We're asking ourselves some important questions these days. We're at or near 50 and are socking retirement funds away like crazy but are nowhere near our goal.For nearly a year now, we've let our retirement dollars accumulate in cash as we ponder--along with most folks--What To Do Now. A few of our stocks--JNJ, for example--have not been totally nailed, but we're concerned that stock valuations are still unreasonably high and vulnerable. So, assuming that the market is unlikely to recuperate significantly over the next few years, here's a hypothetical question: You have no debt. You own no property. IF all your tax savings were suddenly cashed out today, where/how would you invest those funds today and for the next 5 years if they were NOT in a tax-advantaged account? If stocks are part of your strategy, what sectors will be the steadiest gainers, in your opinion? (Hmmm--waste management is starting to look good....can always count on waste...). Our thinking: consumer non-cyclables, medical care/drugs, value retail, banking(?)yer thoughts?kse4
Author: kse4 Date: 9/5/01 10:34 PM Number: 31808 We're at or near 50 and are socking retirement funds away like crazy but are nowhere near our goal.For nearly a year now, we've let our retirement dollars accumulate in cash as we ponder--along with most folks--What To Do Now. A few of our stocks--JNJ, for example--have not been totally nailed, but we're concerned that stock valuations are still unreasonably high and vulnerable. So, assuming that the market is unlikely to recuperate significantly over the next few years, here's a hypothetical question: You have no debt. You own no property. IF all your tax savings were suddenly cashed out today, where/how would you invest those funds today and for the next 5 years if they were NOT in a tax-advantaged account? One thing for sure: don't get greedy! Protect your principle! Time is too short to recover from a blunder!!Since you will need to draw from the money in five years, you probably need to make sure you don't lose any of it. That means that you should utilize a conservative asset allocation plan. Many people in your shoes would probably choose a balanced, 50/50 equities/bonds split. For equities, you might choose a total market index fund like the Vanguard VTSMX fund, and a short term bond fund like the Vanguard GNMA fund, VFIIX.Sure, you'll pay some income taxes on the GNMA income, but it's relatively safe, and in this market, safety means a lot!!If you prefer stocks, you might want to consider some of the higher dividend, old economy, stocks like MO, EK, DD, GM, F, CHV, BAC, etc. These stocks have beta coeficients well under 1.0 (meaning they are less volatile than the S&P500, and provide a lot of portfolio stability just now. The dividends may be the only gains you'll get over the next couple of years in this market.Russ
A clarification on my posed question:Assume you WON'T be drawing on the money at the end of 5 years--your investment goal is actually ten or fifteen years off. But what course would you take toward that goal in the near/mid-term? (I've looked at the Vanguard GNMA--an attractive suggestion, all things considered.)kse4
You own no property.This is the first thing I'd take care of. I'd prefer to own and live on ramen noodles, as opposed to renting and living on deluxe macaroni and cheese. Ownership has big advantages, one is, the payments stop eventually, as opposed to rental, you have tax deductions for the interest and other fun stuff.Over five years, I'd be thinking that boredom is good. Bond funds, GNMA funds, EE and I bonds. I'd also look at REITs, utilities and other steadily growing companies with secure, high dividends (I don't have any in particular to recommend).I don't know what you have or what your goals are, so that's a bit of a cookie-cutter piece of advice.
Author: kse4 Date: 9/6/01 2:54 AM Number: 31819 Assume you WON'T be drawing on the money at the end of 5 years--your investment goal is actually ten or fifteen years off. But what course would you take toward that goal in the near/mid-term?Well, that changes the picture considerably, and you should probably be focused on maximizing growth as opposed to protecting principle.I would say that with ten years or more (before starting withdrawals), you should be very heavily weighted in equities via a broad market index. You might still want to hold some bonds, or short term bond funds, though, because it has been shown that this will lower your portfolio volatility with only a small reduction in the potential gains. One of my favorite books is 'The Intelligent Asset Allocator' by William Bernstein. He presents data on this topic showing that a 75/25 equity/bond ratio will reduce the standard deviation of the portfolio from 20% to 16% while only reducing gains from 11% to 10%.No matter what you do though, you should probably not expect returns as high as the ones in the 90's. I think with the high PE ratios, we will see many years of lower than normal growth. I wouldn't be surprised by ten years of 6% (average) growth in the S&P500.Russ
"We're asking ourselves some important questions these days. We're at or near 50 and are socking retirement funds away like crazy but are nowhere near our goal"You don't say what your goals are?To me that is putting the cart before the horse.You might want to check out my prior post at:http://boards.fool.com/Message.asp?mid=15590718Re: Late Start Retirement PlanningCorrection to book list -book by Mr. O'Neill is:How To Make Money In Stocks", by William O'NeillFurther information can be researched at:http://www.fool.com/retirement.htm....", here's a hypothetical question: You have no debt. You own no property"You left out:*your future earning capacity?*your future health concerns?*your plans for the funds 5 years from now?..."If stocks are part of your strategy, what sectors will be the steadiest gainers, in your opinion? (Hmmm--waste management is starting to look good....can always count on waste...). Our thinking:..."Even the "experts" can't agree. Ask 100 analysts about the future prospects of a particular stock or sector and you would probably get 100 different scenarios. And you want "predictions" from message board posters - LOL.Seriously - you might find what you are looking for at:http://boards.fool.com/SubFolders.asp?fid=10042http://www.fool.com/Community/FoolBoards/InvestmentClubs.asphttp://boards.fool.com/Boards.asp?fid=10005http://boards.fool.com/Boards.asp?fid=10008http://www.fool.com/community/resource/http://www.stanford.edu/~wfsharpe/
Hello cdr46,I left out specifics because my questions isn't about me. Note the use of the second person pronoun in the hypothetical. Supply your own variables--I'm more interested in a conversation than in fishing for predictions.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 difficult market--most of us are 'up' on the research, have pretty solid backgrounds, and do our due dilligence--but still don't have The Answer. And The Answer will always be subjective--who cares about 'the experts'? I'm interested in how other Fools down here in the trenches construct and support their strategies...kse4
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.
Take a look to Money Magazine on-line at money.com.I just did. They have some excellent articles on your exact question.Ed
Gotcha, thanks for the clarification.Do you of these web sites?To obtain historical rates of return go to:http://www.planplus.com:8080/calculators/Historical/Historical.jspFor future prognostications go to:http://www.dismal.com/cgi/stocks.asp"What is the fair value of stock prices? The answer to this question depends on investor expectations for corporate earnings and interest rates. The Dismal Scientist® introduces a tool to quantify what different investor expectations mean for stock price valuations." A few of my favorites:http://www.efficientfrontier.com/http://www.stanford.edu/~wfsharpe/http://www.superstarinvestor.com/
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