Thoughts? (on my investing approach & thoughts on "expensive" markets)?

[Captain Cactus]

My investing strategy so far is in my next post down (sorry, this is my first time posting!)  What are your thoughts?

When considering the various Vanguard index funds (i.e., Total US Market index, total international, emerging markets, etc...), how does one identify if a particular market is "over valued", or "too expensive"?

I hear that the US total market is "too expensive" right now so I'm considering the Vanguard emerging markets index for long term growth & dividends.

Any insight is appreciated!  Thank you-

[Paul | pdgessler]

Stare deeply into your favorite crystal ball and the answer will be revealed to you. :-)

Nobody knows for sure. That's why I (and most on this forum, though there is a vocal opposition) just have my investing on autopilot. My recommendation: Come up with an investment policy statement (IPS) that you are comfortable with, and stick to it.

[Captain Cactus]

Thank you for your reply.  That was my first post on this forum and I've been reading the MMM blog for about two months now.  I had a lightening strike moment shortly after the new year this year.  I first discovered The Minimalists blog, which then lead to MMM, which opened my eyes to the possibility of FIRE.  I want to buy my freedom.

I'd love to hear your thoughts on my strategy/approach.  Here's where I'm at and what I've been doing:  I've got about $200,000 total in retirement accounts.  Here is how I've allocated it: About $150,000 in total US stock index funds (Vanguard for IRA and the passive US index from my 401K), $23,000 in VTIAX, about $10,000 in VEMAX, and another $10,000 in VBTLX.  Then around $7000 in HRZN, which is a high yield BDC stock.  Future contributions are going to VTSAX. 

I have a taxable brokerage account which contains about $10,000 in VTSAX and another $12,000 in high-yield BDCs (PSEC & HRZN).  I realize that these are "riskier", but the yield is good (between 10%-14%/year, monthly dividends).

I always max out my ROTH IRA (though I'm thinking about switching future contributions to traditional IRA); previously I simply contributed 6% into my 401K to get the company match (which is a generous 150% match on the first 6% I contribute pre-tax).  I recently bumped that up to 18% to max out that avenue (I make between $100,000-$110,000/year).  Hopefully I'll be able to maintain that.

I have $35,000 in an emergency fund, just a plain savings account.  That is probably a bit high, but my having that solid base makes me comfortable being a bit more aggressive with my investments.

My gut tells me to keep going with VTSAX until I've got about $250,000 of that, then start branching out into international/emerging markets.

I'm 35, married with 2 young kids.  I want to buy my freedom and eventually take my talents (I'm in medical sales/business development) to some kind of non-profit where I'll make a little money but be able to contribute in a more meaningful way.  I'm looking about about 10 years from that point. 

Thoughts?

PS...this post kind of got away from me and got long.  Is it worth reposting in a new thread to get broader feedback?  Thank you!

[Telecaster]

When considering the various Vanguard index funds (i.e., Total US Market index, total international, emerging markets, etc...), how does one identify if a particular market is "over valued", or "too expensive"?

I hear that the US total market is "too expensive" right now so I'm considering the Vanguard emerging markets index for long term growth & dividends.

The US total market is expensive right now.   "Expensive" means we should expect lower than average returns for some long period of time in the future.  I don't see that as a problem at all.   Over your investing career, some of the time returns will be above average, and some of the time returns will be below average--by definition.  BFD.

Some international exposure is fine and healthy but overall the US is the best place to invest.  Here's the top 10 holdings in the S&P 500:

Apple Inc.   
Microsoft Corporation   
Exxon Mobil Corporation
Johnson & Johnson
General Electric Company
Berkshire Hathaway Inc
Facebook, Inc.   
AT&T Inc.   
Procter & Gamble Company
Wells Fargo & Company

All of those companies except Wells Fargo have significant overseas markets, and even Wells Fargo has some overseas operations.   You're getting international exposure by owning American companies.

PS good job saving that much by 35. 

[Captain Cactus]

Thanks Telecaster, I appreciate the perspective and the kind words.  I think that I will stick to the VTSAX (and my 401K "equivalent" of that index fund) for now. 
For me, investing is a very satisfying way to spend money.  So much better than spending my hard earned cash on material possessions.  Like I say, I am buying my freedom one investment at a time. 

[Heckler]

I'll just leave this here for you to ponder.  It's one of my favourites for the power of global diversification. 

[mrpercentage]

Expensive follows the current popular paradigm. It can change with the latest fad.

Value follows future earnings. A few things muddy the waters. First value is determined by future earnings-- that means current conditions don't exactly apply. Oil can be low due to conditions and a year or two later be extremely high. If your companies earnings are based off of this commodity you can look bleak now but in reality be highly undervalued in two years time. It's difficult to predict and I suspect many analyst's formulas will betray them. Another example would be the effect of currency devaluations on a company like Procter & Gamble. They could have great sales and be killed in currency exchanges.

Generally speaking the revenue (total money earned by a company) is going down right now. Not a good sign for near term market valuations. They (the companies) have been manipulating perceived performance through things like share buy backs. Less shares in circulation will boost your earnings per share even if your revenue is going down.

Some general considerations about the market:
It can go down a lot faster than it can sustainably go up in one run. This means you should be wary of buying into rallies that run up 10% in a month. Im not saying sell it. Im saying you might want to back off a little on how aggressively you buy. If you are passively buying just ignore and keep buying.

It is a fact that human nature will urge you to buy into a rally and sell to prevent loss when the market goes down. So when you get the urge to throw a lot of money in please refer to number 1. You will get another opportunity so there is no rush. Castles built in the sky fall to earth or fall into the sea. Jimi Hendrix said so.

Look into what you are buying. Check the holdings. Looking into the holding may change your outlook on what you are investing in.

Im going to use American Funds as an example. You might think you want to be a little aggressive and be in growth. Then you check the holdings:
Growth fund of America
Amazon
5.7%
Alphabet
2.7%
Broadcom
2.4%
Home Depot
2.3%
UnitedHealth Group
2.0%
Microsoft
1.7%
Amgen
1.7%
Philip Morris International
1.6%
Netflix
1.4%
Oracle
1.4%

Then after looking around you decide Washington Mutual better fits your investment philosophy
Washington Mutual:
Microsoft
5.5%
Home Depot
4.4%
Verizon Communications
3.5%
Coca-Cola
3.0%
Boeing
2.9%
Comcast
2.7%
Lockheed Martin
2.6%
Merck
2.3%
Wells Fargo
2.2%
JPMorgan Chase
2.1%

Have you ever looked? Do you care? Do you know where your money is going? I think awareness is key. I prefer picking companies myself but if retirement accounts don't allow it I find the holdings that best fit what I really wish to own.

Finally, determining the true value is very difficult for an entire market. I plan to step around this by buying corrections by rolling bonds into stocks. I will always purchase bonds and then just roll them into stocks during a crash. This does two things. 1. It limits the amount of bonds I own as they will always be 100% rolled into stocks. 2. It pays me interest while I wait for a more reasonable price for stocks.
Just the most recent of many strategies I am working with. I like it a lot. Only time will tell if its wise. I feel more active and psychologically that is better for me.