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Old 11-09-2009, 09:45 AM   #21
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Welcome to the board, Tim.

You don't have an earnings problem, and you don't have a savings problem. But perhaps you should start thinking about asset allocation before your analysis results in more paralysis.

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Originally Posted by Meadbh View Post
I would have thought that anyone entering the military was not averse to risk (of your life for your country) but obviously there are different views of risk for different areas of your life
Joining the military adds a number of uncontrollable risks to your environment, and the only way to control the total risk is to minimize the personal number of risks you're taking. So the military spends a lot more time on risk management than most professions.

When any of us (civilian or military) cross the street we all risk being hit by a bus. But when a military member cross the street in a combat zone they risk being shot at. Civilians don't have to cross streets in combat zones but military don't have much of a choice, and veterans tend to adopt a slightly more conservative approach to street-crossing. However we all eventually have to cross a street somewhere.

Unfortunately the risk-management techniques learned in combat zones can also lead to a tendency to try to avoid or control risks that really aren't very amenable to either. Outside of a combat zone, those risks can be deemed acceptable through hedging.

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Originally Posted by timwalsh300 View Post
I mentioned that I'm risk-averse. It may actually be a product of my age, ironically enough. Already, during my lifetime, there have been no less than four legendary market crashes: 1987 (Black Monday), 1990 (Nikkei), 2000 (Dot Com), and 2008. I've been watching what this does to people. As a result, I think I've grown up valuing peace-of-mind over prospects of spectacular wealth. My fiancee is of the same opinion.
As you've pointed out, bad stuff happens.

But are we really all so egocentric as to think that our generations have the worst investing climates? For my age group I'd add in the zero-returns decades (1966-1982), runaway inflation of the 1970s and early 1980s, and the 1973-4 oil crisis. Older folks would add in the Korean War's influence on the market, WWII, and the Great Depression.

Seems kinda parochial to claim that earlier generations had all the good investment returns and that there won't be any good returns for the rest of us. "Reversion to the mean" works both ways. Maybe instead of claiming that we'll be "paying back" the great returns of the 1990s for a few more decades, maybe the 90s were a "reward" for all the bad years before then. Maybe in a few more years we'll be seeing another set of great returns to make up for the last decade. Do you really want to have a 100% cash asset allocation for the next decade?

You're perfectly willing to believe that you could lose 30%, 50%, or even 80% of your money. If that's what you truly believe then you should invest in MREs and gold bullion-- and maybe a Bobcat excavator to bury them. What about the huge returns of the last six months, let alone the cumulative returns of the next six decades? What about the 65% chance that the market will go higher over the next 30 years?

The point you're making is that the longer you stay in the stock markets, the more bad things could happen to you. You're right. But you're also ignoring the good things that could occur the longer you stay in the market, and in the history of humanity more good things have happened than bad. You also can't see the bad results of NOT being in the markets, so you're not worrying about them. You should be worrying about them.

I agree that WWII allowed the U.S. a (hopefully) unique opportunity to "take advantage" of 25 years of competition-free environments while the rest of the word had to focus on staying alive. I agree that it's difficult, maybe impossible, to predict future returns from history. But you could consider that corporations tend to grow their profits at about the rate of GDP, and to generally keep up with or even exceed inflation. Even the pessimistic Gordon equation predicts 4-6% returns for the next few decades.

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Originally Posted by timwalsh300 View Post
That said, I understand all the arguments for long-term equity investing and I have been giving it a try until just recently. I started a Roth IRA in early 2008 and have contributed the max of $14,000 thus far. Today the account balance sits at $11,222, having cashed out last week in anticipation of another big correction. This experience taught me that I'm even more risk-averse than I thought. I found myself constantly checking Google Finance, reading business and economic news, screening for different stocks and funds, and wanting to tweak my portfolio. It's been a good education but I'm afraid that this is no way to live the rest of my life.
I'm not going to try to change your mind about this one, but I'll point out that successfully predicting a string of short-term corrections is a game you will begin losing all too soon. You're focused on a "big correction" during the same week that Buffett went "all in" to make the biggest acquisition of his life eight-decade lifespan. Why would you focus on the bad things when he's focusing on the good things? Which one of you has the lifetime experience to make credible predictions? If you're so good at predicting the corrections, shouldn't you be equally good at predicting the big upward moves as well?

Making the wrong prediction (or making it too early) will cost you far more in missed opportunities (while you pay far more in short-term taxes) than it could ever cost you in market losses. But again you can see the market losses better than you can see the missed opportunities, so it's easy to focus on the bad things while overlooking the good.

Conventional wisdom says that, for those of us who aren't Buffett, we should avoid predicting the short-term moves and focus on the long term. We should avoid dodging every single risk that's out there and just avoid the risks that we can personally control while hedging the uncontrollable ones. In your case, you could avoid hyperactive asset management and overtaxation by finding an asset allocation you can live with. Bernstein's "Four Pillars" book is very good at tailoring allocations to risk tolerance so that you can sleep at night, knowing that some good things are happening along with all of the bad stuff.

If you're going to worry then you might as well worry constructively. The noisemakers you're listening to now make their income by encouraging you to react to the short term instead of planning for the long term. Lay off the short-term deadline journalism, the stock screeners, and the Chicken-Little media for a while. Read Bernstein's latest books on the history of trade and the birth of plenty. Read Dimson & Marsh's "Triumph of the Optimists" and Milevsky's "Are You A Stock or A Bond?". Read about asset allocation in Bob Clyatt's "Work Less, Live More" and "The Boglehead's Guide". The more you learn about asset allocation, the sooner you'll adopt a more balanced perspective to market behavior.

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Originally Posted by timwalsh300 View Post
I've begun to think that maybe it's just not necessary in my case. I estimate that I'll earn a little less than $2 million (in 2009 $, "regular military compensation") over the next 20 years, plus whatever my soon-to-be-wife earns. After that I'll be eligible for military retirement benefits. It appears that we could retire before age 45 to a modest yet comfortable lifestyle by saving ~25% of our income over the next 20 years, even if our savings grows merely at the pace of inflation. That could give us at least $500,000 in the bank along with my pension of ~$45,000 per year (both in 2009 $) - enough to make early retirement an option without losing sleep at night over fears of seeing our savings wiped out.
With bonuses, higher allowances, promotions, and pay raises your number is actually more like $2.5-$3 million. Unlike most of this board's ERs, if you retire on a military pension in your low 40s you can look forward to at least four decades of inflation protection and cheap healthcare. In other words you've already hedged away the two most devastating risks to any retiree. Maybe it's better to focus on those achievements and not be overly concerned about black swans & meteor strikes.

You're right about the income and the savings.

If you don't need to take the market risks then why torture yourself?

Well, here's a few things to consider:

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Originally Posted by timwalsh300 View Post
I'm curious to hear what you all think of this as a plan. Am I making any serious miscalculations? Has anyone else gone down this road and regretted giving up the chance for more capital gains and a more lavish lifestyle? Or does anyone wish that they had done this themselves?
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Originally Posted by timwalsh300 View Post
Thanks to everyone for the replies. I'll address a few points now...
1. Call me a fool, but I'm already signed on for 10 years; even more if I exercise certain options in my contract. How many people get through 10+ years but opt out before 20? I don't know.
Speaking of risk and staying in the markets for a long time, what about the risk of having a really really bad tour sometime during your 20-year career? As any of the dozens of military veterans on this board will tell you, it's not a risk-- it's a near certainty. In addition, your priorities will change over the next 20 years as you age and mature. You eventually will find significant conflicts between the way you want to live your life and the way you're being asked to live it.

When (not if) that situation occurs, it would be nice to have choices. The choice to have a parent stay home and take care of the kid(s) or aging parents. The choice to leave active duty for the Reserves. The choice to totally leave the military and become a civilian. The choice to pursue what you belatedly realize are your true interests. The choice to live your life when it needs to be lived instead of putting it on hold for 20 years and hoping that you survive to pick it up again in retirement. The choice to not risk a stress-induced heart attack as an O-5 (there's an Army program for this!) and have to completely redesign your life.

You might not actually NEED any of those choices, but it's a huge mental relief to HAVE them.

In my case the really really bad tour(s) occurred right after I'd incurred a four-year obligation (years 8-11). I gutted it all out but it was very ugly and, in retrospect, I was nuts from the stress. In retrospect I would have been much happier in the Reserves and the resulting retirement would have been about the same. In reality I was too ignorant about the Reserve opportunities (let alone the civilian ones) to have the courage to make the leap.

A few years later spouse had a bad tour of her own. Luckily she didn't have any obligations and was able to transfer to the Reserves-- just short of 18 years. She wouldn't have had the courage to make that decision (and to forego $750K-$1M of pay/pension) if she hadn't educated herself and if we hadn't achieved nearly 20 years of stock-market index returns.

So that's why you want to take a bit of risk with your investments-- to give you choices when you really need to be able to make a choice. It doesn't have to be an insane risk on 100% small-cap telcoms. Instead it should be a diversified asset allocation, perhaps 50-50 stocks/bonds or even 30-70, that lets you take comfort both in the knowledge that you're avoiding big losses while giving your portfolio a margin of safety for the rest of your life's events.

[I'm going to conclude this post in a second part. Stupid vBulletin posting limit!]
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Old 11-09-2009, 09:46 AM   #22
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Originally Posted by timwalsh300 View Post
2. The possibility of the pension going away is a real concern, however remote it may be. That would be the equivalent of losing maybe $2 million in lifetime income. I think that regardless of our investment strategy we'd have to continue working until "normal" retirement age if this happened.
Speaking of "bad things", the military tried this in the 1980s with the original version of REDUX. Retention plummeted so quickly that the JCS persuaded Congress to backpedal to the current "Career Status Bonus". I don't think it's likely to happen again, and even if it does you've correctly pointed out that it will only take you a few more years of civilian employment to make up the difference. But having watched a few swings of the pendulum, I don't see any big changes to military pensions for those already in the service.

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Originally Posted by timwalsh300 View Post
I wouldn't lose sleep over a potential 10% or 15% dip in NAV. I'm only worried about the 30%, 50%, 80% losses (which I've been conditioned to expect) and the possibility that we are in a secular bear market similar to what the Japanese have experienced for the last 20 years.
I think that a detailed comparative study of the American and Japanese markets-- corporate behavior, financial regulation, and government management-- would reassure you that it's far less likely to occur here. The Japanese crisis was founded on significant corruption and a lack of political will that makes the U.S. Congress look like a bunch of sober Jeffersonian accountants. And the Japanese example is a potent warning to enable America to avoid repeating their experience. But you have other things to read up on before studying this situation.

Here's what I think you could do right now:
- Max out your TSP and your IRAs. All of that money is available when you need it, before age 59.5 and without penalty, via 72(t) withdrawals or, in the case of Roth IRAs, contribution withdrawals. If you don't feel comfortable doing that then put taxable money in bond funds or CDs for a home down payment or a kid's college fund. The TSP's world-beating expense ratios, even lower than Vanguard, make this too good an opportunity to pass up.
- As W2R ("Just2Retired?") has suggested, while you're learning more about asset allocation you could stick with the TSP's "G" fund and put your IRAs in short-term bond funds or CDs. Then you won't feel (too much) pressure to act.
- Read up on asset allocation and design one that you can live with. It's an iterative process. The AA you decide on today will go through some tweaking over the next 10 years, but the tweaking will be done because you've learned more and feel more confident-- not because you're scared of the markets.
- If you decide that you're truly uncomfortable with stock-market volatility (the risk of loss) then consider dividend stocks/funds, REITs, and landlording rental real estate. The third is a lot more challenging than the first two but they all produce relatively steady streams of income that will help you stop worrying about the actual price of the asset.
- Put a safety valve on your asset allocation. Decide ahead of time that IF the market sets a new high for six months, or if it gains 20% in a year, or if it does some other outlandish woo-hoo! result, THEN you're going to cash out 3-5% of your investments. Taking a little off the table could make you feel better when things revert to the mean. Do this on the other side, too-- if the market sinks to a new low, or loses 20% in a year, or otherwise makes you filled with fear, then raise your savings rate and put even more money into buying shares at rock-bottom prices. In other words, "value average" by putting more money into the losing assets of your allocation when they're cheaper.
- Keep saving. You don't have to change anything on this regard, but watch out for lifestyle creep. If you save the pay of every promotion and live as if you were at one rank lower then you'll be far ahead of your fellow officers.
- Think about what you'd do if you couldn't stand being in the military for another 10 years. That'll help you sort out your life priorities (not just your career priorities) and it'll help you focus on keeping choices available to you.
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Old 11-09-2009, 10:27 AM   #23
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My truly risk adverse suggestion:
First put your Roth IRA money in 7yr CDs at PENFED at 4%. This should preserve your capital+, as long as inflation averages less than 4% over the next 7 yrs, since it is NOT taxed inside the Roth. Max out your contributions for this year & next in these CDs.

Next purchase I-Bonds, 5k at e-treasury and 5k paper for you and your fiance' this month and then again in Jan. Your capital will be preserved for up to 30yrs at inflation rate + .3 minus fed taxes on the total interest when you cash in. (40k total)

TSP: When your marginal tax rate exceeds the current bottom-tear 15%, put the excess amount into TSPs G-Fund(up to limit). Since this is pre-tax money, it & earnings will all be taxed at your marginal rate when you begin to withdrawal them. I doubt you will ever get any lower than current 15%, so putting money which would be taxed at that rate into an account where you will likely be taxed at a higher rate later is iffy at best...
IF you ever start to feel wild and crazy move 10% of TSP$ to the C-Fund when the market appears sufficiently 'beat up'... Since your exposure is only 10% - losing half would only drop your TSP 5% and earnings on the G-Fund will likely make up most if not all of that. So you'll be able to see the amounts preserved - perhaps NOT when inflation is considered - but it is reassuring to see the total rising rather than wildly bouncing up & down. Perhaps moving another 10% of the G-Fund to C-Fund on the downturn would help when/if the stock prices come back. NOTE: any losses in this account are fully tax deductible - since you can't withdrawal it to be taxed, if it isn't there.

After tax money remaining: PENFED 7YR CD at 4% looks to be fairly safe for your longer term savings. Should the rates go up, you can do the math to see if early withdrawal penalties can be made up by the increased rate. Buying additional CDs at regular intervals will lead to some laddering of maturities.

At some point in time you and/or your soon to be spouse will spot some companies at work or home that provide exceptional products or services. If it is publicly traded company and isn't being sold at too much of a premium to it's overall value buy some in a discount brokerage account. NOT a lot just a grand or two something you won't worry about nightly. Hold on to it until you feel they NO longer provide exceptional products OR they are selling at a premium too high to value. Don't worry if you miss a top or a bottom in price. IF you find, you(or spouse) have knack for this start trusting your instincts, who knows maybe you'll be the next Buffett. IF not, there are many stock, etf, mutuals, which can give you diversified stock exposure at relatively low trading costs. You can start with 10% exposure and then precede from there as you feel more or less comfortable. Splitting your savings 90/10 when you feel values justify. If stocks do well, you could achieve an 80/20 portfolio ratio and this would obviously be a good thing -- as long as you don't see another bubble about to pop. Cashing in those winnings and placing them safely in CDs/treasuries etc. should keep you from feeling the agony of defeat when it happens again. Look forward and try NOT to be a daily stock tracker or balance checker.
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Old 11-09-2009, 10:33 AM   #24
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You should consider DCA that $90k into Wellesley Income over the
next 3 years and get on with your real life. At 7%, that could double
every 10 years and give you a tidy nest egg of about $360k in 20
years without adding anything extra to the pot. There will be ups
and downs, but 20 years is a long time to let the pot grow.

The problem, of course, is that few people can exercise the dicipline
of letting the pot grow without dipping for "emergencies" like a college
education, new homes, etc. Perhaps your extra savings over the
next 20 years should be allocated toward saving for the inevitable
and necessary big expenses in life. Make sure those savings are
in short term assets like CDs, MM funds or other short term "safe"
investments so that they will be there when you need them and
reduce the temptation of tapping the mother lode.

May God bless you and your service.

Cheers,

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Old 11-09-2009, 03:31 PM   #25
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Nords....

Just a point from me on your long post... you seem to infer that Buffet is in for the short term and is timing the market... from what he says (and even said when buying the railroad), he believes in America... in the long term... so he is not worried in losing in a short term, but wants to earn in the long run...

This is what I think you are trying to tell the OP... that the long term is the way we should be investing...
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Old 11-09-2009, 03:52 PM   #26
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Nords....

Just a point from me on your long post... you seem to infer that Buffet is in for the short term and is timing the market... from what he says (and even said when buying the railroad), he believes in America... in the long term... so he is not worried in losing in a short term, but wants to earn in the long run...

This is what I think you are trying to tell the OP... that the long term is the way we should be investing...
Do either of you or anyone else understand why he's paying a 30% premium on the price he could have bought the stock for before he made the buyout offer?

It's like going to the store and TVs are on sale -- SO you say I'll take them all - if I can pay 30% extra?
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Old 11-09-2009, 03:56 PM   #27
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Do either of you or anyone else understand why he's paying a 30% premium on the price he could have bought the stock for before he made the buyout offer?

It's like going to the store and TVs are on sale -- SO you say I'll take them all - if I can pay 30% extra?
Rumor has it that BNSF mgmt thought the offer was too low...
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Old 11-09-2009, 04:04 PM   #28
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Rumor has it that BNSF mgmt thought the offer was too low...
Sure say that after the price goes up to within a penny of the offer... But if he kept buying it at the old price - without all the hoopla - he could have had a lot more for a lot less.
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Old 11-09-2009, 04:46 PM   #29
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Do either of you or anyone else understand why he's paying a 30% premium on the price he could have bought the stock for before he made the buyout offer?

It's like going to the store and TVs are on sale -- SO you say I'll take them all - if I can pay 30% extra?

Kind of off subject here.. but hey, we have hijacked many a threads...


IF you want to buy a company... the whole thing... then you have to induce all of the holders to be willing to give up their shares... paying market price is not enough to get everyone on board...

Also, you want the management to recommend that this is the 'best' they can expect. Either that our you go 'hostile'... a hostile bid is usually not good for either party....

And the SEC has rules about your intentions... I am not schooled in the rules, but I believe if you own 5% of a company, you have to follow certain rules on buying stock... so everyone knows what you are doing... he can not buy 20% of the company on the cheap and then offer the premium....


As for the bid being to 'low'... Yahoo holders found out that sometimes it is better to take what is offered than to push to hard... especially if there is only one buyer making a bid...
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Old 11-09-2009, 04:58 PM   #30
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Sorry about that Tim - we relinquish your thread to it's previous stated objective - risk adverse investing -
I try to buy stocks, w/o paying a 30% premium over price whenever I can.
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Old 11-09-2009, 05:28 PM   #31
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Tim,
A great OP with good questions. I can't add much to the great advice/points-to-ponder you've been given by Nords and others. But, here goes:
-- I'm in almost the exact situation you anticipate you'll be in when you retire--our retirement is based on the USAF retirement check every month and the money we saved. I retired from the USAF about 5 years ago, so I'm still relatively new to this stuff. My AA is approx 75% equities, 10% cash, and 15% bonds. Why are we so heavy into stocks?
--- It's not that we are trying to get rich. As you have observed, we don't need to hit a home run, we just need to consistently stay ahead of inflation. You've got a long time horizon ahead of you, and stocks have a long track record of providing the type of growth (not steady growth, but growth) that stays ahead of inflation to a degree that will allow a reasonable withdrawal rate (3-4%).
--- Because we can. As I see it, the relative stability of our pension takes the place of a big chunk of cash/bonds in our AA. If the market crashes and we lost every nickel, I'd cry a lot but we could get by. We'd eat a lot of beans and bread, but we could do it. Conversely, if Uncle Sam gave me that retirement pay as a lump sum, I'd probably have to invest it in something with a very stable value (even at lower returns) to get the same stability. While pay in the military has gotten a lot better than it was 40 years ago, you still won't get rich, and pay lags the civilian sector in most areas. Your pension helps compensate for this. You'd probably have more money to plunk into a 401K if you worked in the civilian market. And, you'd need to put more of it in conservative investments because you'd lack the COLA'd retirement pay. In my case I believed that I could afford to take the risk of being in stocks, and that I needed to do it.
--- To diversify risk: There's a potential that the government is gonna owe a lot of people a lot of things over the coming decades. Taxes are probably going to go up. Some benefits are going to go down. So, if the promises aren't kept in their entirety, it's good to have a robust alternate source of monthly income. If you "play it safe" in your earning years and give up the higher yields historically offered by stocks, you may not be able to generate that make-up monthly income. I agree that stocks don't appear to be cheap right now--and you can try your hand at market timing if you like. It didn't work for me, ad it doesn't work for most people.

As Gumby mentioned, your ideas on how much cash you'll need may change as you get older. Mine did. Kids, college, hobbies, house, travel. I've still got one foot in the rat race as a result. We could get by without the extra income, but we choose not to. If I'd selected a more conservative investment philosophy over the last 25 years, we'd have fewer options.

Put the money in good investments and don't obsess over it. I scarcely looked at my stash over a period of 20 years, I just did my annual rebalancing. All the money came out via payroll deduction and I never missed it and we barely thought about it. Lots of dps in values and meteoric rises--just like the book said we should expect. If I'd tried to time things and make daily adjustments I'm virtually sure we'd be worse off now.

I realize that some of these points contradict others (e.g. if the government might not keep their promises on my pension, doesn't that mean I should take LESS risk with my nest egg?). I don't attribute this to faulty reasoning, but to a valuable ability to diversify my logic strands so that they have negative correlation with each other.
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Old 11-09-2009, 06:29 PM   #32
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Nords....
Just a point from me on your long post... you seem to infer that Buffet is in for the short term and is timing the market... from what he says (and even said when buying the railroad), he believes in America... in the long term... so he is not worried in losing in a short term, but wants to earn in the long run...
This is what I think you are trying to tell the OP... that the long term is the way we should be investing...
My editing window is closed out on that post. I'm trying to imply that Buffett pretty much ignored all the doom&gloom and went way long, including borrowing $8B over the next three years, to buy a business that most would regard as hopelessly second-millenium. Yet he's probably sleeping soundly at night.

He's already obligated to the long term-- 10 years!

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Why are we so heavy into stocks?
Because we can. As I see it, the relative stability of our pension takes the place of a big chunk of cash/bonds in our AA.
Years of considering that question, and still that's about the best answer I can come up with.

The value of the steady military paycheck, the COLA pension, the cheap healthcare... it all adds up to a huge slug of gilt-edged government bonds in any retirement portfolio. Putting the TSP, the IRAs, and the taxable investments into 100% stocks would still be less than 30-70 stock/bonds overall. And if there's home equity & rental real estate then the stock percentage is even less.

Maybe we should just pay ourselves $100,000/year and donate the rest of our investment portfolios to the Gates Foundation over the next 20 years. Then we could spend 14 hours a day reading about investing and playing bridge over the Internet...
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Old 11-09-2009, 06:33 PM   #33
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"How many people get through 10+ years but opt out before 20? I don't know."

I did. Left at the 7 yr point. Tried to get a job in my field in the civilian world but timing was off and reentered the AF with the idea of going to retirement. After 4 more years could not stand it and made another exit. This time was able to get hired by a major airline, never looked back and took early retirement last year.
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Old 11-09-2009, 06:40 PM   #34
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I have to admit I agree with Sam theoretically, but it is definitely the throw the kid in the deep end and see what happens approach to learning to swim.
You could simply put everything you have and every extra dollar you ever earn into the market and then just suffer the slings and arrows of outrageous fortune. Because you have an expected pension in ~18yrs. that will serve as your life preserver, no risk is too great... You asked how much risk you need to take and the answer is you probably don't have to risk anything OR could risk everything if you wanted. Like Sam, I already have my pension and could loose all my investments and still survive quite comfortably (thank you). But I don't need to - Bill gates won't be getting donations from me...
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Old 11-10-2009, 01:28 PM   #35
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Originally Posted by samclem View Post
--- While pay in the military has gotten a lot better than it was 40 years ago, you still won't get rich, and pay lags the civilian sector in most areas. Your pension helps compensate for this. You'd probably have more money to plunk into a 401K if you worked in the civilian market. And, you'd need to put more of it in conservative investments because you'd lack the COLA'd retirement pay.
Actually, I am amazed at how much parity there is in pay now - I am a Reservist and have a civilian job (well, now I'm self-employed). The military compensates quite a bit tax-free that is not compensated on the outside. Add in the ability to have TSP plus the pension, and it's hard to beat.

I second Nords post regarding assessing what you want in your life. Some people are cut out for the military and some aren't. Some are better off part-time and some full-time. Know yourself and you'll be able to make better decisions. AA is important and you do see how different streams of income and where they come from are part of your AA - a COLA'd pension is similar to holding bonds or some other conservative investment, so then to balance, one would allocate some of their resources into more risky ventures.

The key, though, is to save money and live below your means. Even if you don't retire until a normal age or later, you will still have the peace of mind regarding finances that others who don't live below their means have---the ability to cover and emergency, do something they want or walk away for a bit of time without stress. The ultimate is financial independence, but getting close counts, too.

Good luck with your decisions.
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Old 11-10-2009, 02:41 PM   #36
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Thank you all again for the replies. Special thanks to Nords for that remarkably in-depth response.

When I opened a Roth IRA in early 2008 and tossed in my first few thousand dollars my attitude was, "Why not just put everything into emerging markets?" Perhaps a little too aggressive... Since then, extreme market volatility and the realization that I have increasingly more at stake is what made me backpedal. All the replies here tell me that now I've probably let the pendulum swing too far in the other direction.

The most convincing argument that several of you have given is essentially that "risk" doesn't always mean "volatility." A portfolio with only bonds is probably less volatile than one which includes stocks, but it may put us at an even greater risk of losing purchasing power (and thus failing to reach our financial goals). I ran some numbers and found that this has indeed happened before: from 1976 to 1982, when interest rates were rising, the real return on bond funds was about -3% (annually) while the real return for the S&P 500 (with dividends reinvested) was about +1.5%.

I'll have to think more about the precise asset mix that is appropriate for us, but I'm willing to accept that balance and diversification are necessary to truly manage our "risk."

Now I have some other questions I'd like to discuss, some of which we touched on here, but I think I will start a new thread for those.

Tim
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