Invest all net worth pre-FIRE or spread out over time post-FI?

[Nerdjenni]

Hi - I'm currently a few years to FIRE and able to sock away a lot of money each year (~$200K/yr) into my nest egg thanks to high wages of my Silicon Valley job. FIRE goal is $2M nest egg by end of 2018, age 37 me, age 39 DW, and god-willing two healthy kids.

Anyways, my question is whether I should I invest all the money I'm socking away right now, or keep a big chunk in cash to invest slowly over time post-FIRE. I recently read Michael Edelson's book on "Value Averaging", which is basically a version 2.0 of the basic dollar-cost-averaging principle where the idea is to use time to spread out your risk by buying more when market is low and vice versa.

Right now, I've been taking my $200K/yr in savings and pretty much investing all of it straight away into my AA. But I know that in a few years post-FIRE, I won't be adding anything more to my nest egg (my goal post-FIRE is to make enough to annual living expenses so I'm not withdrawing from the nest egg, but I won't be adding to it).

Should I be holding back a chunk of my pre-FIRE savings in cash so that I can gradually put it into my AA over the course of my post-FIRE years? If so, how much?

Right now, I have total net worth of $1.35M. Of that, $1.25M is invested into my AA so I only have $100K in cash right now. Thanks!!

 

[nun]

Unless you are very pessimistic about current investment returns why would you miss out on years of compound interesting by waiting until you retire to invest cash?

 

[RunningBum]

I would think that you're already spreading out your risk somewhat by investing a % of each paycheck in your 401K and company stock program, plus if you make more each month than you spend you can auto-invest the excess.

My rationale is that I handle risk with a proper asset allocation, and other than possible tax impact, my money fully invested is no different from your money that is not, so why treat it differently?

If you would prefer to time the market, that's a different story and you may do better if you predict it right. Value averaging might be a way to automate market timing, but why isn't value averaging done by having sell triggers once you are fully invested?

The reality is that it probably won't make much difference, especially since we're talking about less than 10% of your money.

 

[Senator]

I save just a bit over $200K in 2015. I did my 401K, HSA and an additional 11K per month in the S&P (IVV) fund. All are with dividends reinvested.

I am now collecting a bit of dividends that will help in the FIRE world.

Invest it now. Do not wait.

 

[6miths]

I'd definitely go with the majority here and invest it as you get it according to your AA. When you actually retire you may want to consider whether your AA might change at that time and rejig things a bit.

 

[38Chevy454]

I agree, why wait? Assuming you are investing into diversified funds per your AA, then you should be good. While you may buy more when it goes down, you gain nothing if it goes up. Plus right now cash is not earning enough to be any significant contribution.

I presume you have maxed out all the pre-tax, so majority of your savings is post-tax. Seems like Roth would be a good plan for some. But you also need to have some available for living expenses given your younger age, and a std after-tax savings account would be good; this can be invested more into stocks since you can take tax break on the qualified dividends.

 

[rayvt]

I agree with all the others about investing now according to your chosen AA.

As far as "Value Averaging" --- it is nonsense. It only works in concept if the market only always goes up or loses only a little. When the market goes down, Value Averaging requires you to put in huge amounts of money month after month.

Consider a case for a 6% Value Average Growth (1/2% per month), and a $250,000 portfolio. Each month, between gains and new money the portfolio must increase by $1250. In ordinary times this will require little or no new money to be put in. But what about a month like Aug 2015 when the S&P500 went down 6.3%. That's a portfolio drop of $15,750, so to get to the required $1250 increase you have to put in $17,000 of new money. Where does that money come from?

Worse, what about the cases where the market drops a few percent for several months in a row, like May to October 2011. -1.4%, -1,8%, -2.1%, -5.7%, -7.2%. To keep on the Value Average growth of $1250/mo you have to put in over $50,000 of new money in those 5 months. Again, where does that money come from?

Value Averaging is nonsense on stilts.

 

[Nerdjenni]

Thanks for the input, all! I'm in agreement with everyone's advice to put all the money into my AA now instead of waiting. Especially after reading this article here where this guy shows that VA hurts you because of the opportunity cost of leaving cash on sidelines.

Michael James on Money: Value Averaging Experiments

So...if my strategy is now to rely on my AA to balance risk, for those of you considering a very early retirement (pre-40), are you planning on dramatically changing your AA pre vs post FIRE? My current situation:

$1.25M investable assets, assuming FIRE at end of 2018 age 37. Will contribute ~$150K/yr for next 3 years before FIRE. After which, assume no additional contribution. I also have ~$100K sitting in liquid cash right now.

My target AA looks like this:

Equity: 65%
-Domestic (w/in class) 70%
--Largecap 50%
--Small-mid 25%
--Value 25%

-Foreign (w/in class) 30%
--Emerging market 25%
--Developed 50%
--Int'l small cap/value 25%

Alternatives: 10%
-REIT 100% (originally had an allocation for commodities, but I don't understand them and have read they are not necessary in AA)

P2P Lending: 10% (this is in LendingClub, pretty aggressive allocation)

Bond: 15%
-Total market bond fund 50%
-Dividend/income 25%
-Corp bond fund 25%

Currently, my real AA is a bit off and over-indexing in equity large-cap due to the fact that I have 13% of my AA in my company stock. This I have been divesting over time and will continue doing so, but am trying to wait for 1-year holding due to tax.

Anyways, my main question is what do you think of this AA and would you change significantly post-FIRE given my circumstances?

Thanks for all your help!

 

[petershk]

I don't think that VA is necaessarily nonsense depending on the situation via a vie DCA.

Let's say you HAVE 120,000 to invest right now. You can
1) put in 120k now
2) put in 10k/no for a year or
3) VA based on market changes to a 10k/mo baseline

So in that case a 5% market rise would drop what you put in month one and a subsequent 10% drop would increase the next month.

In that scenario it might be better than straight DCA though of course historically its better to put the whole amount to work day 1.

Sent from my HTC One_M8 using Early Retirement Forum mobile app

 

[Turn_the_Page]

I'm afraid this is another of those questions that we can't truly know the answer to without a crystal ball. I'd assume the market is reasonably efficient and just keep investing. You're young, have a fabulous salary. I wouldn't worry about it too much.

 

[rayvt]

My target AA looks like this:

Equity: 65%
-Domestic (w/in class) 70%
--Largecap 50%
--Small-mid 25%
--Value 25%

-Foreign (w/in class) 30%
--Emerging market 25%
--Developed 50%
--Int'l small cap/value 25%

Alternatives: 10%
-REIT 100% (originally had an allocation for commodities, but I don't understand them and have read they are not necessary in AA)

P2P Lending: 10% (this is in LendingClub, pretty aggressive allocation)

Bond: 15%
-Total market bond fund 50%
-Dividend/income 25%
-Corp bond fund 25%

I wouldn't put anything into P2P lending. Buy fireworks instead. Either way you'll burn through all the money, but fireworks will be fun to watch.

The other stuff, I think that you're overthinking it and making it more complicated than it need be. You don't need to slice & dice the sub-allocations that way. VTI and VXUS (or VEA) does a perfectly fine job.

Bonds are problematic going forward, whe interest rates rise, but again I'd be inclined to simply just go with something like AGG or BND.

If you don't mind doing a bit of work, Antonacci's GEM looks pretty good. Is Gary Antonacci's Global Equity Momentum Strategy Robust? — Severian Asset Management You don't have to go full-on, of course. You could run half of your money with your favorite AA and half with GEM.

would you change significantly post-FIRE ?

As long as you have a sound, robust strategy & asset allocation, I don't see any reason to invest differently after retirement.