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Author: 57andrew Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75381  
Subject: Up, down, sideways Date: 12/28/2010 8:44 AM
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An acquaintance of mine (it would be presumptuous to call him a friend)told me a few months back that for those of us approaching retirement life could be very different from how we had imagined. And not for the better. He forecast a lot of sideways movement with bouts of volatility that would make it, in his words, a great trader's market.
Philosophically I struggle with the idea of trading in my pension fund and the Trustees probably won't smile on it too much either. But how else do I preserve my "wealth" and generate enough to give me an income? If I believe the volatility will revert to the mean then dividend stocks are fine although arguably I miss out on buying at lower entry points if I buy now. As I trawl the web for ideas and insights I see only divergence. There is no consensus. China hits the wall, Peripheral-Europe implodes... we're all doomed. Valuations are reasonable, its all in the price, emerging markets are the place to be, plenty of room for growth. Inflation, deflation. Take your pick. The thing that amuses me most is the idea that all the bad news is in the price already. It always is until "it" happens and then the markets reprice again. Downwards. And markets seem to be increasingly correlated. Bad news rarely seems to be market specific. There are few places to hide. So currently I'm about 80% cash, 20% equities - no idea where gold is going, don't feel I understand the fixed income market well enough but intuitively feel wary and where I live residential real estate prices are so high they give a yield of about 2% after tax. I am long energy stocks but am being advised to buy uranium miners as well.

So after all that preamble, how do others see themselves protecting their pension nest egg? Do you see the world in a less confused way than I do? What is blindingly obvious that I am missing? I'm not looking for the earth - a real return of 5% would do me just fine and I'll take some capital volatility. But the world looks scary to me right now.

And I thought retirement was supposed to be the fun part of life.

Seasonal greetings to one and all.

Andrew
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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67983 of 75381
Subject: Re: Up, down, sideways Date: 12/28/2010 9:02 AM
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But how else do I preserve my "wealth" and generate enough to give me an income?

Dividend paying stocks. Especially those listed on Dividend Champions and Dividend Achievers (Google the terms). They may not preserve your wealth per say, but with dividend paying stocks your more interested in continual payments and increasing payments over time. So to a certain extent you don't really care about stock price after you buy.

JLC

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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67984 of 75381
Subject: Re: Up, down, sideways Date: 12/28/2010 10:35 AM
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Right or wrong, we're trying to protect our porfolio by having a high fixed asset allocation, currently around 68%. Due to historically low rates and the likelihood of higher rates, our bond fund allocation is divided between Vanguard short-term investment grade and Vanguard intermediate term investment grade. The balance (around 32%) is in Vanguard equity funds. As I see it, the greedy and dishonest on Wall Street and in DC can easily destroy the equity market again, just as they did a few years ago, only next time it might take 10 to 20 years to recover. They would have a harder time ruining the investment grade bond market, simply because large cap companies generally are well managed and operated, totally unlike the government. If rates start to skyrocket, I'll move the bond fund money into Vanguard's MM until things seem to top out, then I'll move the money back into bond funds. I'm not into market timing, so I don't claim any particular genuis in deciding if and when to move bond fund money into the MM. Good luck to us all, because the future likely holds nothing but unpleasant surprises for us all.

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Author: tjscott0 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67985 of 75381
Subject: Re: Up, down, sideways Date: 12/28/2010 10:38 AM
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Yep dividend stocks. Dividend Champions are stocks that have increased their dividend payout for 25 consecutive years or more.
Where to find these stocks?
http://www.dripinvesting.org/Tools/Tools.asp

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Author: drippinfool Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67986 of 75381
Subject: Re: Up, down, sideways Date: 12/28/2010 11:00 AM
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My philosophy is that "nobody knows nuthin" so I invest in low-cost broad market indexes and diversify across stocks, bonds and cash. That way, I don't need to worry about trying to predict the future, which I have found I am able to do only in hindsight.

-drip

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67987 of 75381
Subject: Re: Up, down, sideways Date: 12/28/2010 11:15 AM
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Andrew wrote a real return of 5% would do me just fine

If by real return you return beyond inflation, good luck. As far as I know that has not happened in any 30 year period, unless you are lucky enough to invest heavily in Microsoft in say 1984, Apple in 2000, etc. On the assumption you need some returns over inflation, I would suggest your past investment choices have not included many items like MSFT or APPL.

I tend to agree with the idea that volatility will be greater in the next 20 to 30 years, but I am far from confident in the prediction. What I am confident about is the return on equities world wide and in particular in the USA will be significantly less in the 2010 to 2040 period that we experience in 30 year period between 1930 and 2000.

There are two things that I commonly hear about investments which I know are flat wrong. #1 It is different this time. #2 What happened in the past will happen again. What I do believe is things will be somewhat or slightly different in the future. For example, in the late 1920s there was a rash of the same creative mortgage financing we experience in the 2004 to 2008 period. Both those items ended badly. In both cases there were serious banking system issues. In one case government did not engage in deficit spending for a period of 3 years. In one case there was a depression - 25% unemployment.

Gordon
Atlanta

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67989 of 75381
Subject: Re: Up, down, sideways Date: 12/28/2010 12:20 PM
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Personally I am trying to keep as diversified as possible, with the exception of long term bonds which I am underweighting.

...He forecast a lot of sideways movement with bouts of volatility that would make it, in his words, a great trader's market....

It would only be a great traders market if you are a great trader.

If the stocks go nowhere for a long period of time then for someone to make money on a trade, someone has to lose money.

If you get into short term trading you will be up against people with decades of experience with some of the best education that money can buy and they have the time to monitor the market every minute of the trading day since trading is their full time job. The odds of you succeding are stacked against you.

If you do try it and do well at first then there will be no way of knowing if it was due to skill or luck so you will also risk thinking you are better than you are and getting more reckless with your money.

Good luck.

Greg

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67995 of 75381
Subject: Re: Up, down, sideways Date: 12/28/2010 3:45 PM
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TwoCybers writes,

<<<Andrew wrote: a real return of 5% would do me just fine>>>

If by real return you return beyond inflation, good luck. As far as I know that has not happened in any 30 year period, unless you are lucky enough to invest heavily in Microsoft in say 1984, Apple in 2000, etc.

</snip>


If you look at the 128 rolling 30-year periods between 1871 and 2000 for an investment in the S&P500, more than 80% of those 30-year periods had an annualized, inflation-adjusted return of more than 5%.

http://www.retireearlyhomepage.com/ireturn.html

intercst

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Author: 57andrew Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68002 of 75381
Subject: Re: Up, down, sideways Date: 12/28/2010 7:12 PM
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Thank you all for your thoughts. I am not sure about the 5% real return hurdle comments. I'll investigate further. I like the Vanguard funds as an idea and again will look into these. My challenge is compounded because I also run FX risk. My pensions are in £ for historical reasons but I need HK$, which is pegged FTB to the US$. Hence I am a follower of Fool.com and Fool.co.uk

As to timing the market, surely this is the retail investor's biggest challenge - being disciplined and brave enough to buy a falling market not jumping in after event. I don't think you need to be a great trader, just a disciplined one. I follow 200 day EMAs, PEs and strong balance sheets. I am looking for value as well as income and too many stocks are trading too high in my view.

I have bought dividend payers so far and spread them across currencies. So I have REITs and utilities in Singapore paying 6% in a strong currency, RDSB, Tesco, Total and ADM amongst others. I refuse to buy high fee mutual funds.

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68007 of 75381
Subject: Re: Up, down, sideways Date: 12/29/2010 12:38 PM
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intercst wrote If you look at the 128 rolling 30-year periods between 1871 and 2000 for an investment in the S&P500, more than 80% of those 30-year periods had an annualized, inflation-adjusted return of more than 5%.

http://www.retireearlyhomepage.com/ireturn.html


I am not going to dispute the data - data for the early years must be very different. The idea one can expect to obtain 5% over inflation with the S&P is problematic based on S&P closings and inflation data.

From Yahoo.com I found the S&P500 in January 1950 to be 17.05. Adjusted for splits the value in December 2010 in 1250. Call it 60 years.

1250/17.05 = 73.78 which for 60 periods is 7.42% compound growth.

I cannot prove this site is accurate (http://www.usinflationcalculator.com/), but plugging in $20 for 1950 gets $181.58 today. Call it 60 years.

$181.58/$20.00 = 9.079 which for 60 periods is 3.74% annual growth.

So using the whole 1950 to 2010 period 7.42% - 3.74% = 3.50% or well below 5%.

I would not be surprised if several 30 year periods between 1950 and 2010 had 5% real returns, but it is impossible for 80% to have such returns without periods of dramatic disinflation - and that has not happened.

Gordon
Atlanta

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Author: temsike Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68008 of 75381
Subject: Re: Up, down, sideways Date: 12/29/2010 2:25 PM
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Use the Gordon Equation to estimate expected equity returns.

That would be the dividend growth rate + the dividend yield. Simple and incredibly accurate.

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68012 of 75381
Subject: Re: Up, down, sideways Date: 12/29/2010 5:28 PM
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...As to timing the market, surely this is the retail investor's biggest challenge - being disciplined and brave enough to buy a falling market not jumping in after event. I don't think you need to be a great trader, just a disciplined one. I follow 200 day EMAs, PEs and strong balance sheets. I am looking for value as well as income and too many stocks are trading too high in my view....

It is not as easy as it sounds. I learned the hard way, fortunately with less than 10% of my portfolio.

Greg

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Author: BretBaughn One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68014 of 75381
Subject: Re: Up, down, sideways Date: 12/29/2010 5:34 PM
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the whole 1950 to 2010 period 7.42% - 3.74% = 3.50% or well below 5%

I think you forgot about dividends. With dividends included, the effective rate was around 7% (adjusted for inflation).

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68021 of 75381
Subject: Re: Up, down, sideways Date: 12/29/2010 8:22 PM
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I believe you are right. Thank you for pointing out my error.

Gordon
Atlanta

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Author: 57andrew Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68044 of 75381
Subject: Re: Up, down, sideways Date: 12/31/2010 8:54 PM
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The other point I would make is that I am not looking at exclusively the S&P. I have a much wider diversification target across geographies and asset classes. I have found another couple of targets to watch as we kick off 2011. The iShares S&P Global Utilities trades on a low PE, has a reasonable yield and I would argue good defensive qualities. Secondly SingTel looks good - yields almost 5% and is a rock solid stock with a progressive divided pattern.

We have also decided in the last few days to buy some physical gold and maybe some real estate, the thinking being to protect ourselves from a demise of fiat currencies going to the dogs. Its kind of expensive insurance but the world sure looks scary from where I sit.

Andrew

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