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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75833  
Subject: Re: what haven would you choose for 5-year horiz Date: 9/7/2001 12:50 PM
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If you were new to the market (which we aren't) and your retirement funds were not tax protected, retirement is 10 to 15 years away and ALL your assets were in cash right now, how would you proceed?

This is a different situation from needing all of one's money in 5 years. The long-term trend of the stock market is up, but there is a lot of volatility and generally the stock market is not recommended for less than 5 years, and even at 5 years there is a 5% chance one's broadly-diversified stock investments would be worth less than today, and even then for a 5-year horizon I would want to have a good chunk of my money out of the stock market, probably something of the order as already mentioned: about 50% equities, 50% other instruments (I-Bonds, individual bonds, bond funds, money market, CDs, maybe even some municipal bonds/bond funds if my marginal tax rate is above 28%).

Well, anyway, the latest rendention of your question is pretty close to home, only I have both a pretty good pension plan so I probably won't need to access my investments early in retriement and I havesome tax-sheltered investments, but my taxable investments are about double my tax-favored investments. I am also about 10 years from when I can retire with full pension benefits or, by my estimates, about 5 years from when I can live off of my taxable investments until I can start collecting my pension with full benefits. (I can start collecting on my pension before then, but the decrease in benefits for each year early is pretty stiff.)

I did a fair amount of reading at Morningstar, Vanquard, SmartMoney, and some at Quicken, decided that the safest way for me to invest would be in funds following an Asset Allocation plan, ran the "One Asset Allocator" at SmartMoney and the "Retirement Planner calculator" at Vanguard, and decided roughly what I would like my stock/bond split to be. I also stumbled across references to The Trinity Study and follow-up studies on "safe withdrawal rates" and noticed that the asset mix suggested for a sustainable portfolio at 4% withdrawal rate was pretty close to the stock/bond ratio I got from the asset allocation calculators, so I had further confidence that I was on the right track.

I later shapped this into an investment strategy, including specific funds that I can hold for the long term, the percentage I would have in each fund, how I would add money, and if and how I would rebalance. The plan for my taxable investments is that I will have a target percent for each fund (the total stock funds represent 75% of my taxable investments, the total of the bond funds represent about 25% of my taxable investments), and then when I put in new money, I would get the balances in each fund, plug it into a spreadsheet, and the fund most lacking according to my plan receives that money. (Of course, this assumes I picked good funds to begin with--one wants to buy good funds during "buying opportunites", one doesn't want to dish out good money for broken goods.) Then if that is inadequate to keep the balance and the stock/bond ratio gets much worse than 5% (e.g., stocks make up more than 80% of the portfolio when I am targeting 75%), I would switch from reinvesting distributions to feeding a MMF, and then send that money to the more lacking fund(s). But if it gets way more out of balance, I would consider selling a portion of the over-represented fund and use the cash to buy the under-repreented fund. So far, it has been slightly over 2 years and I have been able to keep the portfolio balanced enough by directing new money.

After firming up such a plan for my taxable investments, I then revisited my 403(b), transferred it to a low-cost provider and ran that provider's asset allocation calculator and, with minor variations, that is how I have my 403(b) money invested (TIAA-CREF: various stock accounts, 15% bond account, 10% real estate account), and, instead of directing new premiums to the desired accounts, I have premiums distributed according to the percentages I decided upon, and then annually I am rebalancing. (The difference between the taxable accounts and the tax-sheltered 403(b) is that I can easily rebalance in my 403(b) without any tax consequences, but I have to be careful about taxable accounts because, other than "nudging" that I layed out above by directing new money and potentially the distributions, active rebalancing has tax consequences that eat into long-term returns.)

I also have a fully-funded emergency fund, half in a money market account at my credit union, half in I-bonds.

When I started my taxable investments, I DCAed into the stock funds, and lump-sum purchased the bond funds. DCA for me had the distinct advantage of getting used to my money being at market risk in small doses, so I got acclimated to it over a period of time.

Would I do things differently today if I were starting over? Probably. I think I would go with two or three index funds (total stock market, total bond, something international) or make use of I-Bonds for the bond exposure instead of a bond fund.

My number 1 recommendation, though, is to get some learning of investing under one's belt so one can make reasonable decisions.

I must admit feeling like a fool having 25% non-equities in my portfolio, until the last 16 or so months when I was really glad I didn't have 100% stock market exposure. It was very hard to resist the dot-com mania until they took a nose dive. I felt like I was putting my money in the wrong place by putting new money in bond funds when stocks were going up, up, and away, and later I had to muster a lot of nerve to put money in stock funds when they were (and still are) going down, but I am more confident in my investment plan than my feelings, so my asset allocation plan nudges me more towards being a "contrarian investor", towards buying low and to a lesser degree selling high. But in the long run I believe I'll do better than someone chasing after the hot funds. From what I have seen so far, I do far better this way than chasing after hot funds or allowing my emotions to interfere with sound judgment.
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