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The returns you can get at a given risk are unfortunately not something you can dictate. E.g. I believe safe municipal bonds are now returning around 3% after

by pg 17y ago

The returns you can get at a given risk are unfortunately not something you can dictate. E.g. I believe safe municipal bonds are now returning around 3% after tax. If you want to get more than that you have to buy bonds with a higher risk of default. But if you put all your assets in bonds, you risk getting burned by inflation. Over the long term, stocks have higher returns than bonds. But over short periods they can have disastrously lower returns. So experts generally advise you split your assets between stocks and bonds depending on how soon you need the money. The usual advice is to put 100 - your age percent in stocks. E.g. if you're 20, to put 80% of your assets in stocks. But of course you'd have to put more in bonds if you need some of the money to live on. The one question no one seems to talk about much is what to do when you have to invest a large sum at once, as you do. If your age implies you should put 70% in stocks, does that mean you should put 70% in stocks the next day? What if you're buying at a market peak? So whatever percent you decide to put in stocks, I'd bleed it in over a reasonably long period. Simulations would tell you how long a period; I'd guess years.

diego 17y ago
That question is addressed A Random Walk Down Wall Street by Burton Malkiel (which the OP should read ASAP). If I remember correctly, he suggests figuring out a decided asset allocation and then buying into it over the course of a time period (say 20 months), on the first day of each month. In this case, that would mean investing 250k per month. The idea is that if you buy a fixed amount dollars worth of whatever, you get more of it when it's down and less when it's up. The idea is to get at least the average of the market over 20 months and avoid being burned by a crash (of course, you might miss out on a market surge). By doing it in a methodical fashion you avoid the temptation of trying to time the market.
- mechanical_fish 17y ago
  I agree with all of this. I'll also chip in my usual recommendation: Bernstein's The Four Pillars of Investing, which will tell you everything you just heard, only in a different and slightly more recent voice. ;)
  - xal 17y ago
    His newer book "Investors Manifesto" is even better and incorporates the recent recession. As always, it's brilliantly structured and easy to read. http://www.amazon.com/Investors-Manifesto-Prosperity-Armageddon-Everything/dp/0470505141/ http://www.amazon.com/Investors-Manifesto-Prosperity-Armaged...
- rphlx 17y ago
  Advising many people to buy on a predictable date smells like an attempt to create a profitable liquidity trade: short on the 1st, cover on the 2nd when prices return to normal demand levels. Buy on a random day, or a down day. :-)
  - borism 17y ago
    250k purchase of SPY/QQQQ/any other liquid paper won't move the market a dime.
- DenisM 17y ago
  They also have a name for this technique - dollar cost averaging. http://en.wikipedia.org/wiki/Dollar_cost_averaging http://en.wikipedia.org/wiki/Dollar_cost_averaging
- ct 17y ago
  with DCA (dollar cost averaging) let's say right now you started buying at the market bottom. And so you're just averaging up in price each month you buy. In this instance it would've been better to have bought everything all at once in the beginning. Everyone seems to always hail DCA as the best investment advice ever but fail to realize it's flaws as well.
  - riffer 17y ago
    It's true that one can do worse with DCA. But if stocks go up one makes money, just less. And if they go down one loses money, but less. In other words, one is more likely to get a return closer to the long term average, which is the objective.
    - ct 17y ago
      It boggles my mind that so many people are complacent with wanting a return close to the average. If the average is negative then is that a good thing? No. People think the market will always go up -- but for the limited data that the stock market has been open there's less than 100 data points (years) to say with a 98% confidence level that the market will always go up. If you've been averaging starting at the top of 2000 and putting the same amount of money in each month you'd be losing money right now 10 years later. You can say well I'm not retiring in 10 yrs and would be saving for 40 yrs. But that's 20% of the time which is a lost time opportunity of a decade.
      - Retric 17y ago
        The secret of dollar cost averaging is vary simple it let's you buy into the market at below the average price. That big dip at the start of 09 made a lot of money for any using dollar cost averaging not so much for people who where already in the market. As to average returns, investing is not going to make you rich, if you plod along for 35 years you can comfortably retire which is not a bad thing. If you want to get rich you need to do something else, on the other hand if you are rich maintaining that wealth is more valuable than significantly increasing it.
- bokonist 17y ago
  I really disagree with this advice. You should always pay attention to the yields when you buy any financial asset. Buying based on rules is silly. If stocks are paying 1.5% yields, and corporate bonds paying 7.5%, as they were in 2000, don't buy stocks! If stocks are paying 5.2% and long term bonds 8% like they were in 1978, go long on stocks (stock dividends will increase as nominal national income increases, usually about 5% a year, if stock prices can be a better buy even if dividends are lower than bond yields). The market is not rational, not even close. But if you are investing long term, and behave rationally yourself (buying stocks when cheap, buying bonds when stocks are expensive) you can beat the market. Right now is a really tough time to invest because both stock yields and interest rates are abnormally low. I'd probably maintain a balanced portfolio, but keep the bonds short term in hopes of a rise in interest rates in a few years.
Retric 17y ago
While I agree that increasing your stock to fixed income ratio as you grow older is a good idea, the 1% more each year seems to be based on a shorter lifespan. At 60 there is a reasonable chance you will be alive in 35 years so you still need to be fairly aggressive or inflation eat your nest egg. Also a major issue with bonds is taxes which can significantly impact returns. The other major investment issue is fees which can dramatically reduce ROI over your lifetime. Do the math on what 1/2 of 1% will cost you ~13% of your returns over 30 years. 1-((x-.005)^30)/(x^30)) It works out to around 13% for most reasonable ROI.
jeromec 17y ago
> E.g. I believe safe municipal bonds are now returning around 3% after tax. If you want to get more than that you have to buy bonds with a higher risk of default. I heard California bonds had jumped because of debt/credit problems, and recently mentioned the option of buying such bonds to my parents who asked a similar money management question. They both cracked up laughing. I told them their reaction illustrated why our state had such borrowing problems. I would not have seriously advised getting the bonds but apparently they yielded annualized tax-free 4.7%. (http://latimesblogs.latimes.com/money_co/2009/06/californias-budget-crisis-has-begun-to-rattle-municipal-bond-investors--market-yields-on-the-states-outstanding-genera.html http://latimesblogs.latimes.com/money_co/2009/06/californias...)
- supahfly_remix 17y ago
  The interest rate is high because of perceived risk. Just be aware that states have defaulted: http://www.publicbonds.org/public_fin/default.htm http://www.publicbonds.org/public_fin/default.htm The largest default in the history of the municipal bond market was the Washington Public Power Supply System's (WPPSS) default on $2.25 billion in bonds. WPPSS launched a risky program to build five nuclear power plants in the 1970s to supply electricity to the Pacific Northwest. Only one of the five planned nuclear plants was ever completed. The WPPSS fiasco gave a lot more credibility to concerns that tax-exempt bonds were not a completely safe bet.
  - aaronblohowiak 17y ago
    It is in the california state constitution that bonds be paid first, then payroll, then everything else.
- ncohen 17y ago
  I wrote the default study referenced in publicbonds.com and was pleased to see the assumptions still hold up. I have started a blog to cover some of these issues again: http://www.thepublicpurse.com http://www.thepublicpurse.com
timdellinger 17y ago
Investing over a period of time instead of all-at-once, in order to diminish the effect of market peaks and make sure you hit some of the valleys, is called Dollar Cost Averaging. I think the reason no one seems to talk about it much is because it's a relatively rare occurrence that someone suddenly has a large lump sum to invest. Most financial talk is about more common personal finance scenarios. That said, there's lots of discussion on dollar cost averaging, which, like most things, is easier to find once you know its name.
- JacobAldridge 17y ago
  I think Dollar Cost Averaging is also fairly common in discussions about regular savings plans - eg, establishing an automatic savings plans that deducts $x from each salary and invests in a fund has the benefits of slowly building savings without you missing it, and dollar cost averaging into a market. Perhaps it's more common here in Australia, where compulsory superannuation (currently at 9%) means almost all of the workforce are investing in shares in some form.
bokonist 17y ago
Over the long term, stocks have higher returns than bonds. What makes you think that is true? We simply do not have enough data to judge. Books like Stocks for the Long Run use incredibly poor methodology, because they left companies that failed out of their indexes ( http://gregmankiw.blogspot.com/2009/07/stocks-for-not-so-long-run.html http://gregmankiw.blogspot.com/2009/07/stocks-for-not-so-lon... ). And when we have reliable data, for the past forty years for instance, stocks have not necessarily had better returns. If you include other countries in the analysis, such as Japan, then the long term superiority of stocks looks even more suspect. And of course, past data is not predictive of future performance because the nature of investing changes (changes in corporate governance, changes in shareholder accountability, too much "dumb money" entering the market due to 401k plans, etc). Dividend payout rates, for instance, have declined dramatically, and dividends are a major component of returns. So maybe stocks did perform better in the past, but will not in the future because of lower payouts. Stocks may perform better in the next thirty years or they may not. There is no substitute for studying the market, understanding what is driving the returns, and making a judgement based on the current times.
- mikedamas 17y ago
  Stocks are inherently riskier than bonds. Lower on the capital structure of companies (last to have a claim on company assets) and stock cash flows have much greater uncertainty than bonds. The statement that "stocks have higher returns than bonds" should NOT lead one to invest too much in stocks in pursuit of those returns (yes, it has -- the "dumb money" you describe), since there is greater volatility of returns around the average. Portfolios should be built upon bonds, with stock market risk layered-in only to a degree.

by pg 17y ago

diego 17y ago

That question is addressed A Random Walk Down Wall Street by Burton Malkiel (which the OP should read ASAP). If I remember correctly, he suggests figuring out a decided asset allocation and then buying into it over the course of a time period (say 20 months), on the first day of each month. In this case, that would mean investing 250k per month. The idea is that if you buy a fixed amount dollars worth of whatever, you get more of it when it's down and less when it's up. The idea is to get at least the average of the market over 20 months and avoid being burned by a crash (of course, you might miss out on a market surge). By doing it in a methodical fashion you avoid the temptation of trying to time the market.

mechanical_fish 17y ago
I agree with all of this. I'll also chip in my usual recommendation: Bernstein's The Four Pillars of Investing, which will tell you everything you just heard, only in a different and slightly more recent voice. ;)
- xal 17y ago
  His newer book "Investors Manifesto" is even better and incorporates the recent recession. As always, it's brilliantly structured and easy to read. http://www.amazon.com/Investors-Manifesto-Prosperity-Armageddon-Everything/dp/0470505141/ http://www.amazon.com/Investors-Manifesto-Prosperity-Armaged...
rphlx 17y ago
Advising many people to buy on a predictable date smells like an attempt to create a profitable liquidity trade: short on the 1st, cover on the 2nd when prices return to normal demand levels. Buy on a random day, or a down day. :-)
- borism 17y ago
  250k purchase of SPY/QQQQ/any other liquid paper won't move the market a dime.
DenisM 17y ago
They also have a name for this technique - dollar cost averaging. http://en.wikipedia.org/wiki/Dollar_cost_averaging http://en.wikipedia.org/wiki/Dollar_cost_averaging
ct 17y ago
with DCA (dollar cost averaging) let's say right now you started buying at the market bottom. And so you're just averaging up in price each month you buy. In this instance it would've been better to have bought everything all at once in the beginning. Everyone seems to always hail DCA as the best investment advice ever but fail to realize it's flaws as well.
- riffer 17y ago
  It's true that one can do worse with DCA. But if stocks go up one makes money, just less. And if they go down one loses money, but less. In other words, one is more likely to get a return closer to the long term average, which is the objective.
  - ct 17y ago
    It boggles my mind that so many people are complacent with wanting a return close to the average. If the average is negative then is that a good thing? No. People think the market will always go up -- but for the limited data that the stock market has been open there's less than 100 data points (years) to say with a 98% confidence level that the market will always go up. If you've been averaging starting at the top of 2000 and putting the same amount of money in each month you'd be losing money right now 10 years later. You can say well I'm not retiring in 10 yrs and would be saving for 40 yrs. But that's 20% of the time which is a lost time opportunity of a decade.
    - Retric 17y ago
      The secret of dollar cost averaging is vary simple it let's you buy into the market at below the average price. That big dip at the start of 09 made a lot of money for any using dollar cost averaging not so much for people who where already in the market. As to average returns, investing is not going to make you rich, if you plod along for 35 years you can comfortably retire which is not a bad thing. If you want to get rich you need to do something else, on the other hand if you are rich maintaining that wealth is more valuable than significantly increasing it.
bokonist 17y ago
I really disagree with this advice. You should always pay attention to the yields when you buy any financial asset. Buying based on rules is silly. If stocks are paying 1.5% yields, and corporate bonds paying 7.5%, as they were in 2000, don't buy stocks! If stocks are paying 5.2% and long term bonds 8% like they were in 1978, go long on stocks (stock dividends will increase as nominal national income increases, usually about 5% a year, if stock prices can be a better buy even if dividends are lower than bond yields). The market is not rational, not even close. But if you are investing long term, and behave rationally yourself (buying stocks when cheap, buying bonds when stocks are expensive) you can beat the market. Right now is a really tough time to invest because both stock yields and interest rates are abnormally low. I'd probably maintain a balanced portfolio, but keep the bonds short term in hopes of a rise in interest rates in a few years.

Retric 17y ago

While I agree that increasing your stock to fixed income ratio as you grow older is a good idea, the 1% more each year seems to be based on a shorter lifespan. At 60 there is a reasonable chance you will be alive in 35 years so you still need to be fairly aggressive or inflation eat your nest egg. Also a major issue with bonds is taxes which can significantly impact returns. The other major investment issue is fees which can dramatically reduce ROI over your lifetime. Do the math on what 1/2 of 1% will cost you ~13% of your returns over 30 years. 1-((x-.005)^30)/(x^30)) It works out to around 13% for most reasonable ROI.

jeromec 17y ago

> E.g. I believe safe municipal bonds are now returning around 3% after tax. If you want to get more than that you have to buy bonds with a higher risk of default. I heard California bonds had jumped because of debt/credit problems, and recently mentioned the option of buying such bonds to my parents who asked a similar money management question. They both cracked up laughing. I told them their reaction illustrated why our state had such borrowing problems. I would not have seriously advised getting the bonds but apparently they yielded annualized tax-free 4.7%. (http://latimesblogs.latimes.com/money_co/2009/06/californias-budget-crisis-has-begun-to-rattle-municipal-bond-investors--market-yields-on-the-states-outstanding-genera.html http://latimesblogs.latimes.com/money_co/2009/06/californias...)

supahfly_remix 17y ago
The interest rate is high because of perceived risk. Just be aware that states have defaulted: http://www.publicbonds.org/public_fin/default.htm http://www.publicbonds.org/public_fin/default.htm The largest default in the history of the municipal bond market was the Washington Public Power Supply System's (WPPSS) default on $2.25 billion in bonds. WPPSS launched a risky program to build five nuclear power plants in the 1970s to supply electricity to the Pacific Northwest. Only one of the five planned nuclear plants was ever completed. The WPPSS fiasco gave a lot more credibility to concerns that tax-exempt bonds were not a completely safe bet.
- aaronblohowiak 17y ago
  It is in the california state constitution that bonds be paid first, then payroll, then everything else.
ncohen 17y ago
I wrote the default study referenced in publicbonds.com and was pleased to see the assumptions still hold up. I have started a blog to cover some of these issues again: http://www.thepublicpurse.com http://www.thepublicpurse.com

timdellinger 17y ago

Investing over a period of time instead of all-at-once, in order to diminish the effect of market peaks and make sure you hit some of the valleys, is called Dollar Cost Averaging. I think the reason no one seems to talk about it much is because it's a relatively rare occurrence that someone suddenly has a large lump sum to invest. Most financial talk is about more common personal finance scenarios. That said, there's lots of discussion on dollar cost averaging, which, like most things, is easier to find once you know its name.

JacobAldridge 17y ago
I think Dollar Cost Averaging is also fairly common in discussions about regular savings plans - eg, establishing an automatic savings plans that deducts $x from each salary and invests in a fund has the benefits of slowly building savings without you missing it, and dollar cost averaging into a market. Perhaps it's more common here in Australia, where compulsory superannuation (currently at 9%) means almost all of the workforce are investing in shares in some form.

bokonist 17y ago

Over the long term, stocks have higher returns than bonds. What makes you think that is true? We simply do not have enough data to judge. Books like Stocks for the Long Run use incredibly poor methodology, because they left companies that failed out of their indexes ( http://gregmankiw.blogspot.com/2009/07/stocks-for-not-so-long-run.html http://gregmankiw.blogspot.com/2009/07/stocks-for-not-so-lon... ). And when we have reliable data, for the past forty years for instance, stocks have not necessarily had better returns. If you include other countries in the analysis, such as Japan, then the long term superiority of stocks looks even more suspect. And of course, past data is not predictive of future performance because the nature of investing changes (changes in corporate governance, changes in shareholder accountability, too much "dumb money" entering the market due to 401k plans, etc). Dividend payout rates, for instance, have declined dramatically, and dividends are a major component of returns. So maybe stocks did perform better in the past, but will not in the future because of lower payouts. Stocks may perform better in the next thirty years or they may not. There is no substitute for studying the market, understanding what is driving the returns, and making a judgement based on the current times.

mikedamas 17y ago
Stocks are inherently riskier than bonds. Lower on the capital structure of companies (last to have a claim on company assets) and stock cash flows have much greater uncertainty than bonds. The statement that "stocks have higher returns than bonds" should NOT lead one to invest too much in stocks in pursuit of those returns (yes, it has -- the "dumb money" you describe), since there is greater volatility of returns around the average. Portfolios should be built upon bonds, with stock market risk layered-in only to a degree.