Our financial system is crumbling this week.

[IMADreamer]

Financial media is constantly full of extreme projections expressed with excessive confidence. Make enough guesses, and someday you'll be right, but mostly better to just tune out these pundits.

This is true. I've seen white papers that show people who watch financial news tend to do worse than people who don't.

When investing for retirement just do the following:

1) Follow a low cost three fund portfolio.
2) Decide the % you want of each fund. A good place to start looking is the vanguard target date retirement funds. For example, if you project your retirement to be 2040ish Vanguard has the following asset allocation:

87% Stocks
13% Bonds

60% domestic equities
40% international equities

Personally I do a little less international, but that's a reasonable %.

3) Make sure you're tax efficient
4) Auto re-balance once a year
5) Don't time the market or sell in a panic. Just make regular contributions.


There are other small optimizations people can make, but doing above will put you in a great position.

This has exactly been my strategy for several years now, largely because of this advice that you gave out a few years a back. It's worked very well for me, and I just put the money away and forget about it. I probably check my balance twice a year.

[Freed Roger]

This is true. I've seen white papers that show people who watch financial news tend to do worse than people who don't.

I'd be interested in seeing these articles if you can find them.

We cashed out of our house a bit ago and for 1st in my life we have investment money that isnt locked up in retirement or our house. It's funny- I am now hawking all over the portfolio and financial news -like the daily - CNBC-ish type [expletive]., I always liked the NPR Marketplace-ish stuff but that is quite different.

even though the retirement $ is more than this house $, I pay way more attention to the latter and catch myself imagining that I somehow hold real influence on it when it goes up/down. It's a superstition akin to thinking what I do or say impacts how the Cardinals play. On the good days -I am genius!. On the bad days -"doh, I knew I shouldnt have done that!"

Anyways -I can see how those articles you mention could be right.

Btw-I am mostly balanced according to the tools on webpage. Mostly mutual funds with nice and varied sounding names lol. The only non balanced part-i did invest about 25% of it directly in some stocks. Its now apparent that VUG (Vanguard ext mkt) is all in with some of same tech stocks I am direct on. Because they work in tandem.

[Michael]

I'd be interested in seeing these articles if you can find them.

I can't, which is annoying. That said, ignore those talking heads. Those news shows are entertainment, not educational.

If you have a large sum of money that you won't need in the next 10 years I highly suggest you setup a Roth IRA. It's easy to do on low cost index sites sites like Vanguard or Schwab. If your income is high enough that it's outside the contribution limits consider a backdoor Roth IRA.

I assume this large chunk of money is in a taxable account, so I suggest you try and be tax efficient with your asset allocation. That means if you have tax deferred account like an IRA or 401k you'll want to keep your low cost bond index funds there. In the taxable account it's better to have your low cost equity index funds.

As for what to buy, I'll reiterate I basically buy 3 types of low cost funds:

1) Total Market US Equities Index Fund
2) Total Market International Equities Index Fund
3) Total US Bonds Index Fund (I have a small amount of an international bond fund as well, but I don't think it's important to own them)

You can find a list of low cost funds like these by the major brokers here.

With this strategy I pay less than 10 basis points in fees a year, I'm effectively diversified and I kick the butt of actively managed mutual funds/portfolios. It's also low stress and easy to do. With investing, fees and taxes are the silent killer and the strategy above really minimizes those problems.

[Arthur Dent]

Here's a textbook chapter on the topic with lots of references:

http://faculty.haas.berkeley.edu/odean/ ... estors.pdf

The conclusion:

The investors who inhabit the real world and those who populate academic models
are distant cousins. In theory, investors hold well-diversified portfolios and trade infrequently
so as to minimize taxes and other investment costs. In practice, investors behave
differently. They trade frequently and have perverse stock selection ability, incurring
unnecessary investment costs and return losses. They tend to sell their winners and hold
their losers, generating unnecessary tax liabilities. Many hold poorly diversified portfolios,
resulting in unnecessarily high levels of diversifiable risk, and many are unduly
influenced by media and past experience. Individual investors who ignore the prescriptive
advice to buy and hold low-fee, well-diversified portfolios, generally do so to their
detriment.

Another excerpt:

The study is motivated by the two observations: (1) men
tend to be more prone to overconfidence than women in areas culturally perceived to be
in the male domain (Deaux and Farris, 1977), and (2) models that assume that investors
are overconfident tend to predict investors will trade excessively and to their detriment.
When combined, these observations predict that men will trade more than women and
that excessive trading will hurt their performance. Consistent with these predictions,
Barber and Odean (2001) document that men trade more than women; the annual turnover
rates of men are about 80%, while those of women are 50%. The excessive trading of
men leads to poor returns. While both men and women earn poor returns, men perform
worse. Virtually all of the gender-based difference in performance can be traced to the
fact that men tend to trade more aggressively than women. Neither men nor women
appear to have stock selection ability (i.e. the gross returns earned on their trades are
similar), so men’s tendency to trade aggressively and the resulting trading costs drag down
men’s returns.

Michael is correct. In fact for retirement saving, just buying the appropriate Vanguard target date retirement fund in a tax sheltered account, while ultra simple, is actually hard to beat without adding (often inefficient) risk. For shorter term taxed accounts, it's a somewhat more complex problem, but for most people, super generic index funds in something like that three fund system are still probably the best choices. As you've noticed, even your growth fund is already 20% big tech stocks, and holding one of those individually just exposes you to positive and negative risks that something happens to that particular company while largely mimicking the sector returns otherwise.

My view is that when you try to be a stock or even sector picker, you are trying to compete with people who are doing this full-time with access to much better data (including various kinds of insider info) and computer analysis. These people are keeping any excess returns in the market for themselves, and you're playing a fool's game trying to beat them with gut feelings, Google, and especially CNBC. You may win from time to time, but as with any gambling, you ought to be careful to not fool yourself when you get lucky and make excuses when you don't. At minimum, the fair comparison is not whether you profited or not but to a buy and hold of a broad index, so if you're doing something else, I'd at least track that against a hypothetical portfolio where you bought the appropriate broad indices (e.g.VTI/BND) and only did infrequent re-balance trades.

[Michael]

In fact for retirement saving, just buying the appropriate Vanguard target date retirement fund in a tax sheltered account, while ultra simple, is actually hard to beat without adding (often inefficient) risk.

Agree with everything you've said with one caveat. The Vanguard target fund, in my opinion, is the crown jewel of target funds. I own Vanguard's target fund in my roth account. That said, it's worth noting there are lousy target funds out there. For example, my company 401k uses Fidelity and their target funds are more actively managed so the fees are 3x higher. I'm personally unwilling to pay that.

Basically keeping it cheap, diversified, consistent and simple is the way to go with investing.

I am Boglehead, hear me roar!

[Freed Roger]

Thanks for the info guys. I would try to stow it tax deferred but we plan to go back into home-ownership with it in a year or two.

I think i am good- relatively safe for our scenario. The main exposure I have for a 1 or 2 yr run ( besides everybodies' overall market bustola) is I may be over-invested in tech stocks. My wise guy Amazon/Google picks were already in the Vanguard (VUG) mutual.

If there is a 2008 type hit and our nest egg for a house erodes, I assume the housing prices will go down too and we will be about the same financial spot- assuming interest rates are low for the balance that goes on a mortgage.

[Freed Roger]

Also- the psychology of this i.e what Dent linked, is interesting. My wife says don't blow it (our housing investment fund). So I started out just being satisfied if I outperform a CD rate for a year. When that was eclipsed within 3 weeks my expectations are up.

It is also funny how I feel like I accomplished something and am productive when I really didn't do much of anything.

[Michael]

Freed, housing and stock prices are not that strongly correlated. For example, the early 2000's would have murdered you. The late 80's and early 90's as well. I would not invest money in the stock market I was planning to use in 1-2 years.

[Freed Roger]

Aah. Yea-no historic correlation. I will revamp.

A caveat to the chart- housing is hard to affix a national # to as busts and slumps tend to range a lot by region and even suburb vs more urban. . 2008 obviously hit the FL AZ NV type areas harder than Stl. For some reason, I think STL housing in general will take a hit next time, not that I hope for it.

On the next house cost - we probably won't be too surprised. As of now we are hyper-specific in the area and what we want. We shall see.

[Michael]

Aah. Yea-no historic correlation. I will revamp.

Good. With a 1-2 time frame you should be looking at money markets and/or CDs. The performance isn't great, but that's what you should do.

A caveat to the chart- housing is hard to affix a national # to as busts and slumps tend to range a lot by region and even suburb vs more urban. . 2008 obviously hit the FL AZ NV type areas harder than Stl. For some reason, I think STL in general will take a hit next time.

Sure, but STL could be even worse. Don't gamble with your future.