Author Topic: Tell Me How You Would Invest!  (Read 8708 times)

Trebek

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Tell Me How You Would Invest!
« on: June 05, 2012, 11:23:31 PM »
SO! In a very short time we'll be debt free. At this point the money that's currently going to our mortgage will be diverted to our FI Fund. I forsee two main phases in our plan:

1. Accumulations Phase (8-10 Years):
- We will both be working full time earning good money and 70%+ of it will go towards the FI Fund

2. FI Phase (50-60 Years):
- We'll "retire", likely continue to do what ever work we wish and travel lots similar to MMM's life I'd say
- Would rather be quite safe and have a steady and sure income as opposed to growing our money heaps

The main concern is that investing for phase 1 will differ from phase 2 I think. As we'll be growing our money so quickly, a ROI of 15% vs 7% doesn't really make that much of a difference... so I'm thinking a safer option like bonds or even high interest bank account might be best. Once we reach FI though we'll clearly need something that throws off on average 6%+ each year so that 3% can be for our SWR and the other 3% can take care of inflation.

I'd like to hear from investors (only ones who have $50,000+ in investments if possible please) as to what path they would take in each phase investing the money and why.

Thanks!

JR

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Re: Tell Me How You Would Invest!
« Reply #1 on: June 06, 2012, 06:35:19 AM »
You should begin investing right away and become comfortable with it before you retire.  I personally just use index mutual funds and like MMM I use Vanguard.  Here is a good article to get you started.

http://www.mrmoneymustache.com/2012/02/17/book-review-the-intelligent-asset-allocator/

arebelspy

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Re: Tell Me How You Would Invest!
« Reply #2 on: June 06, 2012, 06:42:44 AM »
The main concern is that investing for phase 1 will differ from phase 2 I think. As we'll be growing our money so quickly, a ROI of 15% vs 7% doesn't really make that much of a difference... so I'm thinking a safer option like bonds or even high interest bank account might be best.

My thinking is the opposite.  Aggressive investing while working, because you have a huge cushion (W2) income.  You have the freedom to aggressively invest, because you can always work another 6 months if the market is bad, or, if it pays off and you hit the number early, you can FIRE earlier.

Either way my investing wouldn't be significantly different from phase 1 to 2, just a slightly different asset allocation and willingness to take on risk/opportunities that come up that I might pass on when RE'd.
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James

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Re: Tell Me How You Would Invest!
« Reply #3 on: June 06, 2012, 08:06:42 AM »
I'm about 80% in the stock market with a balanced portfolio, and under 20% bonds.  (I'm about 1/3 of the way through the accumulation stage)  I probably won't change my allocation much until I actually stop working, which will probably be a good number of years past FI since I enjoy my job and need to maintain my skills in order to do the medical mission stuff I enjoy.  Even when I officially retire I will probably be heavily in the market, but I'll figure out that part when I'm closer.

skyrefuge

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Re: Tell Me How You Would Invest!
« Reply #4 on: June 06, 2012, 09:21:28 AM »
Phase I sounds reasonable, IF you intend to keep working for 8-10 years regardless of the size of your nest egg, AND you save enough that it will get you to the required total in that time period with only a moderate ROI.  In that case, there is no benefit to taking on more risk to achieve a higher return, because you don't need the money that a higher return could provide.  If you can meet your goals with only low-risk investing, that's great.  However, I advise you to look at the ROI on a "high-interest" bank account these days.  The numbers are nothing like "7%", and no investment has a number like "15%"!

But then your Phase II numbers rather contradict the idea that you can meet your goals with low-risk investing.  If there was such a thing as a "quite safe steady and sure" investment that provided 6%+ returns, yeah, then you'd be golden, but I don't think there is such a thing.  If not, and you still wanted the same dollar amount to be returned with the same safe-and-sureness, that means you'd need to expect a lower ROI, which means you'd need to start retirement with a larger nest-egg, which either means working longer, or accepting more risk during the working phase to achieve a higher return.

Initially I read your post the same as arebelspy did, that you're thinking of lower-risk investments for Phase I, and then switching to higher-risk investments for Phase II.  But now I think maybe you ARE talking about the reverse, lowering your risk in Phase II, but the numbers that you're throwing out for ROI are just too high?

fiveoh

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Re: Tell Me How You Would Invest!
« Reply #5 on: June 06, 2012, 10:08:23 AM »
Dividend Growth Investing.  It will keep you beating inflation, has a lower beta than the over all market, and you dont even have to touch your principle. 

Ipodius

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Re: Tell Me How You Would Invest!
« Reply #6 on: June 06, 2012, 10:32:58 AM »
One thing I haven't seen mentioned elsewhere, and is worth some thought, is the tax implications of changing investments. If doing so means you are required to pay Capital Gains Tax, then you need to confirm that over a relatively short term before FI your increased returns on an investment will outweigh the tax you will pay when moving into your long-term income generating investments.

Obviously, you can look at different ways to structure your investments, and different vehicles to invest through, in order to minimise this.

grantmeaname

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Re: Tell Me How You Would Invest!
« Reply #7 on: June 06, 2012, 10:54:55 AM »
Dividend Growth Investing.  It will keep you beating inflation, has a lower beta than the over all market, and you dont even have to touch your principle.
Why is beta lower for dividend growth investing? Come to think of it, why do you really care how high beta is anyways? If you're buying and holding, doesn't short-term volatility pretty much become irrelevant?

fiveoh

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Re: Tell Me How You Would Invest!
« Reply #8 on: June 06, 2012, 11:03:32 AM »
Dividend Growth Investing.  It will keep you beating inflation, has a lower beta than the over all market, and you dont even have to touch your principle.
Why is beta lower for dividend growth investing? Come to think of it, why do you really care how high beta is anyways? If you're buying and holding, doesn't short-term volatility pretty much become irrelevant?

Usually most DGI portfolios hold a lot of big blue chip stocks which have lower betas i.e. KO, MCD, PG, JNJ etc.   I guess you could create one that has a higher beta if you wanted to.... you "shouldn't" care but most people do.  :)   

RoseRelish

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Re: Tell Me How You Would Invest!
« Reply #9 on: June 06, 2012, 11:59:50 AM »
Asset allocation has only 2 inputs: risk tolerance and time before you need the money (principle). Because you won't *need* the money (principle) for a long time, I'd say to be as aggressive in your allocation (as long as you can sleep at night) throughout both phase I and II.

Dividends provide a consistent stream of cash that allows your principle to stay untouched, which is especially beneficial during downturns - though investors "shouldn't" care if their return is made up of dividends or capital gains over the long run.

grantmeaname

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Re: Tell Me How You Would Invest!
« Reply #10 on: June 06, 2012, 12:27:28 PM »
Usually most DGI portfolios hold a lot of big blue chip stocks which have lower betas i.e. KO, MCD, PG, JNJ etc.
That makes sense. Out of curiosity, do you know if dividend growth blue-chip stocks are less volatile than blue-chip stocks as a whole? Or is DGI less volatile because it focuses on a less volatile class of stocks?

fiveoh

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Re: Tell Me How You Would Invest!
« Reply #11 on: June 06, 2012, 03:25:53 PM »
Usually most DGI portfolios hold a lot of big blue chip stocks which have lower betas i.e. KO, MCD, PG, JNJ etc.
That makes sense. Out of curiosity, do you know if dividend growth blue-chip stocks are less volatile than blue-chip stocks as a whole? Or is DGI less volatile because it focuses on a less volatile class of stocks?

I'm not 100% sure on that but my guess would be its because they focus on a less volatile class of stocks.   

Mr Mark

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Re: Tell Me How You Would Invest!
« Reply #12 on: June 06, 2012, 06:17:45 PM »
There's little difference in investing strategies between your two phases.

The most aggressive long term (>30yrs) mix would be around 80% stocks and 20% bonds, rebalanced say every 366 days. The volatility you'll experience will increase returns. You can add a bit of REITs or commodities as the spirit moves you.

Later, MMM means you,ll have time for 1 or 2 rentals that can provide a core low volatility income stream, reducing or even eliminating any need to draw from the investment stash.

And note that 100% stocks are not 'even more aggressive' and hence better for a long term investor. A dose of bonds increases long term returns. 100% stock is just sub-optimal.

arebelspy

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Re: Tell Me How You Would Invest!
« Reply #13 on: June 06, 2012, 08:45:07 PM »

And note that 100% stocks are not 'even more aggressive' and hence better for a long term investor. A dose of bonds increases long term returns. 100% stock is just sub-optimal.

Only slightly, and it quickly gets into the bonds hurting more than helping.

I think the idea of some bonds helping a portfolio is damaging in general because then people overinvest in bonds, and hurt their returns.

I wouldn't go more than 10-20% bonds for someone in the accumulation phase.

I think 100% stocks >> something like 60/40 (or, god forbid, something worse).
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Mr Mark

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Re: Tell Me How You Would Invest!
« Reply #14 on: June 07, 2012, 11:04:23 AM »

And note that 100% stocks are not 'even more aggressive' and hence better for a long term investor. A dose of bonds increases long term returns. 100% stock is just sub-optimal.

Only slightly, and it quickly gets into the bonds hurting more than helping.

I think the idea of some bonds helping a portfolio is damaging in general because then people overinvest in bonds, and hurt their returns.r

I wouldn't go more than 10-20% bonds for someone in the accumulation phase.

I think 100% stocks >> something like 60/40 (or, god forbid, something worse).

Disagree. Having some  bonds enables rebalancing, which forces some ' sell high buy low' activity. Over long term with stock volatility this enables a 20% bond mix to beat the returns of pure stocks.

arebelspy

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Re: Tell Me How You Would Invest!
« Reply #15 on: June 07, 2012, 05:19:52 PM »
Reread what I said (20% is fine).  You're agreeing with me by posting the same number I did, not disagreeing.

Would you like to argue 60/40 is better than 100 however?  As that's a number I called out as worse.
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Mr Mark

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Re: Tell Me How You Would Invest!
« Reply #16 on: June 07, 2012, 09:45:09 PM »
Reread what I said (20% is fine).  You're agreeing with me by posting the same number I did, not disagreeing.

Would you like to argue 60/40 is better than 100 however?  As that's a number I called out as worse.

Let's agree for a long term (>>30yrs = effectively means everlasting) investor, 15 - 25% bonds is best.

To call the other 2 options is impossible; using historical data gives the call to equities, yet my risk tolerance would have to have balance via real estate, REITs,  or something. 60/40 is probably better for the average investor than 100% stock when you give some weight to medium term performance.

Putting all your stash in one asset goes against the grain. Always.

sol

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Re: Tell Me How You Would Invest!
« Reply #17 on: June 07, 2012, 11:05:39 PM »
Putting all your stash in one asset goes against the grain. Always.

Anyone who says "always" is always wrong.

Reido

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Re: Tell Me How You Would Invest!
« Reply #18 on: June 10, 2012, 05:20:09 PM »
Usually most DGI portfolios hold a lot of big blue chip stocks which have lower betas i.e. KO, MCD, PG, JNJ etc.
That makes sense. Out of curiosity, do you know if dividend growth blue-chip stocks are less volatile than blue-chip stocks as a whole? Or is DGI less volatile because it focuses on a less volatile class of stocks?

I'm not 100% sure on that but my guess would be its because they focus on a less volatile class of stocks.   

As a sort-of hybrid between dividend growth investing and indexing, I chose to go with the DIA or dow jones index.  It has the highest dividend yield of any major index, and several large dividend stalwarts are present.

One issue this index solves is also sector concentration risk.  Prior to 2008, keep in mind the financial sector was full of large dividend paying companies...  like Bank of America for example...  we know how that played out.  The DIA provides a better diversification.

Finally, the index rarely changes, and this minimizes capital gains, or at least defers them as long as possible...


ed

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Re: Tell Me How You Would Invest!
« Reply #19 on: June 11, 2012, 08:47:37 AM »
How to invest is easy; with a little research, you should find that putting most of your assets in shares, essentially on auto-pilot, applying dollar-cost averaging to avery broadly-based index-tracking ETF like the MSCI World will give you a good (evidence-based!) risk-reward pay-off.  Buying a recent edition of Security Analysis (Graham & Dodd) will turn out to be money well spent - not a light read, but you need to know the research, know the why of what you are doing (also, just reading that monstrous tome will noticeably improve upper-body musculature). 

Being an investor is difficult in a way I am sure many posters here will agree with: you will likely find that learning the necessary emotional discipline , or more elegantly, sang froid is the hardest part; which is to say, to learn to be happy with doing the rational, evidence-based thing. Right now, as an indebted person, you pay off a nice slice of your debt every month and make, more or less, a guaranteed return, and find yourself the paid-up owner of an ever-larger fraction of the house around you.  You need to exert continual self-discipline to keep to what I am sure is a very accelerated repayment schedule, but you have the great advantage of a very reliable carrot.

Soon, however, you will find yourself accumulating significant liquid assets, watching the sums mount steadily through five digits and into six, zigging towards the great threshold of FI.  Now, you have new problem: at a click of a mouse, you can send your money off to moulder on deposit, to do a little better in the bond market, to chase some shiny commodity, to follow a hot share tip, or  into the capable hands of some professional money manager.  I personally had no emotional difficulty doing this when the total amount was still in the low to middling five digit range.  I was completely comfortable with risk, and had far too much of it (I was a stock picker!).  When I found myself  in the land of six digits, things became much more difficult.  The amounts were just too large; the upside fabulously tempting, but the prospective losses terrifying.  I went into a funk, and spent the better part of a year in cash.  I felt terrible; I now knew exactly what I should do with my money, but couldn't bear to proceed.

In the end, I realised that the only way to get moving was for the rational part of my brain to play some tricks and even to compromise a little.  I would bribe my emotional side with a relatively modest investment in a very exciting bank that was making incredible returns for some close friends, and the rest I would put into sensible and boring etfs.  I did at least try to cast a broad net with my index trackers.  Another existing risky investment was too exciting to abandon - but I was able to convince myself to reduce my position and move at least some of that risky money into a more sensible place.

Well, along came the crash - and that thrilling bank went to zero, while the etfs dipped, then grew back.  It was painful - but, at last, my emotional side came to love those boring index-trackers.  I also learned to feel the truth of something I had read previously; that checking too often the current market value of your holdings is a really bad idea.  If returns are flat, you will be tempted to put your money in some hot new field; if down, you will feel poorer and foolish for the "loss" (which, of course, is still a purely theoretical one - you've not sold yet) - and maybe tempted by "safer" (i.e. more inflation-vulnerable) assets.  If up, you will feel very rich and clever, which is also dangerous.   You will become more confident, less cautious - and much less inclined to save (this happened to me).  It is emotionally difficult to save when your investments are piling up; I had this problem myself when Mr. Market was giving me over-generous valuations, and, yes, I saved less.  It just didn't feel necessary - even though I knew that Mr. Market is a bit of a manic-depressive, and I should not believe too much in the prices of any given day.

I'll end with a story about some retirees in Florida, sitting around a pool, discussing the paths that had led them to FI. The topic turned to return on investment - who had achieved what rate of return on their assets?  The bragging moved around the pool, until it hit the group's philosopher.  "I've got no idea", he said.  "I don't even know whether I beat the market... but I made enough to get here.".

And that is the salient point.  We aren't trying to get rich quick; we are trying to get to FI, reliably but without undue delay. Remember that the exact rate of return you get is not that important.  Don't be greedy, and don't try to be fearful.  Just try for a market return with the lowest possible transaction costs, and stick with it.  It will take a while to learn to ignore Mr. Market's mood swings, but it is a trick you can learn.


Mr Mark

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Re: Tell Me How You Would Invest!
« Reply #20 on: June 11, 2012, 04:50:08 PM »
Thanks Ed. Nice post.

Vahla

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Re: Tell Me How You Would Invest!
« Reply #21 on: June 14, 2012, 01:52:20 PM »
I'll end with a story about some retirees in Florida, sitting around a pool, discussing the paths that had led them to FI. The topic turned to return on investment - who had achieved what rate of return on their assets?  The bragging moved around the pool, until it hit the group's philosopher.  "I've got no idea", he said.  "I don't even know whether I beat the market... but I made enough to get here.".
I just wanted to say that was a great post and I've passed it around to some friends.  I especially liked the above story.

Trebek

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Re: Tell Me How You Would Invest!
« Reply #22 on: June 15, 2012, 08:59:47 AM »
Damn ed... that was an awesome post. Seriously, you've given me an extremely detailed vision of what I'm currently experiencing and likely what I will experience in the coming years Thank You :-)

From what you (and countless others now) are saying, basically just buy something like a Vanguard Index Fund or EFT, set up my automatic savings deposits so that from day 1 after we finish with the mortgage those payments go into the Fund and just completely ignore everything you hear about finance forever more, maybe checking up on it once a year or so yeah?

ed

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Re: Tell Me How You Would Invest!
« Reply #23 on: July 04, 2012, 05:16:12 AM »
Thanks guys- if I had realised people would be actually reading it, I probably would have tidied it up a little.  Instead I think I'll put an edited version on my own blog.  Anyway, best of luck with the journey, hope your FI coefficient reaches 1.0 and beyond without undue delay :-).