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URL:  http://boards.fool.com/ok-lets-take-this-perspective-then-100000-30619658.aspx

Subject:  Re: Strategy comparison S&P500 vs. IUL Date:  4/3/2013  1:29 AM
Author:  Rayvt Number:  71678 of 80385

OK, let's take this perspective then;
$100,000 liquid net worth.
How much of it would *you* (RayVT) put into an unhedged-long buy & hold position on the S&P, with the backward-looking wisdom & awareness of typical S&P drawdowns, versus "life happens" potentiality of needing to raid it for junior's uninsured skateboarding incident?


None.
Zero.
$000,000

First of all, "incident" thing is why you have insurance (homeowner's and health). But still, a valid question if you substitute "unexpected expense" for that bit.

Oh, my! So many points to respond to. Here goes ... ;-)

1) "unhedged-long" -- Implies that there is such a thing as a hedged long position. There isn't. A "hedged long" position is effectively just a smaller position. Which by definition is unhedged, that is, an unhedged smaller position. (Which, BTW, is why covered calls are a stupid strategy -- they hedge away all but a teeny bit of the profit.) This phraseology is just fear-mongering.

2) "buy & hold" -- I don't do buy & hold. Of *anything*. Every investment strategy I use is subject to some form of a market-timing overlay/gate for shifting my equity allocation to short-term or intermediate term bonds/T-bills. It's not perfect, and it's not ultra-technical, or genius-level, or requires a massive or superhuman effort as CC likes to taunt. It just moves to cash when the general market is in a downtrend, and back to equities when in an uptrend. It takes approximately 2 minutes once a month. Maybe 4 minutes if you have to boot up your computer first.

3) "S&P" -- I don't actually invest in the S&P500. I invest in various ETFs and individual stocks. But still, saying S&P is a valid synonym for "equities".

4) "backward-looking wisdom [of S&P]" -- All anyone has to do is pull up a long-term chart on the S&P. Here's one: http://finance.yahoo.com/q/bc?s=%5EGSPC&t=my&l=on&am...
Now look for a time when you can say, "If I put money in here and didn't touch it for several decades, that would suck." Can't find one, can you? Even the peaks right before the crashes of 1974-75 & 1987-88 don't look bad when you can see the entire picture.
Due to recency bias, the crashes of 2001-03 and 2008-09 look big and bad. But then you notice that EVERY prior period had its peaks & valleys, so these ones are not different -- they are just recent.
In 20-30 years, the 2000-2010 peaks & valleys will occupy the same position that 1970-1980 does now. IOW, just spiky noise way down on the chart.

5) "& awareness of typical S&P drawdowns" -- Yup. Drawdowns happen. That's life. Sometimes you hit a golfball and it lands in the lake. Hell, I saw Tiger Woods nail one right into a pond at Cog Hill. Arrange your affairs so that a large drawdown doesn't wipe you out.
Diversify.
Personally, I diversify not only between asset classes but also between strategies.

If drawdowns *didn't* happen, then investing would be risk-free. And therefore return-free. Like a bank account or CD. No volatility and also very low return.

6) "life happens" potentiality of needing to raid it" -- So, which is better, having $250K in an account that was worth $400K 2 years earlier, or having $75K in an account that has never ever had the possibility of a losing month? You understand the low-risk of having a mortgage along with enough assets to "stroke a check" to pay it off. No difference.

The only thing is the way you look at it. I read a psychology article recently that explained