Will Value Investing allow me to retire in 16 years?

[Cnote325]

Hi all...just found this board so decided to register. 34, married, 1 child, homeowner, Roth, Rollover IRA, and SIMPLE plan.

Wife is a teacher with a pension and a Roth IRA.

Ideal world would be to retire at 50 , but could live with 55, and worse case scenario would be 60 .

Looking for ideas to achieve my early retirement goal. Right now I am mainly using mutual fund with managers that have a value based investing approach, invest a large portion of their own money beside mine, can move to cash, can invest anywhere (not limited by prospectus to a Mstar box) they see value..ie US, international, small, mid, large, etc. I am almost 100% equity right now using 6 fund managers that meet my criteria in both my SIMPLE and Rollover IRA. What little fixed income I have is invested in Strategic Income Funds and Floating Rate Funds. The Roth IRA is invested in stocks of silver mining companies, Oil ETFs, Healthcare ETFs and some other various stocks.

Investable assets are 134k with annual savings of $16,500. (plus the wifes pension) She will be full retirement age at 55 with her 30 years of teaching.

Will mutual funds get me to my goal? Do I need more individual stock exposure? Emerging markets? Should I lower my SIMPLE contribution in favor of an after tax account for pre-age 59.5?

Time to go explore the rest of this forum.
Thanks.

 

[CCdaCE]

I think you have a fine head start. But, there is much more to learn.

Expense ratios, wrap fees, management fees, etc. All tough to take, for me, when they're high.

Savings rate and risk tolerance are two things to weigh. You can save more and easily meet your goals. You can take more risk and possibly meet your goals. Now the question is when road do want to travel? Or, some of both?

Estimate expenses, estimate return(s), and compare to see if your goals are met. It's tough to forecast this far out. Try Firecalc in the blue strip at the bottom of the page. A lot of moving parts/variables/range of outcomes.

Value? What's wrong with growth? How do you know which one is going to win? These are the kinds of struggles I'm talking about. The value vs. growth argument is also one of risk.

I'm 34 and I don't have it all figured out. But, it's fun to keep learning. Keep asking questions. Another good forum to consult is bogleheads: http://www.bogleheads.org/forum/index.php

-CC

 

[seraphim]

Wish I had read this when I was your age:


http://www.investorsolutions.com/uploads/documents/Investment_Strategies_21st.pdf

 

[pb4uski]

Welcome and congratulations on your good start.

From what you describe, you're into some pretty dicey stuff. There are two distinct approaches of the run to retirement: the tortoise and the hare.

Your portfolio is the hare. If your investments do well, you would get to retire earlier; if not then later, but the 10 years of flexibility in your retirement date fits with the riskiness of your investments.

A tortoise portfolio would be a mix of equities and fixed income, low-cost index funds. When I was your age, I was probably close to 100% equities, but in index funds perhaps with a little fixed income thrown in. As a couple datapoints, the Vanguard 2030 target date fund is 80 equities/20 fixed income and the 2040 fund is 90/10.

Given you are 15-25 years away from retirement, I would suggest that you run some scenarios to see if your current savings rate, along with pensions and SS available to you, would provide for your desired standard of living in retirement. I happen to be a fan of Quicken's Lifetime Planner tool included in Quicken as it is a simple step-by-step tool that provides projected nestegg (using assumptions that you provide) and you can compare changes in assumptions using its "What-if" tool. That should give you an idea if your current savings rate is sufficient to provide for an early retirement.

The downside of Lifetime Planner is that it is a deterministic approach (ie; you provide a long term average investment earnings rate that it uses), so you may want to supplement the Lifetime Planner analysis with Firecalc or OMP or other planners out there.

 

[Cnote325]

Thanks for the responses. Site will become addicting I am sure.

I am in a self directed Rollover IRA and SIMPLE IRA with no wrap fees. The only 'fees' i pay are the internal fund expense ratios and $9.99 on ETF and stock trades. All the funds I use are true no-load funds with active management. I do believe in active management, but also understand that the vast majority of managers do not beat their respective indexes. I do however believe that with the managers I am using, I (they) stand a much better chance at adding alpha and beating the broad market indexes. I also and willing to pay a higher expense ratio for that desired out performance. Indexes and Target date funds are not for me, at least at this stage in my life.

When I say 'value investing' I am not referring to the traditional value vs growth definition or style boxes. The managers I am using have the ability to invest anywhere they 'see value' regardless of where MStar categorizes the holding; and can also move heavily into cash if they do not perceive any value buys at the current time. I look for funds, that by prospectus, can invest across the style boxes and countries, as well as hold cash, and in some instances fixed income, ie a go anywhere approach. The majority of them preformed quite well (-10 to -20%) during 2008, given the performance of the broad markets. This was due in large part to their ability to move to cash, which most of them held upwards of 10-15%. This is very different than those managers, who by prospectus have limits on the amount of cash they can hold and are forced to only pick (ie) large cap growth, or small cap value stocks, etc. What does the manager of that fund do when they see no attractive buys in their market cap space? Forced to buy something they may not be very strong on?

With that said, I don't think that my Rollover IRA or SIMPLE are invested in 'dicey' investments. If anything, I will be giving up some performance in bull markets, but protecting my downside when the bear roars. I think over longer time horizons, limiting downsides has a bigger impact on performance than upside capture. The ROTH however, is a little dicey with the 'gamble' stock plays. But I do keep a close eye and have set targets on each holding.

I am going to run through the Firecalc and see what that brings up.

I need to get a handle on what money I will live on from 50-60 since at the current pace, all my money will be in qualified plans. Maybe the wife wants to work to 65?

 

[samclem]

Cnote325,
I think you are asking a fundamental question that is very common: "Can I reliably find a stock-picker who can add value (above the fees/expenses he charges) compared to a low-cost passive indexing approach?"

In short, I believe the answer to this question is "no." But books have been written on this (a classic: "A Random Walk on Wall Street" by Burton Malkiel. Also see "Bogle on Mutual Funds").

The FAQ portion of the board has a compilation of threads on this topic (Thanks Nords and MaddytheBeagle!)

Many people believe they can pick the stocks that can outperform the market, and sell at the right time. Other people believe they can pick the right managers (of MFs, etc) who can do this. The record shows otherwise.

 

[EvrClrx311]

I do believe in active management, but also understand that the vast majority of managers do not beat their respective indexes. I do however believe that with the managers I am using, I (they) stand a much better chance at adding alpha and beating the broad market indexes. I also and willing to pay a higher expense ratio for that desired out performance.

Welcome, you'll learn a lot here, I know I have.

In no way am I trying to be a Debby Downer... but just want to open your eyes to something.

100 out of 100 people who invest with active managers think/say/believe the exact same thing. You'll hear stories of actively managed funds out performing their index for periods of time (even up to 10 years)... but removing survivor-ship bias its staggering the number of them that lose over 20 or 30 year periods. In the neighborhood of 98-99%

The advice I always give is to look to index funds if you are not comfortable investing on your own... if, however you can devote a couple hours a week... or about 10 hours a month to some reading and research go pick up a book on screening and you'll find ways to beat the overall market on your own, with something as simple as a PE filter... just make sure to choose a broker that doesn't eat away all of your profit with the trading costs...

"What Works On Wall Street" ~JPO, is a very mathematical/statistic heavy example of this kind of thing.

 

[Midpack]

Right now I am mainly using mutual fund with managers that have a value based investing approach, invest a large portion of their own money beside mine, can move to cash, can invest anywhere (not limited by prospectus to a Mstar box) they see value..ie US, international, small, mid, large, etc. I am almost 100% equity right now using 6 fund managers that meet my criteria in both my SIMPLE and Rollover IRA. What little fixed income I have is invested in Strategic Income Funds and Floating Rate Funds. The Roth IRA is invested in stocks of silver mining companies, Oil ETFs, Healthcare ETFs and some other various stocks.

I'm curious why you're asking here instead of your 6 (implied personal advisor) fund managers handling $134K? Aren't they a lot smarter than we are?

 

[samclem]

100 out of 100 people who invest with active managers think/say/believe the exact same thing. You'll hear stories of actively managed funds out performing their index for periods of time (even up to 10 years)... but removing survivor-ship bias its staggering the number of them that lose over 20 or 30 year periods. In the neighborhood of 98-99%

The advice I always give is to look to index funds if you are not comfortable investing on your own... if, however you can devote a couple hours a week... or about 10 hours a month to some reading and research go pick up a book on screening and you'll find ways to beat the overall market on your own, with something as simple as a PE filter... just make sure to choose a broker that doesn't eat away all of your profit with the trading costs...

So, in a nutshell, you believe active managers--with rooms full of computers and researchers, are unlikely to beat the indexes, but that the average Joe can do it in a couple hours per week? What's the difference--just the expenses?

 

[Cnote325]

Well of course 100 out of 100, if you didn't believe it possible, it would make no sense to try and beat the index.

Not sure what you mean by survivor-ship bias? please explain.

This thread wasn't meant to be an active vs passive debate, but seems we are headed there....I also, am sure I wouldn't buy and hold for 20-30 year periods.

I have strict screens and guidelines in place for managing my 'fund managers' and prob of most importance is that they invest a large portion of personal net worth in the fund themselves. In addition to reasonable fees, investment philosophy, manager tenure, etc.

No argument from me that the majority of active managers fail to beat their index, but some do and fairly often. But this isn't a set-it and forget-it approach like buying an index would be. You need to actively manager your active managers.

Welcome, you'll learn a lot here, I know I have.

In no way am I trying to be a Debby Downer... but just want to open your eyes to something.

100 out of 100 people who invest with active managers think/say/believe the exact same thing. You'll hear stories of actively managed funds out performing their index for periods of time (even up to 10 years)... but removing survivor-ship bias its staggering the number of them that lose over 20 or 30 year periods. In the neighborhood of 98-99%

The advice I always give is to look to index funds if you are not comfortable investing on your own... if, however you can devote a couple hours a week... or about 10 hours a month to some reading and research go pick up a book on screening and you'll find ways to beat the overall market on your own, with something as simple as just looking at PE values.

"What Works On Wall Street" ~JPO, is a very mathematical/statistic heavy example of this kind of thing.

 

[Cnote325]

Also, I don't think its a coincidence that nearly all the funds I am currently invested in are 1 to 2 man fund shops that have some what concentrated holdings.

These aren't huge fund companies that operate as teams and have 100's of stocks to track. I would agree with buying an index vs Growth fund of America or another MF that has in excess of 100 positions and numerous managers.

In my opinion, some of the reasons active managers under perform is their growth, excess positions and forced asset style investing. I try to avoid this with my selection process.

What better way for a manager to beat an index then practically replicate it with 500 holdings.......

 

[samclem]

With all the exotic investment products out there, I have to wonder why no one has come up with a way to somehow bundle the total returns of market timers--so that I could short it.

 

[Cnote325]

I'm curious why you're asking here instead of your 6 (implied personal advisor) fund managers handling $134K? Aren't they a lot smarter than we are?

Did I rub you the wrong way?

Thought this was about information sharing.

Fund managers won't take a call from me...maybe one day, but at the current level, no suck luck.

Thanks for your insight though.

 

[EvrClrx311]

So, in a nutshell, you believe active managers--with rooms full of computers and researchers, are unlikely to beat the indexes, but that the average Joe can do it in a couple hours per week? What's the difference--just the expenses?

The basic idea is that individual investors can beat managed funds because they have an advantage when it comes to riskier investments: smaller capital = smaller spreads when buying/selling equities...

when a large mutual funds takes a small stake in a company they are devoting millions and get hit with very large spreads on their purchasing... as they buy... the price goes up and they pay more on average for their shares. When an individual purchases on a much smaller scale they'll get a better price (or at least they'll get into the position more quickly/efficiently).

I won't get into the examples of stock screening because its outside the scope of this board... and definitely not a retirement kind of investment strategy. FWIW, I stick to index funds for all my retirement stuff... and buy/sell stocks only for my taxable accounts (where I've beaten the S&P 6 of the last 7 years... so it is possible, though definitely requires time/effort, 10-15 hours a month in my case)

 

[EvrClrx311]

Not sure what you mean by survivor-ship bias? please explain.

Good question, and apologies for my contribution towards hijacking this into a managed vs index investment discussion. This should be a welcome Q&A for you, so feel free to ask away with any other questions you have.

Survivorship bias is the idea that mutual funds (and stocks) that fail tend to disappear off the radar and are not searchable anymore once they fail. So if you look at every mutual fund out there right now and say... "heck, the average mutual fund is doing great over the last 20 years"... what you are missing is the number of ones that failed.

Companies that tout their managed funds certainly take advantage of this by starting lots and lots of mutual funds and quietly disposing of the ones that are doing less than stellar on the history reports. Then they can show their clients that on average all of their current (open) funds are doing pretty well.

More information than I'm sure you cared for, but along those same lines you'll then see revision to the mean issues arise, or the idea that something that has done really well recently has a higher liklihood of doing poor into the near future. Or more simply... what goes up... must come down. This is why a lot of people do such a poor job at investing. You jump into the current hot thing (techs in the dot com bubble, REITs in the housing bubble) because it has been making the huge returns recently... only to find it soon on a downward trend

If something has overachieved for a while, its likely to soon underachieve to return to its average long term trend. Ironically, with long term investments it is often more beneficial to invest in things with a history of good returns that have just done poorly recently... although everyone tends to do the opposite.

 

[Bestwifeever]

It sounds like you are already very happy with the fund managers you have selected and how you've structured your investment approach.

Welcome to the boards!

 

[Cnote325]

Thanks.

I am happy with the funds I am currently using. But always keep my eyes open as I know times/things change.

It sounds like you are already very happy with the fund managers you have selected and how you've structured your investment approach.

Welcome to the boards!

EvrClrx311--thanks for the info. I didn't know that and def skews the numbers.

Also, one of the fund managers I use (Berkowitz, FAIRX) is a prime example of reverting to the mean, and then some! This guy had a great ride for 10 years, until he didn't. In 2011 he was the worst performing fund for the style box MStar puts him in (b/c every fund is forced into one). From one extreme to the next for him with big bets on the financials (AIG, BOA). I learned a lot with my 6 year ride with this manager...he went from a little known manager to the Mstar manager of the decade. With that came huge inflows which may or may not have contributed to his poor year. But lessens were learned.....

 

[Midpack]

FWIW

Did I rub you the wrong way? Of course not.

Thought this was about information sharing. Works both ways. Why not just tell us what funds you're in? Maybe I misunderstood how you're investing, are your "fund managers" advisors (that's the way it sounds) or just funds available to any investor?

Fund managers won't take a call from me...maybe one day, but at the current level, no suck luck.

Thanks for your insight though.

 

[Cnote325]

I get an email for every response...can I change that setting?

Anyway...here are the funds I am using:

FAIRX- Berkowitz
GRSPX- Chip Carlson
YAFFX - Donald Yacktman
FPACX - Steven Romick
SAVIX, Colin and Ed Symons
WPOPX - Wallace Weitz

This are the 6 I am currently using, and have a few more that I follow and have used. Hussman and Ivy.

On the fixed income I am using Fidelity Floating Rate, Osterwise Strategic Income and Loomis Sayles Strategic Income. Don't have a lot of exposure to bonds but some more though the 'equity' guys above as some have it in their fund as well.

 

[LOL!]

I wonder if you use a benchmark for your portfolio such as the Vanguard Value Index fund and the Vanguard Small-cap Value Index fund? Or the etf EFV for international value index? Or a combo of these to reflect the large/small/foreign distribution of your portfolio?

 

[Midpack]

Are you comfortable with these expense ratios? Expense Ratios - Bogleheads A big headwind for the fund managers to overcome vs index funds, but not out of line for an active manager.

Anyway...here are the funds I am using:

FAIRX- Berkowitz 1.02% ER
GRSPX- Chip Carlson 0.98%
YAFFX - Donald Yacktman 1.25%
FPACX - Steven Romick 1.28%
SAVIX, Colin and Ed Symons 1.48%
WPOPX - Wallace Weitz 1.37%

This are the 6 I am currently using, and have a few more that I follow and have used. Hussman and Ivy.

On the fixed income I am using
Fidelity Floating Rate
Osterweis Strategic Income 0.91%
Loomis Sayles Strategic Income 0.95%
Don't have a lot of exposure to bonds but some more though the 'equity' guys above as some have it in their fund as well.

 

[Cnote325]

I wonder if you use a benchmark for your portfolio such as the Vanguard Value Index fund and the Vanguard Small-cap Value Index fund? Or the etf EFV for international value index? Or a combo of these to reflect the large/small/foreign distribution of your portfolio?

I can surely run the numbers using MStar. Not sure it is apples to apples as the indexes are set while these managers (heavily in large caps currently) move around as they see fit.

I am about to 'retire' for the weekend but will compare next week to see how they stack up. I will equally weight my 6 managers and then use 60/20/20 split on the Vanguard Indexes.

 

[Cnote325]

Are you comfortable with these expense ratios? Expense Ratios - Bogleheads A big headwind for the fund managers to overcome vs index funds, but not out of line for an active manager.

Not sure comfortable is the right word, but I am aware of them...everyone hates paying fees especially in down markets.

Fees are a secondary screen for me, after the criteria previously mentioned. I would never exclude an investment in my portfolio based on just a fee. But I sure expect to beat an index given I pay the higher fee. And I understand each manager won't/can't do that each and every year. So hopefully this group can average out to above average returns.

 

[samclem]

I can surely run the numbers using MStar. Not sure it is apples to apples as the indexes are set while these managers (heavily in large caps currently) move around as they see fit.

I am about to 'retire' for the weekend but will compare next week to see how they stack up. I will equally weight my 6 managers and then use 60/20/20 split on the Vanguard Indexes.

It's likely not worth your time to compare these managers/funds to benchmarks. The data size will be too small and the results will be entirely explainable by what the overall market was doing. To really know you'd need a complex study. Lots of academics have done them, but not against this particular special set of wizards. Anyway-good luck!

 

[Ed_The_Gypsy]

Welcome, Cnote.

You are still in the accumulation phase, so IMHO 100% equities is the right way to go for now. Bond yields are low these days and IIRC are on the order of 2.2%--which you will only get if you hold them to maturity. When interest rates go up (they cannot go down much further), the resale value of a bond will drop. This would affect bond funds as well as individual bonds.

There is little risk in fixed income, but little return as well. It just drags down your total return unless interest rates are high when you buy in.

As far as riding value alone, maybe not such a good idea for you (although my holdings are value-biased) as you have a longer accumulation phase left than I do.

Growth might be good to have in your portfolio as well these days. It would ride world-wide recovery. Buying growth only appeals to me when a fund has low turnover. Growth means buy-and-hold to me.

The problem with only taking one asset class is that it is hard to read the future. I like to have several asset classes, but they all have to pay well. Volatile is OK, as rebalancing smooths that out, but they have to perform well over time for me.

Looking at your funds fees, you are giving away about 1% on average every year over index funds. That adds up over time. You might want to compare your funds to narrowly focused value index funds over the same time period.

I used to buy Forbes September(?) issue for their annual mutual fund honor roll, which rated mutual funds in three consecutive up and down markets (measured by peaks and troughs in the S&P 500 I think). They graded performance in down markets harder than up markets. My AHA! moment came when I noticed that the list was different every year--except that Vanguard's S&P 500 index fund was almost always on the list.

One of the biggest things you can do right now is put away as much as you can. I recommend 15% of your income and/or all of a spouses salary.

Cheers,

Ed