What options do I have, invest or run?

[Queenie]

Hi all,


After my introduction here and some really good advice from a few posters I went back and hit the books even more. So many questions raised and ideas to make my head spin. Perhaps just as well, at least my money is still sitting in the bank so I haven't actually taken a nose dive.


Have been running my ideal “portfolios” on Morningstar all the while now thinking to up my share portion and decreasing bonds due to the information I gather here. What I am seeing though in my fictitious portfolios is that the bonds look better than the stocks. VBTLX and VBIIX look to be holding, while all the other funds I am watching are falling into the red more and more every day.


I am convinced I should start investing despite this market, in a dollar cost averaging strategy as suggested by RetireSoon, but this girl is a bit wary. Don't want to wait it out, waited far too long to take control of my assets as it is, but not sure if I shouldn't have a bit more patience.


Know I am a dryer sheet wannabe (so it says) but feeling more like a “what the heck are dryer sheets anyway” at the moment. The more I try to follow, the more confused I become. At the same time, I can see myself sitting here 10 years from now still grappling with the same questions.


Have decided on an asset allocation of about 50-50 which as a newbie and until I feel comfortable should be about right, 49% stocks, 47% bonds, 3% cash and 1% other is how morningstar breaks the following down:


VBIAX 35%
VBTLX 36%
VEXMX 11%
VTSMX 11%
VRUS 7%


What kills me, is that other than VRUS and VBTLX all the others are currently in the red. Will be going into this for the long haul, not looking to make any sort of market killing. I have a steady and secure pension and will be adding monthly to my investments from that and the remainder of cash I have on hand.


My question is really, What would YOU do if you were a newbie with cash to invest and getting older as I sit here... My gut feeling is to go to bed and pull the covers over my head (as I have been doing for the last few years), my brain tells me to go forward with “the plan” and hope not to lose my pants in the process.


I am sorry this is long and I hope some of you can make sense of my elementary knowledge of investing (I am studying hard though to become a good ER contributor and save my money from wasting away in the bank!). I would go to a financial adviser, but tried that and he asked me for the passwords to my on line bank accounts so he wouldn't have to “bother” me all the time. I did get some lovely colored graphs in an expensively put together report, though....



Thanks in advance for any and all input... I hope I don't get slammed too hard for my apparent ignorance even though I probably deserve it...


Queenie

 

[easysurfer]

Hi Queenie,

I think that you are on the right track. Doing lots of reading etc. before investing.

In my opinoin, DCA'ing with an asset allocation that you feel comfortable with is a great strategy. DCA'ing forces you to invest regardless of how the market is doing and the proper asset allocation allows you to sleep at night.

Great that you made the wise choice of not going to a financial planner and handing over the keys to your investments to him.

Easysurfer

 

[MichaelB]

Hi Queenie

Have been running my ideal “portfolios” on Morningstar all the while now thinking to up my share portion and decreasing bonds due to the information I gather here. What I am seeing though in my fictitious portfolios is that the bonds look better than the stocks. VBTLX and VBIIX look to be holding, while all the other funds I am watching are falling into the red more and more every day.

So bond prices are rising and stock prices are falling. If you were food shopping and saw that some prices had gone up and others gone down, would you be more likely to buy more of the cheaper things (stocks) or the more expensive stuff (bonds)?

I am convinced I should start investing despite this market, in a dollar cost averaging strategy as suggested by RetireSoon, but this girl is a bit wary. Don't want to wait it out, waited far too long to take control of my assets as it is, but not sure if I shouldn't have a bit more patience.

Dollar cost averaging is a good way to reduce your risk when you are concerned about asset price volatility.

Have decided on an asset allocation of about 50-50 which as a newbie and until I feel comfortable should be about right, 49% stocks, 47% bonds, 3% cash and 1% other is how morningstar breaks the following down:

That sound pretty reasonable.

VBIAX 35% Vanguard Balanced Index
VBTLX 36% Vanguard Total Bond
VEXMX 11% Vanguard Extended Market
VTSMX 11% Vanguard Total Stock market
VRUS 7% I don’t know this but the ticker is Pharmasset, Inc

I just added the names of the funds for readers than may not recognize them.

What kills me, is that other than VRUS and VBTLX all the others are currently in the red. Will be going into this for the long haul, not looking to make any sort of market killing. I have a steady and secure pension and will be adding monthly to my investments from that and the remainder of cash I have on hand.

Would you rather wait until the prices are higher? The same amount of cash would buy you less of each asset.

My question is really, What would YOU do if you were a newbie with cash to invest and getting older as I sit here... My gut feeling is to go to bed and pull the covers over my head (as I have been doing for the last few years), my brain tells me to go forward with “the plan” and hope not to lose my pants in the process.

If it were me, I would get rid of the balanced fund. I would replace the bond part (40%) directly with a Vanguard bond fund. I would take the stock part (60%) and allocate it to international stocks. Then I would start to invest it by DCA’ing just like you mentioned.

If the 7% is one stock I would want to understand why? That much in one stock is quite risky.

 

[Queenie]

Thank you easysufer, RCA is the way, I can understand the logic there. Is one of the few things that got through and made sense.

MichaelB, thank you for your response, have run your suggestion and it looks like this:

VRUS - Pharmasset - 5%
VEIEX - VG Emerging Markets - 15%
VEXMX - VG Extended Market - 15%
VTSMX - VG Total Stock Market - 15%
VBTLX - VG Total Bond - 50%

Reason for VRUS, although I lowered to 5%, will call it a woman's intuition. I want that one and it is important it does well.

So did I do well in replacing the Bond part? This feels good to me, too. Is still a weird feeling buying something that is Red, we are brought up to read red as danger and not something to plunge into.

I am continuing to play with figures, but will call Vanguard in the morning. Have a feeling I will begin to learn even more once I have been baptized by fire...

Thanks again and look forward to more inputs..

Queenie

 

[HFWR]

Or, you could simplify even more...

VTSMX - Total US
VGTSX - Total International
VBTLX - Total Bond

 

[TheWizard]

Bogleheads forum might be a good place to get advice on this area.
DCA is how most employed folks build up their investments. Are you still employed or is your bank acct $$$ pretty much it?
50/50 is a good overall AA for some folks but will you have the right mindset to rebalance it properly?
Stocks are the more volatile component, so what I do is set trigger limits of 48% and 52%.
If stocks fall below 48%, I move 1% of my total assets from bonds --> stocks, just 1%. A day or two later, I might need to move another 1%.
This algorithm is rather simple to implement and makes more frequent smaller moves, so one GETS ACCUSTOMED to doing it.

 

[DblDoc]

Or, you could simplify even more...

VTSMX - Total US
VGTSX - Total International
VBTLX - Total Bond

+1

I would definitely replace the VEIEX with VGTSX. The former is a small and volatile portion of the entire international market, the latter covers it all including some emerging markets

DD

 

[Lisa99]

Or, you could simplify even more...

VTSMX - Total US
VGTSX - Total International
VBTLX - Total Bond

+1 - I believe in keeping it as simple as possible. The most important part of your portfolio is the AA. How you slice and dice within equities can gain you a point, but for simplicity the above is great.

And if you really want to buy VRUS do so, but consider it as a 'fun money' investment. Many people here have their core investments in index funds but then have a small pot of money in individual stocks to keep things lively.

 

[MasterBlaster]

Or, you could simplify even more...

VTSMX - Total US
VGTSX - Total International
VBTLX - Total Bond

That's kind of similar to Scott Burns (Couch potato) Margarita Portfolio.

 

[TheWizard]

...and a followup question/concern might be: why is most of your $$ sitting in the bank at present?
In some cases, folks pull out of the stock market due to volatility and fear of losing it all. So we need to know how much an issue fear is and how you will do on roller-coaster rides...

 

[Queenie]

That's kind of similar to Scott Burns (Couch potato) Margarita Portfolio.

Thanks to MasterBlaster and all who +1'd him. Is this what you are proposing it should look like, along with what Lisa refered to as my "fun money". Yes, that is exactly what that is, I'll call it my Allegria account.

47.62 Vanguard Total BondIntermediate-Term Bond - VBTLX
33.33 Vanguard Total StockLarge Blend- VTSMX
14.29 Vanguard Total IntlForeign Large Blend - VGTSX
4.76 Pharmasset, Inc.

Yes, I do need to remember to KISS (keep it simple stupid).

I am so glad I found this forum and you people. So, what you think of the above allocation? I am good with this AA.

Queenie

 

[Queenie]

Bogleheads forum might be a good place to get advice on this area.
DCA is how most employed folks build up their investments. Are you still employed or is your bank acct $$$ pretty much it?
50/50 is a good overall AA for some folks but will you have the right mindset to rebalance it properly?
Stocks are the more volatile component, so what I do is set trigger limits of 48% and 52%.
If stocks fall below 48%, I move 1% of my total assets from bonds --> stocks, just 1%. A day or two later, I might need to move another 1%.
This algorithm is rather simple to implement and makes more frequent smaller moves, so one GETS ACCUSTOMED to doing it.

Yes, have been reading over there, too! I am retired, and I will have time to learn and the mindset to rebalance. I am learning every day. I feel comfortable with a higher allocation towards stocks as I will not be needing this money to increment my pension. I have some money for initial investment and to move forward with DCA for some time to come. I will see how well I fair on a roller coaster having never tried before.. I am a survivor, I don't think a roller coaster will get the better of me. :->

When the time comes to rebalance, I will certainly be here begging for suggestions from the more experienced.

Thank you Wizard.

Queenie

 

[Lisa99]

Thanks to MasterBlaster and all who +1'd him. Is this what you are proposing it should look like, along with what Lisa refered to as my "fun money". Yes, that is exactly what that is, I'll call it my Allegria account.

47.62 Vanguard Total BondIntermediate-Term Bond - VBTLX
33.33 Vanguard Total StockLarge Blend- VTSMX
14.29 Vanguard Total IntlForeign Large Blend - VGTSX
4.76 Pharmasset, Inc.

Yes, I do need to remember to KISS (keep it simple stupid).

I am so glad I found this forum and you people. So, what you think of the above allocation? I am good with this AA.

Queenie

Have you considered a specific small cap slice?. When I moved from Ameriprise to Vanguard, VG provided a free portfolio analysis and made the following recommendations which we followed (we're 60/40 with no 'fun money' allocation):

35 - Total Stock Mkt (non-qualified - held in VG)
15 - Total Intl (non-qualified - held in VG)
10 - Small Cap Index (qualified - held in 401k)
40 - Total Bond - (qualified - held in 401k)

Where the funds are placed is also important to your tax picture.

 

[GregLee]

VBTLX and VBIIX look to be holding, while all the other funds I am watching are falling into the red more and more every day.

I wonder whether we're on the same page. I think red is good, if you're buying (not good if you're cashing out). Red means prices just dropped. You want to buy at low prices. Go for the red.

 

[Queenie]

Have you considered a specific small cap slice?. When I moved from Ameriprise to Vanguard, VG provided a free portfolio analysis and made the following recommendations which we followed (we're 60/40 with no 'fun money' allocation):

35 - Total Stock Mkt (non-qualified - held in VG)
15 - Total Intl (non-qualified - held in VG)
10 - Small Cap Index (qualified - held in 401k)
40 - Total Bond - (qualified - held in 401k)

Where the funds are placed is also important to your tax picture.

I worked overseas, have no 401's and such. I don't think, now being retired, that I qualify for any tax breaks... I have always paid my US taxes... well sometimes I didn't actually and boy was that a mistake. The IRS is a cruel business.. I do have one of my fictitious portfolios with small cap blend NAESX. I will try running that with this newest holding assortment and see what comes up! Will let you know. If you have another small cap you recommend, please share.

Thank you, Lisa!
Queenie

 

[Queenie]

I wonder whether we're on the same page. I think red is good, if you're buying (not good if you're cashing out). Red means prices just dropped. You want to buy at low prices. Go for the red.

Yes Greg, we are on the same page, I am training myself that red is good and does not mean warning and danger in this world. This ole dog can learn new tricks!

Thanks! Queenie

 

[Lisa99]

I worked overseas, have no 401's and such. I don't think, now being retired, that I qualify for any tax breaks... I have always paid my US taxes... well sometimes I didn't actually and boy was that a mistake. The IRS is a cruel business.. I do have one of my fictitious portfolios with small cap blend NAESX. I will try running that with this newest holding assortment and see what comes up! Will let you know. If you have another small cap you recommend, please share.

Thank you, Lisa!
Queenie

You're welcome

Vanguard has a Small Cap Index, you just want to understand tax ramifications of holding small cap and bonds in a qualified account. Bogleheads has a FAQ on Tax Efficiency that you may want to read.

All dividends in a qualified account are taxable whether they're reinvested or not so you want to understand where to place each of your investments (qualified vs non-qualified [IRA, Roth IRA, 401k accounts])

 

[easysurfer]

Yes, have been reading over there, too! I am retired, and I will have time to learn and the mindset to rebalance. I am learning every day. I feel comfortable with a higher allocation towards stocks as I will not be needing this money to increment my pension. I have some money for initial investment and to move forward with DCA for some time to come. I will see how well I fair on a roller coaster having never tried before.. I am a survivor, I don't think a roller coaster will get the better of me. :->

When the time comes to rebalance, I will certainly be here begging for suggestions from the more experienced.

Thank you Wizard.

Queenie

With the market doing the rollercoaster ride, if it continues to do so during the year, it'll be a great time to see the DCA'ing in action. (More shares bought at down times, less shares bought at higher times).

Once you have your funds and allocations chosen and you decide how much to invest each month, if you haven't thought of that already, you can have the DCA amounts automatically invested each month from your checking account. That way, it's pretty much on autopilot.

That's what I do..KISS. Pretty much only follow the indexes (Tot Stock.. Tot Intl Stock, Tot Bond, and Money Market), then just concentrate on getting the allocations so I can sleep at night.

 

[HFWR]

That's kind of similar to Scott Burns (Couch potato) Margarita Portfolio.

The Couch Potato while drinking a Margarita Portfolio...

 

[Queenie]

The Couch Potato while drinking a Margarita Portfolio...

I sure hope there is nothing wrong with that, well minus the Margarita, when I am really feeling daring I add a twist of lemon or lime to my water...

 

[Queenie]

Well, I did it and slept just fine.

Discovered Vanguard is open till 8 pm, so gave them a call and chatted a bit, then opened my account on line. Very simple, very straightforward. Will take till Tuesday till my funds are transferred from my bank, so not really an investor quite yet.

48% on Total Bond
26% Total Stock
13% International Stock
13% Small Cap

Also cash into the Money market fund so I can invest in my "Allegria" stock of choice as soon as the money is available.

Phase I is complete, thanks to many of you! Now, on to Phase II, how much and how often for the DCAing portion of this investment. I will, as suggested, get these amounts invested automatically at intervals.

More reading to do before I can go hit the couch as some here have suggested!

Thanks everyone and if you have any suggestions on DCAing or can pinpoint good posts or articles about it that would be nice, too!

Queenie

 

[pb4uski]

For your DCA, you might consider an approach called value averaging rather than DCA. It works like this, let say you want to invest $12000, a $1000 a month for 12 months. The first month you would invest $1000. If at the end of the month the $1000 was $950 as a result of market movements, you would invest $1050 (bringing your total balance to $2000). If at the end of the next month the balance was $2075, you would invest $925 (bringing your total balance to $3000). So on an so forth until the $12000 is fully invested.

What this approach does is invest more when the market is relatively lower and invest less when the market is relatively high (buy low). You have to fudge it a bit here and there but I used that approach to save for my kids education and was quite pleased with the result.

It is just a slightly better version of DCA, but does require a smidgen of additional work. Some folks would rather keep it simple and DCA a fixed amount each month. Both work fine, the important thing is that you are investing in your future.

 

[TheWizard]

I'm a bit confused about Dollar Cost Averaging (DCA) in this situation. You're retired, so are you really planning to add new money to your VG investments each month? If so, then I assume the new money will come from your pension?

Regardless, the goal of new money coming into your VG account should be to maintain your asset allocation (AA). That means when stock prices are low, ALL of that month's new $$ goes to buy more stock. And when stock prices are high, all of the new $$ goes to buy more BONDS. This is especially true when the new $$ is a small fraction of the total already invested.

Anyhow, I think my point was: this is a variation (an improvement) on classic DCA: you buy stocks when their value is low, but you don't buy any stocks when their value is high...

 

[Queenie]

Thanks pb4uski! I will think about that approach while figuring out how much how often as a basis. That could work very well, but as usual I always need time to digest new ideas. DCAing with value added? Does it have a proper name?

Thank you too, Wizard, of course the idea is to keep the AA more or less stable to the original AA, so may have to favour one fund over another according to market flucuations.

Thanks again,
Queenie