Mutual Fund/Bond Advice

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Mutual Fund/Bond Advice

Postby chris oak » November 11th, 2017, 6:12 pm

This is going to be one of the most boring topics ever, but I don't know jack shidt about investments and was going to hit Bill Mac up directly as I know he has more insight than the normal spearo. I'll heed everyone this warning, do not fill this thread with bs bickering about past or current presidents or we'll shut it down. I figure this is good info for younger spearos to think about, I told Dam about this a while ago and I preach it to our younger staff all the time.

I am looking for general advise from those in the know. I have put as much as I could afford into my deferred compensation as I could which wasn't a ton and I've been doing this over many years. I would HIGHLY recommend you do this when you are young, it is taken out pretax and the thought is when you retire you will be under a different tax bracket.
It doesn't really matter, what matters is that money that you normally spend on starbucks, drinks, and other bs, you won't really miss and in the meantime if you choose wisely, it will give you a return of around 3-10 percent. Keep in mind that's the market average over time, there were many years under X president where I was losing every quarter and it was pretty disheartening. The rule then was NOT TO SELL since I was young and could ride out the market and that advice proved fantastic when the market returned the last few years.

The mutual funds that I choose have been doing well, most have been returning anywhere from 10-20 percent which is pretty phenomenal. The market is very volatile and my buddies who invest and know a lot more than I do have kind of predicted a big crash, and I'm reading the same thing from professionals. Normally if you are young, you don't care because the market is something that you want to ride out a long time to overgo the highs and lows. Since retirement is looming over the horizon, I'm sketchy about keeping my current portfolio because my buddies are saying I should sell now and buy safer bonds.

Bonds pay very little in return, but they are safe and are what they tell you to do when you get close to retirement. Since I don't want to lose out a ton before I retire, do you think I should start selling the mutual funds and moving that into bonds? If so is there a percentage that I should shoot for selling? Or is there something else you would recommend?
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Re: Mutual Fund/Bond Advice

Postby Steve G » November 11th, 2017, 9:15 pm

This is a very interesting post and if it gets any responses I imagine that they will all very dramatically due to differing experiences and risk profiles.

I agree with most of what you say (Start early and max-out). If you want to retire with a lifestyle like you are living now you will need millions, pension payments with a present value of millions or some mix of the two.

One of the most important things to realize is that over the long term the rate of inflation is 3.2% so that every 20 years your money is worth half as much, or conversely everything costs twice as much.

Another important factor to consider is that many mutual funds or other investment vehicles pay management fees often expressed as a expense ratio. Depending on the fund management company and share class you purchase these can cost you 1% of the asset being managed. Further, if you are using a financial adviser, they may also be charging 1% or more (could be less as well). The point being, if your fund is achieving 10% you may only be achieving 8% (just an example) and over the long term even 1% is a HUGE difference.

Chris, you mention that some of your mutual funds are are achieving 10 -20%. That indeed is phenomenal if it is doing that long term, especially when you consider that roughly 80% of US large cap mutual fund managers have been unable to beat the S&P 500 over the last five and ten years and the S&P 500 has achieved an average of 9.8% over its life. Of course I do realize that not all funds are competing with the S&P.

You can certainly adopt a more risk adverse strategy if you wish, but I disagree strongly with those who sell that advise. You are giving up a huge potential return to do what, keep up with inflation? You dive with sharks; you can't be that risk adverse. Especially for someone as young and capable as you are. You still have a long horizon and if you took a beating you can recover.

Last of all, run the numbers. They are pretty simple to do, and see if you can live the life you want.

Of course you need to be a ble to sleep at night with the decisions you make.:obscene-drinkingcheers:
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Re: Mutual Fund/Bond Advice

Postby NaClAddict » November 12th, 2017, 6:13 am

Chris, how soon will you need the money? Will you be forced to start cashing out your deferred comp? If the answer is soon, then think bonds. If you have 3-5 years after the crash to wait on cashing in you probably won't be affected by a crash. Obviously it would've great if you could put into all bonds right before the crash and then put it back into the market at the bottom and reap the growth. But alas there is no crystal ball.

Trust your gut, listen to friends in the know, but trust your gut. I personally believe we will see some type of crash soon. Will it be housing, stocks, a combo? Who knows. Technology, day trading, and political intervention are all affecting traditional economic cycles. Cycles will happen faster and faster. If your stocks tank, they will come back. The question is, can you wait? If you are forced to cash out stocks during a crash you could lose a large percentage of your portfolio. You could be forced by life, or minimum age distribution.

At your ripe old age, I'd keep money in the market. You're only about halfway through life. Also have you considered an income property? Write offs can really help you out. I see a lot of retired coworkers get worked when their distribution and pension kick them up a tax bracket. Even in retirement lowering taxable income is a smart strategy.

Oak, my dad retired off a pension. He's been a great role model. My father in law was a successful financial planner. They both have great advice. If you want I could put you in touch with them.

Also, I personally believe it's never bad to invest in things you need. How's your roof? Plumbing? Gigas doesn't count! She's a luxury item. But cashing out while the market is up to pay for important life essentials like your car, house, or zeroing debt is a pretty solid plan as well.

Edit: there are different things to do with different accounts. Public sector managed accounts, investment options, and type of pension must all be factored in.
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Re: Mutual Fund/Bond Advice

Postby chris oak » November 13th, 2017, 2:15 pm

Thanks guys, I guess what I'll have to look at is how much I will need to supplement my pension. If I'm fairly close maybe I'll convert a larger portion into bonds. I have been reading up a bit and there's so many different theories about whats going to happen, the predictions are that it can drop 50% and if that happens I sure won't be able to retire unless I shield it until the recovery happens. The last time when the stock market took a giant dump and I was losing money every quarter I kept my mutual funds but diverted the deferred comp into bonds, I rode it out and then when things stabilized I didn't lose out on the mutual funds that I already had and then rediverted the deferred comp back into mutual funds as well. That worked out very well, but again it was within a ten year period and that was without pulling any money out that would supplement my salary.
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Re: Mutual Fund/Bond Advice

Postby Steve G » November 13th, 2017, 3:44 pm

chris oak wrote:Thanks guys, I guess what I'll have to look at is how much I will need to supplement my pension. If I'm fairly close maybe I'll convert a larger portion into bonds. I have been reading up a bit and there's so many different theories about whats going to happen, the predictions are that it can drop 50% and if that happens I sure won't be able to retire unless I shield it until the recovery happens. The last time when the stock market took a giant dump and I was losing money every quarter I kept my mutual funds but diverted the deferred comp into bonds, I rode it out and then when things stabilized I didn't lose out on the mutual funds that I already had and then re-diverted the deferred comp back into mutual funds as well. That worked out very well, but again it was within a ten year period and that was without pulling any money out that would supplement my salary.


So this is getting fun....

......theories and predictions buy a bunch of men and women who need to come up with theories and predictions in order to sell their books, programs, shows, columns etc. Snake oil! They can't predict the future of the stock market with any more certainty than they can predict the outcome of the Preakness. If they could they'd all be richer than God. If your going to put any weight on any of their theories or predictions I suggest you look and see how you would have fared had you followed their theories and predictions ten years ago. Its worth the effort. Its only your retirement. :) Your own theory of buy and hold seems to have served you well. Why would you think that market would go to shit over the next ten years other than due to the fear mongering of the new theorists? The only theory I have is that over the long term the market will keep chugging along as it has been for the last 50 years more or less.

You may want to take a look at page no. 2 (actually the fourth page of the document) of Berkshire Hathaway's annual report (select the first item, 2016 Annual Report (PDF file)). http://www.berkshirehathaway.com/2016ar ... ual16.html

The right hand column shows the results of the S&P 500 since 1965 next to Berkshire's results (Nice ;) ). In a worst case scenario, there isn't a string of 10 years where you would have lost money if you bought and held but there are a lot of 10 year periods where you could have made out like a bandit and on average it returned 9.7%

I forgot; I do have another theory. If the Standard & Poors goes into the toilet long term, we all got bigger things to worry about than the S&P and you'll be grateful you know how to catch and prepare your own meal.
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Re: Mutual Fund/Bond Advice

Postby NaClAddict » November 14th, 2017, 5:45 am

Chris, it sounds like you are looking for income, not just shielding your net worth. This will require money management. Bonds are super safe but you could lose out on growth. You need to really sit down and look at what your needs and wants are. There is no way you want to disclose this info over the net.

These needs will change. I.E. Your deferred comp plan probably has to be cashed out by a certain age. What will you need when that happens? Will you take cash? Reinvest? Honestly, a good CFP can look at a few years of tax returns, have a quick talk, and they will tell you what they would do. Can you move it to stocks now? One percent management fee on a so-so fund is no Bueno to me.

I'm not too worried, I'm younger, I'll ride it out. I think big house mutuals are great for growth. Index funds can be better. A small fee to have my money managed by a proven winner? Sounds good to me. I will never be a day trader, it's not in my personality.

I really, really, really think inflation will hit before a crash. Going bond heavy prior will stunt portfolio growth. 1 mil in today's money ain't so great if we see 3% + inflation for a few years. Gubmint has printed a lot of money. We are currently floated by the rest of the world. What effects wil a global ripple have? Better start polishing that crystal ball.

In summary, bonds/stocks? Depends on your needs/assets.
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Re: Mutual Fund/Bond Advice

Postby Bill McIntyre » November 14th, 2017, 8:59 am

I’m out of town playing with grandchildren so I haven’t been paying much attention but here are a couple of impressions. You seem way to young to be worrying about riding out bear markets. How close are you to retiring?

You’ve probably heard that old rule of thumb that says that you should subtract your age from 100 to get the part of your portfolio to allocate to stocks. We’re living longer now so that’s probably too conservative but it provides a starting point. Of course it depends on your individual circumstances and your tolerance for risk. As someone said you have to be able to sleep nights. According to that rule of thumb I should have only 22 percent in stocks but I have far more than that. But my wife and I both defined benefit pensions that we could live on if we lost our entire investment portfolios. We might have to sell a horse and a boat, but we could make it. Our mortgage was paid off years ago. You mentioned some sort of pension yourself.

Of course if you do observe some sort of
asset allocation rule it will require some periodic rebalancing, maybe annually. You have to sell some of what has done well and put the money in what has done poorly. That takes a lot
of discipline when the stock market has been booming. You’ll be tempted to hang in for the ride.

One other onverdation before I go back to
Playing with pit bulls. You mentioned mutual funds vs bonds as if they were mutually exclusive. You can buy bond mutual funds and that’s the easy way to go for most people. I have owned individual bonds in the past
But you have to worry about term to maturity, yield to maturity, call dates, yield to call, etc. I’m too lazy to do that any more so my fixed income money is funds.
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Re: Mutual Fund/Bond Advice

Postby chris oak » November 14th, 2017, 10:17 pm

Thanks Bill I was hoping you'd chime in. It is very interesting on how many different views there are on things but I like hearing a lot of different opinions before making a decision. I'm still reading up as well, Thanks for that pdf Steve, it's amazing how Buffet turned that company around.

It's possible for me to retire when Im 55 and my pension only goes up slightly year to year after that if I continue working. It's one of those things where I have to calculate when it's best to retire. If I want full salary for my pension then I'd have to work until I'm 75, there's no way I want to do that because I wouldn't want my coworkers to have to carry my weight, my job is pretty active and we have to dive in some bad conditions, lift heavy pumps, etc. I also am a firm believer in doing what you want to do while you can, who knows if I blow up with cancer or have an accident. I know a lot of guys who worked a few years until retirement and then had a heart attack and never got to do anything and man that's a damn shame.

When I ran the computer models at work, if my deferred comp made at least 3 percent gains every year then I'd be making the same amount of money withdrawing a bit from it and adding it to my pension and could live that way until I was 95 before the deferred compensation ran out. It's very tempting. However, if I plan poorly or if my mutual funds tank within the next five years then there's no way I could retire at all without making severe sacrifices, and like I told my wife: there's no way I'm selling that boat :).

I heard similar things about the bond ratio that Bill mentioned, although the way I heard it was you subtract 10 after halving your age which means I should have 40 percent in bond funds. Right now I'm only carrying 10 percent, mainly because I had been watching the funds and tracking their growth over time and had broken it up into different percentages of foreign, small, mid and large cap. But I need to plan my exit strategy for when I retire. I'm hoping if I keep pretty much what I have now at almost the same ratios and just convert say 20 percent into bond funds then I should be able to ride out any shortfalls for at least ten years. I wish I knew more about this when I started out at work, but at the least I started throwing a bit at a time in my deferred comp. I'm trying to learn as much as I can right now because a lot of it is really confusing. My game plan will include working part time somewhere, at a spear shop, doing scientific collecting of specimens, or working as a contractor for environmental surveys.

Again, for most younger spearos this is probably the most boring thing around you could read and I could have just hit up my friends on a sidebar but I wanted the younger guys to at least think about what we are talking about. I bring this up to every young staff I know and I usually recommend they check out vanguard as it's an easy way to start a Roth IRA if their work doesn't have one. Had I listened to my old professor when I was a freshman in college I'd be way ahead of the game now, he recommended that you set aside one dollar a day and put it into funds (at the time he said cd's because they weren't dead like they are now), with modest growth in 40 plus years you'd have a lot of money. I tried it for a few months and then blew the money on car stuff. It's hard to think about your future when you are 18. My friends at work are all mid twenties to about 40, a lot of them blow unbelievable amounts of cash on starbucks every day and other things without ever planning for the future. I think it's like better than 50 percent of the country doesn't have any real investments and that's going to be scary when they grow older and are scrambling too late.

If you are young and working part time and can set aside 100 a month into a decent mutual fund and keep it up, you will be blown away at what you will end up with when you hit 65. Of course that means cutting back on your speargear and man that's a hard bullet to bite ;).
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Re: Mutual Fund/Bond Advice

Postby Bill McIntyre » November 15th, 2017, 11:06 am

It occurs to me that at least some people may not realize that bond prices can be volatile and you can lose a lot of money if you have to sell before maturity. Here’s an oversimplified example that I used to use to introduce the subject. Let’s say you buy a bond with a par (face) value of $1000 and a 10 percent coupon interest rate. The bond pays you $100 per year. Then interest dates on similar bonds goes up to $15 percent. So an investor can buy a new bond that pays $150 per year. If you need to cash out and sell your old bond in the secondary market,a new investor can buy your bond paying $100 per year or a new bond paying $150. The only way he’ll buy your bond is at a reduced price so that the $100 per year amounts to 15 percent on that price. You do the math. So the point is that if interest rates rise, bond prices fall, and vice versa. That math you just did was oversimplified because the amount the bond prices moves in the opposite direction from interest rates decreases as term to maturity decreases. There is a way to calculate that price sensitivity but we won’t get into that here. However, the price sensivity is called duration, and bond funds publish the average duration of their portfolios. If you think interest rates are about to rise (so bond prices will fall) then you might want to buy bonds or funds with short duration. If you think interest rates will fall (so prices will rise) then you want bonds or funds with long duration.

I hope that wasn’t more than you wanted to know. I won’t give a quiz.
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Re: Mutual Fund/Bond Advice

Postby Steve G » November 16th, 2017, 9:12 am

Chris:

Nice to see that you are propagating the importance of investing/taking responsibility for retirement. If you have affected one young spearo to begin investing for retirement then you have most likely made a material difference in his or her family's life. And because of the long term nature of it they may never even realize the profoundness of the change. Its pretty hard to sell a comfortable retirement to an I want it now culture (Which by the way is not a comment directed at today's youth, but rather American Consumerism). :obscene-drinkingcheers:
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