In the area of investments I have been an ERE pretender. Currently I put all my money into:
-an index-tracking mutual fund (~$30k... was larger until I bought a house 7 months ago)
-cash in savings ($50k)
(I also have $16k sitting in a 401k, but now that I am no longer a resident of the US it feels unbelievably distant to me since I can't move it to Canada without a huge penalty until I'm 60).
I apparently do not believe in the value of compound interest.
Well, due to an unfortunate miscalculation in my Canadian taxes, I accidentally oversaved for my taxes. I am incorporated and have to save for my taxes. Saving for your taxes and paying your taxes in a lump sum is a very, very, very good way to hate the gov't. Seriously, there is a very large amount of money sitting in an account right now earmarked for a bridge to nowhere.. sigh.
Anyways, because I oversaved for my taxes, last month and the next 3 month are "tax-free" for me and my savings rate will be almost 2x (huzzah!). So I'm motivated to start putting my money to better use.
Permanent Portfolio
Dogs of the Dow
Both (use the dogs of the dow as the stock component)
Pick a few low risk mutual funds
Something else?
The moment of truth is here, I actually need to setup my allocations and start transferring cash into investments. Would love to hear some thoughts on how others are setup before I make the big plunge this weekend...
The Moment of Truth
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AlexOliver
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Don't use the dogs of the dow as the stock component of the permanent portfolio. If you're interested in the PP, I suggest reading Harry Browne's Fail-Safe Investing.
One thing Jacob says a lot is that index funds are bad because you get the same return everybody else does. (I think, correct me if I'm wrong Jacob). Harry Browne says investing is accepting the return everybody else is getting (paraphrasing) and speculating is thinking you can do better.
One thing Jacob says a lot is that index funds are bad because you get the same return everybody else does. (I think, correct me if I'm wrong Jacob). Harry Browne says investing is accepting the return everybody else is getting (paraphrasing) and speculating is thinking you can do better.
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RightClawSouth
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In my humble opinion none of the traditional strategies will work yet (Buy & Hold, Dogs, Permanent, etc.). There are still too many large negative variables floating around for the market to act "normal", which is what the majority of those strategies are based on.
There are also some potential problems that have no historical norm to use as a comparison. High Frequency Trading (HFT) being one of them.
Short article on that.
http://www.ritholtz.com/blog/2010/10/ma ... hat-crash/
Personally, I have been timing the market here and there, and I have been focused on companies who were hit overly hard. But, mostly, I have had cash since before the crash.
There are also some potential problems that have no historical norm to use as a comparison. High Frequency Trading (HFT) being one of them.
Short article on that.
http://www.ritholtz.com/blog/2010/10/ma ... hat-crash/
Personally, I have been timing the market here and there, and I have been focused on companies who were hit overly hard. But, mostly, I have had cash since before the crash.
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RightClawSouth
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- Joined: Wed Jul 28, 2010 3:15 am
I remember Jacob had a post about the advantage of dividend earning stocks being that they're tax free (under the current system) if your income is low enough (which it probably would be under ERE).
I don't know enough about this but my feeling is that ERE folks might find themselves with interesting tax situations that could affect the optimal investments to choose...
I don't know enough about this but my feeling is that ERE folks might find themselves with interesting tax situations that could affect the optimal investments to choose...
dang... a lot of my investments will be held in my corporation. In Canada capital gains from a corporation are taxed at the highest marginal tax rate (no 1 year gaming possible). So feels like the tax penalty of "re-balancing" is maybe too high.
anybody know of a more tax-friendly investment strategy...
actually maybe it doesn't matter. If I am going to pay capital gains it doesn't matter if I take the hit yearly, or en masse after 40 years. So maybe maximizing gains is more important.
anybody know of a more tax-friendly investment strategy...
actually maybe it doesn't matter. If I am going to pay capital gains it doesn't matter if I take the hit yearly, or en masse after 40 years. So maybe maximizing gains is more important.
@dpmorel
Decent returns for the amount I have been investing. BP was one. When it went below $30 I considered it a good risk, since the well cap appeared to be imminent. I sold near $35. That is a good return, but my overall portfolio return is rather low because it's mostly cash.
I have also been timing my mutual funds in my 401k on the big moves, though I haven't done that in a while...too hard to predict over the last 6-8 months.
Decent returns for the amount I have been investing. BP was one. When it went below $30 I considered it a good risk, since the well cap appeared to be imminent. I sold near $35. That is a good return, but my overall portfolio return is rather low because it's mostly cash.
I have also been timing my mutual funds in my 401k on the big moves, though I haven't done that in a while...too hard to predict over the last 6-8 months.
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George the original one
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the business doesn't need it. I am technically self-employed (I basically have one "full-time" gig and two side contracts so that allows me to be self-employed). I want to leave the money in the company until I retire as I am taxed at the highest rate now, and should be taxed at the lowest rate when I retire.
I am an income investor. So the permanent portfolio is a no-go for me.
25% in cash (money market fund): pays no income currently
25% in precious metal: pays no income
25% in a S&P 500-type index fund: pays less than 2% in dividends
25% in long term treasuries: pays 3-4% in dividends.
That's just not enough income for me. Currently I own a mixture of dividend-paying stocks (US and foreign) and fixed income instruments(I prefer CDs to bonds right now) and my conservatively invested portfolio yields just over 3% per year, enough to cover my expenses.
But if if are a total return investor, then the permanent portfolio could make sense.
25% in cash (money market fund): pays no income currently
25% in precious metal: pays no income
25% in a S&P 500-type index fund: pays less than 2% in dividends
25% in long term treasuries: pays 3-4% in dividends.
That's just not enough income for me. Currently I own a mixture of dividend-paying stocks (US and foreign) and fixed income instruments(I prefer CDs to bonds right now) and my conservatively invested portfolio yields just over 3% per year, enough to cover my expenses.
But if if are a total return investor, then the permanent portfolio could make sense.
@cestlavie - Thank you for your post. It actually really made things clear to me.
In the world of ERE, the ERE period is relatively short in terms of investing so any "growth" strategies are maybe less applicable.
Maybe all you really care about is figuring out how to maximize income, so you can retire as early as possible. Which makes me think a dividend/bond oriented strategy is a better fit.
Having said that, there is a wealth protection issue. PP helps cover wealth protection. But actually I don't care about wealth protection immediately. I care about getting retired.
1. Build up an ERE fund. Have that initial ERE fund maximizing income so I can be financially independent/retired sooner.
2. Start my FI/retired life. In my case I think I'd actually still have some work that earns money.
3. Invest that new money in "wealth protection" - i.e. balance my portfolio ala PP.
In fact all my FI/ERE years would probably be geared towards wealth protection instead of generating new income. I want to protect my new status more than I need to grow it.
In the world of ERE, the ERE period is relatively short in terms of investing so any "growth" strategies are maybe less applicable.
Maybe all you really care about is figuring out how to maximize income, so you can retire as early as possible. Which makes me think a dividend/bond oriented strategy is a better fit.
Having said that, there is a wealth protection issue. PP helps cover wealth protection. But actually I don't care about wealth protection immediately. I care about getting retired.
1. Build up an ERE fund. Have that initial ERE fund maximizing income so I can be financially independent/retired sooner.
2. Start my FI/retired life. In my case I think I'd actually still have some work that earns money.
3. Invest that new money in "wealth protection" - i.e. balance my portfolio ala PP.
In fact all my FI/ERE years would probably be geared towards wealth protection instead of generating new income. I want to protect my new status more than I need to grow it.
CestLaVie is correct, the PP is a conservative total return portfolio, Dogs is an equity income portfolio. Those strategies feel secure or scary in different ways:
equity income: cash income stream is secure; market value of capital swings wildly so you have to worry about being forced to sell in a bear market or being wiped out completely by a meltdown
conservative total return: market value of capital is secure; multiple assets so at least one should survive a crisis; income comes mostly from selling appreciated assets so you have to worry about selling too fast, and rely on finding "greater fools" to sell to
Another option, which I know isn't popular here, is a moderate or conservative lazy portfolio. For example 50% stock index / 50% intermediate treasury bond, Vanguard's retirement income fund, or Swedroe's "concentrated" portfolio. A portfolio like that is a reasonable middle ground and is consistent with mainstream advice which some people find comforting.
IMO investing holy wars start because people have natural needs for different kinds of safety. Abandoning your plan and going to cash while your portfolio is down is far more damaging than choosing a sub-optimal allocation and sticking with it. The most important thing is finding a portfolio that provides the kind of safety you will need to "stay the course." This takes self-awareness and reflection.
equity income: cash income stream is secure; market value of capital swings wildly so you have to worry about being forced to sell in a bear market or being wiped out completely by a meltdown
conservative total return: market value of capital is secure; multiple assets so at least one should survive a crisis; income comes mostly from selling appreciated assets so you have to worry about selling too fast, and rely on finding "greater fools" to sell to
Another option, which I know isn't popular here, is a moderate or conservative lazy portfolio. For example 50% stock index / 50% intermediate treasury bond, Vanguard's retirement income fund, or Swedroe's "concentrated" portfolio. A portfolio like that is a reasonable middle ground and is consistent with mainstream advice which some people find comforting.
IMO investing holy wars start because people have natural needs for different kinds of safety. Abandoning your plan and going to cash while your portfolio is down is far more damaging than choosing a sub-optimal allocation and sticking with it. The most important thing is finding a portfolio that provides the kind of safety you will need to "stay the course." This takes self-awareness and reflection.
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George the original one
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I pretty much agree with CestLaVie as to why PP is not my current choice (and unlikely ever will be).
I choose bond funds over CDs because of higher yields and the opportunity to purchase US federal tax-free yields in excess of 6.5% (don't know if that's possible for Canadians). I've got mental stop-loss orders in place and also have my finger poised to sell if interest rates go up and/or NAV drops.
Someone else mentioned an ETF for preferred stock. That made sense as another bond-like investment.
Since you're not worried about the capital in the short term, then individual stocks are worthwhile. At the moment, because of recent run-ups, the hunt is difficult. In major stocks a month ago, JNJ (Johnson & Johnson) was a screaming buy and INTC (Intel) was a calculated risk; now, not so much. The MLP sector has also had a significant run-up and you'd be paying top dollar. Royalty trusts for oil & natural gas are at their high end, too, but if you believe energy prices are likely to rise in the near future, then they'd be good bets.
Hmm, if I were to take a chance today, it's most likely going to be in the BDC's (PNNT, ARCC) and mortgage REITs (NLY, AGNC). I'd temper those choices with the bond funds.
I choose bond funds over CDs because of higher yields and the opportunity to purchase US federal tax-free yields in excess of 6.5% (don't know if that's possible for Canadians). I've got mental stop-loss orders in place and also have my finger poised to sell if interest rates go up and/or NAV drops.
Someone else mentioned an ETF for preferred stock. That made sense as another bond-like investment.
Since you're not worried about the capital in the short term, then individual stocks are worthwhile. At the moment, because of recent run-ups, the hunt is difficult. In major stocks a month ago, JNJ (Johnson & Johnson) was a screaming buy and INTC (Intel) was a calculated risk; now, not so much. The MLP sector has also had a significant run-up and you'd be paying top dollar. Royalty trusts for oil & natural gas are at their high end, too, but if you believe energy prices are likely to rise in the near future, then they'd be good bets.
Hmm, if I were to take a chance today, it's most likely going to be in the BDC's (PNNT, ARCC) and mortgage REITs (NLY, AGNC). I'd temper those choices with the bond funds.
Actually I think this discussion has really highlighted the beauty of ERE to me.
Lets pretend here that the market returns 7% over a 20 year period.
classic investor invests $10k. He turns that $10k into $38k with the magic of compound interest. All hail compound interest its magical!!
ERE investor cuts costs by $10000. He invests that $10k which turns into $38k. ERE investor turns that $10k into $38k based on 7% return as well. But, in addition, over that 20 year period he has gained $10,000 * 20 years = $200,000. So his net return is actually $238,000!!! (presumably Mr. ERE would also invest that $200k and make even more money)
So Mr. ERE had a 17%+ return over a 20 year period. Mr. Classic Investor returned 7%.
Additionally Mr. Classic Investor has to try to compensate for his lacklustre gains. He tries to compensate by making riskier bets and aims for 15%.
Meanwhile Mr. ERE is free to take safer, better allocated, higher income investments.
In all honestly ERE is the lowest-risk, highest returning financial product on the market. Jacob - you should start marketing ERE as a mutual fund. When people order, you show up at their house, burn their mcmansion, smash their cars and leave behind a bicycle and say "viola, 17% return".
Lets pretend here that the market returns 7% over a 20 year period.
classic investor invests $10k. He turns that $10k into $38k with the magic of compound interest. All hail compound interest its magical!!
ERE investor cuts costs by $10000. He invests that $10k which turns into $38k. ERE investor turns that $10k into $38k based on 7% return as well. But, in addition, over that 20 year period he has gained $10,000 * 20 years = $200,000. So his net return is actually $238,000!!! (presumably Mr. ERE would also invest that $200k and make even more money)
So Mr. ERE had a 17%+ return over a 20 year period. Mr. Classic Investor returned 7%.
Additionally Mr. Classic Investor has to try to compensate for his lacklustre gains. He tries to compensate by making riskier bets and aims for 15%.
Meanwhile Mr. ERE is free to take safer, better allocated, higher income investments.
In all honestly ERE is the lowest-risk, highest returning financial product on the market. Jacob - you should start marketing ERE as a mutual fund. When people order, you show up at their house, burn their mcmansion, smash their cars and leave behind a bicycle and say "viola, 17% return".
@dpmorel
I think the first two options you mentioned (PP and dogs) are not very good for an investor in the early phases of accumulation. PP as others have mentioned is very conservative and in my opinion is more appropriate for an investor with a large portfolio who wants to be defensive.
Dogs of the dow, I think would be difficult to invest in a taxable account. You may get dividends and selling/buying every year may generate gains.
Personally, I go with well diversified low cost mutual funds (some of which target value indexes). However, i don't know what the situation is in Canada re accessibility of low cost funds.
Edit: I think the first thing you should determine first before picking on an asset allocation is (1) how much risk are you willing to take and (2) what expected return level do you need to meet your goals. Knowing the answer to these two questions will help you figure out what is an appropriate investment vehicle (assuming 1 and 2 are not incompatible).
I think the first two options you mentioned (PP and dogs) are not very good for an investor in the early phases of accumulation. PP as others have mentioned is very conservative and in my opinion is more appropriate for an investor with a large portfolio who wants to be defensive.
Dogs of the dow, I think would be difficult to invest in a taxable account. You may get dividends and selling/buying every year may generate gains.
Personally, I go with well diversified low cost mutual funds (some of which target value indexes). However, i don't know what the situation is in Canada re accessibility of low cost funds.
Edit: I think the first thing you should determine first before picking on an asset allocation is (1) how much risk are you willing to take and (2) what expected return level do you need to meet your goals. Knowing the answer to these two questions will help you figure out what is an appropriate investment vehicle (assuming 1 and 2 are not incompatible).