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Personal Finance Advice and Education! (10 Viewers)

-OZ- said:
Honestly I don't think there's a significant difference for most people. 

A pullback will affect the underlying holdings, which will impact the ETF or fund about equally. The one advantage imo of ETFs is you can rebalance immediately. With MFs, you sell and buy at the end of the day, so unless I'm wrong it takes two days to rebalance in most accounts. Other than the TSP, I'm entirely in ETFs so I might be wrong.

Otoh, with ETFs you probably have to purchase in whole shares within can leave some extra cash sitting in the account, too little to buy another share. M1 gets around this, other brokerages might too. 

The difference is so marginal it's basically irrelevant in the big picture.
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It doesn't take two days to rebalance. It's done the same day.

 
Sand said:
10 percent for 25 years is a spectacular return.  
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Rule of 72 means double every 7.2 years, so roughly 8x initial? Yeah I'd be happy with that going forward. 

 
Tool said:
It doesn't take two days to rebalance. It's done the same day.
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Ok, your brokerage is better than mine with mutual funds. I'll probably leave E-Trade in the next couple months, put the regular account funds into M16

 
-OZ- said:
Ok, your brokerage is better than mine with mutual funds. I'll probably leave E-Trade in the next couple months, put the regular account funds into M16
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Ah I was talking about doing it through same fund company. With broker maybe two days is standard 

 
Tool said:
Ah I was talking about doing it through same fund company. With broker maybe two days is standard 
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I think you identified a key problem with discount brokerages. These funds are free trades with E-Trade but only if you keep them for a month or more, and there's a delay in swapping funds. Not bad for a buy and hold strategy but perhaps not ideal.

 
NutterButter said:
I might be if I knew what the hell he was talking about.
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Basically that these passive ETFs own thinly traded stocks and that if there is a big outflow the liquidity crisis in those will amplify the price action as there will be few buyers.  That's pretty much it.

Also, looks like the employment report is out.  130,000 jobs created (meh), wages up 3.2% (awesome), unemployment rate steady at 3.7% (very good), back unemployment hits all time low at 5.5% (awesome).  Pretty good report.

 
Sand said:
Basically that these passive ETFs own thinly traded stocks and that if there is a big outflow the liquidity crisis in those will amplify the price action as there will be few buyers.  That's pretty much it.
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I can't say that makes anything clearer.  :lol:   Should I go back to buying actively managed funds that don't outperform these indices and have higher fees?   Or am I just screwed either way each in its own way?

 
So what happens when the bulk of people in the 403b/401ks begin drawing that money out in retirement?  I doubt many people are pulling from them these days, but soon enough millions of people will be drawing large numbers out.

What happens when that happens?  Anything?

 
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ghostguy123 said:
So what happens when the bulk of people in the 403b/401ks begin drawing that money out in retirement?  I doubt many people are pulling from them these days, but soon enough millions of people will be drawing large numbers out.

What happens when that happens?  Anything?
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This is why the feds incentivize children. Grow the population so there are more producing than retired.

 
ghostguy123 said:
So what happens when the bulk of people in the 403b/401ks begin drawing that money out in retirement?  I doubt many people are pulling from them these days, but soon enough millions of people will be drawing large numbers out.

What happens when that happens?  Anything?
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In this world of low yields, particularly now with S&P yield well over the 10 year, I think the appetite for equities will be large and consumed by the next generation.

Except for the Millenials - they'll just whine about not having investing money over a $6 SB coffee.

 
ghostguy123 said:
So what happens when the bulk of people in the 403b/401ks begin drawing that money out in retirement?  I doubt many people are pulling from them these days, but soon enough millions of people will be drawing large numbers out.

What happens when that happens?  Anything?
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Except this is already happening and we are none the worse for wear.
 

One percent of the U.S. baby boomer population controls about one-third of that generation's assets, and the richest 10 percent of the population own more than two-thirds, according to a 2009 report from the Congressional Budget Office. Once retired, these wealthy individuals or households do not spend a significant portion of their assets on consumption, exhibit a low rate of dissaving and prefer to leave bequests. Meanwhile, poor households don’t have stock portfolios to sell upon retirement. Due to the concentration of wealth in the U.S., baby boomers’ retirement may not have an extremely negative effect on stock market performance.
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Gawain said:
Except this is already happening and we are none the worse for wear.
 
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What percentage of people in retirement are drawing from those accounts right now?  Now compare that to 20 years from now when pensions are really no lo ge a thing for retirees and the 401k/403bs are what almost everyone draws from.

I suppose more and more people are beginning to use them which offsets that.

I am not saying I think anything will go wrong, just throwing out conversation.

However, I do have a bit of a skeptical feeling about how the "just throw it in index funds and let it sit" method.  I mean, if that is what a ton of people do someone somewhere is going to try and screw us all out of a lot of money some way.

 
ghostguy123 said:
However, I do have a bit of a skeptical feeling about how the "just throw it in index funds and let it sit" method.  I mean, if that is what a ton of people do someone somewhere is going to try and screw us all out of a lot of money some way.
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Oh you mean like Active Mutual Fund Managers? 

 
Walking Boot said:
I could see a potential situation with passive index investing, sure. I think it was brought up in this thread a year or two ago, but I can't find the link or video. IIRC, the argument goes, every Friday, maybe 5 billion dollars gets added to the stock market courtesy of 401ks and other payroll contributions. That money is getting passively spread out among the S&P 500, Russell 2000, etc... the big get bigger. A regular cash infusion to all the stocks, the tide raising all boats. But some of these blue-chips aren't actually increasing in value in a corresponding way. Are Costco, IBM, Goldman Sachs, Home Depot, etc, really innovating and growing? Or is their stock price supported and increasing just because of that $5 billion influx every week? What is their true valuation?

It would appear that there would be an opportunity in identifying both companies that are being artificially boosted by passive index investing (stock price going up because everyone needs to buy them every Friday because they're on an index list, not because their value is increasing) and those companies being artificially suppressed because they're not in an index (stock price lower than true valuation because fewer dollars are available to stocks not in the index).

I'm not arguing for active management. But too many people (not in this thread, just laypeople in the market) just see "passive index" or "buy an ETF" advice and go for it without realizing that passive doesn't necessarily mean it's guaranteed to go up. You can buy an ETF or a passive fund that invests in anything... I could see some old lady thinking "I'm fine, I'm invested in passive index and ETFs" and then finding she's all-in on TVIX or triple-shorts or an ETF in some now-dead industry like dial-up internet providers or other buggywhips. Somewhere I heard there are more ETFs and passive indexes than actual stocks in the market... it's all tranched all the way down.

I could see a scenario where the abstraction causes a domino effect, sure. I could see where a correction in valuation (if it's being artificially propped up like argued above) could cause a flash crash or worse. I could see a world where those who can accurately evaluate valuation and target their investments into those not being artificially supported as surviving, too.
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:goodposting:

This sums up my concerns pretty well now that index funds are the popular flavor. 

 
I had some app one time that would track actual holdings of my passives.  My main takeaway from that was I was heavily invested in apple and by and large only had 15 stocks that were 80% of the holdings.  

 
culdeus said:
I had some app one time that would track actual holdings of my passives.  My main takeaway from that was I was heavily invested in apple and by and large only had 15 stocks that were 80% of the holdings.  
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Morningstar X-Ray is great for this.  I check it occasionally.  I think you can have a paid account that tracks it, but I use the free version every so often, plug in your holdings and it tells you what you own.

 
Walking Boot said:
Yeah, I did this with Morningstar, broke down all the holdings of all my funds to see where my money "really" was. Turned out to mostly be Google, Altria, Alibaba, Raytheon, Taiwan Semiconductor, Nvidia, Tencent, Honeywell, Heineken, Northrup Grumman, Apple, and a bunch of others I had less than $1k in 
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This is why I don't just "VTSAX and chill" like many advocate. I don't have many individual stocks (2 right now, Omega health, a REIT, and discover financial). But I have a healthy amount in small cap, vanguard REIT, international small, China consumer (CHIQ, it's actually been one of my best over the past few weeks), some speculative biotech and medical breakthrough... Almost all ETFs, but not the routine ones everyone talks about. 

 
culdeus said:
I had some app one time that would track actual holdings of my passives.  My main takeaway from that was I was heavily invested in apple and by and large only had 15 stocks that were 80% of the holdings.  
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Have a hard time seeing how that is possible. Don't know what you owned but Vanguard Total Stock Index has 19% in top 10 holdings

 
Tool said:
Have a hard time seeing how that is possible. Don't know what you owned but Vanguard Total Stock Index has 19% in top 10 holdings
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VT balance international stuff in.   The ones that just do us equity are a bit different.  

 
If I want to move some investments from domestic to international (mutual funds), should I do this after an up day on the djia?

 
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Random said:
If I want to move some investments from domestic to international (mutual funds), should I do this after an up day on the djia?
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Probably doesn't matter.  But since international funds usually follow the US that's a good a guess as any.

 
Random said:
If I want to move some investments from domestic to international (mutual funds), should I do this after an up day on the djia?
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Could also wait for a down day on the international. Or wait until the combo is there for both events. 

Or accept that what happened yesterday has no predictive value on what happens tomorrow, and just pull the trigger 

 
So I recd a buyout offer from previous employer for my pension.  Lump sum 51k now, annunity for same or leave my fixed pension of $562 per month in place.  I’m 53 now and pension payments start at 65.   Thinking the best option might be take lump sum and roll into ira.  What are your thoughts? 

 
stlrams said:
So I recd a buyout offer from previous employer for my pension.  Lump sum 51k now, annunity for same or leave my fixed pension of $562 per month in place.  I’m 53 now and pension payments start at 65.   Thinking the best option might be take lump sum and roll into ira.  What are your thoughts? 
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To me, yes, lump sum makes the most sense.

 
stlrams said:
So I recd a buyout offer from previous employer for my pension.  Lump sum 51k now, annunity for same or leave my fixed pension of $562 per month in place.  I’m 53 now and pension payments start at 65.   Thinking the best option might be take lump sum and roll into ira.  What are your thoughts? 
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If I'm doing this right, NPV for 15 years of that pension is a total of $24K.  25 years is $31K.   (using discount rate of 7.5%)

$51K in an IRA today would be worth $132K in 12 years (assuming 8% return).

 
Long Ball Larry said:
If I'm doing this right, NPV for 15 years of that pension is a total of $24K.  25 years is $31K.   (using discount rate of 7.5%)

$51K in an IRA today would be worth $132K in 12 years (assuming 8% return).
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As long as it is invested well you can’t beat it. It’s like the waiting 8 years for SS. If you invest that money properly you can never catch up even with the bigger payments at 70 and your family does much better if you don’t live a long time. 

 
stbugs said:
As long as it is invested well you can’t beat it. It’s like the waiting 8 years for SS. If you invest that money properly you can never catch up even with the bigger payments at 70 and your family does much better if you don’t live a long time. 
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Plus you make sure you actually get the money

 
Long Ball Larry said:
If I'm doing this right, NPV for 15 years of that pension is a total of $24K.  25 years is $31K.   (using discount rate of 7.5%)

$51K in an IRA today would be worth $132K in 12 years (assuming 8% return).
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Couple things here

You don't account for taxes in this analysis.  I think that is likely a mistake

Your discount rates / return assumptions.  Who is using 8% returns with any confidence at this point?  I would suggest a 5% return

 
wilked said:
Couple things here

You don't account for taxes in this analysis.  I think that is likely a mistake

Your discount rates / return assumptions.  Who is using 8% returns with any confidence at this point?  I would suggest a 5% return
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fair.  i was just trying to do a quick back of the envelope calculation and a model for how to think about it, and I think that the conclusion is still clearly the same.

I am willing to only take half commission on this one.

 
The easiest way to make the comparison is to determine what it would cost to buy that pension on the open market.  In this case you'd be shopping for an SPIA (single premium immediate annuity).  Those do roughly the same thing as a pension, pay you a monthly fixed amount til you die.  For this purpose I am going to assume you are male, and assume the numbers above have no survivorship built in, and that they are not inflation adjusted.  In other words, you get $562 a month beginning 2031 at age 62 and that's how it is until you die.

Popped the numbers in to schwab, and it says to buy that SPIA it would cost $73K today.  Based on that, it would say that the future payments (pension) are more valuable than receiving $51K today, and if you accepted the $51K you'd be taking a 30% haircut on the overall value

 
for what it's worth, if I was a company offering lump sums, I would intentionally price the lump sums at a 25% discount or so, as I know psychologically people are going to value the immediate $$ over future $$

 
ghostguy123 said:
Plus you make sure you actually get the money
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I think that's one of the biggest reasons to take the lump sum.

How do you value the risk of company/organization/government/whatever eventually not being able to pay out the pension?

I've heard far too many sad stories of people getting their pensions cut and/or worries about entities not being able to fund future pension payouts.  

 
eoMMan said:
I think that's one of the biggest reasons to take the lump sum.

How do you value the risk of company/organization/government/whatever eventually not being able to pay out the pension?

I've heard far too many sad stories of people getting their pensions cut and/or worries about entities not being able to fund future pension payouts.  
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I think the risk tends to be overblown.  Remember, the people who can direct the finances likely stand to collect a pension themselves, so lots of self-interest there.  There's a risk, but it's not the 30% risk that is being priced in above

 
wilked said:
The easiest way to make the comparison is to determine what it would cost to buy that pension on the open market.  In this case you'd be shopping for an SPIA (single premium immediate annuity).  Those do roughly the same thing as a pension, pay you a monthly fixed amount til you die.  For this purpose I am going to assume you are male, and assume the numbers above have no survivorship built in, and that they are not inflation adjusted.  In other words, you get $562 a month beginning 2031 at age 62 and that's how it is until you die.

Popped the numbers in to schwab, and it says to buy that SPIA it would cost $73K today.  Based on that, it would say that the future payments (pension) are more valuable than receiving $51K today, and if you accepted the $51K you'd be taking a 30% haircut on the overall value
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Problem with this line of thinking is that this is not an option for him 

He has two options with this money, and taking the lump sum and investing it is a more wise option that waiting for the monthly payout.

The cost of this pension on the open market is irrelevant (to me anyway).

 
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ghostguy123 said:
Problem with this line of thinking is that this is not an option for him 

He has two options with this money, and taking the lump sum and investing it is a more wise option that waiting for the monthly payout.

The cost of this pension on the open market is irrelevant (to me anyway).
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You might want to re-read it.  I am not proposing any new options...  There are only two options - lump sum and pension.  I am taking the pension parameters, and finding the lump sum cost of the same product (in this case an SPIA).  If the lump sum is efficiently priced it would equal the cost of that SPIA.  In this case the lump sum they are offering is at a 30% discount to market rate for the same product (pension/SPIA).  

Pension / future payments is the smart financial move here.  There may be other factors than strict finances, but from a numbers game it's the move

 
wilked said:
The easiest way to make the comparison is to determine what it would cost to buy that pension on the open market.  In this case you'd be shopping for an SPIA (single premium immediate annuity).  Those do roughly the same thing as a pension, pay you a monthly fixed amount til you die.  For this purpose I am going to assume you are male, and assume the numbers above have no survivorship built in, and that they are not inflation adjusted.  In other words, you get $562 a month beginning 2031 at age 62 and that's how it is until you die.

Popped the numbers in to schwab, and it says to buy that SPIA it would cost $73K today.  Based on that, it would say that the future payments (pension) are more valuable than receiving $51K today, and if you accepted the $51K you'd be taking a 30% haircut on the overall value
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What is your dollar value on the future payments, though?  Don't you think that there is still a value to being able to grow that $51K  over the next 12 years?

 
Random said:
He did.  You cant buy an equivalent annuity with the cash out offer.

The annuity being offered at his job would cost $73K, he's only being offered $51K.
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I want to see the numbers if he cashes now and rolls over, looking at that growth.

Versus those payments starting at 65.  Where is the break even?  Is there one if the initial 51k grows at 5-6%?

The cost of the annuity seems irrelevant because it's not an option anyway.  Maybe it shows that annuities are over priced.

 
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