Holding or investing?

[sgeeeee]

I notice that there has been a lot of discussion lately about putting money on "hold" and waiting to time making new investments.

Although I did that once or twice early in my investment education, a number of studies and investigations eventually convinced me that this was a losing strategy. So today, I try to stay essentially 100% invested. I might leave money in a money market for a week or two while I do some research and check out my balances with spreadsheets, but I don't park money for longer than that even if I feel the market as overpriced or think we are just around the corner from rampant inflation, etc.

So I'm curious if there are other investors like myself out there and how the "money parkers" decide when to jump in? Do you think that parking has paid off?

[wabmester]

I've been agonizing over this for a while. * Normally, I'm fully invested. *I've only tried to time the market a few times, and I can honestly say that I wouldn't have been able to retire at 40 if I hadn't timed.

I started investing in 1985. * My first taste of market timing was the day after the Oct 1987 crash. *I didn't see any fundamental changes to the stocks I liked, so I bought a lot more on sale. *That worked out well.

Around 1995-1996, I thought stocks were looking expensive, so I sold a bunch of individual stocks and left my IRA alone. *Big mistake both ways. *IRA was heavily exposed to Japan. *Japan dropped 50% in early 90's. *Continued to hold just to have it drop another 60+% starting in 2000. *Meanwhile, US stocks went bonkers.

Started a dot-com as a hobby in 1996. *Sold it in a stock swap in early 1999. *By then, it was abundantly clear to me we were in a bubble similar to Japan 10 years prior. *Sold 90% of my stock by end of 1999 and moved into 60% cash, 40% long-term munis. *That worked out very well.

Moved a bunch of the cash into real estate. *Retired in 2002. *Sold off the long-term munis starting mid 2003 as interest rates seemed poised to take off.

Now I'm sitting on 30% real estate, 15% stocks, 60% cash equivalents *.

I plan to reduce my real estate exposure to about 20% this year. *I'm pretty happy with my stock exposure where it is -- the market isn't as crazy as it has been, but investing through two major bubbles (US + Japan) is enough for me. *I plan to move from short-term cash equivs to TIPS and intermediate bonds if/when rates go up, and then I'll be fully invested again *

* some math wiz is bound to notice that this adds up to 105%. *5% is in an income-generating trust -- the assets are outside of my estate.

[Ted]

If a person is somehow assured of not having to liquidate assets, the investment strategy with the highest probable return is to put all of their money into stocks immediately and keep it there.

The same principle applies to other assets. *The sooner they get their money out of cash and into investments that have more risk, the more they are likely to make over the long run. *

In the real world, however, people always have some chance of needing cash to pay for large expenditures, and so to control their personal financial risk, they should have a portion of their assets in cash and other less risky assets even though it is reducing the probable return of their total portfolio.

For this reason and for reasons of personal psychological comfort, I think that it is OK to "park" perhaps 15% of a person's assets in short-term investments. (If they have suddenly received a large sum of money, it is OK to hold even more of it in short-term investments for a while, to reduce the risk of experiencing a sudden large drop in value that would be psychologically devastating.)

As I have said elsewhere, I think that a short term bond fund is the ideal place to do this, because it (at least Vanguard's) is very liquid and will provide at least enough of a return to beat inflation, with very little risk. The "pay off" to parking money is reduced risk rather than increased return.

[unclemick]

My timing skill since 1966 is less than totally excellent - a minus 2 to 3% vs the S&P 500 over the long haul is my best guess - Although I did have periods of living 'lagre'.

Core (72%) today is balanced index (Vg Lifestrategy) which has a timing element buried in it.

Next biggest is DRIP stocks and timing is selling one to buy a 'better value'

Generally avoid cash unless saving for something specific - and have used and like VG short term corp. if the 'savings period required' is long enough.

[renferme]

you like the Vanguard short term bond fund. It is not available as a choice in my 401k.
What is available is the Vanguard Total Bond Market Index Fund. What do you think of that one ?
The fund contains about 66% gov. mortgage backed and Treasury/agency bonds, a beta of .96 and
r-squared of .98. A vanguard quote: "Interest rate risk should be moderate for the fund because it invests mainly in short- and intermediate-term bonds, whose prices are less sensitive to interest rate changes than are the prices of long-term bonds". An alternative to this bond fund could be what is called the "Fixed Fund",
which I predict will pay about 3.8 to 3.9% this year.
The "fixed fund" is investment contracts with insurance companies backed by investment grade fixed income securities and bond mutual funds.

SG,

I am going to try to stay fully invested and stick to an Asset Allocation of 65 stocks/ 35% bonds.

I have been convinced it is a losers game to try and do otherwise. There are people a lot smarter than me that get burned in the long haul by trying to time things. Having a good plan and sticking to it makes sense to me.

I did buy a bunch of stock the day after the 87 crash and felt pretty smug a couple years later. But in all honesty, if I would have developed an asset allocation plan and stuck to it, I would have come out better and had far less anxiety. In the grand scheme of things the 87 crash was about 16 years ago and totally meaningless today. Anything that we do today will probably be just as meaningless 16 years from now, unless we are still on the sidelines waiting to invest

[wzd]

I am fully invested right now, although I keep thinking I should cut back the stock portion. 72t withdrawals are in a laddered bond, and the rest is stock, resulting in 75% equities, 25% bonds. My emergency cash reserve is a $100k HELOC. Since it is pre-approved, and we have borrowed on it in the past, and paid it back down, I am comfortable using that for emergency funds.

I guess I do a little market timing, since our living funds are from a brokerage account with automatic monthly transfers to checking. The account builds up a margin debt at times when I don't want to sell anything because the stock prices are too low, but I don't let that get very large.


Wayne

[cute fuzzy bunny]

As previously described, I'm concerned with stock price levels against historical averages, and keep hearing that bond death bell noise regarding interest rates and inflation. While sitting on a pile of cash, as a bargain shopper I dont like the options

I put about 20% into various foreign stock indexes. I moved some IRA money out of large cap US into REIT and managed US and foreign small caps.

About 7% is in the short term corp bond fund.

The majority I put into the Wellesley Income fund. Its mostly high quality credit, low end of the intermediate range duration bonds. About 35% is value dividend stocks. The worst down years of this fund arent that bad, and the current income and average appreciation more than fit my SWR and inflation.

I figure the money is "safe" there and does me some good if the stock market continues to wiggle up and continues to pay me better than 2 or 3% on my investment.

Now...should the stock market tumble a bit, say 15%+, although I'd like to see something in the low 20% range, I would move about half of that Wellesley money into mid and large cap funds. Then I'd probably do nothing. If that death bell about interest rates and inflation starts to look a little more imminent (and I dont think it happens this year), and the market is still peaky, I'd probably shift the Wellesley into cash or the short term corp fund.

While it appears quite obviously the opposite, I absolutely dont believe in market timing. I also think we're at a very unusual crossroads with re-emboldened and inexperienced retail investors waving around a lot of cash, weak dollar, high gold, low interest rates, a recovering economy thats not showing all the signs that it truly IS recovering, and monetary policy that appears likely to make things worse rather than better in the next 2-3 years. So while the ebb/flow cant be predicted well by mortal man, making the fully invested index approach the right thing to do 95% of the time over 95% of history, I dont think the next 18 months is a good time for it.

[sgeeeee]

Thanks all, for the discussion so far. Let me add some questions to some of the comments:

TH: What events are you looking for to trigger re-investment in this unusual time? If things get "better" gradually over several years, as opposed to something like a large correction, does it change your plan?

Ted: I'm not sure I understand the difference between what you describe as parking, and establishing a lower risk threshold to my allocation by increasing my bond allocation. I use ~ a 6 year bond ladder along with about 1 year cash/mm allocation to take care of my short term risk aversion. So when I say I'm essentially 100% invested, I mean that I have money in those investments as well as in my other alloction choices. Do you consider that kind of allocation outside of your normal targets?

Wabmester: You mention your existing allocation and seem to imply that you are looking for a time when you might want to change that. Do your re-set your allocation targets on a specific schedule (once a year, for example) or do you reconsider on a continual basis?

TH,

Quote:

I dont think the next 18 months is a good time for it.

I know what you are saying TH and my guts don't like this situation either, but what would you say in 18 months if the Market was up another 25% and the ecomony had actually started producing jobs! If your long term horizon is over 15 years, it probably does not matter when you invest, as long as you do.

I know of a guy that was absolutely convinced that the Dow Jones was headed to the 5,000 Level after the NASDAQ meltdown of 2000-2001. He is still not invested in stocks and is patiently waiting for the dow to hit 5000.

My Grandparents were so convinced that there would be another depression that they continued to save and scrimp the last 30 years of their lives. They both died in the Mid 1980's at ages 86 and 87. And they were right in way - there was a depression for them - because they lived like there was one!

[eytonxav]

I agree that trying to time the market is a crap shoot, and although the logical side of me dismisses market timing, on the emotional side, I can't seem to stop second guessing myself when I make a move that subsequently seems poorly timed.

What would you do given another 911, sell immediately and hope to buy back at lower level or hold pat?

Doug

[unclemick]

A minor 5000 point drop to 5-6000 DOW would be an interesting test for my balanced index funds - especially as interest rates would likely spike at the same time. My back of envelope calc. says a minus 22% overall portfolio drop would equal the 73-4 period(worst post 1946 drop). Something to look forward to - stay the course in balanced index and maybe buy some more 'hobby' stocks. Markets do flutuate - hence all SWR calculations. BTY - I went thru a period 1976-1982 when our 401k 'fixed fund' called GIC's back then at 11% generally beat stocks.

Quote:

What would you do given another 911, sell immediately and hope to buy back at lower level or hold pat?

Doug,

My plan says to hold Pat matter what happens. Takes all the anxiety out of it.

As Swedroe says:

"Bear markets are temporary, Bull Markets are permanent!"

Re. 9/11 revisited, I heard they did a survey recently
that ranked people's worries. A 9/11 repeat was
pretty high on the list, but not number one.
I expect more terrorist attacks in the future. Don't see any way to prevent it really. However, it is not on my
list of things to worry about. Honestly, I never give it a thought, regardless of what level of awareness our
leaders request. The whole Homeland Security
strategy is seriously flawed IMHO. Anyway, I wouldn't make
any changes in anything, no matter what kind of
attacks were launched aginst the USA.

John Galt

[Ted]

Quote:

Ted: *I'm not sure I understand the difference between what you describe as parking, and establishing a lower risk threshold to my allocation by increasing my bond allocation.

In general I don't advocate "parking" money in short term investments, in that it represents a variation of market timing that, if done habitually, will probably reduce long term returns. *(The exception is that it is always prudent to put money into short term investments about a year in advance of planned major purchases.)

But right now, I think that long term bonds represent an unusually high risk. *If people feel uncomfortable in achieving their target "long term bond" allocation through a combination of TIPs, high yield bonds, and REITs (which is what I am doing) then "parking" some of their "long term bond" assets in short term bonds is a safe alternative with a better return than CDs and the like.

Quote:

you like the Vanguard short term bond fund. * *It is not available as a choice in my 401k. What is available is the Vanguard Total Bond Market Index Fund. * *What do you think of that one ?

Except for TIPs, I think that the main advantage that Treasury Bonds have over a diverse selection of high grade corporate bonds (having low default risk) is that they are free of state tax. *But this lowers their return while not providing any advantage within a tax-advantaged account. *Thus, I prefer to hold only corporate bonds (including high yield corporate bonds) or TIPs in tax-advantaged accounts. *I don't think that the Vanguard Total Bond Index Fund includes either TIPs or high yield corporate bonds, but it does contain a large proportion of regular Treasury securities.

Without knowing your complete financial status, I can't recommend precisely what you should do to achieve your target allocation. *However, if a short term corporate fund or TIPs fund is not available in your 401(k) plan, you might consider concentrating your stock holdings in it, while switching some of your stock investments in another account into a short term bond fund or TIPs in that account. *

[wabmester]

Quote:

Wabmester: *You mention your existing allocation and seem to imply that you are looking for a time when you might want to change that. *Do your re-set your allocation targets on a specific schedule (once a year, for example) or do you reconsider on a continual basis?

Because real-estate is large percentage of my holdings, my reallocations are event driven for the most part. If I find a property I like, or some event like a tax auction comes around where I make a purchase, my RE allocation will go up until I sell a property.

I have a love/hate relationship with real estate. It's done well as an investment, and I like that it's a hard asset with both inflation protection and utility value. But I have a big concentration in a relatively small region, which is a big diversification no-no. And then there are liquidity issues, carrying costs, transaction costs, etc.

[cute fuzzy bunny]

Quote:

TH: What events are you looking for to trigger re-investment in this unusual time? If things get "better" gradually over several years, as opposed to something like a large correction, does it change your plan?

In short: where I am now is going to get me "good enough" returns with limited downside risk even if I stay right where I am.

Long answer:

I'm fully invested right now and the Wellesley fund where the bulk of my money sits is about as appreciative a fund with as low a risk as I can find. Look at the numbers for average annual return for 1, 3, 5 and 10 years: 9.6, 7.2, 6.5, 9.5 and since inception in 1970 at 11%. Better 3, 5 and 10 year numbers than the S&P 500. I wouldnt mind staying in this fund for the duration...especially with a .20% management fee (for the admiral shares i'm in). In 18 years its had 3 down years of -4.1, -4.4 and -1.9%...all small and all in years when bonds took a bath and stocks didnt do so well either. With this investment I also dont worry about "another 9/11"...I'm assuming thats going to happen, and more than once. I'd stay invested even though the "experts" and "professionals" advised everyone stay in there and "dont let the terrorists win", then promptly sold their holdings.

You dont get the big run up money, but the returns are steady, solid, the volatility low, and no stomach spinning drops of 20-30%.

Now, if the fed starts humming the "Raising the rates" song, I might divest half of the Wellesley into cash or the short term corporate. Wait out the rate hikes and NAV drops and go right back in after we see 2.5-3% of hikes. If they take 12-18 months to raise rates, I'm still collecting on the bond portion and the dividend portion of my stock holdings until then.

Separately, If we see a 15-20% drop in US equities, I might divest a portion of Wellesley into US mid and large caps. I wouldnt be hurt by the drop much, because only 35% of Wellesley is in stocks and they're cheap value dividend bearing stocks...the ones that wont go down 25%. I think the Dow should be 7500, the Nasdaq around 1550, and the S&P around 850. I thought at the bottom of the downslide that we were almost fairly valued against historical trends. Yeah, I know, its different this time.

If we see a 20-25% drop in REIT values, I might put 20% of this holding into that and enjoy the fatter yields. If we dont see a drop and REITS keep powering up, thats ok, I have a good size hunk of my IRA in them already.

However, in the absence of any major moves or combination of moves, I might stay right where I am indefinitely. About 1/3 of my port is in reits, foreign stocks and bonds, emerging markets and managed US and foreign small caps...pretty broad diversification...so a 5% drop in Wellesley, or even a 7-10% drop wouldnt make me shiver.

ALL THAT having been said, once one or more of these incidents occurs and I make a change, I'm unlikely to fiddle with the assets any further except for re-balancing. Right now I'd like a little more equity exposure and a little more REIT exposure, and I'd like to sidestep the interest rate incurred value drop in bonds at least partially.

[Telly]

Quote:

The same principle applies to other assets. *The sooner they get their money out of cash and into investments that have more risk, the more they are likely to make over the long run. * In the real world, however, people always have some chance of needing cash to pay for large expenditures, and so to control their personal financial risk, they should have a portion of their assets in cash and other less risky assets even though it is reducing the probable return of their total portfolio.

Well that's about where I am.
I am still holding too much in Cash (1-2% returns), CDs, and Savings Bonds. Roughly 25% or so of portfolio. Most of the SB's were bought years ago, with the idea that they would be redeemed tax-free for college expenses. But as my income went up, it ruled that angle out. Now that my income is low, I could start using them soon for college expenses. But now the returns on those humdrum SB's looks good! Gonna keep them for now! And the older CD's have good rates on them, so I'll leave them alone till they expire. Which leaves the cash position. Except for doing a little bit of Roth (probably REIT index fund), all I have open to me is taxable. The TIPS mutual fund that I went into back in May went up, then down, and is wallowing around right where I bought it. I'll leave it as another asset class, but am not thinking of adding to it at this time. TIPS mutuals had been going great, but I think I got in about near the peak. Well, at least I didn't get into GNMA fund, that had gone up so much so fast, I figured if I got into it it would be at the top. So it was. So is that market timing?

Anyway, I am left with the "cash disease". On one hand, the low returns on cash can be a drag on the total portfolio returns. But on the other hand, I'm not losing it. And it does provide the buffer function. I just think it's too much buffer for now.

[unclemick]

In our case "cash disease" is mental - not financial - 87 yr old mom who remembers 'The Great Depression' so with SS (hers) plus my and my girlfriend(for 28 yrs.) two small pensions we have enough to cover 'core expenses' (food,shelter,transportion,etc) for the next twenty years - which would make her 107. I've convinced her to hold about half in Vg Lifestrategy Income for the last ten years but she keeps the rest for when 'hard times' come back.

I wasn't around during "The Great Depression" but a return of "hard times" wouldn't surprise me a bit.
IMHO a little survivalist thinking is not a bad thing.
Remember Murphy's Law? I believe Murphy was an
optimist.

John Galt