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Old 04-09-2008, 06:40 AM   #21
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Investing in retirement is a battle between doing what is financially optimal, (stick at least 1/2 the money in the stock market ASAP) and enjoying a good nights sleep. DCA is quite a reasonable compromise.
This is very true.

FreddieW, this would be something to consider. Personally, I received a large windfall on Valentine's Day and I am a fairly conservative investor.

Here is what I did, though it is not guaranteed to preserve your capital in the short term. I put 30% into Vanguard's Wellesley (VWIAX), fully investing in it according to my plan immediately, since Wellesley is pretty stable. Then I began DCA'ing into VTSMX (Vanguard's Total Stock Market index) and VFWIX (Vanguard's FTSE All-World Ex-US Stock Index). I have been moving between 1/5th and 1/10th of my full planned eventual investments into each of these two funds each month. The rest is in money market for now.

I sleep well at night, and in fact right now this taxable account is 101.4% of what it was on Valentine's day. It has been as low as 99.1%, though, back in March.
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Old 04-09-2008, 08:23 AM   #22
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This was the type of feedback I was hoping to get as a result of my original post. There have been several very good suggestions from others as well with viable ideas as to how to "compromise" between doing what is intellectually recommended via some of the forum's recommended reading list and actually putting those AA strategies into practice given the emotional turmoil one has now that a paycheck is no longer forthcoming. There's plenty of outside noise going on as financial experts try to predict where the economy is going over the next few quarters. The disconcerting result of all this is the predictions are all over the board and not really pointing in one general direction or the other. I know this has always been the case however it seems to be magnified as to the potential extremes more so this time. Thanks again for taking the time to provide your insight.
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Old 04-09-2008, 09:02 AM   #23
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I am a big fan of DCA. Just identify your AA between equity and fixed-income and stat the course - it's that simple.

Let's suppose you have decided a 50/50 (equity/fixed-income) would meet your financial goals while keeping you sleeping soundly, the following simple allocation should suffice:
25% -- Vanguard Total Market
25% -- Vanguard Total International
25% -- Vanguard Total Bond Market
25% -- Vanguard TIPs


Naturally, some people prefer to slice and dice more as an attempt to optimize more.
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Old 04-09-2008, 11:21 AM   #24
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That's my thinking as well however I wanted the group's feedback as to whether investing in TIPs or ST Treasuries might be a better hedge against inflation in the short term (about 1 year)
Freddy, I just browsed this thread quickly but this sentence stood out to me. TIPs and ST Treasuries have enjoyed a great ride because of flight to quality. I personally thought TIPS were a great buy last June but NOT now because real rates (TIPS yields) are at historic lows. Take your time in learning about stocks and bonds. Bonds can be particularly confusing and the bond market is very efficient.

Why don't you make use of Vanguard's free consultation if you're shifting a large hunk of assets their way? When I ER'd their consultation helped me a lot even though I did not follow their suggested allocation to the letter.
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Old 04-09-2008, 12:36 PM   #25
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... given what I consider the extreme volatility currently within the stock market these days that hopefully is a short term phenom (Less than 18 mo). If I'm properly interpreting the feedback from those who responded, the lesson learned is that the AA recommended by Clyatt and other recommended reads on the forum list are sound long term investment strategies and the best advice is to decide on an AA that I am comfortable with and stick with it rather than try to time market changes in the short term.
As measured by the VIX volatility index, this ain't nothin' compared to 2001-2002 or Oct 1987 or 1966-82. If you're feeling alarmed by these little ripples then you either need to find a big, safe liferaft or sit on the shore for a while watching the water. Of course you could also just hang on for the ride, but that type of investor psychology tends to result in selling low and buying high.

I think it's far better to pick an AA that you can live with than to try to pick the market that you can live through.

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It must be nice to have no fear or confusion and complete confidence about the outcome when it comes to investing. Is that the true power of positive thinking? Past results may not......, even for the seemingly unquestionable Bernsteins AA.
Yeah, it is nice, and I worked pretty darn hard to get there-- thanks for appreciating it. Asset allocation seems to be the only factor to consistently have the most influence on investment returns-- some studies say it's as high as 90% of the returns.

I've cut through my fear & confusion through worrying constructively by learning more about investing & economics. That "positive thinking" comes from all the dozens of books & websites that I've been reading over the last decade and from having our ER portfolio nearly double since 2001.

Maybe you'll gain some more perspective from reading Dimson & Marsh's "Triumph of the Optimists" than you will from CNBC's screaming or the alarmist columnists reporting sky falling on MSN or CBSMarketwatch.

And as I've pointed out on other threads, Bernstein's not unquestionable-- but he's good at explaining and he backs it up with the studies/math to support his point. Iif you're gonna make fun of Bernstein then you have to read "The Intelligent Asset Allocator" or plow through Milevsky's math. Those guys have the chops. You have... well... I guess that awareness is always the first step.
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Old 04-09-2008, 08:24 PM   #26
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That "positive thinking" comes from all the dozens of books & websites that I've been reading over the last decade and from having our ER portfolio nearly double since 2001.
I've been reading the same stuff for a long time too, nearly 30 years. The more I read the less reassured I become in trying to know how to invest for the next 30 years. One can go with the odds, that doesn't guarantee a good outcome for the next "short" 30 year span that will make all the difference to me.

I think the black swan is important, we seem to get caught up in thinking that what happened in the last xx number of years means things will stay the same. Even if xx=100 years of history. Even the AA studies are only based on a slice of past history. The possibilities going forward are infinite.

Anyway, we are all different. How I see it is likely not very similar to how you see it. In 30 years we will know what happened.

Great job on that double in the last 7 years, that is outstanding.
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Old 04-09-2008, 08:32 PM   #27
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I've been reading the same stuff for a long time too, nearly 30 years. The more I read the less reassured I become in trying to know how to invest for the next 30 years. One can go with the odds, that doesn't guarantee a good outcome for the next "short" 30 year span that will make all the difference to me.

I think the black swan is important, we seem to get caught up in thinking that what happened in the last xx number of years means things will stay the same. Even if xx=100 years of history. Even the AA studies are only based on a slice of past history. The possibilities going forward are infinite.

Anyway, we are all different. How I see it is likely not very similar to how you see it. In 30 years we will know what happened.

Great job on that double in the last 7 years, that is outstanding.
Rockon have you made a decent buck in the past 30 years?
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Old 04-09-2008, 09:29 PM   #28
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I've been reading the same stuff for a long time too, nearly 30 years. The more I read the less reassured I become in trying to know how to invest for the next 30 years. One can go with the odds, that doesn't guarantee a good outcome for the next "short" 30 year span that will make all the difference to me.

I think the black swan is important, we seem to get caught up in thinking that what happened in the last xx number of years means things will stay the same. Even if xx=100 years of history. Even the AA studies are only based on a slice of past history. The possibilities going forward are infinite.

Anyway, we are all different. How I see it is likely not very similar to how you see it. In 30 years we will know what happened.

Great job on that double in the last 7 years, that is outstanding.
The point that Nords is making I think is not just reading and research but actual experience in doing it and building confidence in his own ability in this area.

It's true that history is not any surety of the future. I consider myself a conservative investor and a conservative driver. I drive 30 minutes each way to work every week day and expect to get there but past history is no guarantee of future success but if I still do it and have confidence that I will get there and not be one of the 30 - 60K killed every year on the roads or the countless more badly injured.
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Old 04-09-2008, 09:34 PM   #29
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Rockon have you made a decent buck in the past 30 years?
Sorry to dissapoint you but more than you probably think. I was hungry poor in 1974, then started to read and learn about investing. I never made more than a middle class income, never won the lottery, or was given any free money. I did not plan on any gains in real estate and only made a few hundred thousand on the houses I owned. I don't need to work anymore and plan on surviving on about $125k/year in retirement in a few years, COLA adjusted at around 3%. I think I've made a buck or two.

There is more than one way to get there. Besides savings, most of my cash was made by being fully aboard several of those once in a lifetime bubbles. I traded trends, it wasn't hard. It doesn't work anymore. Those bubbles will still be skewing a lot of attitudes and studies for a long time.

I must say I have been cautious lately. freddyw is seeing some of the same things we are all seeing. I wouldn't say he is wrong to be concerned, nor would I advise him on what he should do. That's how I see things differently, there is not an absolute right or wrong way to be investing. To each their own, nobody knows for sure. There is not an easy recipe in a book.
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Old 04-09-2008, 09:38 PM   #30
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Sorry to dissapoint you but more than you probably think. I was hungry poor in 1974, then started to read and learn about investing. I never made more than a middle class income, never won the lottery, or was given any free money. I did not plan on any gains in real estate and only made a few hundred thousand on the houses I owned. I don't need to work anymore and plan on surviving on about $125k/year in retirement in a few years, COLA adjusted at around 3%. I think I've made a buck or two.

There is more than one way to get there. Besides savings, most of my cash was made by being fully aboard several of those once in a lifetime bubbles. I traded trends, it wasn't hard. It doesn't work anymore. Those bubbles will still be skewing a lot of attitudes and studies for a long time.

I must say I have been cautious lately. freddyw is seeing some of the same things we are all seeing. I wouldn't say he is wrong to be concerned, nor would I advise him on what he should do. That's how I see things differently, there is not an absolute right or wrong way to be investing. To each their own, nobody knows for sure. There is not an easy recipe in a book.
I think you are just finding stuff to worry about then with all due respect. And why would it disappoint me you made good money. Good for you! Less you need to worry about
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Old 04-09-2008, 09:53 PM   #31
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There is not an easy recipe in a book.
Exactly. Not "a" book, but maybe 20 of them.

There are a lot of really dumb ways to invest, ways that are 90% sure to leave you poor. There are two ways to avoid this:

1) Faith: A young investor picks up a book, or runs into an advisor, and they believe what the author/advisor says. It sounds reasonable, and the case studies in the book/seminar/advisor's illustrations sound very good. So, the investor starts saving and investing according to this plan. He doesn't understand it, hasn't listened to other approaches, and doesn't have the foundation needed to sense BS. Sometimes this guy becomes a zealot and tels everyone about the one, true way.
Probably 80% of the faith-based investors do poorly, because the picked a bad guru. The ones who succeed lucked out by somehow picking a guru who gave good info. Still, an investor who bases his plan on the charisma of a guru is a juicy target for the next charming guru. And most of the gurus are hucksters.

2) Reason: A young investor picks up a book with a skeptical eye, and reads a lot of things. After reading and listening to a lot, if he has some mix of attributes (logical reasoning, some math skills, and an interest in learning about this stuff) he's likely to figure out which "experts" are putting out worthwhile advice. This investor will have a lot more persistence in investing overall and in style of investing.

I think most people here want to help folks become investors who are guided by reason, not by faith. That's what I took from Nords's earlier posts in this thread.

Rockon wrote:
"I've been reading the same stuff for a long time too, nearly 30 years. The more I read the less reassured I become in trying to know how to invest for the next 30 years. "

If the more you read, the less comfortable you feel about investing, I can suggest two possibilities:
1) It's possible you were a "faith based" investor before, and "sure of things". If you are now reading materials that are illuminating the fact that markets are uncertain (but providing ways you can mreduce volatility while increasing growth) then I'd say that things are moving in the right direction
2) If you are taking in more information but remain uncertain and frustrated because you are looking for the "next big bubble" to ride, then it's possible you remain a faith-based investor, with all the pitfalls that entails.

Provided in a spirit of camaraderie, and knowing I don't have all the answers . .
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Old 04-09-2008, 10:33 PM   #32
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Exactly. (but providing ways you can reduce volatility while increasing growth) . .
I'm probably some of both types. Thanks for the thoughful response.

Let me nitpick, a little, the sentence I quoted. I understand reducing volatility and how that works. When you say reducing volatility increases growth, that is tough for me. The main proof I can find for saying this is true is citing past history. If we can agree that past history isn't really predictive of the future, it really doesn't make sense to me that you can reduce risk (volatility according to many) and increase gain (growth). Typically the lower the risk the lower the return. How can you have your cake and eat it too? Or am I looking at this incorrectly?
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Old 04-09-2008, 10:47 PM   #33
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I think you are just finding stuff to worry about then with all due respect. And why would it disappoint me you made good money. Good for you! Less you need to worry about
To tell the truth, if that can true, I got involved in this thread because I thought freddyw was treated a little gruffly, the guy was just looking for some advice....
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Old 04-09-2008, 10:49 PM   #34
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I'm probably some of both types. Thanks for the thoughful response.

Let me nitpick, a little, the sentence I quoted. I understand reducing volatility and how that works. When you say reducing volatility increases growth, that is tough for me. The main proof I can find for saying this is true is citing past history. If we can agree that past history isn't really predictive of the future, it really doesn't make sense to me that you can reduce risk (volatility according to many) and increase gain (growth). Or am I looking at this incorrectly?
No, I probably wasn't very clear. I didn't mean that reducing volatility increases growth. But the two things are certainly related.

As you probably know, reducing volatility while increasing growth is the "Holy Grail" of modern portfolio theory. Normally, higher risk (higher volatility) assets produce higher returns over time--this is just because investors won't put their money into risky assets unless they are rewarded with higher payoffs--over time. As you likely know, the way most people optimize their portfolio is by choosing a lot of different asset types that are each highly volatile (i.e. they will go up and down a lot, but will also produce high returns over time), but with returns that are poorly correlated with each other (when one asset type is down, another tends to be unaffected or even tends to increase in value). Thus, their entire portfolio stays relatively stable, but they get the advantages (higher return) of holding all these risky asset types.

Now, what I read in your posts is that you don't believe the assets will behave the same way in the future. I agree that we can't know for certain exactly how each will perform, or even how they'll correlate with each other over very long periods, but this approach still offers the best chance of long-term success. The investor doesn't have to pick one horse and be right. Nobody can reliably pick the next big winner (real estate? Foreign Stocks? Oil? Japanese Yen? Big US companies?), but by owning a well-chosen mix, I think I optimize my chances of coming out well (and minimize my chances of an Alpo diet at age 75). Anyway, most of us aren't swinging for the fences--we want to get on base consistently.

FWIW.
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Old 04-09-2008, 11:07 PM   #35
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I agree with that.

Using a highly diversified and uncorrelated AA tends to reduce risk and reduce return verses a highy correlated portfolio. The idea that a highly diversified and uncorrelated AA should increase return, as I have read more than once, is not a valid premise. (even though it might have happened in the past history)
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Old 04-09-2008, 11:23 PM   #36
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A post by Larry Swedroe on the morningstar boards from a while back(11-02-98 to be exact). Posted without any addln comments other than highlighting by me

-h

On similar topic thought the following might be of interest.A study published in the Fall 1998 issue of the Journal of Investing sought to determine whether international equity diversification actually provided risk reduction benefits.The study covered the period 1970-1996. The author examined the performance of portfolios with varying allocations to the S & P 500 Index (representing large-cap domestic equities) and the EAFE Index (representing large-cap equities of Europe, Australia and the Far East). For example, the study looked at portfolios that were 10% S & P 500 and 90% EAFE, 20% S & P 500 and 80% EAFE, etc. At the end of each year a portfolio would be rebalanced, correcting for market movements, to its designated allocations. Using a statistical method called bootstrapping (basically creating a series of monthly returns using randomly selecting periods) the study was able to effectively examine far more data points (the study chose to look at 5-year holding periods) than just the 27-year period provided. Before reviewing the results of the study it is important to note that during this period the S & P 500 Index outperformed the EAFE Index by 12.29% to 12.03% per annum.
The study concluded the following:
A combination of the S & P 500 Index and the EAFE Index outperformed either index individually-a result of the low correlation.
Increasing the international allocation to as much as 40% raised returns and reduced risk as measured by volatility, or standard deviation.
An allocation of 40% international produced the highest Sharpe ratio- a measure of the amount of return for a given level of risk.
Moving the international allocation from 0% to just 20% reduced the probability of negative returns by one-third.
Investors with a 10% international allocation could be 98% certain that they would reduce risk by raising the international allocation.
Even investors with a 20% international allocation reduced risk in over 90% of the 5-year periods studied by increasing their international exposure.
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Old 04-09-2008, 11:38 PM   #37
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Interesting discussion. While I have been tempted to do the same recently and I know of at least one other cow-orker who has moved all their 401(k) money into cash. From experience, in the past this happens at the market bottom.
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Old 04-10-2008, 12:55 AM   #38
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RockOn,

We've talked a few times before and you still don't believe

Quote:
I understand reducing volatility and how that works. When you say reducing volatility increases growth, that is tough for me. The main proof I can find for saying this is true is citing past history. If we can agree that past history isn't really predictive of the future, it really doesn't make sense to me that you can reduce risk (volatility according to many) and increase gain (growth). Typically the lower the risk the lower the return. How can you have your cake and eat it too? Or am I looking at this incorrectly?
There is no proof, as we know. We have no proof the sun will rise tomorrow either. We do have strong correlations though, and we can easily show that when two high-returning, uncorrelated assets are combined the result is a higher overall CAGR with a lower std. deviation of returns.

Quote:
The idea that a highly diversified and uncorrelated AA should increase return, as I have read more than once, is not a valid premise. (even though it might have happened in the past history)
It is indeed valid, and has been reproduced over and over throughout different time periods. That does not prove its validity, but as an investor you must ask yourself: What is the PRUDENT strategy? Can there be any other?

The problem I think you're having is you don't want to rely on history. So, we can devise a simple math model to prove it, but I doubt you would like that because it doesn't model any 'investable' scenarios. So whats left?

The key here is that correlations of returns for different asset classes do change over time. However, for a long-term investor, 5-year correlations data is not that meaningful. What is much more meaningful is average or median correlations over several 10 year or 20 year periods. We expect that bonds will continue to have a low correlation to stocks for fundamental reasons - the numbers may vary from year to year, but by holding the right mix of stocks/bonds we can 'hedge' our bets.
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Old 04-10-2008, 05:11 AM   #39
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I agree with that.

Using a highly diversified and uncorrelated AA tends to reduce risk and reduce return verses a highy correlated portfolio. The idea that a highly diversified and uncorrelated AA should increase return, as I have read more than once, is not a valid premise. (even though it might have happened in the past history)
I don't think you are agreeing with what I meant to say.
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Old 04-10-2008, 04:40 PM   #40
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RockOn,

We've talked a few times before and you still don't believe

No, sorry but I still don't believe. You seem to want it both ways, lower risk= lower return is a basic rule. If lower risk did = higher return in the past, that was just the luck of the selected history.
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