Market Philosophy

[Campgottagopee]

Jeez. How many does that make?
On a related note, I finally got my hands on my dad’s model 94 awhile back. It’s a beauty.

I'd say I've owned over 30, currently have 12. I've traded some and sold some. It's just a hobby I enjoy and can make a few bucks.

I don't go looking for them, I just come across them. Back when we had a gun section in the classified section it was a lot easier. These Belgium made A5's aren't around like they used to be.

 

[JTG]

So, this thread has been quiet. Yeah, a little hard to talk markets without politics filtering in. Of course the GA Senate runoff is pretty significant, and the results will definitely have an impact on monetary policy and the markets. Anyone make any moves in anticipation of market effects from the potential runoff results?

I put some money on the sidelines (stable/money market fund) and rebalanced a little away from the bond market. I can see what happens over the next 30 days and decide where (and when) to put that cash back into play.

 

[Milo Maltbie]

I think it has more to do with Fed policy than electoral politics. I think the reason the stock market remains high is that the Fed is loaning so much money that goes to stock buy backs, which bids up the price of equities. So in the middle of a pandemic when maybe 40% of the wage earners are struggling to pay bills, or not paying them, the Fed is working to insure that rich people don't take any paper losses. I don't understand whether that is causing an equities bubble, or if the buy backs support prices in a stable way.

OTOH calling into question the legitimacy of the United States government can't be good for business, but here we are.

mm

 

[DomB]

My philosophy: buy and hold, index funds, set an allocation that you can revisit only after a waiting period (for me, 6 months, but I haven't changed my asset allocation in at least 7 years), and rebalance no more than once per year. I know some folks think this is crazy, but I pay almost no fees (say 0.15% / yr) and I spend about two hours a year thinking about my portfolio. I am happy to accept average equity returns, because over time I have beaten steller one-year performers in the public equity market. If you are investing with a long enough time horizon, asset inflation/deflation doesn't really matter (my guess would be at least a 7-20 year time frame).

Everything I just said takes maybe 10-20 hours to educate yourself with google and wikipedia searches and 2-3 hours of 'work' per year in rebalancing. People tend to pick their asset allocation (stock bond split) based on ability, need, and willingness to take risk. If you have a lot of money that you inherited or earned, you don't really need to take risk (as much) but you also have more of an ability to do so.

How I approach it in some detail:

I basically subscribe to the so-called Boglehead philosophy: I pick my asset allocation between equity and bonds, and then in equity domestic and international. I buy those three types of mutual funds, only passive index funds. I tend to use Vanguard Total Market and Vanguard Total Market World (not sure of the official name of the World one, but it is basically ex-US. I don't ever sell them, and I don't try to time the market. I rebalance through purchasing one time a year, and only if my allocation is off by a set percent. So my 'trading' time is a few hours a year.

The only exception to this is/will be that if my bond allocation leads to more than 4 years expenses in bonds, I have given myself the option of investing the excess only in domestic/international index equity funds. My reasoning is that in any (likely) downturn, 4 years bonds would give me enough cash so that equity values would increase. In addition, because I worked for the fed govt for 5 years, I have access to a unique bond that cannot go below par/ 1$ to $ value. I believe that holds true in the worst downturns like the great depression and '08; at least at this point it seems like it would have worked with the COVID market shock and apparent recovery.

In March I had some big paper losses. If I sold, I would have been in trouble. I continued to buy on my scheduled basis. Something similar in February 2018.

I first started investing a few years before the 08 downturn. I was very frustrated then because literally at the end of the years, my contributions were much higher than market value of my entire portfolio. Of course, that had the effect of buying low as I stuck with the strategy over time.

If you are frustrated with trying to guess or pick managers or strategies, go to google or wikipedia and type in bogleheads; there are no guarantees in life. I do believe the information is helpful and interesting for the average person.

 

[Harvey]

Boglehead

Totally.

big paper losses

Never sell.


The original Boglehead, in my mind, was a guy named Taylor Larimore. He was kind of the unofficial leader of two forums, one on Morningstar and one standalone at Bogleheads.com or maybe Bogleheads.org (can't remember).

This guy really impressed me. Understated but insistent that if you:

• Start young (20s best)
• Save at least 10% of income
• Dollar cost average (basically buy all the time, every week no matter what)
• Keep your costs rock bottom
• Don't outsmart yourself (market timing)

...you will have plenty to retire at 65.

I followed him religiously for a few years, and after I felt I understood what he was teaching, kind of dropped off that forum. There are some tax nuances I don't really understand, and I should probably get help with. Where you hold different kinds of investments really matters, and I don't fully understand that. If you have enough to save outside of your tax sheltered options (401k) go super efficient, like a low cost total stock market fund. That much I know.

I followed most of that advice, except I didn't start in earnest until I was in my 30s. Was too busy being a starving artist, but hey. Before I got married I saved like 35% of my income for about 10 years and that compensated somewhat, but not as much as starting in my 20s would have. Hard to have your shit together in your 20s, but it is what it is.

Not to be an asshole, but I laugh when I read something about "how does xyz news event affect your strategy." It doesn't. At least not for me.

 

[DomB]

Harv,

I am not a tax lawyer or CPA, but have spent some time reading into this. Some details below. You could also read the chapters in Taylor's Boglehead's guide to saving and boglehead's guide to investing. I would suggest before selling anything, speak with a professional. If you have VGD accounts, you could call into them for basics.

On your tax efficiency point, if you can, you want your bonds in a place that delays or removes tax liability. Typically, that will be a 401(k) (ordinary earned income when you withdraw) or a Roth IRA (subject to a bunch of rules, but no taxes if withdrawn after I believe 59.5). Here you don't hurt yourself because when you withdraw from the 401k, it is ordinary income even if you held stock (special rule because of the fact that ordinary income tax on the 401k was deferred). Why? Because the return on bonds (interest) is taxed as ordinary income, which is typically a higher rate, same as a pay check.

Stocks you typically want in your after tax account once you have filled up tax deferred or protected accounts. Why? if you do not sell, you are only taxed on dividends, which you reinvest as a bogle head. The dividends (after I believe W Bush tax change) are taxed at a capital rate, which tends to be quite low and for some folks I believe zero. When you sell to draw down, it stocks are subject to capital gains, which if held long term (can't remember if one or two years) has a reduced tax rate. There are tables in wikipedia that tie capital gains rate to ordinary income rates. In the lower few brackets, there is no federal cap gains tax for long term cap gains (note there very likely is state income tax). That is a pretty good deal. Real world example. Say you have 1M in S&P 500 mutual fund. That returns 2% dividends a year. That 20,000 is taxed potentially as long term capital gain, so let's say 20-25% if you are at the highest levels, or about 4,000. Considering that when you sell the stock, it is a long term capital gain in the future, that is not a bad deal since we all have to pay taxes.

It is a lot more complicated than that, but that is a decent rule of thumb.

Before one would apply this rule of thumb, you should consult an advisor before selling anything to rebalance or move accounts around, because selling anything can be a taxable event - it could make your tax bill go up a lot, or run afoul of a rule that would get you a penalty (think selling out of a 401k before the age limit, which i think is 59.5 or 55). As we get older, there will usually be a taxable gain on stocks (again, at a capital gain rate, which is much lower than ordinary income).

Ordinary income is basically wage income; capital gains is tax preferred and is considered a passive return on an investment. The best is something like a Roth IRA (income limits and yearly limits), which can end up never being taxed.

 

[Harvey]

Most of that I get. It's about how do withdraw after retirement.

Also I THINK you need to dump the target retirement funds when you retire and break them into component funds so you can withdraw in a more sensible (tax efficient and rebalancing) way.

Another thing, I got on the ROTH train late, and have been wondering about converting. It's a scary thing to do.

 

[DomB]

Harv -

On draw down, it is a bit tricky but very managable. IMO: Step1: google the gocurrycracker blog post about withdrawal strategy; Step 2: Whip out an excel file and run some scenarios while having a wikipedia tab open with the capital and ordinary tax rate tables.

Basically, you may have to whip out an excel and run some scenarios. I believe the blog gocurrycracker has a well-known post on drawn down strategy. Reading that blog post alone will get you more than 50% to a withdrawal strategy. It is actually quite possible that some withdrawing about 70,000 in cash a year would not have federal tax liability. The basic point is when withdrawing, you have to keep in mind the value of the dollar you are withdrawing: that means thinking about (a) tax rate (ordinary vs. capital) and (b) marginal rate - how once you exceed x, the increment is taxed at higher value. I spent

On Roth, if you have not contributed to Trad IRA this year, the general cap is 6,000; if you are older, it is a higher catch up limit. I would definitely call VGD, as they have specialists that don't cost more on Roths - they do not give advice, but they can explain the mechanics. It is a bit complicated to explain on a blog but happy to discuss if you PM me. Keep in mind, I am not thinking about withdrawing from my Roths for a long time, so I am not focused on the hold period (it may be five years?).

 

[DomB]

Sorry for the typos and nonsequitors - fat fingered the post button.

 

[DomB]

And Harv, not really my business and I should stop now, but given where it sounds like you are in your planning, you have a lot set and are in a good spot; you made the good choices years ago. I think you should really look into two issues now: (1) withdrawal strategy; (2) healthcare.

For 1, The blog post I mentioned gets you a long way (tax rates are definitely different now on the ordinary income side due to Trump tax cuts).

For 2, not sure of your age, but if under medicare age, check out blog posts on Obamacare. It is actually a great way to secure healthcare in retirement particular if you retire before medicare age. That same blog has good posts on pre-medicare healthcare. Whatever folks' politics, Obamacare is a boon to people who want to retire.