Personal Finance Advice and Education! (11 Viewers)

[Kenny Powers]

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[Random]

I think the point Siff is trying to make is to not rely SOLELY on your 401K/IRA investments. They're good to have and if market returns outpace inflation over the next 20 years, great. However, if you look at our most recent 10ish years returns, you'll see thats not a given anymore. You could also look at Japans last 30(?) years to see that.

 

[eoMMan]

Strictly financially speaking, it would be a good idea to move out of California too.

 

[Steve Tasker]

#1: Not only is it possible, but it is likely, that the path to retirement used today will be very very different for you 40-50 years from now. You don't live in your grandfathers world...nor do you live in your father's world. You'll be paying into Social Security your entire life...you will never get one penny from it. 401k plans, IRA etc fine. Use them to your advantage while you can. But if you are going to count on those as your nest egg you better damn well become one hell of a great market timer. There are bull markets and there are bear markets. You better plan on retiring a the peak of a massive bull run. Timing the market 3months out is a difficult endeavor...timing 40 years out is tough. Let's say you've grown that next egg to $10m in the year 2050 in a massive bull run...only to see 50% of that portfolio disappear in a matter of weeks because you get unlucky as that bull turns to a vicious bear. Everyone thinks it can't happen to them. History tends to prove otherwise.#6: Your investments need to have a minimum capability of 15% annual return (probably closer to 20%). You need to be able to look into the future and determine where growth is going to be and jump in NOW. This is a huge risk...so do your homework...then re-do it again. Your ability to correctly predict that future will go very far in determining your ability to retire.

I've found myself struggling with these lately. I'm terrified with the way the US markets are heading, frankly. I alluded to it earlier in the thread - last year, I passed up maxing my 401k contributions (despite having the financial resources to at least get very close to it) to just sock my money into a savings account. I'm risk-averse by nature, and the peace of mind knowing I'm getting a simple 1-2% interest on my savings just feels better than tossing my money in a 401k to see it flushed down the drain in 1-day of market activity.But with that peace of mind comes, well, no real growth....I'm on the fence on what to do this year.

 

[siffoin]

#1: Not only is it possible, but it is likely, that the path to retirement used today will be very very different for you 40-50 years from now. You don't live in your grandfathers world...nor do you live in your father's world. You'll be paying into Social Security your entire life...you will never get one penny from it. 401k plans, IRA etc fine. Use them to your advantage while you can. But if you are going to count on those as your nest egg you better damn well become one hell of a great market timer. There are bull markets and there are bear markets. You better plan on retiring a the peak of a massive bull run. Timing the market 3months out is a difficult endeavor...timing 40 years out is tough. Let's say you've grown that next egg to $10m in the year 2050 in a massive bull run...only to see 50% of that portfolio disappear in a matter of weeks because you get unlucky as that bull turns to a vicious bear. Everyone thinks it can't happen to them. History tends to prove otherwise.#6: Your investments need to have a minimum capability of 15% annual return (probably closer to 20%). You need to be able to look into the future and determine where growth is going to be and jump in NOW. This is a huge risk...so do your homework...then re-do it again. Your ability to correctly predict that future will go very far in determining your ability to retire.

I've found myself struggling with these lately. I'm terrified with the way the US markets are heading, frankly. I alluded to it earlier in the thread - last year, I passed up maxing my 401k contributions (despite having the financial resources to at least get very close to it) to just sock my money into a savings account. I'm risk-averse by nature, and the peace of mind knowing I'm getting a simple 1-2% interest on my savings just feels better than tossing my money in a 401k to see it flushed down the drain in 1-day of market activity.But with that peace of mind comes, well, no real growth....I'm on the fence on what to do this year.

Gaining 1-2% is LOSING. Real inflation is closer to 10% than it is to the BS 4% that the gov't tells you. That's why I said you need to be making 15-20% per year...if you're not doing that you are not growing your portfolio/assets. Odds favor a bear market 2x every decade...that's why you have to gun it up in a bull market.http://www.shadowstats.com/alternate_data/inflation-charts

 

[sports_fan]

#1: Not only is it possible, but it is likely, that the path to retirement used today will be very very different for you 40-50 years from now. You don't live in your grandfathers world...nor do you live in your father's world. You'll be paying into Social Security your entire life...you will never get one penny from it. 401k plans, IRA etc fine. Use them to your advantage while you can. But if you are going to count on those as your nest egg you better damn well become one hell of a great market timer. There are bull markets and there are bear markets. You better plan on retiring a the peak of a massive bull run. Timing the market 3months out is a difficult endeavor...timing 40 years out is tough. Let's say you've grown that next egg to $10m in the year 2050 in a massive bull run...only to see 50% of that portfolio disappear in a matter of weeks because you get unlucky as that bull turns to a vicious bear. Everyone thinks it can't happen to them. History tends to prove otherwise.#6: Your investments need to have a minimum capability of 15% annual return (probably closer to 20%). You need to be able to look into the future and determine where growth is going to be and jump in NOW. This is a huge risk...so do your homework...then re-do it again. Your ability to correctly predict that future will go very far in determining your ability to retire.

I've found myself struggling with these lately. I'm terrified with the way the US markets are heading, frankly. I alluded to it earlier in the thread - last year, I passed up maxing my 401k contributions (despite having the financial resources to at least get very close to it) to just sock my money into a savings account. I'm risk-averse by nature, and the peace of mind knowing I'm getting a simple 1-2% interest on my savings just feels better than tossing my money in a 401k to see it flushed down the drain in 1-day of market activity.But with that peace of mind comes, well, no real growth....I'm on the fence on what to do this year.

Gaining 1-2% is LOSING. Real inflation is closer to 10% than it is to the BS 4% that the gov't tells you. That's why I said you need to be making 15-20% per year...if you're not doing that you are not growing your portfolio/assets. Odds favor a bear market 2x every decade...that's why you have to gun it up in a bull market.http://www.shadowstats.com/alternate_data/inflation-charts

That's a load of bull.

 

[Steve Tasker]

#1: Not only is it possible, but it is likely, that the path to retirement used today will be very very different for you 40-50 years from now. You don't live in your grandfathers world...nor do you live in your father's world. You'll be paying into Social Security your entire life...you will never get one penny from it. 401k plans, IRA etc fine. Use them to your advantage while you can. But if you are going to count on those as your nest egg you better damn well become one hell of a great market timer. There are bull markets and there are bear markets. You better plan on retiring a the peak of a massive bull run. Timing the market 3months out is a difficult endeavor...timing 40 years out is tough. Let's say you've grown that next egg to $10m in the year 2050 in a massive bull run...only to see 50% of that portfolio disappear in a matter of weeks because you get unlucky as that bull turns to a vicious bear. Everyone thinks it can't happen to them. History tends to prove otherwise.#6: Your investments need to have a minimum capability of 15% annual return (probably closer to 20%). You need to be able to look into the future and determine where growth is going to be and jump in NOW. This is a huge risk...so do your homework...then re-do it again. Your ability to correctly predict that future will go very far in determining your ability to retire.

I've found myself struggling with these lately. I'm terrified with the way the US markets are heading, frankly. I alluded to it earlier in the thread - last year, I passed up maxing my 401k contributions (despite having the financial resources to at least get very close to it) to just sock my money into a savings account. I'm risk-averse by nature, and the peace of mind knowing I'm getting a simple 1-2% interest on my savings just feels better than tossing my money in a 401k to see it flushed down the drain in 1-day of market activity.But with that peace of mind comes, well, no real growth....I'm on the fence on what to do this year.

Gaining 1-2% is LOSING. Real inflation is closer to 10% than it is to the BS 4% that the gov't tells you. That's why I said you need to be making 15-20% per year...if you're not doing that you are not growing your portfolio/assets. Odds favor a bear market 2x every decade...that's why you have to gun it up in a bull market.http://www.shadowstats.com/alternate_data/inflation-charts

I don't disagree with you, but I'll freely admit that I don't understand the market nearly well enough to ensure 15-20% returns every year for the next 40-50 years until I retire (I'm 23 now). I'm more from the Taleb school of "I don't understand this ####, I should invest so that I don't get ####ed over".If you're right, and I don't know if you are or aren't, it's a terrifying prospect. I'd say that I'm more "financially intelligent" than the vast majority of Americans (as it's necessary for my job), and I'm frankly inept when it comes to actually managing my own holdings when it comes to individual stocks/bonds/other vehicles. I can't tell you how many clients I have who love to day-trade and make their own market predictions and run a $20,000 loss every year. Guys spending their days reading the WSJ and such, executing their trades and coming up with massive, massive losses. Obviously people can handle their own investments and do great - I know guys like you and others are very active in the investing threads and seemingly do very well....but it's a terrifying, terrifying prospect to me.

 

[Dr. No]

#1: Not only is it possible, but it is likely, that the path to retirement used today will be very very different for you 40-50 years from now. You don't live in your grandfathers world...nor do you live in your father's world. You'll be paying into Social Security your entire life...you will never get one penny from it. 401k plans, IRA etc fine. Use them to your advantage while you can. But if you are going to count on those as your nest egg you better damn well become one hell of a great market timer. There are bull markets and there are bear markets. You better plan on retiring a the peak of a massive bull run. Timing the market 3months out is a difficult endeavor...timing 40 years out is tough. Let's say you've grown that next egg to $10m in the year 2050 in a massive bull run...only to see 50% of that portfolio disappear in a matter of weeks because you get unlucky as that bull turns to a vicious bear. Everyone thinks it can't happen to them. History tends to prove otherwise.#6: Your investments need to have a minimum capability of 15% annual return (probably closer to 20%). You need to be able to look into the future and determine where growth is going to be and jump in NOW. This is a huge risk...so do your homework...then re-do it again. Your ability to correctly predict that future will go very far in determining your ability to retire.

I've found myself struggling with these lately. I'm terrified with the way the US markets are heading, frankly. I alluded to it earlier in the thread - last year, I passed up maxing my 401k contributions (despite having the financial resources to at least get very close to it) to just sock my money into a savings account. I'm risk-averse by nature, and the peace of mind knowing I'm getting a simple 1-2% interest on my savings just feels better than tossing my money in a 401k to see it flushed down the drain in 1-day of market activity.But with that peace of mind comes, well, no real growth....I'm on the fence on what to do this year.

Even if you're entirely risk averse, what you did was insane.Almost every 401k i've ever seen has a choice for a bond-type fund, or some type of crappy low interest rate guarantee.So unless you put that money into a Roth IRA, which would be a great choice, then essentially what you did is this:let's say you shorted maxing your 401k by 5Kso instead you took the money.. assuming about 25% tax you ended up with 4K.Now you took that 4k and put it in a 1% savings account.... and you're going to pay more taxes on whatever interest you gain How long is it going to take you to turn that 4k back into the 5k you could've had by maxing the 401k and putting it in the crappy 2-3% money market they have there.. and not paying any taxes on the minuscule gains until retirement (if you believe in retirement)the answer is a LONG time. To not tax defer or at least enter that money into an account where you can potentially grow it interest free is crazy unless you need the money, or can invest it in something that's not the market to make yourself more money.. like your education, or real estate, etc.

 

[rabidfireweasel]

#8: Probably the most important financial decision you will ever make is in the choosing of your spouse. Don't just pick one because she has a great rack or can #### like a pron star. Your spouse needs to be the kind of a person you WANT in a foxhole when the SHTF. A bad investment decision can be made up in a matter of months. A bad spousal decision will take DECADES to overcome- if ever. Let me make this 100% clear. THE SINGLE MOST IMPORTANT FINANCIAL DECISION YOU WILL EVER MAKE IS IN THE CHOOSING YOUR SPOUSE.

This to me is a super important point. As an artist and poker player, I met and dated lots of women. Many of them were super exciting, and could seem like short term super stars. If I had married almost any of them, my life would be likely be a disaster right now. As it was, my credit scores were crap, I had a bunch of debt and no savings at age 32. When I got married, I still picked a super exciting lady who made my head spin, but I picked someone who I felt like I could count on no matter what. Someone who could be there, right there in the foxhole. I can work hard at home and at my job, live with very few luxuries, but I used to be careless with money. She can live with few luxuries, but is careful about money. I am forty now, with two young kids (7 and 3) and on target to retire at 55. That is all thanks to her.Most of the marriages that I know that have struggled have had money issues fundamentally embedded in their problems. Pick someone you can trust, who you can believe in, who will map out a financial path and walk it with you before you get married.

 

[NewlyRetired]

#1: Not only is it possible, but it is likely, that the path to retirement used today will be very very different for you 40-50 years from now. You don't live in your grandfathers world...nor do you live in your father's world. You'll be paying into Social Security your entire life...you will never get one penny from it. 401k plans, IRA etc fine. Use them to your advantage while you can. But if you are going to count on those as your nest egg you better damn well become one hell of a great market timer. There are bull markets and there are bear markets. You better plan on retiring a the peak of a massive bull run. Timing the market 3months out is a difficult endeavor...timing 40 years out is tough. Let's say you've grown that next egg to $10m in the year 2050 in a massive bull run...only to see 50% of that portfolio disappear in a matter of weeks because you get unlucky as that bull turns to a vicious bear. Everyone thinks it can't happen to them. History tends to prove otherwise.

#6: Your investments need to have a minimum capability of 15% annual return (probably closer to 20%). You need to be able to look into the future and determine where growth is going to be and jump in NOW. This is a huge risk...so do your homework...then re-do it again. Your ability to correctly predict that future will go very far in determining your ability to retire.

I've found myself struggling with these lately. I'm terrified with the way the US markets are heading, frankly. I alluded to it earlier in the thread - last year, I passed up maxing my 401k contributions (despite having the financial resources to at least get very close to it) to just sock my money into a savings account. I'm risk-averse by nature, and the peace of mind knowing I'm getting a simple 1-2% interest on my savings just feels better than tossing my money in a 401k to see it flushed down the drain in 1-day of market activity.But with that peace of mind comes, well, no real growth....

I'm on the fence on what to do this year.

Steve, you are way way way way way way way way way way too young to be concerned about short term market movements in a 401k.I have seen highs and some incredible lows in my years. In the end the only safe haven is to be boring and dollar cost average. It is the oldest and still most affective investing strategy. You are NOT throwing your money away when the market goes down. In fact, for a dollar cost average technique to work out, you actually need the market to fluctuate.

Your 401k is the perfect tool to dollar cost average.

Do NOT think you can predict the future, you can't. No one can. That is why the #1 long term failing strategy is market timing. Market timing may work in the short term, but in the long term (30-40 years) it has proven to be a losing technique. The only thing you can absolutely count on is market fluctuation, both up and down. Take advantage of that by simply dollar cost averaging. DO NOT sit on the side lines, I implore you. Your 401k is NOT for near term investing. At your age you should not be worrying about how your 401k is performing. And unless you can honestly tell me what the environment will be like in 40 years when you get to your 401k, I think it is a huge mistake to stay out of it.

One of the reasons many of us came out of the recent market crash better than before we entered it is because we kept buying all the way down, just as we are buying on the bounce back.

 

[NewlyRetired]

I don't disagree with you, but I'll freely admit that I don't understand the market nearly well enough to ensure 15-20% returns every year for the next 40-50 years until I retire (I'm 23 now).

Unless you are Bernie Madoff, you shouldn't know how to get 20% returns every year.Anyone who tells you you can/should average 20% returns for a 40 year period is an idiot. Sorry, there is no other gentler way to put it.

 

[IvanKaramazov]

I don't disagree with you, but I'll freely admit that I don't understand the market nearly well enough to ensure 15-20% returns every year for the next 40-50 years until I retire (I'm 23 now). I'm more from the Taleb school of "I don't understand this ####, I should invest so that I don't get ####ed over".If you're right, and I don't know if you are or aren't, it's a terrifying prospect. I'd say that I'm more "financially intelligent" than the vast majority of Americans (as it's necessary for my job), and I'm frankly inept when it comes to actually managing my own holdings when it comes to individual stocks/bonds/other vehicles. I can't tell you how many clients I have who love to day-trade and make their own market predictions and run a $20,000 loss every year. Guys spending their days reading the WSJ and such, executing their trades and coming up with massive, massive losses. Obviously people can handle their own investments and do great - I know guys like you and others are very active in the investing threads and seemingly do very well....but it's a terrifying, terrifying prospect to me.

1) Nobody gets 15-20% returns every year. That's not a realistic goal. 2) There's no need for day trading or even active account management. Just put your 401k/IRA savings into an index fund. That's vastly better than a savings account over the long run.

 

[siffoin]

People. People. People. You are taking what I've written way out of context. My position on the market has been stated in the FFA over and over. If I've said it 1x, I've said it easily 100x. For the sake of clarity let me state it for the 101st time.

You INVEST in Bull Markets. You HEDGE or go to cash in Bear Markets. The single most important skill you can learn as an investor is how to identify those trends. If you don't believe that it is possible to determine whether the market is bullish or bearish, you have no business participating in it.

The point I'm trying to make is that in a Bull market you need to invest and do so aggressively. The reason for this is that a bear market is apt to wipe 30-50% of your portfolio out. Playing for safety in a Bull market minimizes your opportunity to actually off-set the losses you will see in a bear market. That coupled with inflation, fund fees, commission etc...makes it very difficult to actually grow a portfolio so that market forces are responsible for a majority of the portfolio's growth. That's why I state and will stand by "your INVESTMENTS need to be returning 15-20%. And the fact of the matter is you might only be INVESTED 70% of the time.

I'm not 100% against $ cost averaging, but I do believe it was more a successful strategy for our grandfathers or fathers not us.

Newly Retired...since you've got all the time in the world...why don't you run some numbers.

Let's start March 1st 1999 with a portfolio of $100k. Let's add $1k per month to the portfolio...and let's benchmark to the SP500. This way we're dollar cost averaging into a diversified fund of the 500 best performing companies that will get rebalanced over time. Take out fund fees, commission costs, and the impact of inflation (I'm fine with 3% per year)...and PROVE that our portfolio's growth is a result of market forces and the power of compounding with $ cost averaging...and not more a result of you adding that $1k per month. I'm not sure we'll see that buy and hold/$ cost averaging portfolio after 12 years showing the kinds of trending results that would enable one to retire. And realize right here and now we're in the midst of a very powerful bull market trend...so I'm cherry picking to your favor. I do have an open mind, will love to be proven wrong...and will wait eagerly for those numbers.

Let's also not discount personal emotion and psychology into the strategy of retirement. It's easy to say with 100% certainty that you will act with 100% consistency. Real world results prove otherwise. Monetary decision are wrapped in emotion...from the $200 electronic gadget you buy, to the car and house you own and to the funds and stocks you choose for your portfolio. Life will throw you curve balls. Emotion and psychology will impact your decisions over time. It's all good and fine to sit here and say with conviction..."I will do "XYZ" across all time and markets. History proves otherwise. At the end of the day everyone has a plan until they get punched in the mouth.

Edit: One more thing. I'm of the following core belief:

No one cares more about my future than me.

If you want to rely on the government for your retirement....If you want to rely on your employer putting your best interest ahead of their own...If you want to rely on a financial adviser. If you believe that the paths to retirement used today will be the same ones used tomorrow...Good for you or perhaps I should say good for me.

 

[Hinezer]

As a 26 year old single guy who will be graduate in May, this is something I've been thinking a lot about. How does the advice change considering I have ~$50k in student loans at 6.8%? Should paying that off be the priority after investing the max in 401k and IRAs?

 

[Dr. No]

As a 26 year old single guy who will be graduate in May, this is something I've been thinking a lot about. How does the advice change considering I have ~$50k in student loans at 6.8%? Should paying that off be the priority after investing the max in 401k and IRAs?

yes, that's a pretty high rate on student loans and thus is a worse debt than a mortgage would be.. and frankly is higher than a lot of vehicle loans even.

 

[jb1020]

Just catching up on this, good stuff in here.

Mint.com. Looks legit, but damn I get a little worried typing in my ss# and my bank password to a website other than my bank.

Mint.com is legit, yes?

 

[Random]

As a 26 year old single guy who will be graduate in May, this is something I've been thinking a lot about. How does the advice change considering I have ~$50k in student loans at 6.8%? Should paying that off be the priority after investing the max in 401k and IRAs?

1) Contribute to your 401K up to what your employer will match. Thats a 100% (or 50% - whatever the match is) gain. Its hard to screw that up.2) Payoff student loans.

 

[Mr. Yuk]

Just catching up on this, good stuff in here. Mint.com. Looks legit, but damn I get a little worried typing in my ss# and my bank password to a website other than my bank. Mint.com is legit, yes?

Been using it for almost 3 years with no problems. Intuit bought them out in late 2009. I love it, just an awesome budgeting tool.

 

[NewlyRetired]

Newly Retired...since you've got all the time in the world...why don't you run some numbers.

I already met my financial goals. I don't really feel the need to run numbers any more. I ran so many in my time it was scary.Good luck reaching your financial goals. I am skeptical that you will get there market timing but its your money and I appreciate the fact that there is likely no one right answer in investing.

 

[NewlyRetired]

Just catching up on this, good stuff in here. Mint.com. Looks legit, but damn I get a little worried typing in my ss# and my bank password to a website other than my bank. Mint.com is legit, yes?

Been using it for almost 3 years with no problems. Intuit bought them out in late 2009. I love it, just an awesome budgeting tool.

Interesting that Intuit bought them. I have used Quicken religiously to track expenses. What does Mint provide that Quicken may not?

 

[Mr. Yuk]

Just catching up on this, good stuff in here. Mint.com. Looks legit, but damn I get a little worried typing in my ss# and my bank password to a website other than my bank. Mint.com is legit, yes?

Been using it for almost 3 years with no problems. Intuit bought them out in late 2009. I love it, just an awesome budgeting tool.

Interesting that Intuit bought them. I have used Quicken religiously to track expenses. What does Mint provide that Quicken may not?

Not sure, I have never used Quicken. Are you able to link all of your bank accounts, credit cards, loans, etc. into one place and get real-time updates with Quicken? Can you sort all transactions?

 

[NewlyRetired]

Just catching up on this, good stuff in here. Mint.com. Looks legit, but damn I get a little worried typing in my ss# and my bank password to a website other than my bank. Mint.com is legit, yes?

Been using it for almost 3 years with no problems. Intuit bought them out in late 2009. I love it, just an awesome budgeting tool.

Interesting that Intuit bought them. I have used Quicken religiously to track expenses. What does Mint provide that Quicken may not?

Not sure, I have never used Quicken. Are you able to link all of your bank accounts, credit cards, loans, etc. into one place and get real-time updates with Quicken? Can you sort all transactions?

yes. Just one press of a button gets everything from 401k;s, to credit cards, to all savings accounts to 529 accounts etc.Sounds very similar.

 

[Steve Tasker]

To not tax defer or at least enter that money into an account where you can potentially grow it interest free is crazy unless you need the money, or can invest it in something that's not the market to make yourself more money.. like your education, or real estate, etc.

Well, this was a piece of it. I wanted to build up 1-2 years of savings, just in case, and was able to hit my target last year. I have several purchases down the line that I'm going to need cash for, and I didn't want to lock a hefty percentage of my money into a 401(k). I'm expecting that I'll need a car this year, as my beater is nearly 160k miles, I'd like to start saving up for a large downpayment on a potential home purchase at some point in the next few years (I'm still renting), and I've been paying down my student loans well ahead of schedule. I think that's my next obstacle, to be honest, for this year. I think I'm going to pay them all off ASAP.I guess another part of my uneasiness is because I don't make THAT much money, and I know I need liquid cash (I'd consider a retirement account non-liquid, as I don't want penalties, 401(k) loans, stuff like that) soon.

 

[Orange&Blue]

To not tax defer or at least enter that money into an account where you can potentially grow it interest free is crazy unless you need the money, or can invest it in something that's not the market to make yourself more money.. like your education, or real estate, etc.

Well, this was a piece of it. I wanted to build up 1-2 years of savings, just in case, and was able to hit my target last year. I have several purchases down the line that I'm going to need cash for, and I didn't want to lock a hefty percentage of my money into a 401(k). I'm expecting that I'll need a car this year, as my beater is nearly 160k miles, I'd like to start saving up for a large downpayment on a potential home purchase at some point in the next few years (I'm still renting), and I've been paying down my student loans well ahead of schedule. I think that's my next obstacle, to be honest, for this year. I think I'm going to pay them all off ASAP.I guess another part of my uneasiness is because I don't make THAT much money, and I know I need liquid cash (I'd consider a retirement account non-liquid, as I don't want penalties, 401(k) loans, stuff like that) soon.

what is your student loan interest rate?

 

[siffoin]

Newly Retired...since you've got all the time in the world...why don't you run some numbers.

I already met my financial goals. I don't really feel the need to run numbers any more. I ran so many in my time it was scary.Good luck reaching your financial goals. I am skeptical that you will get there market timing but its your money and I appreciate the fact that there is likely no one right answer in investing.

Awesome! I figured you wouldn't do the work. I did it for you.Here is your premise...the ONLY PROVEN method for success. We invest in a diversified market (SP500...SPY)...we dollar cost average...we hold through thick and thin...because it is the buying on the way down in a "fluctuating" market that makes you rich.Like I said I ran the numbers. I didn't even take into account fund fees, commissions or inflation. Here's the results of this "experiment":On March 1, 1999 you invest $100k into the SPY. On the 1st of every month after, you add $1k to the balance of your portfolio. March 1, 1999 the SPY trades at $123...so you start the portfolio off with 813 shares (value of the portfolio= $99,999k). On Feb 1, 2011 the SPY trades at $129.46. You have added $143k (for a total of $243,000) to your portfolio by dollar cost averaging and as a result you now have now have 2044 shares. The value of your portfolio now sits at $264,595. Over 12 years time...you have returned a grand total of $21,595. Or after 12 years a total ROI of just under 9%....that's a killer return of under .75% annually. Note that this does not take into account any fund fees or commission costs...nor does it take into account the affects of inflation.Here is a look at the month by month performance.https://spreadsheets.google.com/ccc?key=0Akv7baESuMCGdFRlZVpuWUcwaTFfazFydHN0SVF6cWc&hl=enAgain, I'll stick by what I've said. Dollar cost averaging worked for the most disciplined of investors of our father's generation. It doesn't seem to be as effective anymore. Your path to retirement seems to be outside the norm of the average working stiff. Sorry to say, but I find it incredulous that dollar cost averaging was the primary investment vehicle to achieve that means...especially for someone who is 42. That must of been one hell of a salary. Good for you!Though I appreciate your concern for my future welfare. I think I'll be just fine going along my path. Good Day to you.

 

[Dr. No]

interesting stuff siffoin... i'll be analyzing this closely

 

[ODoyleRules]

People. People. People. You are taking what I've written way out of context. My position on the market has been stated in the FFA over and over. If I've said it 1x, I've said it easily 100x. For the sake of clarity let me state it for the 101st time.You INVEST in Bull Markets. You HEDGE or go to cash in Bear Markets. The single most important skill you can learn as an investor is how to identify those trends. If you don't believe that it is possible to determine whether the market is bullish or bearish, you have no business participating in it.

I think the problem that many people (or at least just me) have in interpreting this is that the BULL vs. BEAR market distinction is only black and white in hindsight. Just browsing through the Stock Strategy Thread, a lot of the trend based investors will comment that, for fictitious example, the 1 week indicators are BEAR while the 4 week and 12 month indicators are BULL. I recognize that this is done to caveat an interpretation, but if the goal is simply to be invested during BULL periods and hedge/cash during BEAR markets, it would be helpful to have better clarity on what is the primary signal for BULL vs. BEAR. I'm trying to learn and, this clarity would be helpful to me. As an example, August 2008 and May 2010 are periods where the trend wasn't so obvious - what should an investor have done in those periods?

 

[NewlyRetired]

interesting stuff siffoin... i'll be analyzing this closely

When analyzing realize the following items in his flawed example:

* Investing $100k of a total $243k investment in one day is not dollar cost averaging. Because such a large portion of the total investment was made on a single day, this is MUCH closer to market timing than it is dollar cost averaging. See my 3rd bullet as to why this makes such a difference to this flawed example.

* He is missing an extremely important element for that sample and that is asset allocation. Dollar cost averaging != blindly throwing money into a single index fund especially one that does not have the proper weight in the emerging markets which were critical during the time period he chose.

* Also recognize the date he chose. He picked the near peak of the market in which he invested more than 40% of the total investment.

So basically he set out to show dollar cost averaging was bad and he did so by using a market timing technique of investing more than 40% of the total investment (100k out of 243k) in a single day. Ironic huh?

 

[Balco]

Just to touch on what to invest in for newcomers. I strongly believe in low cost index funds. Actively managed funds are not worth the extra cost. Get an index fund.

Also, asset allocation is important. The Boglehead Guide to Investing has a nice section on asset allocation that I think many would find healthy.

I am at about 70 % stocks and 30 % bonds in my tax efficient accounts.

I have been thinking of investing in several sector specific ETFs (11 of them) in a taxable account.

Still reading up on this:

Article

 

[Steeler]

.

 

[rascal]

:(

 

[chet]

Awesome! I figured you wouldn't do the work. I did it for you.Here is your premise...the ONLY PROVEN method for success. We invest in a diversified market (SP500...SPY)...we dollar cost average...we hold through thick and thin...because it is the buying on the way down in a "fluctuating" market that makes you rich.Like I said I ran the numbers. I didn't even take into account fund fees, commissions or inflation. Here's the results of this "experiment":On March 1, 1999 you invest $100k into the SPY. On the 1st of every month after, you add $1k to the balance of your portfolio. March 1, 1999 the SPY trades at $123...so you start the portfolio off with 813 shares (value of the portfolio= $99,999k). On Feb 1, 2011 the SPY trades at $129.46. You have added $143k (for a total of $243,000) to your portfolio by dollar cost averaging and as a result you now have now have 2044 shares. The value of your portfolio now sits at $264,595. Over 12 years time...you have returned a grand total of $21,595. Or after 12 years a total ROI of just under 9%....that's a killer return of under .75% annually. Note that this does not take into account any fund fees or commission costs...nor does it take into account the affects of inflation.Here is a look at the month by month performance.https://spreadsheets.google.com/ccc?key=0Akv7baESuMCGdFRlZVpuWUcwaTFfazFydHN0SVF6cWc&hl=enAgain, I'll stick by what I've said. Dollar cost averaging worked for the most disciplined of investors of our father's generation. It doesn't seem to be as effective anymore. Your path to retirement seems to be outside the norm of the average working stiff. Sorry to say, but I find it incredulous that dollar cost averaging was the primary investment vehicle to achieve that means...especially for someone who is 42. That must of been one hell of a salary. Good for you!Though I appreciate your concern for my future welfare. I think I'll be just fine going along my path. Good Day to you.

How about using an average 10-year period in the S&P instead of the lost decade? Nothing like picking one of the worst 10-year periods in history to make your point. But based on the other drivel you've written, I am not surprised. Anyway, although there is some good stuff in here, almost none of it was written by you.

 

[siffoin]

interesting stuff siffoin... i'll be analyzing this closely

When analyzing realize the following items in his flawed example:

* Investing $100k of a total $243k investment in one day is not dollar cost averaging. Because such a large portion of the total investment was made on a single day, this is MUCH closer to market timing than it is dollar cost averaging. See my 3rd bullet as to why this makes such a difference to this flawed example.

* He is missing an extremely important element for that sample and that is asset allocation. Dollar cost averaging != blindly throwing money into a single index fund especially one that does not have the proper weight in the emerging markets which were critical during the time period he chose.

* Also recognize the date he chose. He picked the near peak of the market in which he invested more than 40% of the total investment.

So basically he set out to show dollar cost averaging was bad and he did so by using a market timing technique of investing more than 40% of the total investment (100k out of 243k) in a single day. Ironic huh? :(

Dude...is this really the game you want to play.First of all let's talk about the date picked 3/1/99. This is a cherry pick to your favor. We start the "experiment" off with a full 12 months of a massive bull market run...one of the largest yearly gains in the past 12 years will be from 3/1/99-3/1/00. Another reason I chose the year 1999, is because this is when we first begin to see the impact of on-line, low cost brokerage trading impacting the market. This is a game changer/difference marker. It is a factor in how individuals have invested from that point forward and is very different in how they invested from that point backward. From my perspective...starting off in a massive bull market..and continuing in this present massive bull market tilts to your favor (I'm not starting in 1/00 and ending in 12/10 as an example). You stated $ cost averaging does best in fluctuating markets...the dates are cherry picked to your favor.

Let's talk about asset allocation. AA is a process where an investor chooses and distributes among several asset classes. I'm 100% in favor of this. But in order to be successful, one needs to be able to define which sets of asset classes are out-performing other sets of asset classes, while taking into consideration the risk tolerance of the investor. Re-balancing is done periodically, as the performance of certain asset classes changes over time...as well as the risk tolerance of the investor. Successful AA requires that one be able to identify which sets of asset classes are out-performing others within a given time-frame. THIS is at it's core Market Timing...something you've stated that has a high failure rate.

As for the picking of the SP500 (SPY) as the investment vehicle of choice. The SP500 represent the largest 500 companies in the US market....across all sectors. It is regularly rebalanced giving it a bullish bias. It includes tech companies (Apple, Google). It includes commodity companies (Exxon). It includes conglomerates like GE. It includes energy, telecom, consumer goods, utilities, health care, financials, materials...SPY IS diversified investing in the US market. Is it the perfect investment vehicle? No. But certainly if $ cost averaging is the only proven method of long term investing, that excels in fluctuating markets...shouldn't it shine over a 12 year time span...that includes 3 bull markets and 2 bears markets and consists of the 500 largest companies that span nearly all sectors?

As for the investment amount...touche...you really nailed me there. I was trying to pull a fast one. So let's re-run the numbers. How about we start off with an opening amount of $5k...and add $1k per month. That's more fair right? Dollar cost averaging will prove it's superiority for sure now.

"Let's run the numbers shall we Jimmy?"

Here they are:

https://spreadsheets.google.com/ccc?key=0Akv7baESuMCGdG5xaTZSM1dKWmJLVG15ekZodDY2OEE&hl=en

So how did we do:

We opened the account with $5k, and an initial purchase of 40 shares of SPY. Over 12 years we added an additional $143k...making that initial investment about 3.5% of the total portfolio. As of Feb 1, 2011, we'd have accumulated 1271 shares, and have a portfolio balance worth $164,520. Over the past 12 years this portfolio would have returned a profit of $16,520. A ROI of 11%...or .09% annually. Of course this performance does not include fund costs, commission/transaction fees, nor the impact that inflation would have on your investment dollars. Definitely Ironic.

 

[NewlyRetired]

Some of our disagreement may be semantics.

I considered all of my investments to be dollar cost averaged AND asset allocated. I always rearranged my investments to keep my allocations pointed to what I wanted. In no way did I consider that market timing.

Market timing to me is pulling all your money out of the market and putting it all back in on whims.

If your market timing is really just asset allocations, then perhaps our ideas are closer than we realize.

All you need to do is google Market Timing Vs. Asset Allocation and see a million articles on why Asset Allocation is good and market timing is not.

As an aside, I still don't understand why you are using a 12 year period to prove anything. Most simulations I ran in my preparations run more in the 30-50 year range. I don't know how the numbers would change, but it would be interesting to see the growth if you moved the date back to say Jan 1 1980 which would give a more realistic range for a investing for retirement.

Of course if you are investing for something shorter term than retirement, then the variables change a bit.

In the end though, I could care less. As I said before, I met my goals earlier than I ever hoped I would when I started planning in my early 20's.

 

[Dr. Awesome]

I think Charlie Sheen has shown you can indeed spend it all on hookers, blow, and booze.

 

[Steve Tasker]

To not tax defer or at least enter that money into an account where you can potentially grow it interest free is crazy unless you need the money, or can invest it in something that's not the market to make yourself more money.. like your education, or real estate, etc.

Well, this was a piece of it. I wanted to build up 1-2 years of savings, just in case, and was able to hit my target last year. I have several purchases down the line that I'm going to need cash for, and I didn't want to lock a hefty percentage of my money into a 401(k). I'm expecting that I'll need a car this year, as my beater is nearly 160k miles, I'd like to start saving up for a large downpayment on a potential home purchase at some point in the next few years (I'm still renting), and I've been paying down my student loans well ahead of schedule. I think that's my next obstacle, to be honest, for this year. I think I'm going to pay them all off ASAP.I guess another part of my uneasiness is because I don't make THAT much money, and I know I need liquid cash (I'd consider a retirement account non-liquid, as I don't want penalties, 401(k) loans, stuff like that) soon.

what is your student loan interest rate?

Less than I'm getting in my savings accounts....I have about $5,500 at roughly 2.3% and another $2,500 at just over 6%. With the student loan interest tax deduction, the impact isn't quite as much, but still more than I'm earning. I hope to just have em all paid off in a few months with a lump-sum payment so I can forget about it.

 

[NewlyRetired]

To not tax defer or at least enter that money into an account where you can potentially grow it interest free is crazy unless you need the money, or can invest it in something that's not the market to make yourself more money.. like your education, or real estate, etc.

Well, this was a piece of it. I wanted to build up 1-2 years of savings, just in case, and was able to hit my target last year. I have several purchases down the line that I'm going to need cash for, and I didn't want to lock a hefty percentage of my money into a 401(k). I'm expecting that I'll need a car this year, as my beater is nearly 160k miles, I'd like to start saving up for a large downpayment on a potential home purchase at some point in the next few years (I'm still renting), and I've been paying down my student loans well ahead of schedule. I think that's my next obstacle, to be honest, for this year. I think I'm going to pay them all off ASAP.I guess another part of my uneasiness is because I don't make THAT much money, and I know I need liquid cash (I'd consider a retirement account non-liquid, as I don't want penalties, 401(k) loans, stuff like that) soon.

what is your student loan interest rate?

Less than I'm getting in my savings accounts....I have about $5,500 at roughly 2.3% and another $2,500 at just over 6%. With the student loan interest tax deduction, the impact isn't quite as much, but still more than I'm earning. I hope to just have em all paid off in a few months with a lump-sum payment so I can forget about it.

Steve, are these the only debt you are carrying or do you have any credit card debt or car loans etc?In general, the rule of thumb states that if you are going to pay down debt, pay down the item with the highest interest rate first.

 

[Steve Tasker]

Steve, are these the only debt you are carrying or do you have any credit card debt or car loans etc?In general, the rule of thumb states that if you are going to pay down debt, pay down the item with the highest interest rate first.

I have a credit card that I use for most purchases. I pay it off in full every month, it usually hits ~$500 a month with groceries, gasoline, and other general purchases.I have no other debt other than the student loans. I'm a pretty frugal person.

 

[NewlyRetired]

Steve, are these the only debt you are carrying or do you have any credit card debt or car loans etc?

In general, the rule of thumb states that if you are going to pay down debt, pay down the item with the highest interest rate first.

I have a credit card that I use for most purchases. I pay it off in full every month, it usually hits ~$500 a month with groceries, gasoline, and other general purchases.I have no other debt other than the student loans. I'm a pretty frugal person.

sweet. Hold on to that tactic. In the end that may do as much for you as any fancy investments strategy will.

 

[george]

Interesting topic. I'm doing some research right now regarding how to target my investments AND set myself up to pay for my kids college. I'm in a little different position than the OP as I'm 42 and have 3 kids, so will likely start a new thread when I'm ready, but I will follow this as well.

 

[NewlyRetired]

Interesting topic. I'm doing some research right now regarding how to target my investments AND set myself up to pay for my kids college. I'm in a little different position than the OP as I'm 42 and have 3 kids, so will likely start a new thread when I'm ready, but I will follow this as well.

First bit of advice, as a rule of thumb, is to make sure you are taking care of your retirement before worrying about college. There are many ways to pay for college via co op, loans, grants, rotc. There is no help for retirement per say outside of what you do yourself.A VERY rough rule of thumb states that you should be saving 20% of your gross income towards retirement before saving for college. If you are expecting a pension or are assured of a solid inheritance, this number can obviously be lowered.

 

[siffoin]

Some of our disagreement may be semantics.

I considered all of my investments to be dollar cost averaged AND asset allocated. I always rearranged my investments to keep my allocations pointed to what I wanted. In no way did I consider that market timing.

Market timing to me is pulling all your money out of the market and putting it all back in on whims.

If your market timing is really just asset allocations, then perhaps our ideas are closer than we realize.

All you need to do is google Market Timing Vs. Asset Allocation and see a million articles on why Asset Allocation is good and market timing is not.

As an aside, I still don't understand why you are using a 12 year period to prove anything. Most simulations I ran in my preparations run more in the 30-50 year range. I don't know how the numbers would change, but it would be interesting to see the growth if you moved the date back to say Jan 1 1980 which would give a more realistic range for a investing for retirement.

Of course if you are investing for something shorter term than retirement, then the variables change a bit.

In the end though, I could care less. As I said before, I met my goals earlier than I ever hoped I would when I started planning in my early 20's.

Sadly...I was barely a teenager in 1980, and I wasn't investing in the market. I said a few times. Dollar Cost Averaging WAS a GREAT strategy for our fathers and grandfathers. I don't need to run the numbers to know that Dollar Cost Averaging from 1980-1999 was extremely successful. If you were lucky enough to have entered into your peak earning years in 1980....there's no reason you shouldn't be a wealthy man. Sadly those 20 years were not part of my peak earning reality.The fact of the matter is this: The time period from the late 1990's to present represents MY reality...more than 50% of my adult life and 90% of my investing life. How or why should I ignore that reality? I would also suggest the this time period represents the investing reality for 95% of the people in the FFA.

Maybe even more important the time period represents YOUR reality. You were what 29-30 years old then? You had just paid off your house. So the late 1990's to present is when you were able to focus your savings towards investments with a strategy of: Buy and Hold/Dollar Cost Average and through Asset Allocation able to utilize market forces and though those gains retire. In addition you were able to buy through the bear market and get rich, which suggest that you were able to more than make up for any losses incurred in the bear markets of the past 12 years very very quickly, and were able to do so without churning your portfolio.

Forgive me for trying to wrap my head around all of this because I don't know of a single person who was able to achieve significant gains in this time period with this type of strategy.

I can come up with a lot of ways on how a 42 year old in 2010 could retire:

1) Own a successful business and sell it

2) Get lucky as an early investor or employee in a company that IPOs.

3) Trust Funder

4) Inheritance

5) Lottery winner

But I cannot for the life of me figure out how a person could have conservatively invested over the past 12 years and showed real gains from those investments that would allow them to retire at the age of 42.

So what I'm saying to you...is that I'm in awe that you were able to do it. The tool you possess...is one I need...we all need. Show please...take 2 minutes and tell me how your assets were allocated in a buy and hold/dollar cost averaging strategy over the past 12 years where you were able to achieve significant gains through market forces that allowed you to retire. Since it was buy and hold...the %'s couldn't have changed much over that time frame either. And I'm not asking you to be perfect with those %'s...heck just ball park'em for me. It's an amazing accomplishment, and those %'s have to be cemented in your mind. I've run the #'s that show at best a US oriented stock portfolio would be flat over that time...and every AA model I've seen for a 30 year old would suggest the large majority of assets be placed in the US stock market. So forgive me for trying to figure out where the gains came from. When I look at a typical AA Model for someone 30 years old it might look something like this:

60% US Stocks - 30% Lrg Cap; 15% Mid-Cap; 15% Small Cap

15% Foreign Stock

12% Bonds

13% Cash

How did yours differ?

That you were able to accomplish your financial goals in the "lost decade" using a conservative investing model and getting rich doing so is something we can all learn from. And because I'm of the belief that the next 12 years is more apt to be like the last 12 years vs. the prior 50 years YOUR specific investing/allocation model is one I'd like to explore in depth.

I look forward to examining your AA model and learning more about how you specifically did this.

 

[BusMan]

 

[NewlyRetired]

Some of our disagreement may be semantics.

I considered all of my investments to be dollar cost averaged AND asset allocated. I always rearranged my investments to keep my allocations pointed to what I wanted. In no way did I consider that market timing.

Market timing to me is pulling all your money out of the market and putting it all back in on whims.

If your market timing is really just asset allocations, then perhaps our ideas are closer than we realize.

All you need to do is google Market Timing Vs. Asset Allocation and see a million articles on why Asset Allocation is good and market timing is not.

As an aside, I still don't understand why you are using a 12 year period to prove anything. Most simulations I ran in my preparations run more in the 30-50 year range. I don't know how the numbers would change, but it would be interesting to see the growth if you moved the date back to say Jan 1 1980 which would give a more realistic range for a investing for retirement.

Of course if you are investing for something shorter term than retirement, then the variables change a bit.

In the end though, I could care less. As I said before, I met my goals earlier than I ever hoped I would when I started planning in my early 20's.

Sadly...I was barely a teenager in 1980, and I wasn't investing in the market. I said a few times. Dollar Cost Averaging WAS a GREAT strategy for our fathers and grandfathers. I don't need to run the numbers to know that Dollar Cost Averaging from 1980-1999 was extremely successful. If you were lucky enough to have entered into your peak earning years in 1980....there's no reason you shouldn't be a wealthy man. Sadly those 20 years were not part of my peak earning reality.The fact of the matter is this: The time period from the late 1990's to present represents MY reality...more than 50% of my adult life and 90% of my investing life. How or why should I ignore that reality? I would also suggest the this time period represents the investing reality for 95% of the people in the FFA.

Maybe even more important the time period represents YOUR reality. You were what 29-30 years old then? You had just paid off your house. So the late 1990's to present is when you were able to focus your savings towards investments with a strategy of: Buy and Hold/Dollar Cost Average and through Asset Allocation able to utilize market forces and though those gains retire. In addition you were able to buy through the bear market and get rich, which suggest that you were able to more than make up for any losses incurred in the bear markets of the past 12 years very very quickly, and were able to do so without churning your portfolio.

Forgive me for trying to wrap my head around all of this because I don't know of a single person who was able to achieve significant gains in this time period with this type of strategy.

I can come up with a lot of ways on how a 42 year old in 2010 could retire:

1) Own a successful business and sell it

2) Get lucky as an early investor or employee in a company that IPOs.

3) Trust Funder

4) Inheritance

5) Lottery winner

But I cannot for the life of me figure out how a person could have conservatively invested over the past 12 years and showed real gains from those investments that would allow them to retire at the age of 42.

One item I mentioned a few times in the thread is that we were more able to retire due to our expense control than due to a huge nest egg. Our financial adviser was pretty clear that our cost control allowed us the choices we have today. We easily could have purchased the fancy cars, the summer home, a boat, etc but we knew that would lock us into working for a long time so we decided against those items. Of the 5 items you listed above, the only one that comes close to our situation is #1. Since we were both engineers in the 1990's, we worked for companies that did very well and as such our stock options did very well. Unlike many people though, we exercised and sold our stock options early. I had many friends watch a lot money go up in smoke in the early 2000's when greed set in, much of which they were never able to get back. And to be fair we do expect an inheritance some day but it is NOT factored into any of our models. If it comes it will simply be gravy.

Also, instead of plowing all of our stock option money into the markets in the late 90's, we took a VERY conservative route, one that we got laughed at for at the time mind you, and that was to finish paying off our house. It turned out to be fortuitous.

In the end though, it is our expense control that put us where we are at. We are the living definition of living below ones means.

As for what returns we got it is hard to be any where near exact since we were constantly dollar cost average investing via 401ks, iras and brokerage accounts. We started back in 1990. We continually added investments until August of last year when we retired and no longer had real income. If I had to make a very rough guess at the average yearly return, I would say in the 7-9% range. Some years much more, some years much less obviously.

As for the AA, there was no one grouping over the 20 year period. It was constantly changing over the years. In some periods we held more small cap. In some periods we held more value. In some periods we held more emerging funds etc As we got closer to our goal we even started to hold positions in balanced funds.

Outside of our company stock, we never invested in individual stocks. I was no where near intelligent enough to do that. And seeing how many mutual funds can't do it with armies of analysts, I guess that is no shame.

I never looked for home runs when investing. I looked more for constant singles simply targeting funds that had a long history of beating their bench marks in both up and down markets. Some funds I have held a long time, some funds I had to remove from the portfolio. Now that it is being handled for me, I can see that there are many areas I could have improved in, but hindsight is always 20-20.

I can tell from your posts that you probably believe I have way more money than I do. As stated in the thread, there are numerous reasons we are in the position we are in outside of investment gains.

a) We both had good jobs (good salaries, bonus structures, options, restricted shares etc). We even both have small pensions from one of our early jobs.

b) We got very lucky in that we purchased our only home in a very down market. We bought in a very nice area so the house not only significantly grew in value but has held most of its value in the down turn. Since we intend to downsize in a few years, this gives us a cash infusion in our early 50's

c) We were disciplined enough to live at home in our 20's (as much as it wasn't fun) which gave the "good start in life" kick

d) We are excellent at expense control

I would put all 4 of those items above any investing strategy we employed but YMMV.

If you are trying to find people who have done this, the following web site is loaded with people who have retired early. You will find many of their stories similar about cost control being as or more important than investment returns.

http://www.early-retirement.org/forums/

 

[ODoyleRules]

interesting stuff siffoin... i'll be analyzing this closely

When analyzing realize the following items in his flawed example:

* Investing $100k of a total $243k investment in one day is not dollar cost averaging. Because such a large portion of the total investment was made on a single day, this is MUCH closer to market timing than it is dollar cost averaging. See my 3rd bullet as to why this makes such a difference to this flawed example.

* He is missing an extremely important element for that sample and that is asset allocation. Dollar cost averaging != blindly throwing money into a single index fund especially one that does not have the proper weight in the emerging markets which were critical during the time period he chose.

* Also recognize the date he chose. He picked the near peak of the market in which he invested more than 40% of the total investment.

So basically he set out to show dollar cost averaging was bad and he did so by using a market timing technique of investing more than 40% of the total investment (100k out of 243k) in a single day. Ironic huh?

Dude...is this really the game you want to play.First of all let's talk about the date picked 3/1/99. This is a cherry pick to your favor. We start the "experiment" off with a full 12 months of a massive bull market run...one of the largest yearly gains in the past 12 years will be from 3/1/99-3/1/00. Another reason I chose the year 1999, is because this is when we first begin to see the impact of on-line, low cost brokerage trading impacting the market. This is a game changer/difference marker. It is a factor in how individuals have invested from that point forward and is very different in how they invested from that point backward. From my perspective...starting off in a massive bull market..and continuing in this present massive bull market tilts to your favor (I'm not starting in 1/00 and ending in 12/10 as an example). You stated $ cost averaging does best in fluctuating markets...the dates are cherry picked to your favor.

Let's talk about asset allocation. AA is a process where an investor chooses and distributes among several asset classes. I'm 100% in favor of this. But in order to be successful, one needs to be able to define which sets of asset classes are out-performing other sets of asset classes, while taking into consideration the risk tolerance of the investor. Re-balancing is done periodically, as the performance of certain asset classes changes over time...as well as the risk tolerance of the investor. Successful AA requires that one be able to identify which sets of asset classes are out-performing others within a given time-frame. THIS is at it's core Market Timing...something you've stated that has a high failure rate.

As for the picking of the SP500 (SPY) as the investment vehicle of choice. The SP500 represent the largest 500 companies in the US market....across all sectors. It is regularly rebalanced giving it a bullish bias. It includes tech companies (Apple, Google). It includes commodity companies (Exxon). It includes conglomerates like GE. It includes energy, telecom, consumer goods, utilities, health care, financials, materials...SPY IS diversified investing in the US market. Is it the perfect investment vehicle? No. But certainly if $ cost averaging is the only proven method of long term investing, that excels in fluctuating markets...shouldn't it shine over a 12 year time span...that includes 3 bull markets and 2 bears markets and consists of the 500 largest companies that span nearly all sectors?

As for the investment amount...touche...you really nailed me there. I was trying to pull a fast one. So let's re-run the numbers. How about we start off with an opening amount of $5k...and add $1k per month. That's more fair right? Dollar cost averaging will prove it's superiority for sure now.

"Let's run the numbers shall we Jimmy?"

Here they are:

https://spreadsheets.google.com/ccc?key=0Akv7baESuMCGdG5xaTZSM1dKWmJLVG15ekZodDY2OEE&hl=en

So how did we do:

We opened the account with $5k, and an initial purchase of 40 shares of SPY. Over 12 years we added an additional $143k...making that initial investment about 3.5% of the total portfolio. As of Feb 1, 2011, we'd have accumulated 1271 shares, and have a portfolio balance worth $164,520. Over the past 12 years this portfolio would have returned a profit of $16,520. A ROI of 11%...or .09% annually. Of course this performance does not include fund costs, commission/transaction fees, nor the impact that inflation would have on your investment dollars. Definitely Ironic.

Probably doesn't change the final analysis too much, but how did you account for dividends?

 

[Random]

Since we were both engineers in the 1990's, we worked for companies that did very well and as such our stock options did very well. Unlike many people though, we exercised and sold our stock options early. I had many friends watch a lot money go up in smoke in the early 2000's when greed set in, much of which they were never able to get back. Also, instead of plowing all of our stock option money into the markets in the late 90's, we took a VERY conservative route, one that we got laughed at for at the time mind you, and that was to finish paying off our house. It turned out to be fortuitous.

1st of all Newly Retired - Congrats! I'm 35 and hope and plan to be retired in my 40's. I'm taking a slightly different approach though, with rentals. 2nd, and you're not going to like this but what you did above is exactly timing the market. Congrats, you did well.

 

[NewlyRetired]

Since we were both engineers in the 1990's, we worked for companies that did very well and as such our stock options did very well. Unlike many people though, we exercised and sold our stock options early. I had many friends watch a lot money go up in smoke in the early 2000's when greed set in, much of which they were never able to get back. Also, instead of plowing all of our stock option money into the markets in the late 90's, we took a VERY conservative route, one that we got laughed at for at the time mind you, and that was to finish paying off our house. It turned out to be fortuitous.

1st of all Newly Retired - Congrats! I'm 35 and hope and plan to be retired in my 40's. I'm taking a slightly different approach though, with rentals. 2nd, and you're not going to like this but what you did above is exactly timing the market. Congrats, you did well.

I wish I had the knowledge about real estate. I feel that is such a good opportunity over the years that we have missed but I never had the inclination or balls to educate myself and take a shot at it. Congrats on making this work for you.I can see that it may look like market timing but I am not sure I looked at it that way at the time. To me I was simply paying down my house which provided two elements to mea) An enormous piece of mind. It is impossible to gauge this in financial terms so I won't bother trying.b) The best guaranteed return on my investment I could make (my mortgage was over 8% at the time if memory serves). I always looked at debt reduction as a form of an investment. If this is considered market timing so be it, but I can honestly say I did not make the choice because I was afraid the market was going to crash. I had absolutely no idea it was going to crash when it did. But since we leaned conservatively we chose what we thought was a good conservative investment with the money we had. The fact that the market crashed shortly after was not part of thinking.

 

[Random]

Since we were both engineers in the 1990's, we worked for companies that did very well and as such our stock options did very well. Unlike many people though, we exercised and sold our stock options early. I had many friends watch a lot money go up in smoke in the early 2000's when greed set in, much of which they were never able to get back. Also, instead of plowing all of our stock option money into the markets in the late 90's, we took a VERY conservative route, one that we got laughed at for at the time mind you, and that was to finish paying off our house. It turned out to be fortuitous.

1st of all Newly Retired - Congrats! I'm 35 and hope and plan to be retired in my 40's. I'm taking a slightly different approach though, with rentals. 2nd, and you're not going to like this but what you did above is exactly timing the market. Congrats, you did well.

I wish I had the knowledge about real estate. I feel that is such a good opportunity over the years that we have missed but I never had the inclination or balls to educate myself and take a shot at it. Congrats on making this work for you.I can see that it may look like market timing but I am not sure I looked at it that way at the time. To me I was simply paying down my house which provided two elements to mea) An enormous piece of mind. It is impossible to gauge this in financial terms so I won't bother trying.b) The best guaranteed return on my investment I could make (my mortgage was over 8% at the time if memory serves). I always looked at debt reduction as a form of an investment. If this is considered market timing so be it, but I can honestly say I did not make the choice because I was afraid the market was going to crash. I had absolutely no idea it was going to crash when it did. But since we leaned conservatively we chose what we thought was a good conservative investment with the money we had. The fact that the market crashed shortly after was not part of thinking.

Amazing how early retirees I talk to or read about all have one thing in common. They paid off their house early. I've got a 5 year plan which includes paying off the rentals (I currently have 4 but may increase that) in the next three years and then our house in two after that. If all goes well that will open up a lot of doors for my wife and me.

 

[NewlyRetired]

Amazing how early retirees I talk to or read about all have one thing in common. They paid off their house early. I've got a 5 year plan which includes paying off the rentals (I currently have 4 but may increase that) in the next three years and then our house in two after that. If all goes well that will open up a lot of doors for my wife and me.

That is a great observation. If you look through the early retirement forums I linked too above, you will find many many people who all paid down the house early. I think this goes hand in hand with many early retires being more concerned with cost control than they are with investment gains.You sound like you have an awesome plan. How did you educate yourself on being a land lord? Did you just jump in and learn as you went or did you have a mentor who guided you? I know there are some pitfalls in that type of investing as there are in all types of investing.

 

[Random]

Good question. I guess I just read up on it on the internet.

Backstory:

A few years back (July 2006) when mortgages were easy and appraisals were "what do you want your house to appraise for", I obtained an equity line of nearly $90K on a house I bought a few years earlier (my personal residence). Used that $90K to "flip" a property (split 50/50 with my brother who was working construction at the time), didn't make a whole lot, but learned a ton in the process. So we decided to roll the dice again and "flipped" another property. Did pretty well with that one. Rolled onto a third, then the market crashed. After the house had been on the market a few months (without a single showing) I pulled the listing and became a landlord. It was really a lot less complicated than people make it out to be so over the next few years I bought a few more. I buy pretty run down properties and he fixes them up and maintains them. We're still 50/50, but not taking anything out until they're paid off and we don't want anymore.