the follow chart.
(http://blogs-images.forbes.com/robertberger/files/2014/09/vanguard-stock-and-bond-returns.png)
The blue on the left is 100% bonds. The red on the right is 100% stocks. The number in the middle of each colored bar is the average return, and the number under each colored bar is the worst year. For most of these portfolios the worst year is 2008. Look at that number in the bottom right under 100% stocks.
-43.1% Imagine that happened now, this year. How would you feel? Would you sell? Would you want to sit in cash again? Would you be tempted to change your portfolio? If the answer to any of these questions is yes then 100% stocks is not for you. So move to the left.
-39.0% This is 90% stocks/10% bonds. Ask all those questions again. If the answer to any of them is yes then this isn't for you so move to the left.
You are Goldilocks and these are your 10 bowls of soup. Find the one that is just the right temperature for you. You can't even start the process of picking funds until you figure out the asset allocation that fits your temperament.
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That sorts out stocks vs. bonds.
Some other questions that need answering:
- split between CDN/US/Int'l
- REITs in the mix to get real estate exposure?
-- Vik
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(https://farm8.staticflickr.com/7646/16967620995_bd9130a418_b.jpg)
Some additional CDN portfolios linked to for CCP.
-- Vik
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I can't give better advice than CCP
http://canadiancouchpotato.com/model-portfolios-2/
Thanks for the links Heckler, I've added CCP to my bookmarks. Remember reading it years ago but it has been a while.
Really interesting that CCP recommend a Canadian content of portfolios ranging between 40% for aggressive and 80% for conservative. I suppose that the bias towards Canadian equities is based on reducing fluctuation due to currency changes but you can get CAD/US hedged exposure to US equities. If you wouldn't have that level of canadian stock exposure living in the US, why should you in Canada?
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Here is the easiest way to pick your asset allocation. Look at the follow chart.
Indexer, thanks. A very useful graphic.
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Some additional CDN portfolios linked to for CCP.
-- Vik
Vik, thanks for the info. Just what I was looking for - especially the jcollins articles on dollar cost averaging. From that I learned that dollar cost averaging loses out 2/3 of the time. This actually helps me in my decision. I'll take a 1/3 chance on DCA based on current market setup. I'm 1/3 invested so I won't completely miss on the upside.
Thanks again for the very useful information.
Any other thoughts out there on my proposed asset allocation? Canadian financial companies and websites are recommending some pretty high asset allocations to canadian stocks and bonds (40-80%). No-one in the US would do that. So provided I can get etfs that hedge currency risk, why wouldn't I have a more diversified portfolio?
Proposed:
40% US, 30% International, 10% Canadian, 5% Emerging, 5% small cap, 10% Cash
I'd use various etf and mutual funds depending on the type of account.
AC
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Some additional CDN portfolios linked to for CCP.
-- Vik
Vik, thanks for the info. Just what I was looking for - especially the jcollins articles on dollar cost averaging. From that I learned that dollar cost averaging loses out 2/3 of the time. This actually helps me in my decision. I'll take a 1/3 chance on DCA based on current market setup. I'm 1/3 invested so I won't completely miss on the upside.
Thanks again for the very useful information.
Any other thoughts out there on my proposed asset allocation? Canadian financial companies and websites are recommending some pretty high asset allocations to canadian stocks and bonds (40-80%). No-one in the US would do that. So provided I can get etfs that hedge currency risk, why wouldn't I have a more diversified portfolio?
Proposed:
40% US, 30% International, 10% Canadian, 5% Emerging, 5% small cap, 10% Cash
I'd use various etf and mutual funds depending on the type of account.
AC
This looks very reasonable to me. Very similar to global market cap. Unless you have access to a high-interest savings account, I would put the 10% cash into a bond fund instead (even short term bonds if you're worried about interest rate risk). The cash will drag your portfolio otherwise. And if the stock markets tank, high quality bonds generally go up a bit.
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I would put the 10% cash into a bond fund instead...
I think that's a good idea forummm. I'll have a lot more cash early as I DCA and will probably shift most to short term bond funds.
Thanks,
AC
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I'd invest the majority in the s and p 500.
One of the biases I've overcome lately is investing in CAD companies. If I wanted a portfolio that tracked global markets it would have only 4% CAD equity. Significantly less than where I am now.
In part I want to cost average the investments over time because buying international stocks at around their highs, coupled with a Canadian $ that has dropped by 20+% may be the equivalent of buying high.
Sent from my iPad using Tapatalk
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I'd invest the majority in the s and p 500.
One of the biases I've overcome lately is investing in CAD companies. If I wanted a portfolio that tracked global markets it would have only 4% CAD equity. Significantly less than where I am now.
In part I want to cost average the investments over time because buying international stocks at around their highs, coupled with a Canadian $ that has dropped by 20+% may be the equivalent of buying high.
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yes that is a good plan
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http://canadiancouchpotato.com/2015/02/04/stepping-back-from-the-hedge/
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Any other thoughts out there on my proposed asset allocation? Canadian financial companies and websites are recommending some pretty high asset allocations to canadian stocks and bonds (40-80%). No-one in the US would do that. So provided I can get etfs that hedge currency risk, why wouldn't I have a more diversified portfolio?
Proposed:
40% US, 30% International, 10% Canadian, 5% Emerging, 5% small cap, 10% Cash
I'd use various etf and mutual funds depending on the type of account.
AC
I've got 31% CDN, 50% US and 19% Int'l breakdown. Essentially no cash [$3.5K]. I have 1yr's worth of living expenses available in a LOC not tied to my house.
I'm thinking of moving that towards 35%/55%/10% as I make additions. I still working on my asset allocation plan so not going to make any sudden moves until I've locked things down.
-- Vik
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http://canadiancouchpotato.com/2015/02/04/stepping-back-from-the-hedge/
Thank you, another good one.