Hi all. Newbie here.
Looking for advice on what are reasonable annual gains to expect and how to select investments that target these gains. My current method lacks planning and needs a readjustment. I've been reading books on technical analysis, trading stocks on MACD, bollinger bands, elder ray, etc, but notice my gains stink. (worse than S&P500) This is essentially lottery method where I have no long term idea of reasonable gains and can't really plan (although losses are limited to 2%).
The numbers I can provide with some confidence are: current investment amount, years until retirement/need, and amount needed at retirement/target date.
What I'm hoping to get advice / experience on is:
- what are reasonable annual gains to expect. The difference between 7% and 12% is substantial, and I'm not sure if 12% is even reasonable.
- how would you go about doing this: a simple targetted retirement etf based on the time frame (2030, 2040, 2010, etc), your own assett allocation, or trading stocks?
should I just see an investment, or are there any decent books that can delve in the actual mechanics of planning and fund picking?
FWIW: 36 year old. Retirement account: $330k in 401k/ira, retire at 72
Education: $17k in coverdell ira for 6 year old. Expecting $80k tuition in 12 years
My first suggestion would be prioritize retirement over the college savings for 6 yo. In 12 years try to have mortgage paid off, retirement plan on track and once you hit some milestones for retirement saving, figure out college costs. FWIW if you use coverdell, consider 529 (state tax deduction) or using taxable accounts. If you use taxable accounts, that money can be refunded to you 100% (hope credit), 50% (hope credit) or 20% (lifetime learning credit). If you use 529 plans or educational IRAs, you cannot get the federal tax credits. As you indicated, you are not even getting a 20% return on your investments, where as the lifetime learning will give you 20% of money back, so think about that long and hard.
My second suggestion is more of a comment on returns. If you aren't getting 7% you are either trying too hard, or not thinking straight (no offense). If you are getting 12% sustained year over year, that is either dumb luck or very strategic investing.
I am 37 yo. You have more saved for retirement than I do, and I plan to retire earlier than you do (you listed age 72, I will be retired by age 57 unless something goes really wrong).
I plan for 8% returns in my calculations- that is 8% return (before inflation). We also set aside close to 25% of gross pay into Roth IRAs and 401ks- this 25% amounts to more than 25k per year.
The Math is questionable if retirement in 2026 for me is possible right now... and here is my math which I use to justify that.
Take annual expenses and multiply by 25. This is the amount needed to save
put that amount by the retirement age...
for example your amount is
$X age 72
divide amount by 2 and subtract 9 from the age
$X/2 at age 63
repeat divide by 2 and subtract 9
$X/4 age 54
$X/8 age 45
$X/16 age 36
I have this as your $330k is worth $5.2 M at age 72. If your annual expenses are $211,000 or less you are on track.
That equation tells you if you are on track with saving... but there are many assumptions not accounted for- for example inflation in the expenses over same 36 years would be one... but the opposite of that is expenses change (decrease) over 36 years- house is paid off, kids have moved out, you can downsize house, maybe fewer cars, lower insurance costs etc...
What is known for sure- if the amount invested is ever 25X of expenses, you can retire really soon because the 25X number has inflation built in (withdraw 4% of assets each year and can raise the withdraw by 3% per year and investment money **should** last for 30-40 years.
My third comment is how to get the 8% return. Here are 3 ideas
1) pick a target date fund and forget about it. Error on side of caution by choosing a date later than retirement date if you need more cushion (more equities=more risk=more return over time)
2) Come up with an effective allocation which is between 50% equities and 100% equities (and 50% bonds/cash to 0% bonds/cash).
It might be
80% equity 20% bonds/cash
or might be
60% equities 20% bonds 20% cash
or might be something else
the allocation should reflect your risk tolerance- if you are looking for smooth returns, you want more bonds, if you can accept high deviations of returns, you want more equities. Focus on deviation (more on this later).
3) Go with a buckets approach and focus on returns. This is what I do, but I still also use key principles from #2.
Buckets means with some money I expect a certain return
with other money I expect a different return
with other money I get a different return
and I don't muddy those 3 items together.
My allocation is
75% domestic, 25% foreign equities
45% domestic large cap
15% domestic mid cap
15% domestic small cap
15% foreign large cap
10% foreign emerging markets and/or foreign small cap
I have a small cash position and small portion in bond funds in some accounts- less than 2% of total though.
You can dissect any of my accounts and see that allocation, and I expect an 8-9% return before inflation from that portfolio.
My 401k has that allocation (no domestic mid cap, so 30% is in small cap), the 75-25 domestic-foreign allocation is intact; 45% domestic large cap still true
My wife's 401k has that allocation (no domestic small cap, so more is in mid cap, no foreign small cap, so 25% is in international large cap)
75-25 is still held/ 45% large cap still true
My Roth is like that (exactly- within 2-3% of all asset classes)
My rollover is like that (exactly-within 2-3% of all asset classes)
I point all this out because I break "conventional" asset allocation wisdom inside wife's Roth and rollover. We do not contribute to the rollover, but it contributes to this system. In my wife's Roth we have the same 75-25 allocation, but we get there VERY differently. My goal is a higher return with this portfolio. Overall my wife's Roth is maybe 10% of total amount invested
If my wife's Roth we have 10 funds- all sector funds. Natural resources, technology, global technology, health care, real estate, value, growth, africa and middle east, emerging markets, financial services.
Overall its some pretty volatile stuff. Especially relative to rest of portfolio. My intended goal is a 12% return for this small position of the portfolio. I do this by buying low. Examples:
In 2008 we bought financial services and real estate. On some of the shares of financial services, we have a 50% gain over about 15 months. For real estate some shares have a 25% return over same time period. In 2009 we bought health care, real estate and technology. For 2010 I am buying health care and technology.
I am generally buying what is currently out of favor. Risky proposition- we send $500/mo to the Roth, and 2X per year I might change what we buy. If something goes up, I stop buying it and look for what is not moving up. All funds are from T Rowe Price, so I am "restricted" to the sector funds they offer. This is $5000 of our annual $25,000 we invest so its not like all the money is chasing a trend.
I do my best to try and keep the 75-25 domestic-equity allocation, but its not always easy because they are managed funds, and 1-2 of them have global in the title, so the manager moves money around some. I am OK with that. I am more focused on buying low than the exact allocation.
My point is if you want a 12% return, use a small portion of your investments (10-20%) and buy individual stocks or sectors you like for short term with that money.
My 3 buckets
1) Retirement core- this is 90% of portfolio which is expected to get a 9% return
2) aggressive growth retirement portfolio- this is wife's Roth and rollover
3) Taxable accounts for financial cushion- if we ever were to lose a job, this fund gets tapped. It is not large now, but I will resume contributing to it once some cash is freed up in budget later in 2010.
Keep rest of portfolio focused on an asset allocation model.
I posted this above
Focus on deviation (more on this later).
Understand risks when you invest and deviations specific allocations have.
For example 100% equities has a historical return of about 11%.
For example an 80-20 portfolio (80% stocks-20% bonds) has a historical return of about 10.5%.
If you look at the deviations, to me the 20% bonds does not smooth things out as much as it should (deviation of 100% equities is about 16-17 I think and 80-20 deviation is only .5% less). If I allocated 20% to something, I want to get something for that 20% position.
Deviation means this. If average returns are 11% and deviation is 16, that means you see 27% returns as often as you see -5% returns (11+16=27; 11-16=-5)
There are various web sites to get you the deviation statistics. To me the only 2 which "make sense" are 100% equities and 40-60 stocks-bonds.
100% equities has highest return, and anything between 100% equities and 40$ equities has deviation higher than returns. 40% equities is the "first" portfolio where the deviation is less than return (average return is about 6.5-7% and deviation is about a .5% lower than return, meaning positive returns year in and year out are most likely with a 40-60 portfolio).
