Mr. Negativity: all my investment options stink...

[rdf]

Re: Mr. Negativity: all my investment options stin

Hi, I'm new to this forum so maybe my remarks will be
old hat to you regulars.

I remember quite clearly the poor performance of all classes
of investments in the early 1970 and for the five to seven
years following.

It seems to me that we are in danger of entering into a similar period of poor investment climate.

The deficit and trade imbalances would seem to indicate that
a strong rise in inflation and/or a sharp drop in the value of
the dollar is in the cards.

So the question remains, if you assume the above is a real possibility, what is a defensive position to take. Assume that
all these bad events will take place over a three to five year span, then it would be prudent to move out of asset classes which will do poorly and wait for a better day.
The obvious losers should be common stocks and long term bonds. At least that is what happened last time.

So what are the good choices?
One that I have tried over the past few years is preferred stocks. Medium term stocks (call dates of five to seven years) seem to be averaging about 6%.
Any coments from you gurus?

 

[Cut-Throat]

Re: Mr. Negativity: all my investment options stin

Hi, I'm new to this forum so maybe my remarks will be
old hat to you regulars.

I remember quite clearly the poor performance of all classes
of investments in the early 1970 and for the five to seven
years following.

It seems to me that we are in danger of entering into a similar period of poor investment climate.

The deficit and trade imbalances would seem to indicate that
a strong rise in inflation and/or a sharp drop in the value of
the dollar is in the cards.

So the question remains, if you assume the above is a real possibility, what is a defensive position to take. Assume that
all these bad events will take place over a three to five year span, then it would be prudent to move out of asset classes which will do poorly and wait for a better day.
The obvious losers should be common stocks and long term bonds. At least that is what happened last time.

So what are the good choices?
One that I have tried over the past few years is preferred stocks. Medium term stocks (call dates of five to seven years) seem to be averaging about 6%.
Any coments from you gurus?

I am not a guru, but here is my 2 cents.


What you are describing is called 'Market timing' -

There are a lot of really smart people on this forum, however I am one of the dumb ones.

I have looked myself in the mirror and said 'You are your own worst enemy'. 'You have not a chance in hell in predicting the future markets, especially since most (80-90%) of Professionals cannot do it either'.

Therefore I have decided on a Stock/Bond Allocation among various asset classes, rebalancing yearly for the next 40 to 50 years. Mostly investing in Index Funds and Short term Bond Funds.

I then can spend my free time Fishing and enjoying life and not worrying too much about market movement

 

[rdf]

Re: Mr. Negativity: all my investment options stin

I think of market timing as trying to make trades in the short term. However, there are sometimes macro economic conditions which are sufficiently out of the ordinary that general trends can be predicted. The "timing" of the event
may not be accurate but the direction should be farily clear.

For example, in Germany during the early 1930s it was obvious that the local economy was going to the dogs. Many people with adequate resources therefore moved their assets to Switzerland and survived the financial chaos better than those without such options.

During the runaway inflation of the 1970s people started to invest in "things". This is a rational idea since things tend to rise in price with inflation. Thus there was a trend towards buying paintings, jewels, antiques, etc.
The trouble with this approach is that your particular choices may not be optimal. There are no art funds or antique funds to allow one to spread the risk. In addition the transaction costs are high.

If you are young enough and disciplined enough you can ride through moderate term downturn, but if you are older or retired the length of the reversal becomes a factor.
Avoiding the risk by switching to another class of investments may not produce as high a yield, but may
still produce a postive yield with much less risk.

One of my best performing investments is the TIAA-CREF
(Teachers Insurance Co) real estate fund. This has averaged about 7-8% per year since its founding in the mid 1990s and has never declined in value.

Unfortunately it is only available to those eligible to join the TIAA retirement plan, so I don't what could be recommended to others.

 

[Cut-Throat]

Re: Mr. Negativity: all my investment options stin

The "timing" of the event
may not be accurate but the direction should be farily clear.

Only in hind sight! - The stock market has predicted 10 of the last 4 recessions.

 

[hocus]

Re: Mr. Negativity: all my investment options stin

I am not a guru, but here is my 2 cents.

I much appreciate the tone of your post, Cut-Throat. It's clear that the majority here does not share my views on investing, and it's of course important that the majority viewpoint be given expression. It's of course also important that new ideas be given expression. It should be possible for both viewpoints to be given an airing on the same forum so that those who are in the middle get to hear both sides of the story before making up their minds.

What you are describing is called 'Market timing'

It's fair to say that I believe that most aspiring early retirees should consider engaging in a limited amount of market timing. It's important to add, however, that I do not favor timing for short-term gains. I am saying that it is possible to engage profitably in long-term timing, timing that may not pay off until after 20 or 30 years of buy-and-hold investing.

 

[haha]

Re: Mr. Negativity: all my investment options stin

I don't want to engage in the timing vs. fixed allocation debate. I think there are pros and cons, that will cut differently for different investors. But I ran across an interesting viewpoint from a guy named Hussman, who runs a mutual fund of the same name. He is a PhD economist as well as a fund manager. I talked to him a few years ago, about options, and he was very impressive in his knowledge and understanding of this somewhat arcane area.

Basically, he admits that a pure valuation based approach, where one leaves the market when a certain threshold is reached, is vulnerable to severe underperformance in the short to medium term. And that medium term can be quite long, in his view maybe close to 20 years before you can feel quite confident that value will out.

Since he has to retain investors in his fund, he adds some kind of market analysis to show him when the market is overvalued, but "OK to buy", and when it is overvalued and one should head for the hills. His short term record is good, but I personally can't give much credence to these bastard child approaches.

However, one has to ask oneself how >10 years of underperformance would feel? If you are young, it could severely set back your program. Maybe you could stay in till things go bad, and then get out? Who knows. I don't have that kind of confidence in myself.

Even if you are older, you might still get antsy, and pile it at the exact wrong moment, when valuation will finally come home to roost.

Since I am older, and I have enough money to last a very long time the way I live, I am more worried about capital loss than I am about underperformance. I can handle a long period of low but positive returns. Losses are what might do me in.

Also, since I buy individual stocks and sector ETFs, I usually have some irons in the fire, and I don't start to get concerned about all the money I am not making while others are getting rich.  Right now, oils and oil service are really performing for me, and I have had them so long that I have low basis. I am comfortable that this will be a multiyear move, with plenty of volatility, but plenty of reward for patient money.

But I can easily see how others would rationally take the view so well expressed in the post above by Cutthroat.

Here is Hussman's full article.

http://www.hussmanfunds.com/wmc/wmc040927.htm

Mikey

 

[cute fuzzy bunny]

Re: Mr. Negativity: all my investment options stin

Only in hind sight! - The stock market has predicted 10 of the last 4 recessions.

And there are three kinds of people.

Those who can count and those who cant!



Anyone hear that honking again?

I dont consider myself to be a "market timer" really. I dont have some kind of hokey 'system' where i'm trying to measure market valuations or buy and sell 'signals'.

I agree with the 'macroscopic events' comment made above. I dont know why I'd decide to sit on my hands when things are over priced, and a day or two after a significant crash or downward move, I'd be buying.

 

[soupcxan]

Re: Mr. Negativity: all my investment options stin

How about this:
Put 20% of my gross income into my 401k, split evenly between vanguard s&p500 (27%), vanguard small cap (27%), and vanguard emerging markets (27%). This will allow for constant DCA so I won't have to worry as much about buying in at the top of another bubble. Then, do the max per year in a Roth split between the vanguard REIT and a precious metals index fund (each would be about 9% of total equity portfolio). DCA into the REIT/metals funds over the next year to avoid hitting a high point - of particular concern for the REIT. Use the rest of my leftover savings dollars to buy a combination of savings bonds (I or EE) and TIPS. At some point down the road when my income rises and I hit the annual 401k contribution ceiling, open a taxable trading account and keep the portfolio weights the same. Is this too conservative for someone my age? I don't know why capital preservation concerns me so much...but it does.

 

[hocus]

Re: Mr. Negativity: all my investment options stin

I don't want to engage in the timing vs. fixed allocation debate. I think there are pros and cons, that will cut differently for different investors

I think you are right about this, Mikey. You may recall that there was a post a little ways back by JWR1945 in which he showed that the historical data indicates that for the average investor the best stratagy today is to be out of stocks altogether (or at least out of the S&P index). I don't think that is necessarily a good idea for many investors. As your post points out, it might take some time for the valuation effect to assert itself. During that time, the investor's assets might be underperforming and he might feel pressure to make changes, which he might end up making at the worst possible time.

My personal view is that for many it makes sense to go with about 30 percent stocks at times of high valuation, to shift to 50 percent stocks at times of moderate valuation, and then to perhaps 70 percent stocks at times of low valuation. But investing is not a one-size-fits-all thing. Investors need to take into account their particular life goals and financial circumstances in making a decision.

I can easily see how others would rationally take the view so well expressed in the post above by Cutthroat.

There are all sorts of legitimate viewpoints on the "What to Do" question. Cutthroat is expressing one, and that is of course fine.

Where we get into trouble is not over questions of "What to Do" but over questions of "What Is." When we talk about SWR analysis, we are no longer talking about subjective opinions as to What to Do. The SWR is a defined concept and a mathematical construct. When you are calculating a number, there are right answers and wrong answers.

 

[hocus]

Re: Mr. Negativity: all my investment options stin

I don't know why capital preservation concerns me so much...but it does.

You shouldn't be defensive re your capital preservation concerns, soupcxan. Some of the greatest investors of all time stress the importance of capital preservation.

The reason why your views seem out of step with those of many others is that we are living in the wake of one of the greatest bull markets in the history of the world. Investing is an emotional business. When stocks go up as much as they recently have and for as long as they recently have, people develop all sorts of funny ideas about what is possible and what is practical and what is realistic.

Views that are today expressed with seemingly great confidence will fade into the mist when the long-term realities of stock investing reassert themselves. The long-term realities have in the past always reasserted themselves and so it is reasonable to believe that they will do so once again. When that happens, all of the magazines and TV shows will be focusing on the importance of capital preservation. You won't be seeing too many articles claiming that stocks are always the best investment class for the long run when that happens.

These things go in cycles. People become overly enthusiastic about stocks and develop "studies" tilting in one direction. People become disillusioned about stocks, and develop "studies" tiling the other way. The smart investor keeps his head as he sees one of the extreme viewpoints and then the other become dominant. He knows that the fundamental rules apply as time goes by.

The fundamental rule is that stocks are a wonderful asset class, but there is no magic to them. What goes up must come down. It's so with everything else and it's so with stocks too. That's common sense, and common sense is often an aspiring early retiree's best friend.

 

[brewer12345]

Re: Mr. Negativity: all my investment options stin

How about this:
Put 20% of my gross income into my 401k, split evenly between vanguard s&p500 (27%), vanguard small cap (27%), and vanguard emerging markets (27%). This will allow for constant DCA so I won't have to worry as much about buying in at the top of another bubble. Then, do the max per year in a Roth split between the vanguard REIT and a precious metals index fund (each would be about 9% of total equity portfolio). DCA into the REIT/metals funds over the next year to avoid hitting a high point - of particular concern for the REIT. Use the rest of my leftover savings dollars to buy a combination of savings bonds (I or EE) and TIPS. At some point down the road when my income rises and I hit the annual 401k contribution ceiling, open a taxable trading account and keep the portfolio weights the same. Is this too conservative for someone my age? I don't know why capital preservation concerns me so much...but it does.

This sounds like a perfectly reasonable plan to me, and very low cost. The real question is what you will do about rebalancing. Will you rebalance the 401k and Roth portfolios to the asset allocation percentages you have laid out once a year, or not worry about it? I do something very similar in my 401k (50% to s&p 500 and 50% to a diversified international fund) and I really have not bothered about rebalancing thus far simply because it represents under 20% of my investable assets. However, I will probably start rebalancing at the end of this year.

A suggestion on the Roth: instead of precious metals, how about a more diversified commodites allocation? Something like PCRDX.

 

[brewer12345]

Re: Mr. Negativity: all my investment options stin

So what are the good choices?
One that I have tried over the past few years is preferred stocks. Medium term stocks (call dates of five to seven years) seem to be averaging about 6%.
Any coments from you gurus?

Be careful with preferred stocks. Call dates are NOT maturity dates. In a typical preferred issue, you would have a 25 or 30 year maturity with NC for 5 or 7 years. This means that the preferred gets called away from you if rates drop (i.e. you lose) and the value of the preferred plummets if rates rise (i.e. you lose). Given their long maturity and subordination relative to other forms of fixed income instruments, you are taking on a lot of interest rate and possibly a lot of credit risk with these things. Not my idea of a great investment.

 

[cute fuzzy bunny]

Re: Mr. Negativity: all my investment options stin

A suggestion on the Roth: instead of precious metals, how about a more diversified commodites allocation? Something like PCRDX.

PCRIX has a lower fee structure and can be bought through vanguard with a $5000 minimum. Considering its an institutional fund, thats pretty good.

Note that commodities funds like this are EXTREMELY volatile and you can lose a whole lot of money quickly. Note also that some analyses show it to be a very good counterbalance to stocks...even better than TIPS.

Commodities tend to offset inflation pretty well, and are particularly effective against unexpected inflation.

The big difference between commodities and metals alone is probably psychological. People "flock to the safety of gold and silver" during some bad times, they dont necessarily do that with commodities. More sophisticated (or bored) investors who look at the historic volatillity reduction commodities bring tend to move in and out of them in an unpredictable manner.

Still, it may not be a bad idea to hold 5-20% PCRIX, and I've seen plenty of data to support that (and a bunch that refutes it).

See Raddr's finance web site for more on this, he's a PCRIX afficionado. Maybe he'll see this and chime in a few pieces of data.

 

[cute fuzzy bunny]

Re: Mr. Negativity: all my investment options stin

Oh yeah, its...

http://www.raddr-pages.com/forums/index.php

And a couple of good discussions can be found at:

http://www.raddr-pages.com/forums/viewtopic.php?t=347

And

http://www.raddr-pages.com/forums/viewtopic.php?t=244&highlight=commodity

Note that PCRIX uses TIPS to collateralize the commodity purchases. In short (and somewhat less accurately) you get the TIPS return AND the commodities return. They can be VERY tax inefficient however.