Author Topic: New investor here  (Read 2273 times)

Jamese20

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New investor here
« on: July 20, 2016, 01:00:35 PM »
Hi everyone,

this is my first post after reading into some of the motivating blogs from MMM

I am just trying to learn the basic investments that MMM is trying to teach on his website and I am looking for a bit more detail if possible. As I am trying to pay off all my debts by year end (no interest on them) I do have some left over that I want to trial out investing into a low index vanguard (13% of my income)

once this year is out the way i will be able to to invest at least 50% of my income, so I was curious to understand - does everyone put 100% of their stash into investments / property and withdraw 4% once they reach FI? does the 4% rate still apply even if the market goes down -10% one year? this bit I am very unclear on.

Also, after reaching a certain very large stash to cover your expenses, what if you need or want to move this into a different fund? you are in effect doing a huge lump sum into a new investment which could of course drop by a large % the week after investing it? how do people manage their risk with that?

Appreciate I am a long way from the last point at the moment but I do want to gain the knowledge before getting there!

Thanks in advance

Jack

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Re: New investor here
« Reply #1 on: July 20, 2016, 01:23:43 PM »
First of all, read this: https://www.bogleheads.org/wiki/Asset_allocation

does everyone put 100% of their stash into investments / property and withdraw 4% once they reach FI?

100% of your stash should be in "investments" -- tautologically. The words "stash" and "investments" mean the same thing. However, it sounds like (since you contrasted with property) you're using "investments" as a synonym for securities, i.e. stocks and bonds. In that case, no, not everyone puts 100% of their investments into securities or property -- other asset classes include cash, gold, other commodities, antiques & collectables, or any other asset, and people select from any or all of them. That said, a 100% securities (or 100% securities + real estate) portfolio is extremely common, relatively simple, and perfectly reasonable.

does the 4% rate still apply even if the market goes down -10% one year? this bit I am very unclear on.

Yes, the definition of safe withdrawal rate is the rate that you can withdrawal without portfolio failure even in the close-to-worst-case scenario. (I say "close to" worst case for two reasons: (1) in theory, the actual worst case could be infinitely bad, and (2) the portfolio success rate considered "safe" is typically considered to be 95%, not 100%.)

Note that the 4% safe withdrawal rate is based on the Trinity Study, which considered portfolios consisting of various percentages of US stocks and bonds (but not other asset classes). YMMV.

Also, after reaching a certain very large stash to cover your expenses, what if you need or want to move this into a different fund? you are in effect doing a huge lump sum into a new investment which could of course drop by a large % the week after investing it? how do people manage their risk with that?

Why would you want to do such a thing?

Jamese20

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Re: New investor here
« Reply #2 on: July 20, 2016, 01:35:11 PM »
thanks for responding Jack,

in response to the last point - lets say you have 500k in 60/40 in stocks / bonds and want to be less risky and put your portfolio into 20/80 stocks / bonds

arent you in effect lumping your whole investment at a different price at that point in time? sorry if this is a really dumb question but I am a complete beginner to investing

mskyle

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Re: New investor here
« Reply #3 on: July 20, 2016, 01:46:40 PM »
thanks for responding Jack,

in response to the last point - lets say you have 500k in 60/40 in stocks / bonds and want to be less risky and put your portfolio into 20/80 stocks / bonds

arent you in effect lumping your whole investment at a different price at that point in time? sorry if this is a really dumb question but I am a complete beginner to investing

Well, hopefully you're thinking further ahead. What could possibly happen on one day that makes you decide, "Shit! I need to completely change my investment strategy!" If you know you're going to want a less-risky portfolio in retirement, the time to start transitioning to that portfolio is years ahead of your retirement.

You need to pick an allocation that is comfortable for you and STICK WITH IT. Frequent trading is costly, and emotion-driven changes in allocation are terrible for your net worth.

Yes, sometimes you need to change your allocation, but you shouldn't just do it all at once, willy-nilly. You usually want to plan.

For an example: right now I have 100% equities (stocks) in my taxable brokerage account. But in the next couple of years, I'm going to want to use most of that money for a down payment on a house, so I want to transition that to something less volatile. So I'm planning to 1) increase the percentage of my overall stache that's allocated towards bonds/cash and 2) put those bonds in my taxable account rather than my tax-advantaged accounts where they live now.

But it doesn't actually make sense for me to sell all of the VTSAX in my taxable account and buy a bond fund instead, because I have a lot of short-term capital gains. I'll save on tax if I wait until September. I am of course taking a risk that the market will go down dramatically between now and September, and I don't love that, but I'm sticking to my plan anyway.
« Last Edit: July 20, 2016, 01:55:40 PM by mskyle »

Jack

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Re: New investor here
« Reply #4 on: July 20, 2016, 01:47:18 PM »
thanks for responding Jack,

in response to the last point - lets say you have 500k in 60/40 in stocks / bonds and want to be less risky and put your portfolio into 20/80 stocks / bonds

arent you in effect lumping your whole investment at a different price at that point in time? sorry if this is a really dumb question but I am a complete beginner to investing

Read this: https://www.bogleheads.org/wiki/Investment_policy_statement

The bottom line is that if you "suddenly" want to change your asset allocation by 40%, you're probably doing something wrong. Either you're trying to do market-timing (which is a bad idea) or your asset allocation had already been wrong for you for a while and you only just now realized it. What you should have been doing is adjusting your portfolio according to your risk tolerance gradually over time instead.

But yes, to directly answer your question, investing (or reallocating) a lump sum does entail some risk based on short-term market volatility. Dollar cost averaging is a way to compensate for that risk.

Jamese20

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Re: New investor here
« Reply #5 on: July 20, 2016, 01:59:24 PM »
thanks guys,

i am planning to put it into 60 equity / 40% bonds for the next 5 years at least and then seeing how its gone. Hopefully I have earned on average 5% returns minimum and then I may use this money to buy a property that i can rent then restart over in the same fund depending on the outcome.

one thing that always does well in the UK is property... even if it goes down in value you can still gain passive income from the rent which sounds like a decent plan to me in retirment

gggggg

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Re: New investor here
« Reply #6 on: July 20, 2016, 03:50:08 PM »

soccerluvof4

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Re: New investor here
« Reply #7 on: July 20, 2016, 05:35:26 PM »
60/40 by most standards is conservative...Not knowing your age most would say thats a portfolio for someone perhaps my age. But you do what makes you sleep at night and read

 http://jlcollinsnh.com/stock-series/   as others have pointed out.  Good Luck!

Jamese20

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Re: New investor here
« Reply #8 on: July 21, 2016, 07:02:02 AM »
thanks for the useful info,

after reading into this and following the links I feel like the logical thing to do is go 100% equity

i am considering using the Vanguard LS 100 for ease of use through an ISA - unless anyone is a guru who definitely thinks this is a major mistake.. it seems quite diversified to me and exposure to a lot of markets

mskyle

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Re: New investor here
« Reply #9 on: July 21, 2016, 12:43:22 PM »
thanks for the useful info,

after reading into this and following the links I feel like the logical thing to do is go 100% equity

i am considering using the Vanguard LS 100 for ease of use through an ISA - unless anyone is a guru who definitely thinks this is a major mistake.. it seems quite diversified to me and exposure to a lot of markets

Haha, you've been on quite a wild ride on this thread! You may want to read up a bit more and really think about how you will feel (and more importantly what you will *do*) when your 100% stocks portfolio drops 30% (or more) in value. Even when, in your mind, you know it's the right decision, your monkey brain is going to panic or at least be severely bummed out when it looks at your ISA one day and sees that the value has dropped by thousands of pounds.

Basically the *worst* thing you can do is put all of your money into equities and then withdraw it in a panic at the bottom of the market. Promise us you won't do that and we'll endorse you putting all your money into equities. Otherwise, stay a little more conservative, at least until the next market drop.

Since you say ISA I'm assuming you're in the UK - this is probably actually a great time for you to get into equities, but it's also going to be really volatile for a while. So, for better or worse, if you invest in 100% equities, you're going to learn a lot about your emotional reactions to investing over the next several months or years. That's not the worst thing.

Personal anecdote time: My first experience investing was putting $3000 (all of my non-workplace-retirement-account savings) into a Vanguard Target fund in May of 2008 (a similar sort of vehicle to the Lifecycle investments). Eight months later the value had dropped to $1683. That really, really hurt. Fortunately I managed to leave the money in there (although I was not strong enough to keep contributing for a while). I didn't start contributing again for a year, and it was the end of 2010 before the account showed any gain at all - 0% return for the first year and a half I was investing. It sucked. But since then everything has been great and that initial $3000 is now worth a lot more. Of course I would have been even better off if I had managed to shove another $500 or $1000 into the account during the winter of 2008/9.

My father, who had a WHOLE LOT more money in the market, had an investment advisor who told him to put a lot of the money in cash post-crash, and he actually ended up losing money overall.

I hope that with those two illustrative examples, next time there's a serious market crash I'll keep my head and stick to my asset allocation. But I don't want to understate how difficult it is to do that. It's really hard. Otherwise-smart people make bad decisions when they see their net worth drop overnight. I'm 90/10 stocks/bonds right now, moving towards 80/20 because of my short-term goals (house-buying). It's not always easy. It is honestly quite reassuring though to see all the people on these boards getting excited about "sales" whenever the market drops though.

Jamese20

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Re: New investor here
« Reply #10 on: July 21, 2016, 03:26:15 PM »
hi mate,

to be honest i have been through quite a ride in a long amount of years..

in all honesty i am used to losing 100% of my money through spending gambling and all other ssorts of stuff... so losing 30% to me at this moment would be a huge success if i had 70% of my savings still!

i think as long as markets do go up in the long term then i can ride it out... i guess the time i would start twitching is if i reach FI and look to retire... having said that i am hoping i have purchased 2 property's at least so i can receive passive income and use the 4% withdrawal rate to iron out any dips


Full_Beard

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Re: New investor here
« Reply #11 on: July 21, 2016, 03:52:51 PM »
I hope that with those two illustrative examples, next time there's a serious market crash I'll keep my head and stick to my asset allocation. But I don't want to understate how difficult it is to do that. It's really hard.

I disagree that it's hard. My retirement accounts are 100% invested in common stock and have been that way since I started investing in 1998 (mostly S&P 500 index). It goes up and down a lot, and I just throw more at it in regular, automatic intervals. Investment advice is a lot like parenting advice. Trends and fads come and go as to what's the hottest, smartest, best thing to do. In the end, the very, very basic principles remain the same through time.
« Last Edit: July 22, 2016, 12:38:29 PM by Full_Beard »

mathjak107

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Re: New investor here
« Reply #12 on: July 21, 2016, 03:57:22 PM »
i agree , i had no problem being 90-100% equity's for more than 20 years of investing .

study's  show that there really is no correlation  between being risk adverse and your ability to stay the course when losses hit .

human nature is we hate losing money more then making it so balanced funds show just as poor investor behavior  as a group as growth funds do when things get volatile .

once most investors see losses with the potential for more losses they tend to run for the exit regardless .