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What would you do???
Old 09-22-2013, 11:16 PM   #1
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What would you do???

HelloÖ I have a couple of questions to bounce of you FIRE experts.

First question: Iím sitting on 32% cash, 8% bond and 60% equities in my total portfolio. The main reason for the flood of cash is I ERíed this year and I had to cash out of company stock and took the lump sum payout from the pension plan. I do not subscribe to market timing, but I do feel that the markets may be getting ahead of themselves and we may see a 10-15% pullback in the near future. I know that I cannot continue to be 32% cash and archive my 6% average return rate and keep up with inflation. I can think of only 3 options for moving my cash positions into equities & bonds: 1) Cost dollar averaging, 2) Buy on dips or 3) Move all at once. I have been doing cost dollar averaging for the past 25 years and do not consider myself a trader or an expert on markets. Any suggestions or strategies that have worked for you?

Second question: 20% of my total portfolio that is still in the companies manage fund (their contributions) which tends to be on the conservative side (up 8% YTD). I plan to roll it over into my IRA account so I will have more control of how it gets invested, but again this will become cash and then Iíll have to decide how & when to put it back to work in equities & bonds (refer to first question J). There is no time requirements for me to move these funds, but Iím thinking I should do it at some point. I just do not know what is the best strategy for doing this given where the market is at right now.

What would you do??
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Old 09-23-2013, 01:18 AM   #2
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I'd keep a lot of cash until I found something I thought was a good value.
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Old 09-23-2013, 02:48 AM   #3
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When DH retired he received a large lump sum from his employer. We rolled it over to Vanguard, decided on an asset allocation, and received a financial plan from them and then invested the money. This was all done in less than a month.
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Old 09-23-2013, 06:05 AM   #4
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The issue you bring up about dollar cost averaging vs. immediate purchase of equities has been discussed many times here. If the market is goes up, you should have put it all in immediately. If the market goes down, DCA is better but not moving it in at all would have been better yet.

You are in a different position in my opinion. You were in equities in the form of your company's stock. So, you have effectively moved suddenly to a lower equity allocation. I will say that your current 60% equities is probably a reasonable level for a retiree. Personally, I have 40% in equities -- all index funds.

My advice (and it is worth as much as you are paying for it) is to determine your target asset allocation and go there as quickly as possible. That means moving your 401k to your IRA ASAP and buy what you want to hold there. An IRA is a good place to hold your fixed income.
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Old 09-23-2013, 06:19 AM   #5
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Quote:
Originally Posted by bradaz2488 View Post
I can think of only 3 options for moving my cash positions into equities & bonds:
1) Cost dollar averaging,
2) Buy on dips or
3) Move all at once.
....
What would you do??
I would do ALL THREE:
1) Put 50% into my asset allocation now.
2) Put the other 50% in at 5% per month over the next 10 months (that is 10 monthly contributions), but also ...
3) For each additional significant one-day dip (e.g. stock market drops 2.5% or more in one day), I would put an additional month 'contribution' into the market at the end of that day thus shortening the total DCA schedule by one month each time this is done.

For the 2nd question, the money is invested already now, so I would just invest it all now too if rolled over.
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Old 09-23-2013, 07:15 AM   #6
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There is no right way, like usual you won't know which was the right choice till it's history, do what makes you the most comfortable. LOL's suggestion is good as long as you can do the monthly DCA'ing. Getting to it on schedule has always been an issue for me, but that's when I w*rking.
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Old 09-23-2013, 07:37 AM   #7
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What is your target AA once you are done? 60 stocks/40 fixed income? or something different?

If that cash would be going into fixed income I would either hold the cash or buy individual bonds (or Guggenheim Bulletshares which are similar to a portfolio of individual bonds) or CDs. The interest rate risk of bonds scares me right now.

If the cash would be going into equities, I would either buy on dips or value average in over a defined period of time to get to my target AA.
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Old 09-23-2013, 09:33 AM   #8
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I'd come up with a plan to move the cash to intermediate term bonds.

Maybe gradually if you are concerned about rate rises. There have been lots of threads on that plus at Bogleheads.

One way to do this is to move from cash to short term investment grade (VFSUX works here). Then gradually move that to intermediate term bonds.
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Old 09-23-2013, 10:34 AM   #9
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An ~ 60/40 AA should be OK. I'm generally warning people of the historical low success rates associated with low equity AAs, but that means getting below ~ 40/60. If you run your numbers in FIRECalc, and then 'Investigate' AA, you can see what would have worked for you in the past, for reference.

Quote:
I know that I cannot continue to be 32% cash and archive my 6% average return rate and keep up with inflation.
Not sure what you mean by 'your 6% average return rate'? We don't get to pick a return. FIRECalc will show what cards people were dealt in the past. I think that provides more information than some assumption - averages do not tell the whole story.

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Old 09-23-2013, 10:39 AM   #10
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I think what OP means is that they are hoping for an average 6% return. Not unreasonable for a 60/40 AA, in fact, a bit conservative. I use 5.5% for the same AA and the historical average is 8.7%.
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Old 09-23-2013, 10:47 AM   #11
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Quote:
Originally Posted by pb4uski View Post
I think what OP means is that they are hoping for an average 6% return. Not unreasonable for a 60/40 AA, in fact, a bit conservative. I use 5.5% for the same AA and the historical average is 8.7%.
OK, but I have a totally different mind-set on this. I don't look at the average portfolio numbers that FIRECalc or any other retirement calculator spits out. I'm concerned with failures - I don't want to run out of money. And sequence of real (inflation adjusted) returns is very important. Averages do not capture that.

Never forget the old saw of the 6' tall statistician that drown standing in the average 4' depth pool.

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Old 09-23-2013, 05:27 PM   #12
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Thanks for the feedback so far. BTW I'll be 50 next month it that helps with the AA. As far as my target AA I was thinking 70% equities, 20% bonds and 10% cash. The 10% cash will give me ~4 years of living expenses plus a car purchase. I'm assuming a 6% average rate of return and 2.5% inflation for my 45 year model. I also ran FIRECal and I have a 100% success rate using my target AA. I guess I should run a 60/30/10 scenario to see if I can take less risk in equities.

So based in the feedback so far I should;

1) Lockdown on my AA. 70/20/10 or 60/30/10
2) Roll my 401K, Lump-sum pension and Company fund into one IRA for better control.
3) Buy equities/bonds funds in the IRA account right away to match my target AA. Keep no cash in IRA account.
4) Start moving cash in taxable investment accounts into equities/bonds using DCA as well as on sharp market dips. Maybe over 1 or 2 year timeframe.
5) Keep 10% cash at credit union. Look at building a CD ladder to get better rate of return vs. savings account.

My tax deferred accounts are at Fidelity and I also have a big chunk of cash at Schwab. Since I'm not a trader or market expert I really want to keep this as simple as possible and still achieve my goals with low fees at the right risk level. I see people using the 3 fund strategy. Below were the suggested 3 fund strategy at Fidelity & Schwab. Any feedback on this approach?
  • Fidelity Spartan Total Market Index Fund (FSTMX)
  • Fidelity Spartan Global ex U.S. Index Fund (FSGDX)
  • Fidelity Spartan U. S. Bond Index Fund (FBIDX)
  • Schwab Total Stock Market Index (SWTSX)
  • Schwab International Index (SWISX)
  • Schwab Total Bond Market (SWLBX)
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Old 09-23-2013, 05:42 PM   #13
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Before you increase equities you might take a look at the chart I posted here:
Shades of the 1980s ...

Personally I'm thinking of dialing back a bit in the coming months. But nobody knows the future .
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Old 09-23-2013, 05:42 PM   #14
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Although....since you are asking what I would do..... I would foolishly wait another week or so until these idiots that can't get along together but still try to run our country cause the markets to drop more. I am waiting to throw in a little more myself. Adding more to my equities. I should be adding more to bond type things.....but just can't talk myself into doing it.
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