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Invisiblememes
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Risk-Aversion & Building your Net Worth from the ground up
    #16841488 - 09/13/12 03:01 PM (11 years, 4 months ago)

So,

Witness the last 15 years.  Roaring 90s, dotcom bubble, subsequent bubble burst, housing market boom and subsequent crash, and now we have equity markets at normalish levels in an economy that is struggling-at-best & completely void of confidence.


I finished grad school a little while ago, got very lucky and secured an amazing job in a phenomenal firm, which allowed me the opportunity to qualify for a new job, with a very big increase in salary.  Consequently I'm at the point in my life where I'm actually going to start accumulating some savings, and will need to put it to the best use possible.  I have a few general things I want to do:

-Pay off my student loans, under 40k.  Hopefully ahead of schedule.
-Purchase a home (big goal, DC area $$$$$$$$)
-Start saving for retirement



Now - A few of my goals are working against each other: every dollar I use to pay off a student loan ahead of schedule is a dollar I can't save towards a house/retirement.  I want to save for retirement, but don't want to expose my capital to any unreasonable levels of risk.  I dont want to play my market in these unstable times, but I don't want to just buy PMs and hope the dollar stays in the toilet either.

So, I'm asking for any advice or guidance regarding the various things I should consider when taking my first down my life's fiscal path.  I need to start putting my money to use, and would like some ideas on how to go about doing that properly - given what I've typed up above regarding my goals and risk-aversion.









Thanks for all input :cheers:







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OnlinegeokillsA
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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: memes]
    #16842067 - 09/13/12 05:00 PM (11 years, 4 months ago)

Unfortunately, this is not a risk-averse world.  Low risk assets simply aren't going to provide a meaningful return in this climate.  So if risk aversion is your primary goal, you'll probably be best saving your cash for the down payment on your house as step one.  And of course, maxing out any sort of available employer match for retirement contributions, if available to you.


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OfflinePDU
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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: geokills]
    #16842631 - 09/13/12 07:00 PM (11 years, 4 months ago)

Paying off debt is the biggest priority.

I would set up an RRSP and contribute a bit monthly just to get in the habit.

I would aggressively pay off the debt in full, and then maintain the same discipline with my savings for a downpayment.


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Invisiblememes
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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: PDU]
    #16848181 - 09/14/12 07:43 PM (11 years, 4 months ago)

Quote:

PDU said:
I would aggressively pay off the debt in full, and then maintain the same discipline with my savings for a downpayment.




After actually LOOKING at my student loan payment today and realizing that of my $250 payment, $175 of that is interest and only $75 goes towards paying off the principle, I am definitely going to be putting every excess penny towards my student loans

There is no return on my savings out there that will supersede the money I'm paying in interest right now on this ~3X,XXX.XX.


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OfflinePDU
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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: memes]
    #16849134 - 09/14/12 11:23 PM (11 years, 4 months ago)

DUH.

I actually just looked into how mortgage lending works .. you pay close to double the price of the house, the first years of your mortgage are less favorable than your current student loan situation. Depressing eh?


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OfflinePDU
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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: PDU]
    #16849169 - 09/14/12 11:33 PM (11 years, 4 months ago)

Oh, BTW ...

Not sure if they do this in the states, but here in Canada I have a very favorable situation regarding saving for a downpayment;

It is called the first time home buyers plan (HBP.) It is a way to contribute to your RRSP (lowering your taxable income) and then withdrawing that money to use towards the purchase of your first home.

You have to pay it back into your RRSP 15%/year over 15 years interest free - but that is a very modest amount.

It definitely gives a young person a foot up...

I'll be interested to hear if they have this in the USA aswell.


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InvisibleDieCommie

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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: memes]
    #16849396 - 09/15/12 12:48 AM (11 years, 4 months ago)

Quote:

meams said:
Quote:

PDU said:
I would aggressively pay off the debt in full, and then maintain the same discipline with my savings for a downpayment.




After actually LOOKING at my student loan payment today and realizing that of my $250 payment, $175 of that is interest and only $75 goes towards paying off the principle, I am definitely going to be putting every excess penny towards my student loans

There is no return on my savings out there that will supersede the money I'm paying in interest right now on this ~3X,XXX.XX.




What is your interest rate?  My investments and speculations smoke my student loan interest rates.  :shrug:  Also, student loan interest is tax deductible.


Edited by DieCommie (09/15/12 12:49 AM)


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OfflineGroovy Grant
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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: DieCommie]
    #16850113 - 09/15/12 06:23 AM (11 years, 4 months ago)

There are a few schools of thought on this. Cash flow/return argument and future value argument. And I waver back and forth between them. Paying off the loan now, not only guarantees you a return of whatever the interest rate is, it also frees up cash flow and means you need to keep less cash on hand to cover the expense in your emergency fund (which then means you can allocate less towards non productive cash and into other higher returning investments).

Then there is the future value, which is taking all of the investments out there and figuring what will yield you the best return. Perhaps you could get twice the rate if you invest in precious metals, or the S&P 500. By taking the highest yield (for your risk tolerance) you are maximizing the future value of your assets. This grows your assets at a which quicker rate then the liability, so in the future you could convert the investment into cash and pay off the liability much quicker, than if you had to accrue amount in other ways.

I think a hybrid of both arguments are where I normally settle. Building your asset column, offsets your liability column. But paying down your liability makes your liability column shrink, and boosts your asset vs. liability ratio (assets divided by liabilities - You want a positive number preferably above 1, but with no liabilities the number is infinity).

One of your goals was saving for a house. One of the factors that will affect your mortgage amount is how much you have in monthly payments, student loans included. I'm not sure if all student loans do this, but when I overpay on my loans or make lump sums, they re-amortize the loan at the end of the year. I continue to pay the much higher original payment and then some, but when applying for a mortgage, I would report the absolute lowest payment amount required. This in affect frees up income to go towards the mortgage. So by paying down your student loans, you are making yourself better off to afford a home.

But nothing, I repeat, NOTHING beats having cash in the bank. When times are rough, or something unexpected happens, nothing beats the ability to cope with whatever comes up with a surplus of non-leveraged, easily assessable cash. Pure ordinary cash in nothing more than a savings account.

Many people argue that savings accounts aren't paying enough to cover inflation. Well, that's not the point. Emergency funds should be essentially non-productive. It's there to protect you when other things don't work out.

Anyways, good luck Meams! I'm sure you'll work out where your priorities lay. It's a juggling act from day to day, on where the emphasis needs to be put. With a finite amount of money; scarcity dictates what is most important to us.


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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: memes]
    #16850180 - 09/15/12 06:50 AM (11 years, 4 months ago)

Hey meams,

That's great you just got a raise and even better that you want to do something with that extra money.  I've been pretty big into investing for several years now, so I'll give you some pointers.  This summer has been phenomenal for my investments.  In a previous thread I was posting in I said something along the lines that I earned an annualized 5% over my investing career, which started in 2008, just prior to the housing bubble burst.  But after updating everything this morning, it's now 7% and a cash return of $15,700.  Considering I invested right through the subprime mortgage crisis, I think that's pretty good.  If you just count the last 3 years, my APR is about 10% and for the last year, it's 12%.  So, with that said, I don't think you should worry about stock market bubbles so much.  In fact, they can often times be a blessing as long as you play them right by buying straight through the dip.

Risk, as you talk about, is defined as the standard deviation of the price of something in the investing world.  That's a fluctuation about a mean.  Historically, the mean return on the market, overall, was 7%, so the longer you hold, the less those fluctuations mean.  Eventually, you get the mean back.  So I think that's the first important point, is to go for long-term investments.

Second, I highly reccomend buying low-cost index funds that track the whole market.  When you buy the stock of individual companies, you need to do a lot of research on them first to make sure their balance sheets look good and that they are financially stable.  Then you need to keep abrest on news coming out of that company.  That, for me, is just too much work.  I'd rather say, I want to be 25% in large-cap value stocks, 15% in small-cap value, 15% in international, 10% in corporate bonds, etc.  And then just buy the whole market for each asset class.  You're not going to catch the full returns of that star performer (e.g. google, amazon, or apple), but you're risk is low and the returns are much more stable, which is what you said you're looking for.

You're school loans, like mine, I would imagine have an interest rate of around 6%.  As you can see, my investments beat that, so it would have been a mistake to pay off my school loans in their entirety, which I was capable of doing.  That said, I didn't have a crystal ball to KNOW that my investments would return that much, so I wouldn't pay the bare minimum either.  You need to strike a balance, in my opinion.

Lastly, on the investing side, I'd strongly recommend you read the book by William Bernstein, "The Inteligent Asset Allocator".  It's a pretty quick read, and that book has changed my views towards investing when I read it and it served me very well.  I couldn't find it on usenet, so you may just need to buy it on Amazon or something, but trust me, it's a worthwhile investment.

As for the house, I'd first check the price-to-rent ratio for your area and see if it even makes any financial sense to buy there.  Unless, of course, it's a long-time personal goal of yours to own, then that's a different scenario.  Either way, you'll definitely want to save up enough for the 20% down payment to avoid the jacked up interest rates that come without having that down-payment.  Me, personally, I'd rather put the extra cash into the markets than a house at this time in my life because the magic of compounding interest coupled with the longer investing time frame is truly phenomenal.


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No knowledge can be certain, if it is not based
upon mathematics or upon some other knowledge
which is itself based upon the mathematical
sciences.
  -Leonardo da Vinci (1425-1519)

Speak well of your enemies.  After all, you made them.


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Invisiblebadchad
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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: pothead_bob]
    #16850661 - 09/15/12 10:28 AM (11 years, 4 months ago)

If you're a federal employee, I think you would be incredibly foolish to NOT max out your TSP matching.  I don't think any other investment is even close to its returns.


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...the whole experience is (and is as) a profound piece of knowledge.  It is an indellible experience; it is forever known.  I have known myself in a way I doubt I would have ever occurred except as it did.

Smith, P.  Bull. Menninger Clinic (1959) 23:20-27; p. 27.

...most subjects find the experience valuable, some find it frightening, and many say that is it uniquely lovely.

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OfflinePDU
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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: pothead_bob]
    #16850684 - 09/15/12 10:34 AM (11 years, 4 months ago)

Bravo - very good post Pothead Bob.


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Offlinepothead_bob
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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: PDU]
    #16852583 - 09/15/12 05:02 PM (11 years, 4 months ago)

Thanks PDU.  I just like to share the things I've learned over the years.


--------------------
No knowledge can be certain, if it is not based
upon mathematics or upon some other knowledge
which is itself based upon the mathematical
sciences.
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Speak well of your enemies.  After all, you made them.


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Offlinextokex
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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: pothead_bob]
    #16906294 - 09/25/12 01:31 AM (11 years, 4 months ago)

Everything suggested in here is good, so I will add my piece of advice:
See a financial planner. They can be of use great use especially to people like you just starting out and who have a lot of plans for the future. They can manage your money for you and get you good rates of return and get you to retirement with more money than you know what to do with. I especially recommend seeing one if you have a significant other  (Perhaps you plan on buying a house and/or getting married and maybe having a kid in 3-5 years?).

They generally charge a percent of assets managed for comprehensive planning/ management (say 1% a year of whatever money they manage. )

Regarding the original post, I recommend paying of your debts first. Retirement plans (401k's especially) have hidden fees (management fees, administration costs, etc.) which really force a lot of active monitoring and participation on the part of the plan participant (you). Otherwise, those hidden fees (which just became mandatory to disclose based on Department Of labor regulation implemented this summer) will erode hundreds of thousands of dollars of your retirement account's potential value over the life of your career. (this is where the advise of your own financial planner can really help). 401k's often have registered representatives of broker dealers who act as investment advisors, but under ERISA law can't act as fiduciaries (conflict of interests since they work for broker/dealer). All they can do is describe facts about a mutual fund, but they can't actually give you advise. Some 401k plans have Registered Investment Advisors (RIA's) which are actually fiducaries, but these plans charge higher plan fees (you get what you pay for)


Edited by xtokex (09/25/12 01:33 AM)


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Offlinepothead_bob
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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: xtokex]
    #16906855 - 09/25/12 07:24 AM (11 years, 4 months ago)

I really don't think a financial planner is necessary.  I see no reason why anybody can't effectively manage their own money.  The primary thing that I did was read that book I mentioned in the last post and then base my investment strategy off of what I learned there.  I read more books along the way, but that's the main thing I did.  And I have been able to secure a 7% annualized return over the past 4 years. 

The reason I secured that return is because my investments closely track the market's returns.  And the reason they do that is because I use low-cost, passively managed index funds.  All one could really hope for is to match the market's returns.  And that's even optimistic because there will obviously be overhead in any investment that you jump into.  The key is to reduce the overhead as much as possible.  And by hiring a guy to manage your money for you, you're already taking a 1% per year hit (if not more), which is an enormous barrier to overcome.  Is that financial adviser going to be able to improve your returns by 1%?  I highly doubt it, since he knows little more than the rest of us about which direction the economy is going.  It's the same as buying actively managed mutual funds.  Some years the managers are hot, beating the market by 3-4%, but odds are that the next year, the market will beat them by that same margin, evening it all out, minus their salary, of course.

Investing in a 401k will most often be your best bet, and the first place you should be putting your money, because your employer will often times match a portion of your contributions.  That's like free money as far as the investor should be concerned and when you're trying to optimize your returns, you shouldn't be passing that up.  Then you need to factor in the fact that it's a tax-advantaged account, allowing you to park money in it before taxes are taken out of your income and then allowing that money to grow tax free until it is taken out.  Those advantages are enormous over a lifetime.

The most important thing, in my opinion, is to learn to live off of beans and noodles, reside in a shithole, and drive a beater while you're in your 20s.  Take all of that money you're not spending on other things and save it all in a very diverse set of investments while you're as young as possible.  The key to amassing a fortune is the time that you start putting the money away and the amount of money you can get in when you're young.  That's how you optimize the benefits of compounding interest.


--------------------
No knowledge can be certain, if it is not based
upon mathematics or upon some other knowledge
which is itself based upon the mathematical
sciences.
  -Leonardo da Vinci (1425-1519)

Speak well of your enemies.  After all, you made them.


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Offlinextokex
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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: pothead_bob]
    #16907275 - 09/25/12 09:39 AM (11 years, 4 months ago)

I agree with you pothead bob, anybody can manage their finances successfully. The question is do most people set aside enough time and actually do it? Probably not. A financial planner is most useful if you got a complex financial situation and a lot going on in your life (like I mentioned earlier, getting married, starting a family, buying a house).
Second, you will have to look around to find a good financial planner, but the returns you will getting from the planner should be abnormal returns (beating the market) while optimally diversified among growth assets like REIT's and equities and income assets like short term debt and long term debt.

Regarding your investment strategy of investing in passively managed index funds, I would say that you are not properly diversifying your portfolio. Yes, you are spread out among stocks so that reduces the firm-specific risk, but your entire portfolio consists of equities and it leaves it wide open for systematic risk. If your portfolio consists of >80% equities, it is a bad strategy overall for the long term unless you like big fluctuations. Market conditions that cause one asset class to do poorly often cause another to have above average returns (i.e. stocks; bonds).
If your time horizon is large (15+ years), then its not a bad strategy since you can wait out the swings, but what if you are about to retire and the same thing happens to you that did to the people who wanted to retire in 2007 only to see half of their life savings gone in a few weeks because they were too heavily invested into stocks.

401k's aren't all they are cracked up to be.

Regarding 401k's, I really suggest to meams to check this out:
http://20somethingfinance.com/401k-match/
Obviously it varies from employer to employer, but this webpage lists the statistics released by the bureau of labor statistics regarding 401k's. The most important thing you should know is that 69% of 401k plans in the country that have employer contributions DO NOT have immediate vesting.
They have cliff vesting, or graded vesting.
What does this mean? The employer contributions are not vested to you (do not belong to you) until you have stayed with the company for several years. If you leave your job before a specified number of years, you lose the rights to ALL of your employer contribution (cliff vesting) or some to most of your employer contribution (graded vesting).

Look at this:
http://www.retirementdictionary.com/definitions/cliffvesting

It shows the most extreme example that federal law allows. Employers can't be more strict then this with vesting.

Vesting is to give incentive to employees to stay with the company for a long period of time and discourage transient workers from participating in the retirement plans.

On top of all this, there is the plan fees, very limited investment choices (usually company stock, a "safe" investment (i.e. money market accounts, CD's, etc.), several mutual funds, and some bonds and equities. The mutual funds normally pay to be listed on the 401k investment choices, so there is the whole conflict of interest thing to worry about (i.e. is plan sponsor listing the mutual funds because they are the best, or because they will give more commission of fees charged to the provider / broker dealer?)


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InvisibleDieCommie

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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: xtokex]
    #16907363 - 09/25/12 09:58 AM (11 years, 4 months ago)

Quote:

but the returns you will getting from the planner should be abnormal returns (beating the market)




Correct me if I am wrong, but on average financial planners do not beat the market.  In fact, they average less than the S&P.  Is that not right?


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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: xtokex]
    #16907459 - 09/25/12 10:20 AM (11 years, 4 months ago)

I know I might receive some criticism with my comments, but investing blindly with a diversified portfolio over the long term is a waste of time, and I will explain my rational.

I always hear the comments, "one can not time the market, and one must have a mix of stock, bonds, and cash, never overweight a asset class." I say if I study the economic situation, why can't I outperform a diversified portfolio?  Why should I buy a over valued asset just to maintain my portfolio allocation?

Everyday we buy cars, homes, TVs, computers ect. and we place value judgments on the price, is this car worth it for the money? Is this home a good deal at this price?  I am not paying that much for that TV, we are always trying to make rational decisions when it comes to purchasing assets, and we get good at it over time. Yet, when it comes to financial asset classes, we are told we have no business trying to make a evaluation of the price, I say bullshit.

During the late 90's, the SP 500 was selling for over 35-40 (PE) times earnings, why the hell would I want to buy stocks at a historically high level?  Every metric we use would tell the investor that the stock market was EXTREMELY over valued, yet a financial planner would have us continually buy this overvalued asset class, it makes no sense.

Today, we have the bond market at a 32 year year high, with yields down to .25- 1.75%,  why the hell would I want to own bonds at these levels? There is all downside and very little upside at this point, yet all the financial planners would have a investor holding and buying this extremely over valued sector, it makes no sense.

The real pros don't play this diversified portfolio game, money management preys on the retail investors, they sell them rules they make up, many are nothing more than salesmen with little understanding of market history. I know everyone can not be a financial market student, but this blindly investing game makes no sense to myself.


Edited by qman (09/25/12 10:22 AM)


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Offlinextokex
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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: xtokex]
    #16907473 - 09/25/12 10:22 AM (11 years, 4 months ago)

Financial Planners have 2 options to manage money:
1. They macro-manage only. That is, they manage the micro managers who oversee all of their client's money.

What this means is: You give your money to your financial planner to manage. The financial planner then has a few money managers who actually manage the financial planner's client's money. The financial planner manages the money managers, and the money managers manage the money.
All of their money managers are heavily screened and monitored, and if one manager is not performing like the rest (producing abnormal returns and beating the market after all costs and fees), then they are replaced.

Financial Planners that do Comprehensive Financial Planning (really the key word here is Comprehensive. There is a difference between financial "planners" who really just do it as a front to sell clients insurance or manage their money and actual financial planners who provide comprehensive planning. ) normally charge 1% of assets managed for providing the services of: managing money (investment recommendations), retirement planning recommendations, estate planning recommendations, tax planning recommendations, and insurance recommendations.

2. They macro-manage and micro-manage at the same time. That is, using their own investment platform, they manage their client's money directly.

Generally financial planners use option 1, and provided that the client is not too risk averse and allows the planner to invest money in growth type assets like REITs and equities, then yes generally they are held to the standard of beating the market and work very hard to do so. Their entire business depends on keeping clients happy, so while it cannot be said that all financial planners out there beat the market regularly, if you do your research and find a good one then I would say you have a great chance that your planner will deliver on providing abnormal returns for your risk tolerance.


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Offlinextokex
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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: qman]
    #16907523 - 09/25/12 10:32 AM (11 years, 4 months ago)

Quote:

qman said:
I know I might receive some criticism with my comments, but investing blindly with a diversified portfolio over the long term is a waste of time, and I will explain my rational.

I always hear the comments, "one can not time the market, and one must have a mix of stock, bonds, and cash, never overweight a asset class." I say if I study the economic situation, why can't I outperform a diversified portfolio?  Why should I buy a over valued asset just to maintain my portfolio allocation?

Everyday we buy cars, homes, TVs, computers ect. and we place value judgments on the price, is this car worth it for the money? Is this home a good deal at this price?  I am not paying that much for that TV, we are always trying to make rational decisions when it comes to purchasing assets, and we get good at it over time. Yet, when it comes to financial asset classes, we are told we have no business trying to make a evaluation of the price, I say bullshit.

During the late 90's, the SP 500 was selling for over 35-40 (PE) times earnings, why the hell would I want to buy stocks at a historically high level?  Every metric we use would tell the investor that the stock market was EXTREMELY over valued, yet a financial planner would have us continually buy this overvalued asset class, it makes no sense.

Today, we have the bond market at a 32 year year high, with yields down to .25- 1.75%,  why the hell would I want to own bonds at these levels? There is all downside and very little upside at this point, yet all the financial planners would have a investor holding and buying this extremely over valued sector, it makes no sense.

The real pros don't play this diversified portfolio game, money management preys on the retail investors, they sell them rules they make up, many are nothing more than salesmen with little understanding of market history. I know everyone can not be a financial market student, but this blindly investing game makes no sense to myself.




You absolutely can outperform a diversified portfolio by giving most or all of your weight to a growth asset class like equities. The thing is, you are taking on more risk. Sure you might make a good return this year, but what about the next? and over the long term?

Next, and most important, you must realize that within each asset class, there exists many sub-asset classes each with their own risk/ return profiles. For example, bonds have high yield junk bonds which have returns similar to stocks and they have government bonds which have low yield as you mentioned. The idea is to be diversified over different asset classes so that your instruments are not too positively  correlated.


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Re: Risk-Aversion & Building your Net Worth from the ground up [Re: xtokex]
    #16910018 - 09/25/12 05:35 PM (11 years, 4 months ago)

In ordinary times, i would agree to pay off debts first. However, we are looking at a financial cliff and congress is playing a game of chicken with it. USA debt has already been downgraded and will go down some more. QE is on constant flow now instead of just now and then. The result is massive inflation coming down the road.

Why would you pay a debt today charging a reasonable rate of interest when you can pay it off later with inflated dollars perhaps at 10 cents on the dollar or less? The same thinking goes toward taking a mortgage. Save your cash, keep your credit sparkly and get a home loan. There are huge tax advantages and in many states your primary residence can't be touched by bankruptcy.

5 years down the road when the stuff hits the fan (or sooner) the min wage might be $30, a gallon of gas about the same price and your mortgage and student loan is priced in old dollars. That huge $40k loan back then looks like perhaps $6k in future dollars. You might pay it off out of a few paychecks. That 125k mortgage looks a lot less too. You still don't need to pay them off, in a few more years it will be so small you can pay it out of pocket.

Inflation raises all prices including labor. Unfortunately not as fast as food, rent, electricity, gas, etc. But wages will have to go up too so fixed debt goes down relatively. The losers will be those on fixed income; pensions, ss, annuities, etc. The value of that home will skyrocket as will gold, silver, etc.

A few years from now expect lots of posts from people saying "how come no one told me gold was going way up?" or similar comments.


--------------------
“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.” (attributed to Alexis de Tocqueville political philosopher Circa 1835)

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