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Best place to park cash for 1-?? months
Old 12-24-2003, 11:47 AM   #1
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Best place to park cash for 1-?? months

Greetings!

I have a little over a half mil in cash from a recent real estate sale parked in vanguards admiral money market fund.

I'm working up the asset allocation to divide this up into, and i'm not thrilled with the recent market run-up. I'd like another month or so to finish tweaking my allocation, and I'd like to wait for a little correction before buying in.

Yes, I know market timing never works. I just feel that we're peaking a little and that we may be in for a little dumper. 4 of the 5 times I've plowed a six figure account into investments they've dropped between 15 and 30% within a month and I had to wait six more to get back to even, so i'm gunshy of buying when the locomotive is running.

Hence, may be a month, may be 4-6 months before I go. In the meanwhile, my MM account is being reduced by inflation. I need somewhere juicier but still 'safe' relatively speaking.

I believe I saw a posting by Ted that said he likes the vanguard short term corporate fund for cash, and that looks good to me. I also looked at the short term overall index which appears to mix in more treasuries and gives a slightly lower return in exchange for more safety.

I'm avoiding any medium, long term or high yield bond funds because of the concerns about potential for inflation wiping out their NAV's.

So whats the concensus for the move. Its preferably a vanguard fund as thats where my moola is, but I do have brokerage capability there and can buy nearly anything. Needs to be simple, no redemption costs, reasonably safe but i'm willing to live with a little risk for a few extra $.

Lastly, whats the take on dividends and capital gains payouts? I'm currently planning on reinvesting div/gains from this fund back into it, but my longer term investments I'd like to have the dividends/gains paid out to my bank account and leave the original investments alone. I'm not a big fan of redeeming shares 10 years later and having to figure out 10 years of reinvestments to establish the cost basis, plus it'd be nice to have a steady stream of dough coming in. I believe the conventional wisdom is to reinvest always and rebalance annually.

Thanks for any and all replies.
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Re: Best place to park cash for 1-?? months
Old 12-24-2003, 01:15 PM   #2
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Re: Best place to park cash for 1-?? months

I have a chunk of cash in a GE Interest Plus account. Yields 2.25% -- not wonderful, but better than a MM account.

http://www.geinterestplus.com/interestplus/index.html

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Re: Best place to park cash for 1-?? months
Old 12-24-2003, 04:11 PM   #3
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Re: Best place to park cash for 1-?? months

Ford also offers corporate money market accounts. Currently yielding 2.84%:

http://fordcredit.com/moneymarket/index.jhtml

With $500K, you're talking about $500/month in a traditional money market vs $1000/month in something with a little more juice, so it might be worth the move. Of course, there's a credit risk trade-off vs treasuries.
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Re: Best place to park cash for 1-?? months
Old 12-24-2003, 06:50 PM   #4
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Re: Best place to park cash for 1-?? months

"4 of the 5 times I've plowed a six figure account into investments they've dropped between 15 and 30% within a month and I had to wait six more to get back to even, so i'm gunshy of buying when the locomotive is running."

If you've got a whole lot of money to invest, it may be better psychologically for you to invest a portion of that (1/4, 1/3, 1/2, etc.) now (or when you have figured out an appropriate AA) in an array of diversified (hopefully) asset classes, and then invest the rest in monthly or quarterly chunks. This may help you stick to your desired AA better. It would certainly help me. Of course, it is always possible for a lot of the different asset classes to become highly correlated when they are all doing badly. Likely? Not really. But possible? Yes. I think we just have to accept this if we're going to invest any of our money in risky asset classes.

In a taxable account, I would rather NOT have any dividends or distributions reinvested. I think that this is much easier for rebalancing, figuring out cost bases, and other tax stuff.

As for rebalancing annually, the most optimal time to rebalance will only be known after the fact. So, I think the best we can do is to rebalance whenever our asset classes get too far off of our % targets. This may be yearly, two times a year, once every two years, or whatever. Of course, things like tax consequences of rebalancing should definitely be taken into account. For example, I would try as hard as possible to not take a short term capital gain if I could.

Try not to second guess yourself too much. If you have decided on an AA that is a good strategy for you, it is still a good strategy if the outcome is good or not so good. Don't confuse the two. There is only so much we can control.

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Re: Best place to park cash for 1-?? months
Old 12-24-2003, 08:19 PM   #5
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Re: Best place to park cash for 1-?? months

If you are considering waiting to time your investments or considering dollar cost averaging the investments over several months, there is some research that indicates these are not strategies with a high probability of success. Here are some links to investigate if you are interested.

http://www.moneychimp.com/features/dollar_cost.htm
"Does Dollar Cost Averaging Work?
Dollar cost averaging means investing a fixed amount at fixed intervals of time. That's a sensible approach, for example, if it means committing yourself to investing a fixed amount of your salary every month toward your retirement.
However, some people also think you should dollar cost average a lump sum. For example, if you had $12,000 that you wanted to invest in a stock index fund, they would tell you to invest $1000 per month over a year, rather than investing the whole amount immediately. The rationale is that market volatility should then work in your favor, because you will automatically be purchasing more shares when the price is low, and fewer shares when the price is high.
As appealing as that theory is, its advantage looks like a myth, as this calculator shows. It uses market data to let you compare dollar cost averaging with lump sum investing for the start date you specify.
. . . (A calculator is included with this link)
Each strategy wins at least some of the time, but after a few runs you'll see that DCA is the statistical "dog", losing about two times out of three.
Of course, dollar cost averaging will win if your start date falls right before a dramatic crash (like October 1987) or at the start of an overall 12 month slump (like most of 2000). But unless you can predict these downturns ahead of time, you have no scientific reason to believe that dollar cost averaging will give you an advantage.
So why do so many people persist in believing that this old dog really knows how to hunt? Maybe because it has a psychological appeal: if the market dips, people will be happy because DCA will be saving them money; and if the market goes up, people will be happy regardless. "
================================================== ============
https://customers.directadvice.com/a...mJumpInNow.htm
" Lump Sum? Jump In Now.
By Frank C. Armstrong, CFP
Last in a series
Congratulations! You won the lottery, inherited some money from a distant relative, sold your company or rolled your pension into your IRA. You have designed an asset allocation plan that meets your needs and have selected the funds you want to invest in.
But just how should you invest that large sum? Should you invest it all in one fell swoop? Or should dollar cost averaging be part of your strategy - investing your money in small bits and pieces over time?
In this case, don’t use dollar cost averaging. While it works well in many circumstances, as we’ve pointed out during the past couple weeks, it actually works against you when you have a large lump sum to invest. Here’s why.
Looking ahead
The market’s upward bias is so strong that it’s unlikely that market prices will be more favorable at some future point than they are today. No matter how you measure it, the market has more good periods than bad ones, and the good periods are better than the bad periods are bad."

This article goes on to show a table of S&P500 performance since 1926 and discusses the implications of using DCA.

"Based on past history, and depending on the period we selected, we would have been right between 62% and 90% of the time had we invested the entire sum immediately rather than waiting until the end of the period to invest part or all of it.
Stalling for time
It may feel good (or more prudent) to delay making the commitment with all or part of your lump sum in hopes that tomorrow’s prices will be more attractive than today’s. Especially in unsettled times, the temptation to "wait and see what happens" or other excuses to delay making a commitment to the market can be overwhelming.
But these delaying tactics are nothing more than thinly disguised attempts to time the market. And delaying investing like that actually decreases your chances of success. Dollar cost averaging with a lump sum is an attempt to "split the baby," and that has historically been a losing strategy. . ."
========================================
The article below is less tactful in it's criticism of DCA when lump sums are available.
http://www.efmoody.com/planning/dollarcost.html
". . .If you have money to invest as a lump sum, DCA produces a LOWER return than investing the money all at once. . ."
========================================

http://www.stockfirst.com/strategies...r_Cost_Avg.htm
"Dollar Cost Averaging :
Making a Little Go a Long Way
. . . As previously noted, dollar cost averaging is probably best suited to the investor who is starting to build a portfolio and does not have sufficient funds to purchase a meaningful number of shares in several companies. . .
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Re: Best place to park cash for 1-?? months
Old 12-25-2003, 03:19 AM   #6
 
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Re: Best place to park cash for 1-?? months

I have had a little "just waiting" cash since last spring.
Don't believe I've ever taken less than 3% by holding it
in bank MM accounts. I do this by finding a bank
offering a "promo" rate for new customers. I open an account and leave the money in until the rate runs out.
Then I find another bank. If they want you to keep the account open for say 6 months, and the good rate
only lasts 3, then I either negotiate out with no
penalty, or just leave enough cash in the old account
to keep it alive. This may sound like a lot of fussing
but hey.............I'm retired!

John Galt
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Re: Best place to park cash for 1-?? months
Old 12-25-2003, 05:05 AM   #7
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Re: Best place to park cash for 1-?? months

I'm leaning toward Vanguard Short Term Corporate also - The risk is that the 'speed' of any interest spike could underrun duration (which I don't know) - but I've used this fund in the past (80's and 90's) and never felt constrained by NAV movement when it came time to reinvest.

In our case - selling some DRIP stocks and looking to beef up balanced index next year.
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Re: Best place to park cash for 1-?? months
Old 12-25-2003, 05:48 AM   #8
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Re: Best place to park cash for 1-?? months

In line with the established financial principle that reward requires risk, immediately investing a large sum of cash in higher risk assets has both greater risk and greater expected return than dollar cost averaging. Whenever I have doubts, however (which is always) I pick a middle of the road approach. I would immediately put about half of the $500k into assets representing my long-term "target" allocation (with any long term bonds being TIPs). I would put the "cash" portion into one or more of Vanguard's short term bond funds (and perhaps some into shorter term TIPs). I would shift these short-term investments into the long-term ones over the next year or so. Stay diversified and stay invested and you will eventually do better than most people regardless of what the overall markets do.
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Re: Best place to park cash for 1-?? months
Old 12-25-2003, 06:44 AM   #9
 
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Re: Best place to park cash for 1-?? months

And here are some more benefits to my earlier post
re. taking advantage of bank teaser MM rates.

If you get a very low "promo" rate offer on one of your credit cards, take the money and put that into your
short term MM account, thus picking up the spread in
the interest rate. So, you are borrowing at a promo
rate (low) and investing the funds at a promo rate (high). There
are rules to this game, and they vary from bank to bank
and credit card to credit card, so you need to keep on top of it. You also need to consider taxes of course, when computing how much you expect to gain on the spread. Typically, when you open a new account the bank will give you a gift.
I picked up enough stuff last year to save a bundle on
Christmas shopping.

John Galt
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Re: Best place to park cash for 1-?? months
Old 12-25-2003, 08:01 AM   #10
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Re: Best place to park cash for 1-?? months

Ted - excellent advice, and one of the options i've been thinking of. Pretty much wanted validation that the vanguard short term bond funds are a decent option vs a money market and several of you seem to think so.

On the topic of timing the entry. I know, I know, I know. Ill advised. But after watching my investments eat it every time I drop a lump sum in while things are on the upside...I have to at least wait for a little something to happen to the downside. Thats why I want to maintain the funds at vanguard so I can shift into the longer term direction on short notice.

I mentioned my longer term asset allocation in my overly lengthy "Hi, I am...", and have since continued to tweak.

Per many pieces of advice on non-correlated assets, I'm looking at vanguards REITS, their Energy fund, some small bits of their emerging markets and explorer funds along with more general international equity indexes, with about 1/3 in US stocks and bonds. I was considering the STAR fund for that 1/3 stake, its a nice bucket of diversity in which to throw money, but I may simply pick their tips fund, short term bond fund, and allocate the rest to one of the large cap funds or indexes.

Only thing that still sticks in my craw is these are almost all up 30-40+% this year.

So my immediate plan is shift my cash from the vanguard MM to the short term corp fund, take my long term bond stake in the vanguard tips fund, and cherry pick the rest of my fund picks for those that havent had quite so big a run-up or still showing some potential upside. Target is to allocate about half the lump some within the next few weeks, and the other half when I'm comfortable that its a good time.

Whistling through the graveyard...
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Re: Best place to park cash for 1-?? months
Old 12-25-2003, 08:37 PM   #11
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Re: Best place to park cash for 1-?? months

Quote:
In line with the established financial principle that reward requires risk, immediately investing a large sum of cash in higher risk assets has both greater risk and greater expected return than dollar cost averaging. *Whenever I have doubts, however (which is always) I pick a middle of the road approach. *I would immediately put about half of the $500k into assets representing my long-term "target" allocation (with any long term bonds being TIPs). *I would put the "cash" portion into one or more of Vanguard's short term bond funds (and perhaps some into shorter term TIPs). *I would shift these short-term investments into the long-term ones over the next year or so. *Stay diversified and stay invested and you will eventually do better than most people regardless of what the overall markets do.
Ted,

I'm dissapointed. From your posts I pegged you as the financial pureist of these boards. You always seem to provide the textbook advice most rigidly. Allocate don't time. Balance on schedule. Use index funds for equity investments. Use TIPS because of their positive impact on portfolio longevity. . .

But now we find out that when it comes to windfall lump sum values, you capitulate rather than move directly to your intended allocations. Next you'll tell me there's no Santa Claus.

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Re: Best place to park cash for 1-?? months
Old 12-26-2003, 05:13 AM   #12
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Re: Best place to park cash for 1-?? months

I'll repeat what I posted on September 16:

"My approach is to put the majority of my investments into "stodgy" stock index funds and low-cost bond funds. Over time, this portion of my portfolio is virtually certain to produce a higher return than most other investors will experience, because of the lower "leakage" to expenses.

With that in mind, I can "gamble" with a small portion of my assets, knowing that if I lose money on that portion, it won't be financially devastating. It is a good way for anyone to reconcile their "logical" and "competitive" instincts."

Economics is a "social science" that is based on the assumption that people act rationally to maximize their level of satisfaction. (At the basic level, this involves achieving a "comfortable" level of wealth, but once people do that, they turn to other sources of gratification.) One of the great paradoxes of economics is that people are simultaneously risk averse, and yet have an urge to gamble. There are countless interesting examples of this (now including TH's posts here) but the way to resolve the paradox is to do as I said, and invest the bulk of your assets according to the best financial/economic logic, and then do a bit of "gambling" at the margin (if you are wealthy enough to have assets that you can afford to lose).

The "gamble" that TH is facing is that stocks will continue to rise and he will miss out on it. Then, he'll hate himself and put a bunch of money into stocks just as they experience a drop! If he follows my advice, he shouldn't feel too unhappy with himself no matter what happens to the markets.
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Re: Best place to park cash for 1-?? months
Old 12-26-2003, 05:28 AM   #13
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Re: Best place to park cash for 1-?? months

Hey salaryguru

I think Ted recognizes both fin. purity AND the human condition - I chided him on an old, old post post about about having to be amateur psych. if he wanted to get into the bus.

Checking back, in 1993 it took about six months to get my rollover fully allocated - and I KNEW lump sum was better than DCA due to the articles available then.

And of course, I NEVER EVER time the market - but if something falls into my value zone (cheap?) - a mere mortal looking at a stock chart might mistakenly ho ho ho call it timing.
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Re: Best place to park cash for 1-?? months
Old 12-26-2003, 05:54 AM   #14
 
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Re: Best place to park cash for 1-?? months

Hello unclemick and Ted. You guys are pretty sharp.
Always enjoy your posts, Ted made a comment
about holding money out of the market and then buying in too late, thus "hating yourself" for sitting on the sidelines. As you know, I am always "on the sidelines"
vis-a-vis common stock. Soooooooo, I've missed the bull markets, but also the big drops. Long term
I may not be better off in the big scheme of things,
but I had predictability along the way. So, no regrets. Let me put it
another way. You can show me all day how stocks have outperformed everything else over the long term.
I don't care. I don't have a long term to work with.

John Galt
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Re: Best place to park cash for 1-?? months
Old 12-26-2003, 08:28 AM   #15
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Re: Best place to park cash for 1-?? months

Oh no. Where will it end. First there's the revelation that Ted is a mere mortal with temptations to gamble and not an investment machine. Next comes the even more frightening revelation that John Galt is not a conservative, bond-only investor but is actually the ultimate market timer just waiting on the side line for all these years for the right timing.

What's next? Is GDER really a survivalist living in the desert off of nuts and berries while sleeping in caves? Does Cut-Throat really hate to fish? Is unclemick really a 13 year old girl from Missoula who likes to pretend to be a retired man on the internet?

I don't know if this old fart's heart can take much more.
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Re: Best place to park cash for 1-?? months
Old 12-26-2003, 10:03 AM   #16
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Re: Best place to park cash for 1-?? months

Uh oh, i've become a troublemaker in a short three days

Actually the idea of the human condition including both aversion and attraction to risk is a good one. It keeps most of us (non-darwin award winners) alive and keeps that life interesting at the same time. Heck, otherwise if the slime growing on the edge of the cave opening didnt taste too bad we'd still be living in there.

I'm ok with the risk that stocks (etc) will keep going up. This holliday shopping season stunk. Bill Gross thinks the economy is about to take a downturn and interest rates are heading north soon. We're ripe (god forbid) for another terrorist event. Depending on your choice of measurement we're either fairly priced, somewhat overpriced, or very overpriced. I havent seen anyone say theres a heaping load of good value still in the market. The bargain shopper in me just says "no".

But heres something I've looked at for many years but havent found anyone to yea or nay it. Perhaps this crowd has some thought on it.

Go get a chart of the DJIA or any other lengthy index. The best demonstrative tool for this is internet exploder with the microsoft money deluxe portfolio tool, and the charting function in moneycentral.msn.com.

If you go there, pull up the DJIA and ask for the data from inception, you get a nice chart from 1928 or so. Overlay the s&p500 over that. Both lines are remarkably similar in trend with the s&p500 enjoying higher return rates.

Lets make this easy, take out a ruler or a straight edge of some kind. You'll see that for most of its life both of these indices went on a nearly flat upward trend that is remarkably consistent when viewed over time. No rocket science here, the markets are efficient and our economy has grown through a variety of influences including inflation. Note that around 1983/84-1994/95 the line tips upwards somewhat and then establishes a second, equally steady but more inclined trend. Perhaps this is due to the influence of technology such as personal computers, copiers, faxes, and whatnot improving office productivity, and our consumption of "unnecessary" goods and services increasing. Maybe simply more people in the stock market. Theres a lot of discussion room there to be sure.

Then of course there is the internet bubble and burst. Man doesnt that stand out in a long term chart.

But heres the rub. Take your ruler or straight edge and extend either the pre or post 1984 trend into todays world. Even at the very bottom of the bust we never came back down to even the improved 84-94 trend line, let alone the one that appears to have dominated our stock market economy for 60 years.

So whats the deal?

#1: this is hooey and means nothing
#2: the 84-94 trend line is a true baseline, we blew up over that and never came back to it and we're now building for another bust back down to the trend line
#3: the '28-84 trend line is the real deal and we've got a long way to head down before the market is 'fairly priced'
#4: we've established a 3rd trend line that cant be drawn because of the rollercoaster ride the markets have been in for the last 8 years and we dont know where the 'bounce' should occur.

I think it does mean something. I think the truth lies between #2 and #4...we've established a new baseline, its higher than the 84-94 one, and we dont know what it is yet. I also think we may have bounced off of it or close to it at the recent market bottom.

Which means we're overpriced right now.

I hope theres some interesting dialog on this. This whole thing basically proves out the (solid and good) investment advice and strategies I see here: markets are efficient, highfliers will come back to earth, dogs will have their day, establish a balanced and well diversified portfolio of indexes that charge nearly nothing, do your regular rebalancing as needed, and go fishing.

But the engine has to have a certain RPM in its efficiency.

Bottom line is I think we're having a dead cat bounce here. People have sat around with plenty of cash, things started to smell better, and they got back in. Things headed up and people jumped back in. Will it sustain like the 95-00 boom? I doubt it. The burn marks are too fresh.
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Re: Best place to park cash for 1-?? months
Old 12-26-2003, 10:44 AM   #17
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Re: Best place to park cash for 1-?? months

TH

The debate is endless- circa 1993 the look back charts said foreign stocks were good(dollar peaked in 1985?), US not so well, Japan would be back, gold was a good insurance(5-10%) etc.

Hence the struggle to pick asset classes and rebalance. Berstein's Efficient webstite used to post classes he thought wre cheap but I haven't seen it in a while. I of course chickened out and bought a 'canned' balanced index by the second half of the 90's and plan to explore/consider a 'sliding' asset mix via the target retirement series.

Monte Python or Warren Buffett - still got to play with my hobby stocks - it only takes one or few - Postscript, page 288, The Intelligent Investor. DCA and index funds got me to ER - but putzing is hard wired into my brain.


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Re: Best place to park cash for 1-?? months
Old 12-26-2003, 07:38 PM   #18
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Re: Best place to park cash for 1-?? months

That's a big fish, Cut-throat. Is there a story that goes with it?

And GDER, there are plenty of Juniper nuts and lots of berries out here in the desert southwest. The Hohkam, Sinagua and Mogollon depended on them as a food source for a thousand years before we got here.

But I'm glad to hear that the two of you are what you appear to be. I am getting worried about whether I guessed right about unclemick.
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Re: Best place to park cash for 1-?? months
Old 12-26-2003, 10:43 PM   #19
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Re: Best place to park cash for 1-?? months

Quote:
#1: this is hooey and means nothing
I vote for the hooey option. There simply is no way to predict future behavior by looking at historical prices.

Having said that, Ben Stein has written a book entitled Yes, You Can Time the Market. I haven't read it, but I understand he basically looked at 100 years of historical data and determined that you should buy when indicators are below their 15-year moving averages, and sit on the sidelines otherwise.

Here's an interview:

http://biz.yahoo.com/ms/031024/98312_1.html

Anybody read the book?
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Re: Best place to park cash for 1-?? months
Old 12-27-2003, 03:21 AM   #20
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Re: Best place to park cash for 1-?? months

Since finance and investing can sometimes be a dry subject, its refreshing to see the hilarious senses of humor coming out!!! I'm sure you guys would be a blast at a New Years party despite all the Meyers-Briggs introverts. Cut-Throat, thats a great picture, you look like a young buck, much younger than I was invisioning.

Nice analysis TH. I wonder if overlaying an interest rate chart would provide any additional insight as to the market performance curves?

Also, wanted to throw out the question given whether the market is over valued, fairly valued or under valued; what is the best way to balance out market cyclicals in terms of investing in growth vs value?? I've heard that a style allocation of 60% value/40% growth is reasonable?

Further it seems to me that a few months ago, the Oracle of Omaha was saying the market is over-valued and he was holding a large cash position; wonder if he jumped in or is still sitting on the cash?

Doug
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Doing things today that others won't, to do things tomorrow that others can't. Of course I'm referring to workouts, not robbing banks.
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