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Investment Philosophy
Old 08-23-2015, 04:55 PM   #1
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Investment Philosophy

Broad, broad subject. Prompted by a wide ranging discussion with a 65 year old friend who successfully handled the last market downturn.

Not a questionnaire, a poll, a test, or even needing a response. Simply an iteration of some of the points I see here on ER, and food for thought.

Individual Broker or Investment Management Company? Yourself?

But that's just the beginning. With your entire financial future at stake, it's almost impossible not to be influenced by other factors, other people, other "philosophies", other experts... and history, world events, media news and opinions... personal confidence, personal finances and not the least, peace of mind.

If you were to explain to friend who does not actively "invest", how you decide to handle your own finances, what would you say? What should he/she look for when investing for the future, assuming they are in a situation similar to yours.

A short list of considerations:

If entrusting someone to invest for you, (person or company) is it based on current performance, recent performance, or long term (years) performance.

History? As in long term market performance, but also for riding trends and successes. What about charting? Do you follow this, or is it more of an afterthought... a validation of someone's predictions?

Buy on recent performance, recent news, expected performance "edge", or more on proven results. Do company "books"... (registry and statutory ledgers) enter the decision, or is this taken for granted when using an advisor.

Balanced investing? High Risk? Conservative? Ultra conservative? Cash?
Does this change with the market?

Leverage? This could take many forms... would, will, should this be an option? ... and if so, how? Leverage being the use of monies that could be used in other means... ie; Cash reserve, early withdrawals, mortgages or loans.

Macro/micro view? Does the market rest on real value or relative value? Other US stock values? International markets, and value relative to global
economies? All of these of course, but how big a factor?

How important is the action of the FED? How "safe" is the FDIC safety net?

Share the name of a trusted financial Guru?

Maybe just as important as any of the above... Avoid the hype of individual commentators on the media, or on financial websites?

Assuming a correction... hold and ride it down? Out at DJ 15K? 13K?
10K... And theoretically out at what point and back in at what point? Alternatives... Bonds? Cash? Gold? And then... short term? long term?

You can surely add many more considerations and "ifs"... If the market bounces back 500 points on Monday, today's thinking will go away, at least for the moment, but the longer term considerations will still be there. Loss is always balanced by opportunity... somewhere. Hearing about this would be especially interesting.
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Old 08-23-2015, 06:10 PM   #2
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I'd say you were making this way way way too complicated.

Do-it-yourself with passively-managed low-expense-ratio index funds in a simple asset allocation of US stocks, foreign stocks, and US bonds based on your risk aversion needs. Then buy, hold, and rebalance occasionally. Ignore talking heads, economic news, and other noise.

Monday is probably going to be a down day based on current futures markets.
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Old 08-23-2015, 06:19 PM   #3
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I'd say you were making this way way way too complicated.

Do-it-yourself with passively-managed low-expense-ratio index funds in a simple asset allocation of US stocks, foreign stocks, and US bonds based on your risk aversion needs. Then buy, hold, and rebalance occasionally. Ignore talking heads, economic news, and other noise.

Monday is probably going to be a down day based on current futures markets.
Exactly, if you have a good AA, sit back and enjoy the show.
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Old 08-23-2015, 06:37 PM   #4
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I think unclemick has this one figured out.
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Old 08-23-2015, 06:48 PM   #5
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I consider investing to be like physics; there's a lot of attention paid to quantum weirdness, but most of us just need a fundamental understanding of mass, inertia,etc., especially if we're going to drive...

I personally feel it's a shame we can't find a way to tolerate interest rates sufficient to allow the majority to save using usury instruments. A very straightforward way to manage inflation erosion, IMHO. My late dad, a bank branch manager, managed to secure his and my mom's retirement with CDs and a bit of rental income before the bottom fell out of interest rates. He played with a few stock investments, but never in a way to expose his nest egg to that category of risk. I've thought long about how to teach 'regular' folks about equity investing, but I can't find a straightforward way to explain the concepts of equity risk. Keep in mind that when you hang out with like-minded people, it can be difficult to understand why others don't understand you...

All that said, I personally think long-term value investing using dollar-cost average contributing is the easiest thing to explain, and practice, with the lowest risk.
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Old 08-23-2015, 06:49 PM   #6
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For those folks who don't want to do any of this "self investing" stuff, like my both my children, then they can just direct their 401k/IRA/etc contributions to a target date retirement fund which will do all the rebalancing and changing of AA over time. Eventually the target fund will be moved into a lifestyle income fund.
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Old 08-23-2015, 07:52 PM   #7
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Here is my investment philosophy: Most "professionals" in the investment world are out to make a buck, and a surprisingly large number of them would rather make money for themselves than provide the best possible service to their clients. Having trained as a professional financial adviser myself, I know from the inside what kind of production pressure many of them are under, as well as what kinds of tricks they are willing to employ to keep their clients dependent on the service, as well as ignorant to what is really being done with their money.

While a very few lucky people can make above average returns for a short while, almost no one can make above average returns consistently over the long run and trying to do so will eventually result in failure. Most of the financial industry exists for the purpose of convincing retail investors that this is not so, and they need high priced products and advisers to "help" them.

My biggest need from investing is not to fail. Getting a consistent average return will beat most investors and allow me to reach the FIRE I want to. I do not need to "win" with the highest returns, I simply need to not lose by taking unsustainable losses.

Passive investing with low cost vehicles and simple diversification gives me the best chance of investment success, and I am willing to be very very patient while that happens. Stay the course. Avoid panic. Trust the math. Do not trust the "professionals" or their emotional appeals. Emotional investing is almost always losing investing. Never invest in complicated schemes I do not understand.
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Old 08-23-2015, 08:47 PM   #8
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Buy/hold/rebalance. Yawn...
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Old 08-23-2015, 10:22 PM   #9
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Balanced investing? High Risk? Conservative? Ultra conservative? Cash?
Does this change with the market?
We're pretty conservative with our portfolio. We have an investing philosophy tracking pretty close to one described in The Millionaire Next Door and follow up books - we made most of our net worth through our vocations, businesses and living below our means, and invest more for capital preservation rather than growth. We follow mainly a matching strategy similar to the one described in the Bogleheads wiki for retirement income planning.
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Old 08-23-2015, 10:26 PM   #10
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My biggest need from investing is not to fail. Getting a consistent average return will beat most investors and allow me to reach the FIRE I want to. I do not need to "win" with the highest returns, I simply need to not lose by taking unsustainable losses.
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Old 08-24-2015, 11:41 AM   #11
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My biggest need from investing is not to fail. Getting a consistent average return will beat most investors and allow me to reach the FIRE I want to. I do not need to "win" with the highest returns, I simply need to not lose by taking unsustainable losses.
An investment manager I worked with described his firm's methodology as "looking for consistent doubles, not home runs", using principles of low cost investing, no market timing, appropriate asset allocation and rebalancing. I'm glad the principles were simple, easy to learn and I've had 35 years of practicing them in the accumulation phase. I have no intention of doing otherwise in my spending phase.
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Old 08-24-2015, 12:21 PM   #12
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We've kept our expenses low by keeping our 401k money in index funds which provide diversification. We've also learned that by investing after tax money into a few concentrated growth stocks of profitable companies you can make some serious money, as long as you take some off the table along the way to diversify (just in case). We are slowly moving most of these growth stocks into dividend stocks to provide income. We also keep several years of living expenses in CDs and savings accounts to ride out a down market. We avoid bonds, letting the CDs balance the asset allocation, since long term bonds can't appreciate the way they have the last 35 years, but can depreciate. We have also had rental properties for twenty years, but are down to just one left which we plan to sell when this tenant decides to move. We've never paid anyone to manage our money, though we have done a financial plan with a Certified Financial Planner. it's working for us.
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Old 08-24-2015, 04:58 PM   #13
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Yeah I think you're focusing on the less critical things and missing the most critical which are
1) taxes
2) fees
3) personal expenses

Let me give an example... Let's say you you buy a coffee every day and have lunch 3 times a week. That's about 25$ for coffee and 45$ for lunch.So 70$/week.

That's about 3600/year. At a 4% withdrawal rate that requires about 90k in investments.

So cutting those expenses is equal to a 90k increase in liquid net worth.

Taxes work the same way and expenses are even more insidious because you don't even eat them or get paved roads .

So I'd do the math on your fees and taxes... Then look at your lifestyle and see what % of any return that chews away.

The best way to minimize thatbive found is to simplify. Mostly low cost vanguard ETFs. Then cut one expense you don't need (e.g. make vs buy coffee) and you probably beat most things you could do with all the complex investing strategies and with 0 risk .



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Old 08-24-2015, 07:08 PM   #14
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For those folks who don't want to do any of this "self investing" stuff, like my both my children, then they can just direct their 401k/IRA/etc contributions to a target date retirement fund which will do all the rebalancing and changing of AA over time. Eventually the target fund will be moved into a lifestyle income fund.
What he said.
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Old 08-24-2015, 07:54 PM   #15
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Not sure we have an "investment philosophy" per se. During the accumulation phase, we maxed out tax-deferred savings and lived on the rest. Everything was 100% equity index funds, with a couple periods of market timing/technical analysis and mixed results. Once ER'd, we diversified into bonds and real estate for stability and we keep some cash lying around. But we're now plain-vanilla DIYers... buy & hold, rebalance, low cost, tax efficiency, ignore the noise.

One thing we did that might be considered a "philosophy"... we didn't want to rely too heavily on portfolio withdrawals and market performance to pay the monthly bills, especially in early stages of retirement. So DW and I both elected the annuity option on our pensions, and we used funds from the taxable account to pay off the mortgage and buy two rental houses. Our expenses are now 70% covered by pensions and rentals, and another 15% from taxable dividends. Our withdrawals are extremely small (zero with SS, later), and our modest cash allocation could last several years.

We sacrificed some upside potential by paying off the mortgage and not taking pension lump sums. This also puts us in a less favorable tax situation with very little room for Roth conversions and no chance for ACA subsidies. One could also argue that our AA is very conservative if you considered the PV of pensions (and maybe SS) as bond equivalents. But that's us and our peace-of-mind "philosophy." No need to run up the score. We've already won the game. Just need to protect our lead, here in the 4th quarter... or maybe it's midway through the 3rd. (?) In any case, the play-calling is intentionally conservative.
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