Author Topic: Where to invest my stache?  (Read 10527 times)

indoexile

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Where to invest my stache?
« on: September 19, 2012, 04:58:10 PM »
I am fairly young (turning 25 at the start of 2013) and have a fairly high paying job. 

Financials :

Vanguard IRA : 24k
Brokerage : 50k
Cash : 20k
DEBT FREE (for now)

Yearly cash to invest : 40k

Currently in my brokerage account I hold blue-chip dividend stocks and I DRIP all distributions back into the underlaying security. My goal is to create enough passive income from this to retire in about 8 years. However, I have been reading a lot of posts here about people using various vanguard funds or ETFs to store their staches. I was wondering if there are good alternatives in the vanguard world to be able to secure a nice passive income stream that grows faster than inflation?

Thanks!
 

arebelspy

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Re: Where to invest my stache?
« Reply #1 on: September 19, 2012, 06:27:28 PM »
Go read JLCollinsNH's latest post: http://jlcollinsnh.wordpress.com/2012/09/17/putting-the-simple-path-to-wealth-into-action/

And all the ones he links to in there.

And then if you still have time, all the entrys from the beginning (there's only like two dozen).

His investing advice is gold.  (Not the metal. ;) )
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joer1212

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Re: Where to invest my stache?
« Reply #2 on: October 16, 2012, 11:39:36 PM »
Since you are looking to retire in 8 years (just like me!), I would not put 100% of my money in stocks. Being only 8 years away from retirement is the same as if you were 57 years-old, and looking to retire at the normal retirement age of 65.
With 100% of your portfolio in stocks, you run the risk of losing a substantial portion of your money if the stock market experiences a large drop just in time for your retirement. Your plans could be seriously delayed.
This being the case, you need something more stable to ensure that your money will be there in 8 years, when you start drawing from your principal.
I am, also, looking to retire in about 8 years. The only difference is that I am 43. I wish I had started investing at your age; I would easily be a retired millionaire by now, so you're in a great position.
You could do something like this:

40% Vanguard total bond (VBMFX)
35% Vanguard total stock (VTSMX)
18% Vanguard total international (VGTSX)
7% Vanguard total REIT (VGSIX)

This is a moderate portfolio, not too aggressive, and not too conservative.
You could play with the allocation percentages, depending on whether you want to take more or less risk, but these are the funds I would get.
By the way, this portfolio is very likely to grow faster than inflation.
I know you wanted a non-Vanguard recommendation, but the truth is that Vanguard has great funds at the lowest cost.

« Last Edit: October 16, 2012, 11:41:09 PM by joer1212 »

arebelspy

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Re: Where to invest my stache?
« Reply #3 on: October 17, 2012, 07:21:07 AM »
joer: Isn't OP's timeframe like 50 years, not 8?

It's not the same as being mid-50s, as there your life expectancy is much shorter.  The OP needs it to last longer, thus going more conservative too early can make ER plans fail.

Something you may want to consider for yourself.

I wouldn't personally advice an ER who still has 8 years of accumulating and 50+ years of ER to be only 60/40. 40% bonds, especially right now, is way too high for this scenario.  IMO.
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tooqk4u22

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Re: Where to invest my stache?
« Reply #4 on: October 17, 2012, 07:31:12 AM »
joer: Isn't OP's timeframe like 50 years, not 8?

It's not the same as being mid-50s, as there your life expectancy is much shorter.  The OP needs it to last longer, thus going more conservative too early can make ER plans fail.

Something you may want to consider for yourself.

I wouldn't personally advice an ER who still has 8 years of accumulating and 50+ years of ER to be only 60/40. 40% bonds, especially right now, is way too high for this scenario.  IMO.

Intuitively people view it as the same but as you point out it is not.  A more aggressive portfolio is needed to last that long.  One thing a 33 year old ER has that a 65 year old normal retiree doesn't have is an abundant supply of Human Capital that can be invested (work) if needed to compensate for any short term swings or mistakes.  No ER wants this to happen but time is money and you have a lot more of it when you are 33 vs. 65.

joer1212

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Re: Where to invest my stache?
« Reply #5 on: October 17, 2012, 05:17:16 PM »
joer: Isn't OP's timeframe like 50 years, not 8?

It's not the same as being mid-50s, as there your life expectancy is much shorter.  The OP needs it to last longer, thus going more conservative too early can make ER plans fail.

Something you may want to consider for yourself.

I wouldn't personally advice an ER who still has 8 years of accumulating and 50+ years of ER to be only 60/40. 40% bonds, especially right now, is way too high for this scenario.  IMO.

I agree that bonds can be a little risky right now, with interest rates being so low. If OP has some kind of "stable" fund available at work, he could consider using it in place of/in conjunction with bonds for the fixed income portion of his portfolio.
OP's time frame is not 50 years if he is adamant about staying retired, and never having to work again.
If, on the other hand, he doesn't feel like it's the end of the world should he have to return to the workforce, then he can get more aggressive with his allocations.
I, myself, never want to work again once I'm retired, as I'm utterly sick of it.
Also, I never understood when people say 'your money has to last you through retirement'. This implies to me that you are drawing down your principal to live off of.
Simply put, if you have to tap into you principal for living expenses, then you haven't saved enough money to retire.
When I retire, I will make sure that I have enough income from the interest my principal throws off to live off of, and reinvest a portion of that to offset inflation. If one cannot do this, then he/she is not in a position to quit their job.

« Last Edit: October 17, 2012, 05:19:38 PM by joer1212 »

joer1212

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Re: Where to invest my stache?
« Reply #6 on: October 17, 2012, 05:23:20 PM »
Quote
Intuitively people view it as the same but as you point out it is not.  A more aggressive portfolio is needed to last that long.  One thing a 33 year old ER has that a 65 year old normal retiree doesn't have is an abundant supply of Human Capital that can be invested (work) if needed to compensate for any short term swings or mistakes.  No ER wants this to happen but time is money and you have a lot more of it when you are 33 vs. 65.

See my reply to arebelspy. 
« Last Edit: October 17, 2012, 05:25:05 PM by joer1212 »

KingCoin

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Re: Where to invest my stache?
« Reply #7 on: October 17, 2012, 05:39:36 PM »
If anyone should lean aggressive with their portfolio allocation, it's a 24yo with his financial ship in order.

All things equal, you'd love to have a less volatile portfolio heading toward retirement. But a bond heavy portfolio is going to have a smaller return, necessitating a significantly larger 'stach to live off of.  OP therefore has to choose between going stock heavy and potentialy having to work a few more years, or going bond heavy and DEFINITELY having to work a few more years. Seems like the former is the better choice.

arebelspy

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Re: Where to invest my stache?
« Reply #8 on: October 17, 2012, 06:16:11 PM »
I agree that I'd like to be in a position to never have to work again when I retire, except by choice, but I disagree that a 60/40 allocation is the way to do it on a 50 year scale.  That's not aggressive enough, meaning you will have to go back to work when inflation rears its head, and you don't have enough equities to overcome it in subsequent rallys.

Unless you just build a ridiculous stache.. I suppose that is one option, work way longer than you need to in order to have an asset allocation not as likely to last you as long as another one might.

Really, it comes down to what lets you sleep at night.  For me, a 60/40 allocation wouldn't let me sleep.  Too little potential gains to let me never have to go back to work.
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joer1212

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Re: Where to invest my stache?
« Reply #9 on: October 17, 2012, 07:25:40 PM »
I agree that I'd like to be in a position to never have to work again when I retire, except by choice, but I disagree that a 60/40 allocation is the way to do it on a 50 year scale.  That's not aggressive enough, meaning you will have to go back to work when inflation rears its head, and you don't have enough equities to overcome it in subsequent rallys.

Unless you just build a ridiculous stache.. I suppose that is one option, work way longer than you need to in order to have an asset allocation not as likely to last you as long as another one might.

Really, it comes down to what lets you sleep at night.  For me, a 60/40 allocation wouldn't let me sleep.  Too little potential gains to let me never have to go back to work.

Well, the 60/40 allocation I suggested for OP is just an example. He can go higher if he has the stomach for it. I just don't think anyone should be 100% in stocks, unless they have a true 50-year investment horizon.
I wish I had the link to a study that suggests a 60/40 portfolio captures about 97% of the return of more aggressive portfolios, without the volatility. Yes, I find it hard to believe, also, but that was the conclusion. 

arebelspy

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Re: Where to invest my stache?
« Reply #10 on: October 17, 2012, 08:35:37 PM »
I'm familiar with (most of, as far as I am aware) the studies.

If I were that conservative, I'd be 40/60, as it's essentially the same along the yield curve.  However I'm not comfortable with that much risk (as yes, I believe 60/40 is riskier than 80/20, or perhaps even 90/10 over a long time frame).

I believe a 60/40 investor is more likely to have to go back to work than an 80/20 one, assuming proper responses to down markets.

Again, to each his own.
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joer1212

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Re: Where to invest my stache?
« Reply #11 on: October 17, 2012, 11:59:17 PM »
I'm familiar with (most of, as far as I am aware) the studies.

If I were that conservative, I'd be 40/60, as it's essentially the same along the yield curve.  However I'm not comfortable with that much risk (as yes, I believe 60/40 is riskier than 80/20, or perhaps even 90/10 over a long time frame).

I believe a 60/40 investor is more likely to have to go back to work than an 80/20 one, assuming proper responses to down markets.

Again, to each his own.

I, myself, have a 70/30 portfolio. 

grantmeaname

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Re: Where to invest my stache?
« Reply #12 on: October 19, 2012, 12:16:11 PM »
I'm familiar with (most of, as far as I am aware) the studies.

If I were that conservative, I'd be 40/60, as it's essentially the same along the yield curve.  However I'm not comfortable with that much risk (as yes, I believe 60/40 is riskier than 80/20, or perhaps even 90/10 over a long time frame).
Could you point me to those studies? I've read the MMM article about the Trinity study and its counterparts, but I don't remember seeing anything about asset allocations that heavy on equities. As I'm planning on being that heavy on equities (~90-95%) for the long run, and I like my actions to be evidence-based, I'd love anything you can link me that I haven't seen.

arebelspy

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Re: Where to invest my stache?
« Reply #13 on: October 19, 2012, 12:20:15 PM »
Could you point me to those studies? I've read the MMM article about the Trinity study and its counterparts, but I don't remember seeing anything about asset allocations that heavy on equities. As I'm planning on being that heavy on equities (~90-95%) for the long run, and I like my actions to be evidence-based, I'd love anything you can link me that I haven't seen.

I will try to dig up precise links later, but for now let me point you to the early-retirement.org forums.  Do a search there, and you'll find lots of links and discussions on the various published studies.
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k9

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Re: Where to invest my stache?
« Reply #14 on: November 29, 2012, 06:43:03 AM »
Simply put, if you have to tap into you principal for living expenses, then you haven't saved enough money to retire.
When I retire, I will make sure that I have enough income from the interest my principal throws off to live off of, and reinvest a portion of that to offset inflation. If one cannot do this, then he/she is not in a position to quit their job.

I'm not sure I agree with that. What if I win $2 million at the lottery ? Should I invest (and risk !) it on the stock market ? That money invested conservatively (even at a poor -1% CAGR after inflation) will sustain me for my whole life a leave some of it to my children. OTOH, if I invest it unwisely (or just before a bear market), I might loose a lot of that capital, beside not being able to live from its interests. Don't forget bear markets usually last for decades.

arebelspy

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Re: Where to invest my stache?
« Reply #15 on: November 29, 2012, 07:13:18 AM »

I'm not sure I agree with that. What if I win $2 million at the lottery ? Should I invest (and risk !) it on the stock market ? That money invested conservatively (even at a poor -1% CAGR after inflation) will sustain me for my whole life a leave some of it to my children. OTOH, if I invest it unwisely (or just before a bear market), I might loose a lot of that capital, beside not being able to live from its interests. Don't forget bear markets usually last for decades.

While I agree with your premise (I.e. eating into principal can be okay, but generally it's better not to), your example detracts from it, IMO.

Even a -1% CAGR over 60 years halves the value of your money, and that's if you don't spend ANYTHING out of it.

Plus I think you underestimate inflation, and overestimate investing to get a -1% real return.  A "conservative" investment won't do that if real bad inflation hits (ala 70s/80s).  If you're in a CD at 2-3% (today's rates) and inflation hits 15%...  You lose.  Hard.

Inflation is the early retiree's #1 money enemy.  Not stock market drops.  That's temporary. Assuming your country doesn't collapse, that will come back.  But you won't see deflation bad enough to undo inflation.  That's permanent, reducing the size of your portfolio and annuities.
« Last Edit: November 29, 2012, 07:19:10 AM by arebelspy »
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k9

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Re: Where to invest my stache?
« Reply #16 on: November 29, 2012, 07:59:46 AM »
It depends what you call a conservative AA :)

Well, you're right, I underestimated what a -1% would do on 60 years. those compounded interests are really amazing ! But I think keeping on par with inflation with a somewhat conservative AA (more on what I call conservative below) is totally possible. And then, with a big stash, living on the capital is, IMO, much less risky than living on the interests of a small stock-heavy (>= 80%) portfolio.

Actually, I'm a big Permanent Portfolio fan. I think its asset allocation is what many (including myself) would call very conservative, with only 25% stocks in it and even 25% of pure cash ; even saving accounts or CDs are called speculative bets in the PP theory ! However, it provides very decent returns. Maybe we are living good years for the PP (with a secular bear market for stocks, a never seen before gold bull market, and tremendous returns on treasuries) that will never be seen again, but I'd really be surprised if it did not provide at least close-to-inflation returns on the next 60 years.

Anything with less than, say, 1/3 stocks/RE can be called conservative I guess, but might still provide decent returns on the long run if you include some sort of inflation protection in it (it could be swiss francs, gold, TIPS, farmland, commodities, a mix of all that, your choice).

As for stock market drops : don't underestimate them. An ER/ERE can possibly make its stash in very few years and then expect living on it for very long. If you made your stash just before a bear market (say, form 1995 to 2000), you will be forced to consume a part of the capital for your living expenses, thus selling your stocks precisely at the moment they are worth very little. When the market really recovers a decade later (or even a little before), a big part of your stash has vaporized and it can't sustain you anymore. Yes, that's pure bad luck, on average it probably won't happen to you, but no one chooses his birthdate.

arebelspy

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Re: Where to invest my stache?
« Reply #17 on: November 29, 2012, 12:32:14 PM »
Permanent portfolio is a great investment method (IMO), but not what is traditionally considered "conservative" (generally with none in the market and all in fixed income, CDs/cash/etc.)

If you're talking PP, I would absolutely expect it to beat inflation.
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grantmeaname

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Re: Where to invest my stache?
« Reply #18 on: November 29, 2012, 04:24:58 PM »
I totally disagree. I'm in the 'PP has historically performed well due to unlikely secular trends and doesn't have the secret sauce to do well in the long term' camp. You might exceed inflation, barely, but I wouldn't count on it.

arebelspy

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Re: Where to invest my stache?
« Reply #19 on: November 29, 2012, 07:44:17 PM »
Interesting.  I think there is more to it than lucky happenstance.

It's not my favorite investment method (mine runs more similar to JLCollins' stuff), and I don't expect it to be able to generate large real returns like equities could, but the volitility is low enough (IMO) that it's a solid plan for someone looking for long term inflation beating returns (say 1-2% real return) without a ton of risk.

(And again, I wouldn't call PP "conservative," persay, like CDs and TBills are.)
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k9

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Re: Where to invest my stache?
« Reply #20 on: November 30, 2012, 03:28:51 AM »
I totally disagree. I'm in the 'PP has historically performed well due to unlikely secular trends and doesn't have the secret sauce to do well in the long term' camp. You might exceed inflation, barely, but I wouldn't count on it.

I also think 'PP has historically performed well due to unlikely secular trends and doesn't have the secret sauce to do well in the long term'. But I can't see how it couldn't at least match inflation, at least close to it, unless stocks perform very badly for some reason. But in that case, a stock-heavy portfolio won't help you very much either.

And I'm also in the camp 'US stock market might have historically performed well due to unlikely secular trends' ;) Sure, the US stock market performed well over the last century, so that might go on forever. But a century ago, say in 1912, the #1 financial place, the worldwide industrial empire, was UK, not US (a barely emerging country, maybe like today's China or a little better). So a century ago, I would have invested in the UK market. Well, it appears that UK's stock market performance since 1900 is well below the US (5.2% instead of 6.2%, but remember we compound that over more than a century, so $1 became $291 instead of $834). Next centuries' returns might be close to those. Who knows.

http://monevator.com/world-stock-markets-data/

Stocks are still winning on the long term, but one should not forget these numbers when investing. I think it's wiser to invest on a worldwide index rather than a US-centric (or any other country) one.

@arebelspy, if a conservative AA only consists in tbills, CDs and low-yielding savings accounts, I agree that's a perfect recipe for failure.

indoexile

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Re: Where to invest my stache?
« Reply #21 on: February 22, 2013, 05:30:14 PM »
I never realized there were so many responses after arebelspy's first response. Thanks everyone for all the useful information.

I have read a lot up on JLCOLLINSNH's blog as recommended by arebelspy. He seems to be an advocate of 100% total market fund (equities) during the wealth building phase.  He claims it has a good international exposure due to the multinational corporations included in the fund. How do you guys feel about that? Would you recommend a separate international fund? What about tax-advantage funds like munis/bonds/etc (I'm not exactly sure how these work)?

I was also thinking of putting 10% into a P2P site like Lending Club.

Also what does AA stand for?

Thanks!

arebelspy

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Re: Where to invest my stache?
« Reply #22 on: February 22, 2013, 05:59:35 PM »
AA stands for asset allocation.

How far are you from FIRE? what are your investment goals? Any other relevant things (plan to buy a house, etc.)? How would you stomach a market drop?  What is your risk tolerance level?

All of these, and more, will play into creating your own personal AA that's right for you.

I do think a Mustachian in the accumulation phase (say, 5-10 years from FIRE) should be near 100% equities.  80% at the lowest, IMO.

I'm not a fan of P2P lending, due to the capped upside and significant potential downside. 

I do tend to favor international more than JLCollins, but he makes a good point for the most part on those.

Those are just my preferences, and what's right for me.  It very likely isn't what's right for you.

Everyone's recipie for a portfolio will be a little different, you have to find what you like. 
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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