All times are dangerous
I read this blog post today, and it tied in with some things I have been thinking about.
Where should we be investing our money now? Specifically, what kind of asset allocation would be appropriate? At the moment:
- Stocks have been going up for a while. Historically, they have to correct or crash at some point.
- Bonds are facing low interest rates. At some point rates will go up and bond prices will fall (but yields will rise, partially offsetting that).
- Gold is an unproductive asset.
- Cryptocurrencies are a bit of a long shot, to say the least 😉
The standard advice would be to invest in a diversified portfolio with stocks and bonds (and maybe some REITs/commodities/P2P lending). Something like your age in international bonds plus world equities (so if you are 40 years old, you would have 40% bonds and 60% stocks). People in Japan might want to add some Japanese bonds and stocks to that. The equities provide growth and the bonds provide stability.
This might be a sensible portfolio depending on your personal circumstances and assuming that the rules haven’t changed (see Nassim Taleb’s work for a deep dive into that).
So far my investing plan has been twofold: to buy dividend stocks (mainly from the US) in order to hold them forever and enjoy the dividends, and to buy equity index funds so that they will go up in price and be sold eventually. I believe the latter approach is more likely to succeed over the long run, but the former is more fun and simpler (you don’t have to worry about selling things to get an income, you just get your dividends every month). It’s incredibly satisfying to see your dividend income rise over time.
The question is, should I change this approach going forward? My wife and I are still working and still doing our best to save and invest for the future.
Every so often I am slightly tempted to sell something and keep the proceeds in cash, so that I can use that cash when stocks go on sale…
So far my natural laziness has stopped me (it’s much easier just to keep buying stuff than start worrying about when to sell it and rebuy it again). Plus I remind myself that people have been predicting an imminent crash for the last six years or so -anyone who sold in 2012 to wait for a correction must be deep in the depths of despair by now (we’d have to have another generational event just for them to break even).
Hopefully today’s post will spark a discussion and help me figure out what I want to do. What do you think? Sit tight or try to adapt to our long bull market (and possible future correction)?
One thing to review might be #6, from two weeks ago on the September 9th Monday Read: https://www.epsilontheory.com/things-fall-apart-part-2/
One of the points there is that for about ten years now nothing has outperformed the S&P 500.* That pretty much is the same thing as Buffett has suggested–put it all in the S&P, with maybe 10% in bonds. A person could also choose CDs in lieu of bonds, since with those (depending on term) you get close to the payout of a bond fund without the interest rate risk. Two years ago real estate became it’s own sector, with many ETFs adding those holdings as a result, so IMO REITs are no longer really necessary. I’d stick to your present strategy of some dividend stocks plus index funds.
One caution about the blog post you linked to, above. It says there “The long game is always higher. … The market does decline from time to time, but always climbs higher after the temporary pullbacks. The only time this will not happen is if civilization fails.” Well, civilization didn’t fail, and the Nikkei has yet to regain its 1989 peak.
*Nothing on Hunt’s list, anyway. US small caps have been on a streak recently, and tho he mentions value, why doesn’t he include growth? E.g., https://www.marketwatch.com/story/dominance-of-growth-over-value-is-a-trade-thats-nowhere-near-over-goldman-says-2018-03-19
I’d be fairly wary of investing in the S&P500 right now (as opposed to an all-world equity index).
For the Nikkei not getting back would only matter if you put all your money in at the peak and then never did anything else. If you had been buying regularly since then it wouldn’t look anywhere near as bad, surely?
Caution is certainly warranted–no problem with that. Different things can be higher up the ladder of risk/danger–S&P 500, Nikkei, bonds, metals, emerging mkts, etc.–and of course the challenge is in making one’s choices.
I guess I should have quoted it, but the article linked to presents this:
“Let’s bring the current stock market into perspective. At the last cycle market high the DJIA was around 13,930 at the end of October, 2007. If you had the worst of all luck and invested a massive windfall (the lottery sent you a gazillion dollar check) at the exact peak you would be up just shy of 90%! (89.55% for home-gamers.) Index funds make it easy to match the market. An all-market or S&P 500 index fund would have yielded slightly different results, but still good gains all the same.”
The article used this example to make its point, while in reality most people are limited to putting money into their investments on a regular basis over many years. I generally agree with that example, but (caution again) wanted to point out a counterexample.
Just invest in a globally diversified balanced portfolio, and don’t believe the rules have changed. I’m wondering if your Black Swan reference was inspired from this article: https://www.collaborativefund.com/blog/fool-me-three-times-and-i-give-up/
Another quote from that article:
“What actually occurred in the decade after the financial crisis – average market returns, tame volatility, pretty average economic growth, falling unemployment – is an outcome you would have have been laughed out of the room for suggesting in 2008, even if all of it was just predicting normalcy. We fell for an irony of thinking extreme tail events were probable, predictable, and visible. The literal opposite of a Black Swan.”
> Well, civilization didn’t fail, and the Nikkei has yet to regain its 1989 peak.
True, but the Nikkei is not the S&P500, and hopefully now somebody wouldn’t go 100% domestic stocks.
I think you raise an excellent question because it’s very hard to argue that stocks or bonds are cheap right now. However, I have learned that I cannot time the market and when I try to do so my investment returns suffer so I do not adjust my holdings based on bond yields or typical measures of over/undervaluation. You mention a bond/equity allocation using your age in bonds with remainder in equities (the same as 100-age in equities). Bengen, who did the original work suggesting that 4% is a sustainable withdrawal rate during retirement, also found that such a high withdrawal rate is only possible if equities are 50-75% of the portfolio. His later work suggested measures like (115 to 140)-age as the allocation for stocks with higher numbers for more risk tolerant investors, so your allocation is pretty conservative. Also, I haven’t seen this work duplicated for international stocks and bonds, only US equities. http://www.simonemariotti.com/downloads/Papers%20finanziari/Bengen%2096.pdf
Thanks for the links/background! My own allocation is 100% equities, and my wife’s is 70% equities, so we’re assuming we are more risk-tolerant than the standard advice.
I prefer to be conservative when giving advice to novice investors though 🙂
Our situations are different, so my experience and recommendations may not be possible for you or other readers. That said, to help prompt a discussion, let me throw out some thoughts.
First, are you investing a set amount of money each month? I did this for most of my investing life, and consider it my best investing move. The amount invested each month went up as my pay increased. Monthly investing smoothed out the ups and downs of the market cycle.
As for how I invested, I’m an American who was lucky to come of age as mutual funds took hold in the US. They got the vast majority of my money. I sent money first to retirement funds designed to avoid taxes, such as Individual Retirement Accounts or 401Ks. I invested in other types of funds when I had more money available to invest. Sometimes I got more adventurous and invested in stocks, but when I got busy or they got hard to track, I sold and concentrated on mutual funds. Over time I learned to put money into the lowest cost mutual funds I could find, using Morningstar to help identify mutual funds with better track records.
The only times I’ve made major changes to my investing program have been when I had a major career change or needed funds for a major purchase. As soon as things settled down and I was confident in my new job, I’d restart automatic investing based on my new salary. The only time I ever sold a bunch of investments, and didn’t reinvest, were for major purchases, such as car or house.
Now that I’m living the retired life, I’m pleased with my investing choices. I can favorably compare my experience with my parents, who didn’t have the same outlook or desire to manage their own investments. Due to what I consider the high cost and poor choices by their financial advisor, they are living much more frugally than they should be.
I’ve never done anything like investing in dividend stocks, but it’s something I’ll consider.
(and I’ve been wondering–I think that’s a thunderstorm in the pic up top, but it also kind of looks like a nuke going off…?)
It’s a great photo, isn’t it? That’s a thunderstorm 🙂
Yes, we put away a healthy amount each month, and I top up my NISA from my biannual bonus twice a year.
Having followed your blog for a while, I was pretty certain that you were doing that. Rather than making big changes to your investment program, you could dial down your risk potential. TokyoWart makes some good points above. Unless you plan to retire soon, though, at your age I think you have more time to stay heavy in stocks.
Question: How risky are dividend-paying stocks?
As single stocks, much riskier than an index (chance of total loss). Otherwise it’s going to depend on the company I guess.
I’m in year two of investing. I have a 70/30 stocks bonds allocation (I’m 39). I think age + 1o is a good idea because I’ve started later in life. I think I’m just going to continue maxing out my NISA and iDeCo with a combination of monthly contributions and bonuses and ignore the stock market. My allocations are automated now, so that’s a good montivation to not only continue, but to aoid tinkering.
Sounds very solid. You should get a decent result with that portfolio.
Ben, I’m wondering what your most successful stocks are in terms of dividends that you receive from them? If this is your trade secret, no need to reveal it, of course! ^ ^
Ha, ha, no secrets here. But your comment has given me an idea for a blog post. Stay tuned!
Thanks Ben! Glad I helped to inspire a future blog post. Looking forward to it…
I sold out of stocks June 2017, as I believed the world economy was getting a bit un-stable however I have missed out on the gains since then…. I am now back in stocks/bonds again…
The one thing I have learned is that one cannot time the market…
I am amazed that with so much instability out there (Turkey, Italy, Brexit, third world economies) that the market keeps rising…or maybe its all being manipulated by central banks…