Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 03-24-2011, 09:17 AM   #41
Recycles dryer sheets
 
Join Date: Jun 2007
Posts: 118
I'm probably the poster child for risk aversion. And, the last couple of years have certainly been challenging for those who shun market risk. But, I suppose this is simply part of the game. Choosing the "risk averse" option comes with a higher admission fee (requires a larger nest egg) because you are essentially buying down risk at the front end. We often associate "risk averse" with those having a "weak stomach." I don't necessarily agree. While the investor with a healthy risk appitite must have a strong stomach to watch his nest egg shrink in a "down market" it also also takes a pretty strong stomach for a risk averse investor to watch his nest egg stagnate when the market soars. In my view, either approach requires discipline, and now is a time when the risk adverse investor's discipline is being sorely tested. But, "every dog has his day" and I believe opportunity will return again for those who are risk averse and have carefully preserved their capital. When QE2 ends this summer, someone is going to have to buy the boatload of debt that the Government has placed on its revolving credit card. This may drive up interest rates once again and give the risk averse investor an opportunity to achieve sensible returns.
__________________

__________________
Geoffrey is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 03-24-2011, 09:53 AM   #42
Thinks s/he gets paid by the post
 
Join Date: Jul 2004
Posts: 1,072
For the OP -this is a great question and could also be stated as where to put your resources for the risk averse portion of your portfolio/asset allocation. I have two nice sized CDs coming due next month and I am disgusted at what is available. My crystal ball says some serious inflation is around the corner and I'd like not to be locked into such low rates when that happens.....I have lots of risk in the other parts of my portfolio, so this is the portion that's meant to be safe.
__________________

__________________
Deserat aka Bridget
“We sleep soundly in our beds because rough men stand ready in the night to visit violence on those who would do us harm.” - George Orwell/Winston Churchill
deserat is offline   Reply With Quote
Old 03-24-2011, 11:31 AM   #43
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
Quote:
Originally Posted by deserat View Post
I have two nice sized CDs coming due next month and I am disgusted at what is available. My crystal ball says some serious inflation is around the corner and I'd like not to be locked into such low rates when that happens.....I have lots of risk in the other parts of my portfolio, so this is the portion that's meant to be safe.
A 3-5-year PenFed CD, knowing that all it'll cost you to switch to NFCU before maturity is six months' interest?

We have our two-year cash stash in that length of maturity because we're betting that we'll only need to tap it 2-3 times/decade. We also have our kid's college tuition in five-year CDs because we think she's likely (but not certain) to continue with NROTC. However the college room/board money is in CDs that mature just before those payments are due.

I think that "chasing yield" is a loser's game... like tennis, as soon as you reach a bit further to hit the next shot a bit harder (instead of just keeping the ball in play) you lose.

OTOH, the real value of CDs is that you have cash available to either live on (during a bear market) or to pick up some serious bargains (during a market correction). If nothing else it earns a discount on the home or car purchase because you don't have a lender drag you through a knothole.

Another tangible savings during periods of low interest rates is that you're not experiencing huge inflation. I don't really care to live in a world where CDs are earning 6-8% and my retiree COLA exceeds 5%...
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Old 03-24-2011, 12:07 PM   #44
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Lsbcal's Avatar
 
Join Date: May 2006
Location: west coast, hi there!
Posts: 5,673
I'm going to go out on a limb here and suggest a little market timing. Suppose you have a 50/50 allocation. Maybe boosting this to 55/45 or 60/40 for a few years makes sense. We are still only 2 years into a recovery and the Fed plus other world governments are making it painful to avoid some risk. So maybe you should take the bet.

Here's a chart of previous markets. It may take a few moments to get comfortable with what it is showing you. Notice that most of the sharp declines have appeared at more then 5 years (60 months) from the previous SP500 lows. An exception was the 1973-74 recession which came on the heals of the 1969 lows (May 70 lows). But note that roll off was fairly gradual.

To avoid the inevitable future bear market you will have to define some rules or develop an algorithm. I know for personal experience this is a tough task. Some would say it is impossible.

Anyway, just some (somewhat controversial) thoughts for a rainy morning here.


__________________
Lsbcal is online now   Reply With Quote
Old 03-24-2011, 01:34 PM   #45
Recycles dryer sheets
 
Join Date: Jan 2006
Posts: 168
I believe one of the academics thinking about this is Zvi Bodie who produced a book called worry free investing.

I believe it was him who was advocating an asset mix of 95% cash and 5% S&P LEAP options, but may be worth looking into if you are interested.

Another thing I thought of was buying treasury strips in a ladder to provide the guaranteed spending money you want each year and taking the discount that you purchase them from face value and investing that in the stock market indexes to keep up with inflation. Not sure how badly the transaction costs and "phantom" income taxes would work against you.
__________________
David

I get up at 7 yeah, and I go to work at 9. Got no time for livin yes I'm workin all the time. Seems to me I could live my life a lot better than I think I am. I guess thats why they call me the Working Man.
DJRR is offline   Reply With Quote
Old 03-24-2011, 04:28 PM   #46
Full time employment: Posting here.
 
Join Date: Sep 2007
Posts: 716
I'm surprised that nobody yet has mentioned preferred stocks. Maybe because they are a bastard stepchild, a sort-of-bond that trades like a stock.

I used to think they were complex to understand and a nonsensical thing to invest in, but since being retired I have found them pretty attractive. We have almost all our fixed-income asset class allocation in preferreds. According to Preferred Stock Investing | Learn To Screen, Buy and Sell The Highest Quality Preferred Stocks the typical yield on new issues is about 6%. FWIW, our portfolio of them is currently yielding about 8%.

Not FDIC insured, but the other moniker is "CDx3", which stands for "3 times the return of a CD"
__________________
rayvt is offline   Reply With Quote
Old 03-24-2011, 06:07 PM   #47
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
I like the concept of CD laddering, which I read for the first time of this website.
Quote:
Originally Posted by brewer12345 View Post
what is the best course of action for a cnservative, highly risk averse investor?
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 03-24-2011, 07:05 PM   #48
Thinks s/he gets paid by the post
tryan's Avatar
 
Join Date: Mar 2005
Posts: 2,449
Brinker keeps a "Fixed Income Portfolio" in his news letter consisting of 25% weighting in each of the following: VFIIX, VFSTX, VWEHX, VWINX. Says the current average annual yield is 3.6%.

Little to soft for me ... but to each, his own.
__________________
FIRE'd since 2005
tryan is offline   Reply With Quote
Old 03-24-2011, 07:15 PM   #49
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,835
For a risk adverse investor in a low interest environment it's a good time to pay down old higher interest debt. Instead of rebalancing equity gains into bonds I've used them to pay down my 4.5% mortgage. It's conservative, returns 4.5% and also brings that mortgage free day closer.
__________________
nun is offline   Reply With Quote
Old 03-24-2011, 09:54 PM   #50
Full time employment: Posting here.
 
Join Date: Sep 2007
Posts: 716
I get a chuckle out of the idea that a 4.5% mortgage is "high interest debt".

"You mean I get a lock on a rate that is only slightly higher than average inflation, on a note that cannot be called, a payment that is fixed and can never go up, that I can keep for 30 years? Count me in!"
__________________
rayvt is offline   Reply With Quote
Old 03-24-2011, 10:24 PM   #51
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
Quote:
Originally Posted by rayvt View Post
I get a chuckle out of the idea that a 4.5% mortgage is "high interest debt".
That's the rate we refi'd from last October... to a 30-year fixed 3.625%. From that new lower perspective, everything looks like high-interest debt.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Old 03-25-2011, 08:59 AM   #52
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,835
Quote:
Originally Posted by rayvt View Post
I get a chuckle out of the idea that a 4.5% mortgage is "high interest debt".

"You mean I get a lock on a rate that is only slightly higher than average inflation, on a note that cannot be called, a payment that is fixed and can never go up, that I can keep for 30 years? Count me in!"
Yeah, it's ridiculous that 4.5% is high interest now. I was looking into refinancing, but my mortgage is almost paid off so it isn't really worth it. Paying it down is a nice way to lock in some equity gains and get a guaranteed return that is more than any fixed income out there.

If I was to refinance it would be to a 30 year mortgage so that my monthly payment would only be $500. At that low amount I could ER and not have to do a 72t, so it would be for cash flow reasons. But I'm still working so I'll just keep paying down the mortgage.
__________________
nun is offline   Reply With Quote
Old 03-25-2011, 09:16 AM   #53
Recycles dryer sheets
 
Join Date: Dec 2010
Location: Tequesta
Posts: 279
In my line of work, income has always been variable, although almost always more than enough to live on. We've developed a spending strategy that involves eliminating virtually all "fixed" expenses. We have a mortgage, but it is almost paid off and we could write a check for the balance, we have real estate taxes and utilities, but everything else is variable. When cash flow was off, we hunkered down. When cash flow was better, we saved for any major purchases and maybe ate out a little more.

My plan when I retire, hopefully at least part way in 2012, is pretty much the same. We have a bunch of insured municipal bonds, some taxable bonds in tax deferred accounts and some equities. For another 8 years, we have income from an asset we sold and the collateral is good enough that we will probably get paid out in full. We have a somewhat shaky tenant on a rental property; we are going to eventually sell the property and put the proceeds in more bonds.

I think we can live reasonably well for the next 8 years off the payout and, if we keep getting it, the rent. The other stuff will continue to accumulate. Assuming SS is still there, SS plus the tax free income will be enough to maintain our current lifestyle, even allowing for some personal inflation. Any equity appreciation will be gravy.

We aren't the ultimate risk averse people, but we're close. If it doesn't work out, we will first cut the standard of living and second pull equity out of our home by selling it and moving to something smaller. The equity is pretty substantial.

This is making me think I should FIRE right now!
__________________
67walkon is offline   Reply With Quote
Old 03-25-2011, 09:36 AM   #54
Recycles dryer sheets
Pete's Avatar
 
Join Date: May 2008
Posts: 350
Quote:
Originally Posted by brewer12345 View Post
Since we are in a world of evry low yields on low volatility/"safe" investments, what is the best course of action for a cnservative, highly risk averse investor?
After seeing your intelligent posts here I'm going to assume this questions is somewhat rhetorical based perhaps in frustration, and you know what type of investments out there are a good fit.
I've always thought our never ending search for higher returns was part of a feedback cycle. Needing higher returns...growth...inflation...work harder and look for higher returns...
Rather than looking for higher returns, I've always done much better looking for ways to simplify, spend less, and actually increase my standard of living by ridding myself of stress and responsibility.
__________________
Pete is offline   Reply With Quote
Old 03-25-2011, 09:38 AM   #55
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,835
Quote:
Originally Posted by 67walkon View Post

We have a somewhat shaky tenant on a rental property; we are going to eventually sell the property and put the proceeds in more bonds.
A big part of my ER plan is my rental income. I have a 2 family. I live on the 2nd and 3rd floors and rent out the ground floor. My tenants are great and as I live in a college town I've never had trouble finding renters.

Right now the rent is $1200 a month, but when my current tenants move out I'm going to do some renovations to make it into a 2 bedroom apartment and update the bathroom and kitchen so I can get $1800/mth.

I've looked into selling and investing the equity, but I like the guaranteed income of the rental and that it is diversification away form stocks and bonds.
__________________
nun is offline   Reply With Quote
Old 03-25-2011, 09:41 AM   #56
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,835
Quote:
Originally Posted by Pete View Post
After seeing your intelligent posts here I'm going to assume this questions is somewhat rhetorical based perhaps in frustration, and you know what type of investments out there are a good fit.
I've always thought our never ending search for higher returns was part of a feedback cycle. Needing higher returns...growth...inflation...work harder and look for higher returns...
Rather than looking for higher returns, I've always done much better looking for ways to simplify, spend less, and actually increase my standard of living by ridding myself of stress and responsibility.
Amen. I got rid of my land line phone and HBO and Showtime on my cable and saved myself $100 a month. I'm now ridding myself of a lot of clothes and possessions.
__________________
nun is offline   Reply With Quote
Old 03-25-2011, 09:47 AM   #57
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
HFWR's Avatar
 
Join Date: May 2005
Location: Lawn chair in Texas
Posts: 12,964
Quote:
Originally Posted by Pete View Post
Rather than looking for higher returns, I've always done much better looking for ways to simplify, spend less, and actually increase my standard of living by ridding myself of stress and responsibility.
I try to do both...

Quote:
Originally Posted by nun View Post
I'm now ridding myself of a lot of clothes...
This thread is useless without pics...
__________________
Have Funds, Will Retire

...not doing anything of true substance...
HFWR is offline   Reply With Quote
Old 03-25-2011, 09:56 AM   #58
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,835
Quote:
Originally Posted by HFWR View Post



This thread is useless without pics...
and would be closed down with them.....seriously you don NOT want photos
__________________
nun is offline   Reply With Quote
Old 03-25-2011, 11:04 AM   #59
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Lest there be any confusion, this was definately a rhetorical question to stimulate debate. I don't think anyone would call me a risk averse investor, given that my portfolio is mostly equities and includes a company that recently exited bankruptcy, small foreign companies, highly leveraged industrials, junk-rated commodity producers, etc. I ask because there are a lot of people in a real quandry as to what to do and I have to advise family members who have lots lower risk tolerance than I do. The approach I have taken for family members is to diversify, include a modicum of equity exposure, and add in stuff like convertible bonds, merger arb funds, etc. that have reduced volatility while still having return potential. Also helps to be scanning for the occasional fat pitch, like the fluke Pen Fed 5% CD offer last year.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 03-27-2011, 02:13 AM   #60
Recycles dryer sheets
 
Join Date: Nov 2008
Posts: 111
Quote:
Originally Posted by brewer12345 View Post
Lest there be any confusion, this was definately a rhetorical question to stimulate debate. I don't think anyone would call me a risk averse investor, given that my portfolio is mostly equities and includes a company that recently exited bankruptcy, small foreign companies, highly leveraged industrials, junk-rated commodity producers, etc. I ask because there are a lot of people in a real quandry as to what to do and I have to advise family members who have lots lower risk tolerance than I do. The approach I have taken for family members is to diversify, include a modicum of equity exposure, and add in stuff like convertible bonds, merger arb funds, etc. that have reduced volatility while still having return potential. Also helps to be scanning for the occasional fat pitch, like the fluke Pen Fed 5% CD offer last year.

Brewer, For the benefit of everyone else will you please be more specific describing real examples of stocks, bonds etc. For example, I will recommend buying dividend paying, stocks, mutual funds & preferred ETF'S----PGF, PFF, DLTNX, GAUCX, NLY, AGNC, FTR, MO, GUT, HYG etc. All these pay > 6% dividends. I own most of these and am continuously looking for new ideas.
Thanks
__________________

__________________
rsingh6675 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Emergency fund impacting risk profile of investor Moscyn FIRE and Money 8 04-26-2009 04:12 PM
33 and (relatively) new investor Johnphx Hi, I am... 5 04-18-2008 10:20 PM
suggestions for my risk-averse mom kevink FIRE and Money 29 08-09-2007 08:17 PM
Where on earth is the value investor to go ? Delawaredave FIRE and Money 41 04-15-2005 07:01 AM
Risk-Adverse Investor Needs Advice robert FIRE and Money 22 04-18-2004 12:06 PM

 

 
All times are GMT -6. The time now is 05:09 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.