As a young person starting out in their career, I have a lot of years of saving for retirement ahead. I don't expect to receive a pension, nor do I think that SS will provide any meaningful standard of living. So I have to save this money myself if I ever want to retire. Not to mention other long-term savings for things like kids' education and whatnot.
This raises the question of what to do with all those long-term funds that I need to accumulate. Short-term/emergency funds are easy: bank or money market fund. Until 2008, I followed conventional wisdom that the market was the place for long-term investments. But even my conservative mix of dividend stock and bond index funds was down 20% last year. Diversification? There was no place to hide. REITs, commidities, etc. all had a good run then blew up. Treasuries were up, yes, but that option is less appealing when the 10 year note is yielding 2.4%.
A buy-and-hold investment in stocks that can drop 30% for reasons that you have nothing to do with is not such a great long-term investment in my book, especially when your dividends get cut along with capital losses. I don't think I'm smart enough to time the market or daytrade my way to profits. You can argue that stocks will come back over the long term, but if the next 10 years is anything like the last 10 years, that's far from guaranteed. You can stretch your investment horizon out as far as you like but that still doesn't ensure you'll eventually make your money back. Obviously the risk/return tradeoff exists. But for risk to be real (and for investors to be compensated for it) sometimes investments will blow up. If we all agreed stocks were risky but you could get around this risk just by never selling when they were down, they wouldn't really be risky after all. I'm not arguing that "this time it's different" but I am skeptical that patience solves all of equities' problems.
So what else is there? I haven't found a whole lot of good options for long-term savings.
CDs/MMFs: low yield, inflation will eat me alive over the long term
Annuities: the fees make me want to barf, the vendor is as likely to go bankrupt as I am, and I can't get to the funds when I need them anyway.
Muni bonds: low expected return, crazy spending by municipalities with falling tax revenues may put them next in line for a bailout.
Real estate: <cough>
Start your own business: time consuming, not a good fit for my personality.
TIPS: Looks good today at CPI+2.5%. But inefficient to hold in a taxable account. CPI may not match personal inflation over the long term.
This raises the question of what to do with all those long-term funds that I need to accumulate. Short-term/emergency funds are easy: bank or money market fund. Until 2008, I followed conventional wisdom that the market was the place for long-term investments. But even my conservative mix of dividend stock and bond index funds was down 20% last year. Diversification? There was no place to hide. REITs, commidities, etc. all had a good run then blew up. Treasuries were up, yes, but that option is less appealing when the 10 year note is yielding 2.4%.
A buy-and-hold investment in stocks that can drop 30% for reasons that you have nothing to do with is not such a great long-term investment in my book, especially when your dividends get cut along with capital losses. I don't think I'm smart enough to time the market or daytrade my way to profits. You can argue that stocks will come back over the long term, but if the next 10 years is anything like the last 10 years, that's far from guaranteed. You can stretch your investment horizon out as far as you like but that still doesn't ensure you'll eventually make your money back. Obviously the risk/return tradeoff exists. But for risk to be real (and for investors to be compensated for it) sometimes investments will blow up. If we all agreed stocks were risky but you could get around this risk just by never selling when they were down, they wouldn't really be risky after all. I'm not arguing that "this time it's different" but I am skeptical that patience solves all of equities' problems.
So what else is there? I haven't found a whole lot of good options for long-term savings.
CDs/MMFs: low yield, inflation will eat me alive over the long term
Annuities: the fees make me want to barf, the vendor is as likely to go bankrupt as I am, and I can't get to the funds when I need them anyway.
Muni bonds: low expected return, crazy spending by municipalities with falling tax revenues may put them next in line for a bailout.
Real estate: <cough>
Start your own business: time consuming, not a good fit for my personality.
TIPS: Looks good today at CPI+2.5%. But inefficient to hold in a taxable account. CPI may not match personal inflation over the long term.