How to get off to a successful start...

[Ptolemy]

Hello Everyone! Firstly thanks for making this a really interesting forum. This is my maiden post (and I'm not advertising for a girl.. ) As a British guy I admire the openness of the responses and challenges; not sure we have an equivalent forum hosted in the UK. I'm confused about the sheets business - perhaps you've been taken to the cleaners by investment advisers (an attempt at English humour.. ) Anyway I won't let a little insanity (on your part) disuade me from asking your opnion.

Well, I have a question and I'd welcome your advice. Several months ago I decided to retire this month at age 45; I've worked in over 100 countries and burnt out. I forgot to read the rules about life and my wife and I have just found out we're expecting our first child - a pleasant surprise and I think we'll manage.

I have enough money to see me through 45 years at 4% withdrawal at 50/50 equity/bonds but the money is currently sitting in a bank. I live in south west England and so US rules don't apply. I obviously want to get off to a good start with my investments and I would not like to see my money reduced in the early years by poor market timing. So, my question is about market timing. What are the recommended strategies to open investments positions with a large amount of money? Lump sum investments in all asset classes simultaneously based on assumption you never know if you're in an up market or down market or cost averaging by drip-feeding based on an analysis of value? If the later how do I determine value? Or perhaps a different method altogether. :-/

Look forward to your replies...
Ptolemy

 

[Marshac]

(an attempt at English humour.. )

English humor:

Anyways, I think you'll find that most people here like to DCA, and don't bother with market timing... there are always exceptions to the rules here though =) Congrats on your new kid!

When I was in London not too long ago, a lot of students were protesting their high college tuition rates.... As a college student at the time, I was sympathetic until I found out what they thought "high tuition" was.... How does England compare in terms of health care and social security for retirees?

 

[wabmester]

Hey, Ptolemy, congrats on the retirement and the kid! I did both at 40 and have been having a blast.

Since the market has an upward bias, traditionally the "right" advice is to go all in at once. However, it's different for us retirees. It's more important for us to preserve capital in the early years, so I would absolutely DCA in at a slow rate.

I started at 10% stocks in 2000, and I'm up to about 25% now. I missed the big drop from 2000-2002, and I also missed out on a chunk of the 2003 rally, but overall I'm way ahead of the game. Once your portfolio has grown much faster than your withdrawal rate, you can start getting more aggressive (or start spending more and stay conservative).

 

[sgeeeee]

For more on the risk-reward tradeoff of using dollar cost averageing (DCA) vs making lump sum investments, check out this previous discussion:

http://early-retirement.org/cgi-bin...t_board;action=display;num=1072298830;start=4

And good luck.

 

[ShokWaveRider]

I started at 10% stocks in 2000, and I'm up to about 25% now. I missed the big drop from 2000-2002, and I also missed out on a chunk of the 2003 rally, but overall I'm way ahead of the game. Once your portfolio has grown much faster than your withdrawal rate, you can start getting more aggressive (or start spending more and stay conservative).

Wab:

Would you be so kind as to share with us you choices of investment?

25% = XYZ Fund
75% = XYZ Funds, Cash etc.

Thanks

SWR

 

[wabmester]

SWR, I'm currently about 20% real assets, 25% stocks, 35% bonds, and 20% cash-equivalents.

For real estate, I chose waterfront properties because I love their supply/demand character. A small part of the real asset allocation is in gold coins (doomsday stash ).

Most of the bonds and part of the cash are combined in a ladder with a weighted average yield of about 7%. I have a separate ladder for TIPS that I'm still fleshing out via DCA. The rest of the cash is sitting in a money market looking for better investment opportunities.

Stocks are about 40% intl and 60% US, both in individual stocks (too many to list), funds (TSM, Energy, Health Care, Total Intl, Small Value), and ETFs (mostly EPP and EWJ).

 

[ESRBob]

Most of the bonds and part of the cash are combined in a ladder with a weighted average yield of about 7%.

Wab,
Did you buy most of these (long) bonds years ago, or are you heavy into high yield? Weighted average yield of 7% looks mighty nice. Either way, it would seem to be either true yield (with credit risk) or low-risk market yield plus return of capital (giving you back a piece of your capital gains that you could realize if you sold these bonds today) -- right?

I opted to sell a fair amount of my appreciated long bonds for capital gains and move things to lower yielding shorter duration funds, but not without running lots of pros-and-cons through my head, (and still not sure if it was the right decision). Curious how you are thinking about this one in your portfolio.

PS: love your intl/domestic allocation!

ESRBob

 

[wabmester]

Bob, the ladder was built over the last few years when yields were higher. It only goes out to 2012. On the shorter end of it are CDs at 5-6%, and I lucked out on the longer end. I bought some junk bonds at 8-9% a while back, and they almost immediately became AA quality after the issuing company was acquired.

I hate selling bonds because the spread will usually eat into profits, but it does make sense to sell before maturity when the yield curve is pretty static. I did sell a bunch of appreciated longer-term munis as I shortened terms a while back, but I decided to hold the appreciated bonds in the ladder since yields had gone down across the entire yield curve and there was no way for me to get equivalent yields on new bonds.

Stocks have been the dogs of my portfolio this year. Only Energy has had significant gains. Almost everything else has gone pretty much sideways.

 

[Cut-Throat]

My 1 year return has been pretty lousy  --- 3.6%

- Best performing over the 1 year (Sept 2003-- Sep 2004) was s&P 500 Index at over 10%, REIT index at 5%. Worst performing was all my International Stock Funds led by emerging markets at -4%.

 

[wabmester]

My orig. intention was to start another business at my new location

Same here. I originally ear-marked part of my nest-egg as startup capital, but my first summer vacation was so enjoyable, I decided to extend it for a few summers.

I still believe that owning a business is the best investment (for me) simply because you've got much more control over your own destiny than you do with any passive investment. And I do get the entrepreneurial itch occasionally, but luckily something always distracts me.

Back to the original topic, it might help to have a written investment plan before you take the plunge. Here's sort of what I did:

Identify some "core" amount. For example, pick a nest-egg size below which you'd feel like you had to go back to work. Protect that number! Sock it away in conservative investments (like TIPS).

Take whatever's leftover and split it three ways:

1) a growth component
2) an aggressive growth component
3) a doomsday component

The doomsday component is optional and is really only intended as a safety margin, but for most people the growth components will give them enough of a safety margin (assuming they're unlikely to go to zero).

This is just my own home remedy, so I'm sure it wouldn't hold up to any real scrutiny, but bonds are my "core", real assets are my doomsday insurance, stocks are for growth (ha!), and I fiddle with various ideas for hypergrowth (starting a business, private placement, etc.).

 

[bow-tie]

I have two children, ages 39, and 33, and I am very pleased that neither have talked about "early retirement".
In my opinion, 20 years from now, the idea of retiring as young as some of  the posters on this board are will pass into a "sign of the times".
Regards, Jarhead

I hope not... for my sake, and for others'.

 

[bow-tie]

What are the recommended strategies to open investments positions with a large amount of money? Lump sum investments in all asset classes simultaneously based on assumption you never know if you're in an up market or down market or cost averaging by drip-feeding based on an analysis of value?

Ptolemy

Here's an interesting article on DCA I ran accross while browsing EFMoody.com

http://www.moneychimp.com/features/dollar_cost.htm

Lots of folks talk of the virtues of dollar cost averaging, and there has been extensive study of the practice...

 

[wabmester]

Lots of folks talk of the virtues of dollar cost averaging, and there has been extensive study of the practice...

Like I said, lump sum is the traditional "right" answer for the simple reason that the market goes up 2 days for every 1 it goes down, on average.

But there's another factor for somebody who just retired. Volatility can send you back to work! Which is why it may make more sense *for a retiree* to slowly DCA into the market until a sufficient cushion is established to let you take more risk.

 

[haha]

I have two children, ages 39, and 33, and I am very pleased that neither have talked about "early retirement".
In my opinion, 20 years from now, the idea of retiring as young as some of  the posters on this board are will pass into a "sign of the times".
Regards, Jarhead

Amen to that, Jarhead. My sons are 28 and 22, the older with way more money than he needs by the standards of this board, the younger just starting out. Five or six years ago many of my older son's friends "retired". They were older than he is, but still very young. Many were just starting families. Others had really expensive lifestyles. I thanked God and knocked on wood too that he wasn't interested in this pathway.

Living on capital is a very hard and unforgiving thing to try over a long period of time. I read a quote where George Soros stated that his father was a private speculator/investor of moderate means. Soros said he was one of the very few people he had ever met to successfully do that. (And raise a family, have a middle class lifestyle, etc.) The world is not structured for idleness, though I personally am (unfortunately) structured for my unique type of idleness. My wife often said, "You are the world's most energetic person, as long as it isn't connected to work."

I think if I were somehow transported back to the decision point, I would try psychotherapy instead of quitting.

Still, with prudence, luck, and a strong tailwind things have gone OK for me.

BTW, I think your sign of the times identifier is very apt. The older I get, the more I realize that much of what I think is normal, or reasonable, or correct, is only whatever is "blowin in the wind" at the time.

Regards, Mikey

 

[John Galt]

None of my kids have talked to me about early retirement, or anything related really. I just want them to be happy. However, I have a lot of information
to impart, however skewed by my politics and cynicism.
They don't ask, so I don't tell. It would be nice to have a
serious discussion with them sometime.

John Galt

 

[Ptolemy]

Thanks everyone for the opinions and references. I'll let you know how I get on!

 

[ESRBob]

I lucked out on the longer end.   I bought some junk bonds at 8-9% a while back, and they almost immediately became AA quality after the issuing company was acquired.

Wab,
I like to think of High Yield Bonds as cousins of value stocks -- there will be some rough times, but if everybody has given up on it (in the publicly traded sphere), it has got better odds on the upside. Not just luck that this happened to you, in other words!

I have tended to shy away from direct ownership of non-treasury bonds having been burned once too often in spreads and commissions buying 'used' bonds, though new ones (When Issued) held to maturity would get around that.

Have you found a place that didn't stiff you? Even Vanguard's Bond Desk didn't protect me, as they just farm the trades out to one of the clip joints.

So have stuck with bond funds, but I have always liked the intrinsic safety of laddering -- you know you can just hold the thing in the event interest rates rise, whereas a fund marks to market and may sell a depreciated bond on you prior to expiration.

ESRBob

 

[charlie]

Hi Ptolemy,

The favorite gurus on this forum are Bernstein and
Bogle. Both advise DCA or "value average" your
equity allocation over a 2 to 3 year period. It is
probably OK to plunge your bond allocation but
keep the "duration" under 5-6 years.

Value Averaging, if you are not familiar with the term,
means to "force" your equity allocation to grow at
a fixed linear rate by adding or subtracting funds
at regular intervals. This is easy to do within a
tax sheltered account. However, for taxable accounts,
one should probably not do any "subtracting" ..... just
wait to add more if you are "above" your chosen growth
line.

Cheers,

Charlie

 

[wabmester]

I like to think of High Yield Bonds as cousins of value stocks -- there will be some rough times, but if everybody has given up on it (in the publicly traded sphere), it has got better odds on the upside.  Not just luck that this happened to you, in other words!

Yup, I've used the analogy myself. Unfortunately, both value stocks and junk bonds are offering very low risk premia right now, so I've recently lightened up my fund exposure in these areas.

Have you found a place that didn't stiff you?  Even Vanguard's Bond Desk didn't protect me, as they just farm the trades out to one of the clip joints.

No, I've never found a way for me (as a retail bond investor) to get a fair shake other than restricting myself to new issues and holding to maturity. I've posted before that I found Merrill Lynch to give me the best bond offerings of other brokers I've tried, and they give their brokers enough wiggle room to offer discounts from their standard outrageous fees, but I still don't like trading bonds.

On the other hand, it makes no sense to me to buy a bond fund that concentrates on treasury issues since Joe Retail can get a pretty sweet deal on treasuries via TreasuryDirect.