Author Topic: The general mindset of Investors  (Read 4554 times)

tdccarpenter

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The general mindset of Investors
« on: April 10, 2014, 04:13:37 PM »
I've been reading investment information for about a year.  I've devoured this investing section and those of, SA, ERE, gyroscopic, BH, BP, among other sites.
I've reviewed the investing philosophies/strategies of several historical investors.  I'm just wondering if a few forum members can answer a few questions.  Just would like an understanding or thesis of how you invest in order to give myself some clarity it developing a personal investment philosophy after I complete my personal student loan challenge.

#1. What assets do you invest in? (An asset is anything that you put money into that you expect to recieve positive cash flow from)

#2.  Why do you invest in those assets?

#3.  Please give me an understanding of how you would do things differently, with regards to investments, if you started over at 25.  No assets, no liabilities.  Making 50k a year living in a cheap part of the US.

I'm doing this as a personal development tool, other members can feel free to use it as such as well.

Frankies Girl

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Re: The general mindset of Investors
« Reply #1 on: April 10, 2014, 04:49:04 PM »
1) Stocks and bonds through index mutual funds.

2) I am not interested in peer-to-peer or real estate, and I prefer a "lazy" portfolio.

3) I'd drop the percentage I have in bonds and go 100% into a total stock market index fund, and probably have retired years ago.

innerscorecard

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Re: The general mindset of Investors
« Reply #2 on: April 10, 2014, 09:04:19 PM »
1. Low-cost indexed ETFs available commission-free through my broker.

2. Same as Frankies Girl above here. Even though I understand why real estate and other private investments are more 'real' and thus more attractive to the general population than stocks (Buffett also explained the psychology behind this in his most recent shareholder letter), the opposite is true for me. I "grok" the concept of diversified ownership of powerful companies well, and I am quite satisfied in the ability of their earnings power in aggregate over time to provide for my economic well-being.

3. I would have viewed the money I spent on education very differently. With my current mindset, I would have looked far more carefully at the opportunity cost of the time and money I spent on some very expensive degrees.

What I understand now is that small and gradual investments made with discipline are a sufficient economic engine for early retirement. I didn't understand that before, and thought that expensive education was necessary for a large income. That was a self-defeating way of looking at things.

Abe

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Re: The general mindset of Investors
« Reply #3 on: April 10, 2014, 09:23:26 PM »
#1&2. What assets do you invest in?

I base my investments on three major groups. What amount would my family need to weather a short-term catastrophe (loss of both jobs, major natural disaster), to weather long-term loss of income and what's left over to speculate with.

a. We keep enough money for 6 month's basic necessities in the bank. It is a small fraction of our overall portfolio and the main priority is immediate access.

b. With that covered, we max out our 401ks with bond funds to pay for basic essentials for the family. The goal here is $1.5 million in 15 years (dual solo 401ks) to generate at least $30k/year in interest. This can also be passed to our children tax-free in event of our deaths.

c. The bond investments alone will probably be ok for early retirement, but there's savings left over that we invest in stock index funds. That's for retirement discretionary spending. I make no assumptions about what will happen to it other than it will probably increase over the long run. 

As you can see, our most risky investments are in stock index funds, which in the long run are acceptably safe. But again, we don't plan on necessarily having all that money available immediately. Between the bonds and the cash, we should be able to weather some period of stock crash/recovery.


#3.  Please give me an understanding of how you would do things differently, with regards to investments, if you started over at 25.  No assets, no liabilities.  Making 50k a year living in a cheap part of the US.

Earnings-wise:
The biggest expenses you'll face at this point are education costs. Don't overshoot! Get a very good understanding of what a degree you may be considering will get you. I know too many people with huge college debt they have a hard time servicing because they thought it would be useful or interesting, but no one hiring shared their opinion. Also, incredibly important, prestige of your college will probably not matter much in the long run for most professions.

Savings-wise:
I recommend to keep a few months' cash in the bank to weather short-term crises. Then, consider investing in stock index funds with some smaller amount of bond index funs. For the long-term, try to set a timeline (i.e. retire in 20 years) and two goals to reach in that time: a stash I can subsist on without a job (retirement or laid off), and one I can use to occasionally spend on luxuries. If your subsistence level can be achieved with just bonds, then you can use your stocks for the extra spending. If the stock market drops 50%, just spend 50% less on random stuff. Your baseline quality of life should remain fine. To figure out the amounts needed, consider that one can withdraw about 4% of a given stash over several decades with a good chance of not running out.

As you get closer to retirement, and the psychological importance of having a baseline income increases, you may adjust your percentages towards bonds. With several years of experience (and hopefully more income) you should have a better understanding of your preferred allocation and retirement budget.

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Re: The general mindset of Investors
« Reply #4 on: April 10, 2014, 09:24:24 PM »
If you've been devouring investment info for a year, I'm surprised you need answers to #1 and #2. You should have a very good idea of the risk and return characteristics of each asset class, and how they fit together as a portfolio. If you don't, I'd pick up a book by Swensen or Bernstein.

As for #3, I suspect most people's biggest mistake is not making an intelligent plan and sticking to it through thick and thin. There's always a dozen ways to convince yourself to be "cautious" and let cash pile up and collect dust, or even worse, pull the plug when the going gets tough.

Zikoris

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Re: The general mindset of Investors
« Reply #5 on: April 10, 2014, 11:42:07 PM »
1. Index mutual funds and laddered term deposits (around 2.6% interest). Max out the tax-advantaged accounts.

2. I'm lazy and it's easy and cheap.

3. I'm 27 now and started investing when I was 25, so nothing really. If I was going back to, say, age 19 or 20, I would follow the same investment strategy but make two lifestyle changes - really focus on getting into higher paying office work (as opposed to factories, farms, etc which I did until a few years ago), and seriously get my savings rate up.

nereo

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Re: The general mindset of Investors
« Reply #6 on: April 11, 2014, 08:43:21 AM »
Quote
#1. What assets do you invest in? (An asset is anything that you put money into that you expect to recieve positive cash flow from)
low cost index funds, my home (I rent out a room, the proceeds of which all go towards the mortgage).  I will likely add some bond funds soon after discussions I've had on this forum. I also have several stocks, but it makes up about 5% of my total investments.

Quote
#2.  Why do you invest in those assets?
I invest in index funds because it's a no-brain strategy that has an extremely high likelihood of allowing me to reach my retirement goal without having to do very much.  I bought the house because interest rates were 'stupid-low', i actually love being a home owner (renovations and the like) and because it gives me the option of using it as a rental down the road.  i pick up stocks when the market has a 'fire sale' like it did in 2008, and when good companies are suddenly trading around their book value.  it doesn't happen often enough to be a core part of my investment strategy, but i find it fun and so far they've done better than the index fund.

Quote
#3.  Please give me an understanding of how you would do things differently, with regards to investments, if you started over at 25.  No assets, no liabilities.  Making 50k a year living in a cheap part of the US.
I started when I got my first job at 15. However, I wouldn't have taken loans out for my master's degree - and I would have worked a part time job to allow me to fully fund my ROTH in my mid-20s.  My biggest regret was that I went 4 years without funding my ROTH during my 20s. 
Also, I would never have bought the mutual funds that I did in my teens & 20s.  The fees!  Instead, everything would have gone into an SP500 fund.  I also would have set up my own ROTH with Vanguard instead of using my parents financial advisor. Again, the fees cost me good returns.


So in sum:  I'd max out my IRA every single year, I'd avoid fees, and one more - I would have asked out the cute redhead in my chemistry class.  D'oh!

spoonman

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Re: The general mindset of Investors
« Reply #7 on: April 13, 2014, 06:40:48 PM »
1) Dividend growth stocks

2) The goal of my dividend growth portfolio is to generate a steadily increasing stream of dividends paid by excellent, low-risk companies.  The stream of dividends is rarely affected by the gyrations of the general market.

3) I would do the same thing.

arebelspy

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Re: The general mindset of Investors
« Reply #8 on: April 14, 2014, 08:56:29 AM »
1) Rental real estate

2) Ability to evaluate good deals and pick and choose the best ones, meaning I can choose properties that will give me a high return on investment, leading to a much faster FIRE date with a much higher income, as well as a more steady income (much less sequence of return risk).

3) Obviously if I had 100% hindsight and was teleported back to age 20 or 25 I could time different markets (stocks, real estate, etc.), but barring that, if I was thrown into a random time period without knowing what year(s) I'd be investing in, I'd do it the same as I have.  In other words, I feel it's a solid strategy (maybe the best for FIRE, depending on the person) that works in any time period.

I'd take my 50k/year, live on less than half that, use my 60-70% savings rate to buy income properties (locally if the numbers work, out of state if they don't), and FIRE by age 30 or so (faster if I could pick up side gig income, or get married and increase my savings rate, though that'd probably lead to the same FIRE time, maybe age 30-31, or early 30s at least, due to wanting a much bigger budget to support a family).
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DoctorOctagon

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Re: The general mindset of Investors
« Reply #9 on: April 14, 2014, 04:36:31 PM »
1. What assets do you invest in?
60% large publicly traded companies, and 40% small business development companies (businesses that write loans to small and medium businesses using capital inflow from investors, and paying out most of their profits directly to shareholders).  I buy individual stocks mostly in a taxable account.

2. Why do you invest in those assets?
Moustachians should park their money in productive assets, and NOTHING IS MORE PRODUCTIVE PER DOLLAR INVESTED than a good, well-run American business. I buy businesses that are cheap at the time of purchase (forward P/E 12 or lower, sometimes much lower).  I prefer to hold companies forever, never selling them, and reinvesting all dividends if possible.  My circle of competence includes the coffee service industry (starbucks), microprocessor companies (intel), data storage companies (Western Digital, Seagate), IT service companies (IBM), and finance/banks (stuff like Wells Fargo, Prospect Capital), and energy stocks (Exxon).  If you buy companies that you understand that look cheap, you will generally outperform the major indexes over several years.

3. How would I do things differently if I started over at age 25?
Should've used margin to buy even more American businesses.  I knew I was right back in the crash of 2009 - i.e., stocks were at 15-year lows and cheaper than they had been since 1932 - but didn't trust myself enough to use any leverage buying stocks when the market began the current long-term bull run back in March 2009. If I had done that at age 25 I would be retired at age 29 living exclusively on dividends.  On the flip side though, I slept at night every night!! :)

RapmasterD

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Re: The general mindset of Investors
« Reply #10 on: April 15, 2014, 11:10:04 PM »
1)
50% SPY
25% VBR
20% BND
5% CASH

2)
Simplicity. Efficiency. Performance. Low cost. This is the portfolio allocation across two 401Ks plus a Roth IRA plus my investment account.

3)
Saved even more.
« Last Edit: April 15, 2014, 11:13:40 PM by RapmasterD »

wtjbatman

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Re: The general mindset of Investors
« Reply #11 on: April 15, 2014, 11:18:12 PM »
#1) Dividend growth stocks (IRA, Taxable), Index fund (401k)

#2) I follow a DG strategy because I love the comfort of holding growth and blue chip stocks and REIT's that throw off regular and growing dividends, and watching how reinvesting those dividends (in just a short period of time) is already growing my stash. With my 401k my only option is a single index fund or a bunch of high expense funds. So total stock index it is. I'm certainly comfortable with it, I just wish I had the option of investing my money as I wish.

#3) I'm only 5 years older than that now, and I know at 25 years old I wasn't ready to invest my income. Now if I was in the situation you described I would pretty much do exactly what Dividend Mantra is doing... well in tax advantaged accounts unlike him, since I know how access those funds before 59.5, but you get the idea :)

beltim

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Re: The general mindset of Investors
« Reply #12 on: April 16, 2014, 12:06:47 AM »
#1) Dividend growth stocks (IRA, Taxable), Index fund (401k)

#2) I follow a DG strategy because I love the comfort of holding growth and blue chip stocks and REIT's that throw off regular and growing dividends, and watching how reinvesting those dividends (in just a short period of time) is already growing my stash.

Just for clarity, are you saying you invest in REITs that grow distributions regularly?  If so, what are some examples?

wtjbatman

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Re: The general mindset of Investors
« Reply #13 on: April 16, 2014, 02:07:47 AM »
#1) Dividend growth stocks (IRA, Taxable), Index fund (401k)

#2) I follow a DG strategy because I love the comfort of holding growth and blue chip stocks and REIT's that throw off regular and growing dividends, and watching how reinvesting those dividends (in just a short period of time) is already growing my stash.

Just for clarity, are you saying you invest in REITs that grow distributions regularly?  If so, what are some examples?

One of my favorites is Realty Income Corp (O). Dividend Growth Rates...
10 year: 6%
5 year: 4.8%
3 year: 7.5%
1 year: 21.2%

Which is impressive considering O currently yields over 5%!

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Re: The general mindset of Investors
« Reply #14 on: April 16, 2014, 12:26:32 PM »
3. I did this, but it's the most important thing: make sure you find a reasonably frugal spouse.