Welcome to the board, Tim.
You don't have an earnings problem, and you don't have a savings problem. But perhaps you should start thinking about asset allocation before your analysis results in more paralysis.
I would have thought that anyone entering the military was not averse to risk (of your life for your country) but obviously there are different views of risk for different areas of your life
Joining the military adds a number of uncontrollable risks to your environment, and the only way to control the total risk is to minimize the personal number of risks you're taking. So the military spends a lot more time on risk management than most professions.
When any of us (civilian or military) cross the street we all risk being hit by a bus. But when a military member cross the street in a combat zone they risk being shot at. Civilians don't have to cross streets in combat zones but military don't have much of a choice, and veterans tend to adopt a slightly more conservative approach to street-crossing. However we all eventually have to cross a street somewhere.
Unfortunately the risk-management techniques learned in combat zones can also lead to a tendency to try to avoid or control risks that really aren't very amenable to either. Outside of a combat zone, those risks can be deemed acceptable through hedging.
I mentioned that I'm risk-averse. It may actually be a product of my age, ironically enough. Already, during my lifetime, there have been no less than four legendary market crashes: 1987 (Black Monday), 1990 (Nikkei), 2000 (Dot Com), and 2008. I've been watching what this does to people. As a result, I think I've grown up valuing peace-of-mind over prospects of spectacular wealth. My fiancee is of the same opinion.
As you've pointed out, bad stuff happens.
But are we really all so egocentric as to think that our generations have the worst investing climates? For my age group I'd add in the zero-returns decades (1966-1982), runaway inflation of the 1970s and early 1980s, and the 1973-4 oil crisis. Older folks would add in the Korean War's influence on the market, WWII, and the Great Depression.
Seems kinda parochial to claim that earlier generations had all the good investment returns and that there won't be any good returns for the rest of us. "Reversion to the mean" works both ways. Maybe instead of claiming that we'll be "paying back" the great returns of the 1990s for a few more decades, maybe the 90s were a "reward" for all the bad years before then. Maybe in a few more years we'll be seeing another set of great returns to make up for the last decade. Do you really want to have a 100% cash asset allocation for the next decade?
You're perfectly willing to believe that you could lose 30%, 50%, or even 80% of your money. If that's what you truly believe then you should invest in MREs and gold bullion-- and maybe a Bobcat excavator to bury them. What about the huge returns of the last six months, let alone the cumulative returns of the next six decades? What about the 65% chance that the market will go higher over the next 30 years?
The point you're making is that the longer you stay in the stock markets, the more bad things could happen to you. You're right. But you're also ignoring the good things that could occur the longer you stay in the market, and in the history of humanity more good things have happened than bad. You also can't see the bad results of NOT being in the markets, so you're not worrying about them. You should be worrying about them.
I agree that WWII allowed the U.S. a (hopefully) unique opportunity to "take advantage" of 25 years of competition-free environments while the rest of the word had to focus on staying alive. I agree that it's difficult, maybe impossible, to predict future returns from history. But you could consider that corporations tend to grow their profits at about the rate of GDP, and to generally keep up with or even exceed inflation. Even the pessimistic Gordon equation predicts 4-6% returns for the next few decades.
That said, I understand all the arguments for long-term equity investing and I have been giving it a try until just recently. I started a Roth IRA in early 2008 and have contributed the max of $14,000 thus far. Today the account balance sits at $11,222, having cashed out last week in anticipation of another big correction. This experience taught me that I'm even more risk-averse than I thought. I found myself constantly checking Google Finance, reading business and economic news, screening for different stocks and funds, and wanting to tweak my portfolio. It's been a good education but I'm afraid that this is no way to live the rest of my life.
I'm not going to try to change your mind about this one, but I'll point out that successfully predicting a string of short-term corrections is a game you will begin losing all too soon. You're focused on a "big correction" during the same week that Buffett went "all in" to make the biggest acquisition of his life eight-decade lifespan. Why would you focus on the bad things when he's focusing on the good things? Which one of you has the lifetime experience to make credible predictions? If you're so good at predicting the corrections, shouldn't you be equally good at predicting the big upward moves as well?
Making the wrong prediction (or making it too early) will cost you far more in missed opportunities (while you pay far more in short-term taxes) than it could ever cost you in market losses. But again you can see the market losses better than you can see the missed opportunities, so it's easy to focus on the bad things while overlooking the good.
Conventional wisdom says that, for those of us who aren't Buffett, we should avoid predicting the short-term moves and focus on the long term. We should avoid dodging every single risk that's out there and just avoid the risks that we can personally control while hedging the uncontrollable ones. In your case, you could avoid hyperactive asset management and overtaxation by finding an asset allocation you can live with. Bernstein's "Four Pillars" book is very good at tailoring allocations to risk tolerance so that you can sleep at night, knowing that some good things are happening along with all of the bad stuff.
If you're going to worry then you might as well worry constructively. The noisemakers you're listening to now make their income by encouraging you to react to the short term instead of planning for the long term. Lay off the short-term deadline journalism, the stock screeners, and the Chicken-Little media for a while. Read Bernstein's latest books on the history of trade and the birth of plenty. Read Dimson & Marsh's "Triumph of the Optimists" and Milevsky's "Are You A Stock or A Bond?". Read about asset allocation in Bob Clyatt's "Work Less, Live More" and "The Boglehead's Guide". The more you learn about asset allocation, the sooner you'll adopt a more balanced perspective to market behavior.
I've begun to think that maybe it's just not necessary in my case. I estimate that I'll earn a little less than $2 million (in 2009 $, "regular military compensation") over the next 20 years, plus whatever my soon-to-be-wife earns. After that I'll be eligible for military retirement benefits. It appears that we could retire before age 45 to a modest yet comfortable lifestyle by saving ~25% of our income over the next 20 years, even if our savings grows merely at the pace of inflation. That could give us at least $500,000 in the bank along with my pension of ~$45,000 per year (both in 2009 $) - enough to make early retirement an option without losing sleep at night over fears of seeing our savings wiped out.
With bonuses, higher allowances, promotions, and pay raises your number is actually more like $2.5-$3 million. Unlike most of this board's ERs, if you retire on a military pension in your low 40s you can look forward to at least four decades of inflation protection and cheap healthcare. In other words you've already hedged away the two most devastating risks to any retiree. Maybe it's better to focus on those achievements and not be overly concerned about black swans & meteor strikes.
You're right about the income and the savings.
If you don't need to take the market risks then why torture yourself?
Well, here's a few things to consider:
I'm curious to hear what you all think of this as a plan. Am I making any serious miscalculations? Has anyone else gone down this road and regretted giving up the chance for more capital gains and a more lavish lifestyle? Or does anyone wish that they had done this themselves?
Thanks to everyone for the replies. I'll address a few points now...
1. Call me a fool, but I'm already signed on for 10 years; even more if I exercise certain options in my contract. How many people get through 10+ years but opt out before 20? I don't know.
Speaking of risk and staying in the markets for a long time, what about the risk of having a really really bad tour sometime during your 20-year career? As any of the dozens of military veterans on this board will tell you, it's not a risk-- it's a near certainty. In addition, your priorities will change over the next 20 years as you age and mature. You eventually will find significant conflicts between the way you want to live your life and the way you're being asked to live it.
When (not if) that situation occurs, it would be nice to have choices. The choice to have a parent stay home and take care of the kid(s) or aging parents. The choice to leave active duty for the Reserves. The choice to totally leave the military and become a civilian. The choice to pursue what you belatedly realize are your true interests. The choice to live your life when it needs to be lived instead of putting it on hold for 20 years and hoping that you survive to pick it up again in retirement. The choice to not risk a stress-induced heart attack as an O-5 (there's an Army program for this!) and have to completely redesign your life.
You might not actually NEED any of those choices, but it's a huge mental relief to HAVE them.
In my case the really really bad tour(s) occurred right after I'd incurred a four-year obligation (years 8-11). I gutted it all out but it was very ugly and, in retrospect, I was nuts from the stress. In retrospect I would have been much happier in the Reserves and the resulting retirement would have been about the same. In reality I was too ignorant about the Reserve opportunities (let alone the civilian ones) to have the courage to make the leap.
A few years later spouse had a bad tour of her own. Luckily she didn't have any obligations and was able to transfer to the Reserves-- just short of 18 years. She wouldn't have had the courage to make that decision (and to forego $750K-$1M of pay/pension) if she hadn't educated herself and if we hadn't achieved nearly 20 years of stock-market index returns.
So that's why you want to take a bit of risk with your investments-- to give you choices when you really need to be able to make a choice. It doesn't have to be an insane risk on 100% small-cap telcoms. Instead it should be a diversified asset allocation, perhaps 50-50 stocks/bonds or even 30-70, that lets you take comfort both in the knowledge that you're avoiding big losses while giving your portfolio a margin of safety for the rest of your life's events.
[I'm going to conclude this post in a second part. Stupid vBulletin posting limit!]
