Do you have an investment plan?

[techboy]

There has been a lot of talk about the stock markets, lately (for obvious reasons), and one thing I've been wondering about is how many here actually have a plan for their investments?

This is from http://www.bogleheads.org/forum/viewtopic.php?t=6211'>Investment Planning FAQ, on a finance board I frequent.

Investment Plan

After educating yourself, the first step on your investing journey should be to settle on an investment plan that includes your desired asset allocation. Your investment plan should look out into the future and include things like a new car or home purchase in a few years, education expenses for children, and retirement, just to name a few. All of these goals require money in different time frames, and the money should be invested accordingly. Studies have shown that your asset allocation will determine more than 90% of your portfolio return, so you should focus on your asset allocation first rather than on fund selection.

Since risk and return are directly related, your asset allocation should balance your NEED to take risk with your ABILITY to withstand the ups and downs of the market. NEED can be determined in many different ways. If you are young, you have the benefit of many years of compounding, so in one respect your NEED to take risk is low. On the other hand, your portfolio size is probably small, leaving you with a long way to go to reach your retirement goals. As a result, you could argue that your NEED to take risk is high.

For people closer to retirement, it may be possible to more closely determine NEED. First, estimate approximately how much income you will need annually after retirement. For this example, we’ll assume you need $100,000 per year. Next, look at any pensions or social security benefits that will provide a source of income. If a pension provides $30,000 per year and social security provides an additional $20,000 per year, then your portfolio would need to provide an extra $50,000 each year. To prevent running out of money, you should probably start by withdrawing 4% a year or less with an annual inflation adjustment. To generate $50,000 per year at 4% requires a minimum portfolio size of $1,250,000. How close are you to your goal?

Turning to ABILITY, this relates to your ability to withstand the ups and downs of the market without getting nervous and making changes to your asset allocation. Selling in the face of a decline is about the worst thing you can do. Here is a table offered by author Larry Swedroe, based on the 1970s bear market, showing the amount of decline for various stock/bond allocations:

Max Equity - Exposure Max loss

20%...............5%

30%..............10%

40%..............15%

50%..............20%

60%..............25%

70%..............30%

80%..............35%

90%..............40%

100%.............50%

There are other ways to determine an asset allocation, including several rules of thumb:

• Your age in bonds. So, if you are 40 years old, then use a 60/40 (equity/bond) allocation.

• 110 minus your age = equities (110-40 yrs old=70/30 asset allocation)

• 120 minus your age = equities (120-40 yrs old = 80/20 asset allocation)

• Vanguard can also help you Create an Investment Plan

So... what kind of investor are you? Do you have a longterm plan? Do you stick to it?

It's important now, because as I wrote in another thread, Rick Ferri is one of my favorite investment advisers, and he recently started a thread at one of my favorite investment sites, titled These Are the Times that Try Men's Souls. Here's what he wrote:

So, you say you are a long-term investor. You say that when the markets turn down you will keep a level head and do what you know should be done. You said that you would look at your portfolio allocation and rebalance, or that you would invest more money to bring your allocation back to its target.

Well, are you? Are you rebalancing? Are you adding more money?

Or, are you taking a 'wait and see' attitude? Or maybe thinking about take a little off the table...or just get out altogether.

Guess what? If this market is bothering you to the point that you are not going to maintain your long-term investment plan, then you have no plan!. You have been fooling yourself about your tolerance for risk because it is not as high as you thought it was. And your plan is based on a that false premise. So, it is time for a new plan.

People are brave in a bull market, but it is in a bear market that true feelings come out. So, if you are not going to do what you swore you would during better times, then reduce your risk permanently. Reduce your allocation to stocks, or let the market do if for you, and do not go back to your over allocated level. Keep it at a permanently lower level. At least you will be better prepared for the next bear market.

On the other hand, if it is business as usual, then good for you. You're investing within your tolerance for risk, and you will be justly rewarded, eventually. I don't know when, or how much more we will lose between now and there, but I do know that "this too shall pass."

Anyway, I was just curious who's got a plan...

[iheartskins]

techboy, do yourself a favor and get a CFA for crying out loud!

[techboy]

techboy, do yourself a favor and get a CFA for crying out loud!

Funny.

I know it seems like I'm always advocating passive, long-term investing, and even this could easily be construed as a not-so-subtle prod via rhetorical question, but I really was curious how many do actually have a long-term plan.

I guess it came off a little more preachy than I intended. :laugh:

[Raub]

guns and gold

[techboy]

guns and gold

Don't forget the bullets. That would be embarrassing.

[DButz65]

I own property in the sticks around the dc area (areas that havent ballooned with residential/business zoning yet. I learned from my father who wayy back in the day bough up all kinds of land in nova and the surrounding dc areas. He didnt need to run his business anymore once he started getting offers from major builders wanting his land and retired filthy rich pretty much.

He also had about 12 rental properties/houses all over va and md, he has sold most of them but still has a few. One day when i get enough $$ to do so, i'll be doing what he did back then.

[SkinsHokieFan]

Not yet besides the basic 401 k from work. I want to really be set with this and have a real long term plan within the next 18 months and decent cash to put in

I have been focusing on short term stuff now (car, and now a home) before thinking long term

[DarrellsMyHero28]

IRA is all I have now, but I don't have enough income to be making any serious investments besides that.

[techboy]

I own property in the sticks around the dc area (areas that havent ballooned with residential/business zoning yet. I learned from my father who wayy back in the day bough up all kinds of land in nova and the surrounding dc areas. He didnt need to run his business anymore once he started getting offers from major builders wanting his land and retired filthy rich pretty much.

He also had about 12 rental properties/houses all over va and md, he has sold most of them but still has a few. One day when i get enough $$ to do so, i'll be doing what he did back then.

It sure does seem that most wealthy people got that way through Real Estate. I've heard it said that "land is the only thing they're not making any more of"

Not yet besides the basic 401 k from work. I want to really be set with this and have a real long term plan within the next 18 months and decent cash to put in

I have been focusing on short term stuff now (car, and now a home) before thinking long term

IRA is all I have now, but I don't have enough income to be making any serious investments besides that.

Do you guys have some kind of plan or allocation as to how you put the money in, or are you just going with whatever seems good at the time?

[DarrellsMyHero28]

Do you guys have some kind of plan or allocation as to how you put the money in, or are you just going with whatever seems good at the time?

I've been putting some in as I go along, it should be more structured but I'm not making enough now that it would make a huge difference and I'll need the money for rent, food etc.

Not to sound condescending but you should probably get on your horse man, you should be serious about putting money away.

[Oldskool]

Does the state lottery count?

[Corcaigh]

For my US retirement funds (I won't go into the pensions I have in the UK ) once I reached a threshold in the Vanguard S&P Index Fund (valuation of two years salary - it's an arbitrary number but it was a milestone of sorts) I am maxing out my 401k following the simple outline from David Swensen who manages Yale's portfolio;

http://www.npr.org/templates/story/story.php?storyId=6203264

Of course this means I'm too much in domestic equity currently (ignoring the chunky UK pensions which are % of final salary and I suppose are a little like bonds as the income is guaranteed), but that will correct itself over time.

I have a big chunk of equity in my house which I hope to cash out of into a smaller property once the kids have finished HS in four years time. I'm considering buying a vacation/investment property but may lean more toward REITs as I don't want the hassle of looking after another damn house at this time.

Now the kids are both out of middle school and more independent I'll have time to think about spending time on a vacation home.

[techboy]

Not to sound condescending but you should probably get on your horse man, you should be serious about putting money away.

Hey! I'm the condescending one around here! :mad:

I am pleased to assure you that I do indeed have a strict IPS, which I follow faithfully.

For my US retirement funds (I won't go into the pensions I have in the UK ) once I reached a threshold in the Vanguard S&P Index Fund (valuation of two years salary - it's an arbitrary number but it was a milestone of sorts) I am following the simple outline of David Swensen who manages Yale's portfolio

My own portfolio choices were influenced very heavily by Swenson's book Unconventional Success. He's the reason I avoid non-Treasury bonds, for instance.

I also follow his U.S./Foreign 60/40 split, and his 50/50 TIPS/T-Bills recommendations.

[Corcaigh]

My own portfolio choices were influenced very heavily by Swenson's book Unconventional Success. He's the reason I avoid non-Treasury bonds, for instance.

As it's only my financial future at stake I wasn't prepared to read a WHOLE book. But a five minute NPR segment along with a short accompanying article was good enough.

[techboy]

Of course this means I'm too much in domestic equity currently (ignoring the chunky UK pensions which are % of final salary and I suppose are a little like bonds as the income is guaranteed), but that will correct itself over time.

Whether or not to consider things like pensions and Social Security to be bonds is an interesting question, but I'd tend to lean no, if for no other reasons than it tends to make allocations a nightmare, logistically (how much is that worth as a lump sum for comparison to the other assets, for instance, or allocation location).

I think it makes more sense to count them as income for the "need" part, then determine one's allocation based on that (whatever the shortfall is between the amount you want and the amount you're guaranteed), kind of like laid out in the quote in the OP.

It's certainly easier that way.

[Corcaigh]

I also use Tarot Cards to help pick individual stocks.

[techboy]

As it's only my financial future at stake I wasn't prepared to read a WHOLE book. But a five minute NPR segment along with a short accompanying article was good enough.

Oh, I don't read the whole books either. I just read the chapter summaries, then skip to the sample recommended allocations.

[techboy]

I also use Tarot Cards to help pick individual stocks.

That's about as good a method as any.

Cramerwatch.org is down, now, sadly, but it used to be a very funny site where they put Jim Cramer's stock picks up against "Leonard the Wonder Monkey" (represented by a random number generator suggesting buy or sell). You could even enter a stock ticker for Leonard to make a suggestion.

As I recall, Cramer never could beat Leonard, long term. :laugh:

*EDIT* Here's what the site looked like, courtesy of the internet archive.

[Corcaigh]

Whether or not to consider things like pensions and Social Security to be bonds is an interesting question, but I'd tend to lean no, if for no other reasons than it tends to make allocations a nightmare, logistically (how much is that worth as a lump sum for comparison to the other assets, for instance, or allocation location).

I think it makes more sense to count them as income for the "need" part, then determine one's allocation based on that (whatever the shortfall is between the amount you want and the amount you're guaranteed), kind of like laid out in the quote in the OP.

It's certainly easier that way.

Yeah, with the fixed income from the Euro pensions I suppose I can lean more aggressive with other investments.

The picture is also influenced by my investment in property that I live in. It's of a size that I won't need (all of it) to live in once the kids have flown the coop so it should be factored into the investment mix in seeing how balanced the whole picture is.

[LegionOfDoom]

Currently I have a 403B....non-aggressive.

Regular Government Employee Pension and TSP.

I have also been buying US Savings Bonds for the last 3 years.

Everything pulled straight from Paycheck.

I would love to retire at 50

[Corcaigh]

That's about as good a method as any.

Cramerwatch.org is down, now, sadly, but it used to be a very funny site where they put Jim Cramer's stock picks up against "Leonard the Wonder Monkey" (represented by a random number generator suggesting buy or sell). You could even enter a stock ticker for Leonard to make a suggestion.

As I recall, Cramer never could beat Leonard, long term. :laugh:

Not only that, of course, but if you worked with a professional broker to make such picks you would have another couple of percent of cost added on top of your losses. :doh::laugh:

I have never picked individual stocks and never will (I don't own a pack of Tarot Cards). I've always worked in the software industry and having read analyst recommendations about companies (that I had detailed internal knowledge of) that were based on totally irrelevant and arbitrary factors, I realized that investing in individual companies based on public information was a mug's game.

[techboy]

Regular Government Employee Pension and TSP.

The TSP is incredible, from what I understand. One of their bond funds (the G, maybe?), has bond-like returns with a guarantee that it won't lose value. Can't beat that.

[Ignatius J.]

As a starving student... the money is coming out of the mutual funds now and not going in. I feel a little bit bad doing that right now, but I'm still way up since the money went in.

In general I try to balance my portfolio by taking out from the stocks that are up the most. I invest in very high risk for the most part, mostly because I can stomach the variance. If I lose all my money tomorrow I'll be sad, but it's no big deal. I'm young and working on an advanced degree, so my income potential in the next ten years is much larger than my savings. As for my plan, I'm 50% domestic with that split about evenly between large and small cap index funds. The other 50% is in emerging markets. No bonds or the like.

I'm also not sure why people say you should have bonds in your portfolio, assuming that you are okay with losing all of your money. To me, you just have to be honest with yourself about your risk aversion. If you really truly are okay with going broke, which I think someone in my situation really ought to be, then why not maximize expectation? In general, it's a winning play in expectation to take up the higher variance, and it's served me pretty well so far.

I will say this though, according to techboy's check for risk valuation, I'm still sitting well. I'm not moving anything out because of the bear market. I'm still just rebalancing, and doing the selling that I would normally be doing just to have some walking around money.

I do wish I were working now like DjTj though. Would be a great time to be putting money in. Still, the PhD is probably the best investment I can make.

[techboy]

As for my plan, I'm 50% domestic with that split about evenly between large and small cap index funds. The other 50% is in emerging markets. No bonds or the like.

Wow. That is aggressive.

I'm also not sure why people say you should have bonds in your portfolio, assuming that you are okay with losing all of your money. To me, you just have to be honest with yourself about your risk aversion. If you really truly are okay with going broke, which I think someone in my situation really ought to be, then why not maximize expectation? In general, it's a winning play in expectation to take up the higher variance, and it's served me pretty well so far.

In theory, that's right, assuming that your various stocks are sufficiently uncorrelated with each other (part of the point of bonds is their Modern Portfolio Theory benefit in terms of uncorrelated assets working together to increase returns). I think that the issue is that most people aren't really risk tolerant enough to be 100% stocks, even if they think they are, and most financial advice is tailored to the masses.

[Ignatius J.]

I do worry about correlations and the like, but with minimum investments, it can be hard when you're not moving that much money around. There are certainly correlations, but from the evidence I've collected so far, they do seem reasonably uncorrelated. The emerging markets that I am in have gone through the roof. The small caps went up pretty far and have come down to just above where I bought them, and the S&P 500 has just kind of sat there. Seems uncorrelated enough to me.

Can you explain some more about the idea of uncorrelated assets working together to increase returns? Obviously, uncorrelated assets decrease variance, but how can they increase expectation?

All I can think of is the effect coming from periodically re balancing the portfolio. But in order for that to affect expectation, you have to make some pretty large assumptions about the market don't you? You have to have a pretty clear notion of things being under and over valued.