Generating investment income in 2011

[dante56]

Dante just curious what was your screen name on the retire early forum?

Clifp,

It was the same.

Dante

 

[GregLee]

I think many people are tempted to do things to try to maximize their returns which inevitibly involve market timing and pricey strategies requiring brokers.

I don't understand this, at all. Why would you ever do anything other than try to maximize your returns? Why does that inevitably involve market timing and brokers? I'm just looking at the year end statement for my wife's common stock mutual fund, in an IRA, and it shows a 34% gain for the year. We bought the shares back in the 70s for about 1/20 of what they're worth now. We never bought any more and never talked to a broker. No market timing. With interest rates so low, why would anyone buy bonds?

 

[nun]

I don't understand this, at all. Why would you ever do anything other than try to maximize your returns? Why does that inevitably involve market timing and brokers? I'm just looking at the year end statement for my wife's common stock mutual fund, in an IRA, and it shows a 34% gain for the year. We bought the shares back in the 70s for about 1/20 of what they're worth now. We never bought any more and never talked to a broker. No market timing. With interest rates so low, why would anyone buy bonds?

I was pointing out the belief that active trading and market timing are a way to maximize return when indexing and rebalancing often produce better returns. Also many people look only to maximize returns and don't consider risk or volatility as equally important properties of their portfolio.

People buy/sell bonds when interest rates are low for the same reason they buy/sell them when rates are high, to maintain their asset allocation. I rebalanced my equity fund gains into intermediate term investment grade bonds recently. My only bit of active input was to avoid long term bonds.

 

[Aeowyn]

I'm planning something along these lines:

• 6 months of expenses in Cash for an emergency fund
• 6-18 months of expenses in Cash for cash flow
• 3-6 years of expenses in a conservative, low volatility portfolio comprised of bonds and large cap stock mutual funds (leaning more toward dividend paying value funds vs. growth funds)
• remainder in an aggressive near 100% stock mutual fund portfolio (fairly evenly split between small, mid, and large cap - fairly evenly split between growth and value - and 30-60% invested internationally)

Have all the non-sheltered investments pay dividends and capital gain distributions to Cash.


If stocks are doing well and I need cash, I'll cash out some money from my aggressive portfolio. Of course any shares I've held for more than a year are taxed at the more favorable long term capital gains rate.

If stocks are going through a rough period but bonds are doing well and I need some cash, I'll take it out of my conservative portfolio.

If all the investments are going through a rough period, then I'll run my cash flow funds down to nothing (but keep the 6 months emergency fund). If the cash runs out, I'll start pulling from the conservative portfolio. It may be down, but shouldn't be down very much.

Having 5-8 years worth of expenses in Cash and conservative investments allows me to treat the rest of the investments as long term investments.

Of course if you're risk tolerance is different than mine, the composition of the conservative and aggressive portfolios could be adjusted.

 

[nun]

• 3-6 years of expenses in a conservative, low volatility portfolio comprised of bonds and large cap stock mutual funds (leaning more toward dividend paying value funds vs. growth funds)

This sounds like Wellesley.

My 1 to 2 year money is in bank account, MM and short term bond index. I may look into a CD ladder if interest rates are higher when I ER.

3 to 6 year money I just kick into Wellesley, Total bond market and Intermediate Investment Grade Bond fund

6 year plus money is in Total Stock Market Index and Total International Index and a little bit of REIT and Emerging Markets that are a hang over from the gogo 90s.

I have been taking profits form my equities to keep my AA close to 50/50 and paying down the mortgage. My interest rate is only 4.5%, but I've decided to sell on the way up and put some profits into securing my ER as I want to go into it debt free.

 

[LOL!]

what happened in the early 1980s if you were in, say a 10 year bond fund, when inflation jumped from 9% to 14% in less than a year? I am going to guess that you lost 20% or so? I'd like to find some data and charts on that, because we could be in for a similar spike. If disaster can happen in the stock market, it can happen in the bond market as well.

In the early 1980s I bought CDs that were paying 12% to 16%.

Here's a chart showing "growth of" a bond benchmark from 1980 to 1983.

So it looks like the biggest loss was 5% or so. Since bonds have dropped 3% in the last couple of months, we are almost there.

 

[Nords]

Can someone help me to understand this statement? Isn't the whole point of Dollar Cost Averaging that you invest a set amount of money at regular intervals? By doing so, more shares are purchased when prices are low and fewer shares are purchased when prices are high. The point of this is to lower the total average cost per share of the investment, giving the investor a lower overall cost for the shares purchased over time. If this is true, then how can DCA studies have shown that it works best when you plunk it all down in one lump sum at the very start?
Thank you for your insight.

midnighter, let me ask you this: If you buy when the S&P 500 is at 1000 all at once, is that better than buying when the S&P500 is at 1000, 1010, 1020, ..., 1500?
If you said it is better to buy at 1500 than at 1000, then no explanation will help you.
Basically, the market goes up 2/3rds of the time and down only 1/3rd of the time, so lump sum works better 2/3rds of the time. The funny thing is that "better" is only slightly better -- maybe 1% or 2% on average over the course of a year.

I'm just catching up with your question, but LOL already answered it...

DCA's biggest benefit is getting investors to do it on autopilot.

 

[Katsmeow]

put 50% in Vanguard total stock market, 50% in Vanguard total bond market, go play golf.

We didn't quite do this, but not far from it.

When DH retired he received a large lump sum that represents about 80% of our total portfolio. The rest is in 401ks at Fidelity.

We received a free financial plan from Vanguard which as largely the above 2 funds. Vanguard did recommend their International Fund as well and picked the best options at Fidelity.

The deviation we made is that we put about 10% of the money at Vanguard into Wellesley. When the Admiral shares came out for the International fund we bought those. We have some money in money market at Vanguard basically representing this year's living expenses.

 

[FIRE'd@51]

Basically, the market goes up 2/3rds of the time and down only 1/3rd of the time, so lump sum works better 2/3rds of the time. The funny thing is that "better" is only slightly better -- maybe 1% or 2% on average over the course of a year.

It's well-known that the investing the lump sum has a higher expected return than DCA. However, it's also more risky. So on a risk-adjusted basis, the two strategies may well be equivalent.