Buy and hold vs. Money Market

[tabascobobcat]

So, I have followed a couple other threads predicting a big market crash mainly the result of the housing market collapse and an artificially inflated economy. Regardless of how or why it got there, when is the best time to switch my buy and hold investments to money market or CD's ??
Or should I go for something a little more fun like vertical credit spread ???
Adjust the 401K or let it ride as is ???

[Nathans_Dad]

My answer doesn't fit into your poll. The answer is that if you have more than 5 years of time to leave the money then leave most of it in the market.

It really depends on how old you are and whether you will need access to that money in the next 5 years. If you do, then the money probably shouldn't be in the market anyhow. If you are <50 then a short term market correction will not significantly affect your returns long term.

Also agree with Wayne about diversifying outside the US. I have some positions in far eastern stock mutual funds that have done very nicely. Think of areas in the world that are undergoing major economic changes and stash some money there. Mutual funds are the best way to go for this (IMHO) because you can get burned in emerging markets when you choose individual companies. Better to leave it to someone who knows the area, know the markets and can actually visit these companies.

I think my next move will be finding a mutual fund that invests in Indian/Pakistani companies...

[tabascobobcat]

In all fairness I realize that I owe you guys a little more of more of a story to help with the ideas and suggestions.

I accumulated the $$ thru smaller monthly deductions over the past 15 years in VNG Index 500. The $$'s are now gaining more in interest/dividends than I am putting in. I am 40 and have a wife that just decided to quit work and have kids. So now she is spending instead of earning. Big impact to expendable/discretionary income. Will is 2 and Ben will be born in 15 days. The only thing that we owe the bank is the 5.09% interest mortgage loan. All cars are paid for. The 401K deposit is 10% and I have started a 529 for the kids which is only funded up to the state max tax deduction. The kids can pay part of college too (but that is a different thread).

I don't anticipate a planned use of the $$ for about 5 years until I need to replace one of the fleet or get the Targa painted. I would like however the $$ to replace the need for the wife to watch one of the neighbor's kids to help make ends meet.

My cell mate at work next to me is in a similar situation. One year ago he gave his broker the go ahead to try the vertical credit commodities deal. He returned 89% last year and 12% last month alone. Makes my 15% with Vanguard look stupid and got me to thinking.............

I appreciate anything input you guys may have as I also realize that many of you have a wealth of knowledge in this area.
Thanks

[turbo6bar]

I'm so bearish the neighborhood kids run away on first sight. That said, I'd let that puppy ride. Diversify a little, perhaps. If you really smell trouble ahead, sell off some (10% or so) and grab a money market fund.

I wouldn't touch the credit commodities. One rarely gets in trouble getting rich slowly. A lot of folks have gotten knee deep in Swepco trying to get rich quick.

Invest in your health and spend time with your family. Those investments will pay off immensely down the road.

I wish you the best,
jurgen

[Bill Verburg]

Trying to guess or time the direction of the market is a fools game.

For best Investment success as opposed to Speculation
Develop an asset allocation appropriate for the level of risk that you can take on
X% US stock
Y% Foreign stock
Z% Fixed(cash, bond)

further subdivide X into the 9 stock categories [small medium large] x [value blend growth]
do the same for your foreign

allocate and re-balance periodically, this forces you to sell hgh and buy low, as does buying out of favor sectors

annually reassess the asset allocation that is appropriate

you can further diversify and reduce risk w/ other diversifiers like real estate or gold & other commodoties

[Dantilla]

Originally posted by Bill Verburg
Trying to guess or time the direction of the market is a fools game.

For best Investment success as opposed to Speculation
Develop an asset allocation appropriate for the level of risk that you can take

Yeah. What HE said.

[masraum]

Interesting info. I'm an investment novice, less than that really. The extent of my knowledge is that all funds eventually aspire to be as good as the S&P500, so that's where my 401k goes.

I read these threads with interest. Are there any good basics or beginners books out there??

[Bill Verburg]

Spend some time Morningstar

and Diehards

Investing Guide

There are lots of worthwhile books, authors worth reading
Graham, Bogle, Swedroe, Ferri, Buffet, Whitman

Some of the above are Indexing fanatics. The biggest controversy about how to invest is Indexing vs Active management. I hedge my bets by doing both while at all times keeping costs down and biasing to value

[jluetjen]

Originally posted by tabascobobcat

My cell mate at work next to me is in a similar situation. One year ago he gave his broker the go ahead to try the vertical credit commodities deal. He returned 89% last year and 12% last month alone. Makes my 15% with Vanguard look stupid and got me to thinking.............

That's the stuff of party conversations. Everyone loves to tell you about that special investment that they made that generated XXX% return. What they never tell you about is all of the deals on which they got hosed. It's kind of like a person who brags about winning $5000 (less taxes) in the lottery, and neglects to mention the fact that they've been buying $5 of tickets a day for the last 6 years to do it!

[tabascobobcat]

Originally posted by masraum
Interesting info. I'm an investment novice, less than that really. The extent of my knowledge is that all funds eventually aspire to be as good as the S&P500, so that's where my 401k goes.

I read these threads with interest. Are there any good basics or beginners books out there??

+1
I am starting to struggle a bit in keeping up.
All good ideas.
At this point I guess that consistency is key.
Pick a strategy and stick to it. My mind keeps trying to blend all
these ideas together.
I need to study a bit more, but the more (I think) I understand, the scarier it becomes.
Keep the ideas coming.

[VincentVega]

The extent of my knowledge is that all funds eventually aspire to be as good as the S&P500, so that's where my 401k goes.

Not exactly

An S&P Index fund isnt the end all be all. Sometimes it's up, sometimes it's not.

[tabascobobcat]

Does anyone know of or about CUNA Brokerage Services, Inc. ????

My credit union is currently touting their services for a complete financial package.

I met with the guy but left not overly impressed for some reason

[Nathans_Dad]

Well from reading what you wrote about your current situation, here is my $.02 (which is actually worth much less than that in real dollars...).

If you are 40 and do not have an immediate need for the cash I would put it into a standard taxable investment account. You will still be able to withdraw the money if needed (less transaction costs and any capital gains tax) but will have it in the market to get the better returns. Again, this ONLY applies if it is money you do not think you will need in the next 5 years. If this is savings for something or you will kill yourself if you lose money, then put it into a money market account or buy government grade bonds.

Now then, to address what to do with that money. In general, every portfolio should have a mix of equities (stock), bonds and cash. What those percentages are depend on your age, your proximity to retirement and how risk tolerant you are. Currently I have 95% of my stuff in stocks and mutual funds and 5% in cash (not counting my savings account). I have no bonds because I am only 34 and have tons of time to allow my money to sit in the market. Thus bonds really don't make sense for me. A financial planner would probably say that I could use a small amount of bonds or precious metals to offset my market risk, but I am a pretty risk tolerant person, especially given my time frame.

As far as which mutual funds you should choose, I have a mix of index funds and privately managed funds. Index funds try to emulate whichever index they track. Thus you will always get the same return as the "market", but will never "beat the market". The bottom line is that less than 10% of actively managed funds every beat the market anyway. I would say about 50% of my stuff is in indexes, another 30% in actively managed funds and 15% in individual stocks. I would say that indexes are a good place to start, I started adding in actively managed funds once I had a decent amount in my IRAs (>$50k for me). Whatever you do, stay away from load funds. There are plenty of no load funds which will give you good returns without paying a load.

Anyhow, I hope that helps some. A great book to pick up if you are thinking of getting into investing and portfolio management is Rick Edelman's The Truth About Money. It is an easy read and covers all the basics of the markets and financial planning.

Financial planning is just like Porsche's. It's a hobby and the more you read about it the better you get. Personally I get a kick out of managing my own money, some people would rather not deal with it and get a planner, that's ok too.

P.S. Don't be tempted by the stories of 85% gains. Yes they happen, but 85% losses are much more common. There is an old saying in the markets: "Bulls make money, bears make money...pigs get slaughtered."

Don't be a pig. If you aim for a nice 10% return annually that is certainly attainable and sustainable. If you happen to luck into a 30-40% return a couple years then count yourself lucky.

[jluetjen]

Something to keep in mind is that they guys who manage stocks for a living (especially for their own accounts, or at least for accounts for which they are compensated based on bottom line performance) will almost always out perform you because they have more time and resources for research. Small fish like you and me are essentially the patsies in the stock market when it comes to individual stocks or sexy investments. You will always be two or three steps behind them when it comes to making the right decisions. Those two or three steps will always mean that they will make the money and you will be holding the risk.

Do a search on my name and "CML" and you can read about how I know this.

[tabascobobcat]

Nathan's Dad,
Thanks for taking the time to pen such a response.

Sounds like a good plan to follow.
Baring anything catastrophic, I do not plan to need the $$ for the next 5 years. It won't kill me to loose the money, but I do want to take a reasonable amount of risk, balanced against reward of course. I had been doing the Index 500, but at some point got a little frustrated with myself for settling for mediocrity. Maybe I was too hard on myself.
I'd still like to be a little more aggressive and try to beat the market by a little, and can accept loosing to it by a little while trying if I have too. I just don't want to loose a significant (25%+)portion.

I am not planning on carrying any of this as cash. I do have a separate lump all ready for that. About 6 months worth in CD's.

Of the mutual and index funds that you invest in, are they US market based or overseas?? I guess that I still like Wayne's strategy.

I too would get a kick out of managing my own $$, but would hope that a pro could turn it into some sort of wealth.

[jluetjen]

Originally posted by tabascobobcat
N I had been doing the Index 500, but at some point got a little frustrated with myself for settling for mediocrity. Maybe I was too hard on myself.
I'd still like to be a little more aggressive and try to beat the market by a little, and can accept loosing to it by a little while trying if I have too. I just don't want to loose a significant (25%+)portion.

Don't forget to include management fees in your calculations. Lots of people fail to consider this, and you'll get hit with these quarter after quarter. Over the course of a few years these fees will tend to pile up.

[Hetmann]

Actually an actively managed fund should beat the S&P most years. Thats why you pay a management fee. Index funds are cheaper in terms of fees since they don't have to do any thinking to run them, just buy everything in the index. I like the idea of allocations and periodic rebalancing. Don't bet the farm any anything risky. Getting rich slowly and steadily is the ticket.

[pwd72s]

Originally posted by masraum
Interesting info. I'm an investment novice, less than that really. The extent of my knowledge is that all funds eventually aspire to be as good as the S&P500, so that's where my 401k goes.

I read these threads with interest. Are there any good basics or beginners books out there??

One book I strongly suggest:

The Bogleheads' guide to investing

by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf

Amazon carries it.

You are thinking in the right direction. A very small percentage of fund managers beat the total market index in any given year. (this book will give you the historical numbers on that) The names of those managers change from year to year. This stands to reason because of the market switching from one sector to another. As you get closer to retirement, you might consider switching from equities to treasuries on a %age basis, depending on your tolerance of risk. Your 401K probably gives you no choice of the firm you buy the S&P index fund from. If you do this outside your 401K, keep a close eye on the fees you are charged. Fees matter!

[Nathans_Dad]

Originally posted by Hetmann
Actually an actively managed fund should beat the S&P most years. Thats why you pay a management fee.

You'd think so, wouldn't you? The bottom line is that most actively managed funds fail to beat their respective averages every year.

Tabasco, a good place to start is www.aaii.com. That is the American Association of Individual Investors. You can join for a fee, but there is a lot of great information on that site for free. My favorite is their mutual fund guide which they put out every year. They group funds by class (domestic, international, large cap, mid cap, small cap, sector, etc) and then break down their performance on 1, 3, 5 and 10 year averages compared to their class. The nice thing is that they require the funds to have low management fees to even get into the guide so you know you won't get stuck with a high fee fund. The fees are also listed on the sheet for the fund. What I usually do is go through the guide for the class of fund I am looking for, pick a few that have done well in their class on a long term basis and then go to the individual websites for the funds to really look at the prospectus.

As far as what funds to buy, it is generally a good idea to have a broad diversification in your portfolio, it will even out the ups and downs. If you have a broad index fund (I use the Vanguard Life Strategy Index fund) then that helps to improve your diversification. After that look at actively managed funds. Most of the index funds are large cap heavy because the indexes are usually large cap heavy (assuming you aren't talking about a small cap index). So I chose a mid cap growth fund, a small cap growth fund and a micro cap growth fund. I then chose a mid cap value fund because I didn't want my portfolio to be ALL growth. That completed my domestic portfolio. I put a small amount (5% of my portfolio) into a Pacific Rim fund because I wanted exposure in the far east. I then chose a tech fund (which I am selling because it only made 3% in the last year) because I thought the tech sector had been beaten up and was due for a rebound (I was wrong).

That's how I set my portfolio up. In general try to stay under 8 mutual funds total. If you get more than that it gets tough to keep up with all of them and you just end up with a jumble of alphabet soup. Try to not duplicate fund classes, there really is no reason to have two mid cap growth funds, pick one that is the best in your mind and go with it.

Set up what percentages you want in each sector at the start. Every year you should rebalance your portfolio and restore those percentages. Yes this means you will sell some of your winners and buy some of your losers (or smaller winners anyhow). That's the point. The losers will become winners (or if they never become winners you choose another fund). I generally give my funds 2-3 years before I sell one to get a chance for them to perform.

Hope this helps.

[pwd72s]

Originally posted by Nathans_Dad
You'd think so, wouldn't you? The bottom line is that most actively managed funds fail to beat their respective averages every year.

Tabasco, a good place to start is www.aaii.com. That is the American Association of Individual Investors. You can join for a fee, but there is a lot of great information on that site for free. My favorite is their mutual fund guide which they put out every year. They group funds by class (domestic, international, large cap, mid cap, small cap, sector, etc) and then break down their performance on 1, 3, 5 and 10 year averages compared to their class. The nice thing is that they require the funds to have low management fees to even get into the guide so you know you won't get stuck with a high fee fund. The fees are also listed on the sheet for the fund. What I usually do is go through the guide for the class of fund I am looking for, pick a few that have done well in their class on a long term basis and then go to the individual websites for the funds to really look at the prospectus.

As far as what funds to buy, it is generally a good idea to have a broad diversification in your portfolio, it will even out the ups and downs. If you have a broad index fund (I use the Vanguard Life Strategy Index fund) then that helps to improve your diversification. After that look at actively managed funds. Most of the index funds are large cap heavy because the indexes are usually large cap heavy (assuming you aren't talking about a small cap index). So I chose a mid cap growth fund, a small cap growth fund and a micro cap growth fund. I then chose a mid cap value fund because I didn't want my portfolio to be ALL growth. That completed my domestic portfolio. I put a small amount (5% of my portfolio) into a Pacific Rim fund because I wanted exposure in the far east. I then chose a tech fund (which I am selling because it only made 3% in the last year) because I thought the tech sector had been beaten up and was due for a rebound (I was wrong).

That's how I set my portfolio up. In general try to stay under 8 mutual funds total. If you get more than that it gets tough to keep up with all of them and you just end up with a jumble of alphabet soup. Try to not duplicate fund classes, there really is no reason to have two mid cap growth funds, pick one that is the best in your mind and go with it.

Set up what percentages you want in each sector at the start. Every year you should rebalance your portfolio and restore those percentages. Yes this means you will sell some of your winners and buy some of your losers (or smaller winners anyhow). That's the point. The losers will become winners (or if they never become winners you choose another fund). I generally give my funds 2-3 years before I sell one to get a chance for them to perform.

Hope this helps.

Very well said Rick...how many times have you wished someone in his 20's would actually listen to this advice? The "gotta have it now" syndome is strong at that age. Besides, once you get old enough to have something to say, nobody wants to hear it.