#MGoMoney: The Market & Your 401K/Investments

If you work at it most folks can build a nice nest egg over time.  

-Live below your means. 

-Invest regular in the stock market. 

-Work on being debt free 

 

I did pretty good for an average guy with this simple method.  I was completely debt free before 60 and it is a great and powerful feeling.  Skip the mcMansion, fancy cars,  and really expension vacations young guys unless you really make the big bucks.   

    

 

All liquid and real estate since before the last crash. Cashed out in fall of 2007 and haven’t looked back.

Too much time left for me to worry. I don't envy those who have to make tough choices with this situation.

I've maxed out on my 401k and have done so since my first job allowed me to do so. I used to daytrade and did okay, but I am confortable now with enjoying life and not checking my daily portfolio performance. Not worried about the past week's performance at all.

Three things I learned at B School: 90% of funds don't outperform the S&P 500, load/high fee funds dont perform better than no load funds, worst five year run in S&P way better than best five year run in bonds. So if your window of retirement is greater than 5 years and can tolerate some ups and downs, being heavily based in mutual funds are a great place to invest, especially with pretax dollars - and the sooner you start the better.

One would be hard pressed to beat Fidelity and Vanguard mutual funds for solid performance with low fees. Fidelity Blue Chip Growth (FBGX) is my number one holding over 19% ave return for the past five years. Vanguard S&P Index 500 is another long term solid performer. Have also Small Cap Index, Biotech fund, International funds.

If you have kids, an MESP (529) investment is good for college savings investment. I went all in a GIC (guaranteed income) investment they offered which average about a 3% annual tax free return, plus other nice tax benefits.

My best investment was, and still is, buying fixer upper rental property in a great location. It's not for everyone and requires sacrifices like anything worthwhile. I'm also a big proponent of paying off your house asap (and obvioulsy no credit card debt).

 

- Know thyself... if you have a portfolio of individual stocks, but you spend more time on MGoBlog than you spend keeping up on the fundamentals of your stocks, market catalysts, etc., you either need to sell that portfolio for a lower-maintenance vehicle or pay someone to manage it for you.  I used to be convinced that I could manage my portfolio as well as any financial advisor.  One day I realized it wasn't about ability, it's about the time and the passion (of which I had neither).

- As your cash flow will allow, take full advantage of every tax shelter you can.  Max out your 401k.  Utilize 529s for college savings.  Spending a few bucks on a good tax advisor every so often is money well-spent.  If you're a business owner with no employees, for heaven's sake open up a solo 401k and cram everything you can into it (limit is $55,000 in 2018!).  If you have a high-deductible health insurance plan, plow up to the max into your HSA.  Shelter every dime you can from Uncle Sam.

- Be very mindful of fees on those mutual funds.  You don't have to read the prospectus to find the fees.  If the fund is charging fees much higher than an index fund, the manager better back it up with consistent performance vs the benchmarks.  I've turned most of my investments over to a professional, and those funds that I manage myself (my solo 401k) is entirely composed of ETFs.  I'm a big fan of ETFs due to their low expense ratios.  I spend most of my research time these days deciding on the best allocation strategy, and then implement that strategy with a mix of ETF's.  I rebalance often to maintain the ratios I set with the help of a professional.

 

Looks like we'll bottom out 10-20 percent down form our late January market highs, so things could still be choppy for the next week or two. Deficit spending and increasing inflation are the root cause for this correction and may result in more frequent or higher rate increases by the Feds. But the economy is humming and corporations are making $. I expect the bull market will get back on track by March and go through most of the year on the up side. Though we could be in for another bear market cycle in 2 to 3 years and the market may give back 40 to 50 percent, just like 2001, and 2007-2008. So, if the market crashes in 2021, I'll want to get out well before the big drop, since I plan to retire in 2028 I'll probably hold off on SS until I'm 70 since I will want to work part time and plan on making much more than the SS wage cap.

So, a little story . . . 

In my 30's I was into investing in everything: tech stocks, tracking stocks (remember those?), anything that seemed like a hot trend.  My criteria was "How fast do I think this thing can double my money?"

Then one day I noticed that the only one consistently making any money from my approach was my broker.

It was time for a little conversation with myself . . . "Self:  You have two choices here.  You either want a hobby, or you want to make money.  Which is it?"

I decided I wanted to make money. 

So I got rid of all the shiny objects I was chasing on an ad-hoc basis, and actually implemented a coherent investment plan.

I started monthly dollar cost averaging a diversified portfolio of no load index funds:

- A Domestic Large Cap fund (essentially the S&P 500),

- A Domestic Small Cap fund (essentially the Russell 2000),

- An International Developed Markets fund,

- An International Emerging Markets fund.

That's it.  Only 4 funds in the entire portfolio.  (You could add a 5th bond fund if you are more skittish or close to retirement.)

A set amount is invested in those funds each month, 25% allocated to each fund.

Then I put away the financial magazines.  I turned off Jim Kramer.  I ignored each Bitcoin du jour.

I stuck with it through the dot com bubble/crash, and 9/11, and the financial bubble/crash, and every other event that felt like the end of the world at the time.

Well, it worked. 

Really really well, over the course of two tumultuous decades.  (BTW, every decade is a tumultuous decade.  This time is not different.)

My retirement will be early and lucrative because of it.  

I did have to find another hobby though. 

My investment strategy is boring.  It fits on the back of an index card, it's something anyone can do, it's investment 101 stuff.  There is no ego satisfaction in doing it  . . . I didn't beat the market, I'm no Wolf of Wall Street, I have nothing to brag about in an elevator when cryptos make a big move.

But it works when it comes to actually making money.

 

       

No, I’m not worried. I’ve got 40 years before I plan to retire. Not going to bother worrying about what the market is doing now when I don’t need any of that money until 2060 anyway.

Corrections are normal and healthy.  If you're diversified and patient you'll weather the correction just fine.  Trying to time the market and "get out" when things are going back is a losing game.

 

Markets generally go up. Sometimes they go up fast, sometimes they go down fast, but they always go up. Just ride it out. Plus, this is a great time to put more money in. Everythings on sale

Cannot predict the market.

One of the coolest investment graphics I ever saw was a timeline of all of the disasters and tragic events that occurred since 1900.  Wars, epidemics, assassinations, depressions, recessions, inflation, energy shocks, popped bubbles . . . all of it.  

Overlaid on top of that was the performance of the stock market throughout all that time.

There were some shock dips after many of the events . . . and then the market keep powering upward. 

Every single time.  No matter what.

Why?

Because the stock market is essentially a measure of human economic activity. 

Humans are very resilient.  They take a step back after the initial shock, but then they get on with their lives.  They have to.  They need to.

After 9/11 we all sat around the TV for days in shock.  But then we went back to work.  We had to.  We needed to.

Human economic activity did not stop.  

The story is even better now, because you can easily invest in domestic and global markets.  You can invest in the human economic activity of the entire world.

Yes there will be shocks.  It's guaranteed.

But the global markets will always power through it.

Human economic activity won't stop.

 

 

  

I'm still in my early-mid twenties, so the retirement accounts are not of much concern to me with 35 years to go; I've been putting about 10% of each paycheck into retirement accounts since I started working a year and a half ago. 

 

I'm slightly more concerned that, of my non-retirement money, about a third of it is in mutual funds, and it's taken a decent hit. Should be fine though. That's money I'm hoping to use in 2-4 years to buy property for the first time. Probably will stop contributing to it for a few months to wait and see. In a way, it might actually be best if for me personally if the market falls more heavily so I can shift some of the 2/3rd that's just in savings/CDs towards the market at lower prices. 

We're back to October 2017 prices. That's 4 months ago. I think the general rule of thumb is if you're more than 10 years from retirement, you should be 90/10 stocks/bonds (at least according to Warren Buffet). If you're less than 10 years from retirement I'd be rather cautious right now though. If volatility and breadth diverge but the S&P makes a new high, look out. A 70/30 or 50/50 portfolio would be prudent. Might even want to look into some TIPS in case inflation blows up (unlikely, but it happened in the 70s).

But if you're more than 10 years out it's not even worth worrying about it.

I'm shorting individual equities, especially Tesla. I once dabbled in 'bear' ETFs and found out the hard way that 3x levered short ETFs (FAZ) are a scam - you get theta decay when holding it over a long period of time and you will be wiped out.

This market is vastly overpriced - average P/E ratio for S&P 500 is at historical highs. Some companies are trading at 10 times revenues (or more) booked as profit, already.

You can make as much money when stocks go up as when they go down - you just need to do your homework on individual companies/industries, and find a broker that will let you short equities.

My 401k money is all money market. I play with money on the side.

These investment advisors are a scam - they can't talk intelligently about a company's balance sheet, industry trends, or anything that requires intellectual thought or research. They've gotten lucky by the Fed bailing the economy out by loading up its balance sheet with garbage, and a political climate of kicking the can down the road, leading to a $20 trillion debt.

Long term we're all dead, but this thing is going to come to a head at some point.

I also hold a fair bit of Monero in case I need to get over the border (good luck doing that with cash or gold).

With the recent two updates to the doomsday clock, I’ve realized that when I watch the nukes fall from the sky and the explosion is racing towards me at 300 miles per hour, I’m going to think, “Shit! I shouldn’t have contributed so much to my 401k.”