I was having a "free" conversation with a financial advisor yesterday about stocks, the market, and 401K performance. With about 25 years to go to retirement, my 401K is doing well as I'm 100% in stock funds, and up a good bit for the year. Her advice was to sell the majority of stocks in my 401K right now and hold the cash in the account (or put the majority in bond fund) to lock in the gains and be ready for the next correction, which she thinks is coming based off of several factors, one being the cryptocurrency situation.
Anyway, what she said made me think, but also didn't quite seem like sage advice. I'm not the most knowledgable wrt investing and such, and I know there are those here who are, but am I right to take that advice with a serious grain of salt, or is there merit to locking in gains right now and just waiting til another correction?
Thanks guys.
So, last spring I took advantage of a free service that Schwab (they manage my 401k) provides. It was a consultation with one of their planners. They run various models against your portfolio utilizing various risk factors. So for example, if you had all of your money in aggressive funds, what would happen if there was a market correction. If you had all of your money in bonds, what would happen vs your potential for growth.
After creating various models, we found that the following balance created a scenario where the losses would be minimal while still being able to build some nice steady growth...
Large Company 30%
Small/Mid 14%
International 15%
Bonds 41%
I am ready to call them again to have another discussion and run the models one more time. I also have been thinking about whether to move the non-bond dollars into bonds or park it in the money market expecting some kind of huge drop. However, I always lose when I try that.
That said, if you 100 pct stock funds, it isn't out of the question to take a 20 - 25 pct of your portfolio and put it in a lower risk investment like a fixed income bond fund.
No need for cash or to attempt to time the market. With your age, there should be no way you go lower than 50 pct stocks/funds.
You may want to sit on some cash (20-25%) so you can buy a dip, but with your time horizon, you could leave it all stocks. If the market tanks 20% you have plenty of time to recoup that.
My best advice, just buy a 500 index fund with your payroll contributions and dollar cost average you way to profits.
Anyone hear from Phil in WNY lately?
If you want to go more conservative, look for funds that pick stocks based on dividend growth or yield.
You may want to sit on some cash (20-25%) so you can buy a dip, but with your time horizon, you could leave it all stocks. If the market tanks 20% you have plenty of time to recoup that.
My best advice, just buy a 500 index fund with your payroll contributions and dollar cost average you way to profits.
Anyone hear from Phil in WNY lately?
+1.. I probably know more about finance than most advisor.. and I can pretty much tell you what she said is utter crap.. If she was so good at guessing the next crash she won't be an advisor, she would have a higher paying job.. Yeah I think a market correction is coming and I have moved from my leveraged funds to non leveraged index funds but I thought that in Sept of 2016.. Look where we are at now.. with a 25 year horizon you will more than recoup your money when the markets corrects itself.. on the other hand if the market doesn't correct itself till 2 more years you are looking at losing out on 20+% gains and possibly more..
either way don't go into bonds rising interest rates = lower returns unless you think the interest rates are going to go down..
My wife and I maxed out our 401ks for years and I retired at 50 my wife at 55
The bulls are runnung wild with Trump taking restrains off and getting tax cuts . confidence will remain high hopfully for another 7years
I have casht savings in a high yield savings account (1.6%). Do the cash holdings I have count as part of the "bond" mix?
it;s managed by a genius Hubner. It is a real estate fund including REITS. If it is not available through your work's 401k just by it outright. Google it
it;s managed by a genius Hubner. It is a real estate fund including REITS. If it is not available through your work's 401k just by it outright. Google it
1.6 high yield for an online savings
I have casht savings in a high yield savings account (1.6%). Do the cash holdings I have count as part of the "bond" mix?
If you are confident in your ability to find a sustainable job then savings account should only be your safety net to support you in case you lose your job.. It shouldn't count as as an investment..
That might be something to consider in a trading account....not a 401k. No one knows the future.....
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first, she doesn't manage my money. It was a conversation with someone who happens to be a F.A.
I have casht savings in a high yield savings account (1.6%). Do the cash holdings I have count as part of the "bond" mix?
If you are confident in your ability to find a sustainable job then savings account should only be your safety net to support you in case you lose your job.. It shouldn't count as as an investment..
I bet she was just expressing her concerns for an upcoming correction....all chatter
Ask her if that is what she has done with her own investments. I bet she didn't
1. Doing that now means you lose out on any future gains
2. How will you know when to get back in?
My 401k dropped about a 1/3 during the great recession. It has all come back and then some.
Stay in the market, you have plenty of time to rebound if a correction does occur.
Bonds - as others pointed out. Terrible idea. Bond rates are inverse to interest rates. Interest rates are going up. Think of a see saw - the farther out you go on the seat, the more you go down if the other side goes up. Long term bond rates are awful for that reason.
Hard to time a market. Selling completely off is insane. Bonds are a known bad play and you don't want to lose the potential gains until a correction so the only thing I would consider is if you invest 10% of your savings, maybe you want to consider investing less and holding that money in the event that you want to dump it in for a correction. That's about all I would consider.
You make most of your money on the small minority of days where things go up. If you are out of the market then, you will not get even the average return.
Sure, there may be a correction, and you may want to hedge on that, but if there is, you should just be dollar cost averaging, riding it out, and participating in the gains as things come back.
25 years is a long time...don't move the majority out until you are in small enough time window that you can't ride through a correction/recovery.
You make most of your money on the small minority of days where things go up. If you are out of the market then, you will not get even the average return.
Sure, there may be a correction, and you may want to hedge on that, but if there is, you should just be dollar cost averaging, riding it out, and participating in the gains as things come back.
25 years is a long time...don't move the majority out until you are in small enough time window that you can't ride through a correction/recovery.
Much more sound advice.
Now this is true BBI advise. (applicable to all occasions)
Sell a portion of each fund so you can diversify, that is probably the best way to go. If there is a correction and you see a flight to quality, you want to be in some bond funds. This way you have some hedge going.
owning some bonds would be fine at 5 years. as long as u r diversified and have some cash for a rainy day you will be good. The real secret to aquiring wealth is to never ever pay a foinance charge. Pay all credit cards in full every month. If you can't then don't charge
Again as mentioned before, in a rising interest rate environment don't select long term fixed income investments.
There are excellent balanced mutual funds such as Vanguard Wellington that have this type of asset allocation as their investment policy.
Great guy, with a capital G...successful, classy, smart, fun.
Perhaps you worked with Dooley back in the day?
My advice: stay invested in the market and contribute as much as you can to your 401K religiously. Steer clear of bonds, as someone mentioned, we are in a rising interest rate environment, and this will cause the value of fixed income securities to fall. So, your safest investment is not so safe.
The economy is strong by all measures, consumer and business confidence is strong, inflation fro the time being is tame, and the tax plan signed into law should act as a tailwind to the market. Sit tight and stay invested, and do not let emotions lead you to irrational decisions.
Feel free to email me if you have any direct questions: jjbjr922@aol.com. Happy to offer advice.
Indeed, simply because an asset group (stocks) are overpriced doesn't necessarily mean there will be a correction or crash. Most experts would tell you that the concept of "reversion to the mean" would indicate that the asset, invested at today's prices, are likely to produce lower than normal returns over the next 10 years. Those "lower returns" can be accomplished by a sudden dramatic drop in prices or sluggish growth each year for 10 years (or any combination).
I would also point out that studies have shown that a 90/10 stock/bond allocation outperforms a 100/0 allocation over most 25 year periods of time. That is because the two asset groups tend to have a low correlation of returns during most time periods, and thus offset each other. So, you might want to rethink your 100% stocks.
As for bonds (and that is a misnomer - you should really refer to it as fixed income - that includes bonds and cash) - while it is true that long term bond returns are likely low (the general rule of thumb is that bonds will have a ten year return equal to their current yield), most investment bonds are not nearly as volatile as stocks (by investment bonds I mean treasury bonds of 10 year maturity or less). And in a rising interest rate environment, while bond funds will go down minimally in price, your monthly reinvested dividend will be purchasing a steadily greater number of shares (the dividend is higher as rates go up - and the price per share is less - resulting in two reasons why reinvested dividends buy more shares month after month in a rising interest rate environment).
In addition, if you are really worried about returns on bonds (and I would not be), you can always invest in individual bonds which, held to maturity, hold zero interest rate risk (in the sense of price variance of holding bonds in a mutual fund). But, as I pointed out above, if you have 10 percent of your 401k in an intermediate term bond fund, your overall returns should be greater over 25 years than if you held 100% stocks.
You will hear about other types of bonds - long term bonds (11-30 years durations) and they have more risk because price fluctuations of bonds are a mathematical equation - and the variables are yield and duration (years left to maturity) ... so that a change in interest rates will affect a bond with 25 years left more than it will affect a bond with 10 years left; and a 10 year bond will be affected more than a 9 year bond etc etc
Some people engage in tactical asset allocation. They decide stock prices are high, so they want to "keep some powder dry" to use to buy more stocks when prices are lower. So, if their normal stock allocation is 90%, they make sell to "cash in" some gains, reducing their stock allocation maybe down to 70%, and then stay at 70% until prices are "low enough" to buy stocks again and bring their allocation back to 90%.
The trouble with tactical stock allocation is that it requires you to be right with your timing both when to sell and to buy back again - and you can have "regrets" if you sell to 70% because prices are high (i.e. most people who believe in tactical asset allocation would have moved to a lower allocation years ago in the current environment) - and then you have to know when prices are "low enough" to buy back in (and most people don't hit the low - they don't get back into stocks until the market has already hit its low and is already well back into the new market upswing)
Thus, most people who have no ax to grind and who study this for their living (university finance professors), recommend that most people are best served by maintaining steady savings every paycheck, keep a steady stock/bond allocation, and don't look at what the stock market is doing until you are 10 years from retirement (at which point you need to start slowly reducing your stock allocation and increase your bond allocation)
Wonder if she is paying his taxes as well? lol
look up the term rebalance and move to a bond like instrument with risk free rate matching inflation. Cash... yikes.
This lady is crazy
This lady is crazy
No way Bitcoin in a 401(k) unless you're talking 1 or 2% of assets.
I am 41 and so I have the same investment horizon as the OP. As I write this, the DJIA is at 26,059. Just over one year ago today, on the close of the first trading day of 2017 (1/3/17), the market closed at 19,881. In other words, the market is up a hair under 24% over the past year and change. A "correction" is defined as a drop in the market of at least 10%. I think everyone agrees that, at some point, a correction is coming. Here, from right now, a 10% drop would equate to losing 2,605.9 points, to 23,453. On Black Monday in 1987, the market lost 22.61% - from right now, that equate to losing 5,891.9 points, to 20,168.
So, as I see it, at this point, the realistic "correction" scenarios would result in a market ranging from 20,168 to 23,453. But take that 20,168 - even that is 287 points above where the market began 2017. Many experts claimed, at the beginning of last year, that the market would go sideways in 2017. So if we were to have a Black Monday-type crash now, those prophecies would prove correct, and stocks would merely be slightly higher than at the start of 2017. And that is a WORST case scenario.
So, from a retirement standpoint, I definitely do not think that stocks should be sold at this time.
But what about this: how about from a 529 college savings plan perspective? This year my kids will be 11 and 9, and assuming my first son enters college in 2025, I have a 7-year horizon. Does my above analysis hold, or should I be looking to more aggressively protect against a correction? That is what I'm wrestling with.
"Stocks Are Headed for a Fall" - not too subtle a title - ( New Window )
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Again not advice but I'd consider gold, Bitcoin or other diversification maybe, but stick to blur chips 33%+ imo maybe get some real estate
This lady is crazy
No way Bitcoin in a 401(k) unless you're talking 1 or 2% of assets.
I seriously doubt there is a single 401k plan in existence that offers Bitcoin as an option
You'd be crazy to get out at this point..............
Anyway, what she said made me think, but also didn't quite seem like sage advice. I'm not the most knowledgable wrt investing and such, and I know there are those here who are, but am I right to take that advice with a serious grain of salt, or is there merit to locking in gains right now and just waiting til another correction?
Thanks guys.
What happens if she is wrong and the correction does not come until the next 25% movement north. You have 25 years to go to retire. You may want to bank some of the profit into more conservative type of products. To be completely out of the market just does not make any sense at your stage in life and stage of trying to grow your retirement assets.
Again as mentioned before, in a rising interest rate environment don't select long term fixed income investments.
There are excellent balanced mutual funds such as Vanguard Wellington that have this type of asset allocation as their investment policy.
All very confusing to me who doesn't even pay attention to my checking balance (if my money comes out of the ATM, then I must have money in my account, etc.....
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You would want to consider a asset allocation mix of 60% equities and 40% fixed income with a 5 year timeline to retirement in a 401K plan.
Again as mentioned before, in a rising interest rate environment don't select long term fixed income investments.
There are excellent balanced mutual funds such as Vanguard Wellington that have this type of asset allocation as their investment policy.
Thanks. This is all confusing to me. I'm 100% equity and I think it's more on the aggressive side so I am thinking on how to best balance things out. I have a decent pension looming but have been also building a deferred comp fund (where the equities are). My insurance guy wants me to stop the deferred comp and re-direct contributions to a whole life (have term now) plan. Rationale has more to do with pension disbursement (NYS has this thing where your spouse gets nothing once you die but you can take less money disbursements in exchange for keeping her paid until she goes.) to allow us to take a full benefit and use the death benefit to keep my wife happy. I think that there might be tax ramifications as well. Just in the middle of deciding if that's what I should do. Portfolio balance is also one of things he wants to work on.
All very confusing to me who doesn't even pay attention to my checking balance (if my money comes out of the ATM, then I must have money in my account, etc.....
Be careful of that switch from deferred comp to whole life. Yes, the life insurance proceeds come free of income tax vs. the pension benefits but that's just the start. First of all, what's the difference in amount between the single life annuity you would get and the joint life annuity. Is there a term certain if you go with a single life? Is you wife younger than you with a longer life expectancy? What is the return on the deferred comp plan that builds up tax free? What is the rate of return on the whole life policy.
You need to crunch some numbers.
Indeed, simply because an asset group (stocks) are overpriced doesn't necessarily mean there will be a correction or crash. Most experts would tell you that the concept of "reversion to the mean" would indicate that the asset, invested at today's prices, are likely to produce lower than normal returns over the next 10 years. Those "lower returns" can be accomplished by a sudden dramatic drop in prices or sluggish growth each year for 10 years (or any combination).
I would also point out that studies have shown that a 90/10 stock/bond allocation outperforms a 100/0 allocation over most 25 year periods of time. That is because the two asset groups tend to have a low correlation of returns during most time periods, and thus offset each other. So, you might want to rethink your 100% stocks.
As for bonds (and that is a misnomer - you should really refer to it as fixed income - that includes bonds and cash) - while it is true that long term bond returns are likely low (the general rule of thumb is that bonds will have a ten year return equal to their current yield), most investment bonds are not nearly as volatile as stocks (by investment bonds I mean treasury bonds of 10 year maturity or less). And in a rising interest rate environment, while bond funds will go down minimally in price, your monthly reinvested dividend will be purchasing a steadily greater number of shares (the dividend is higher as rates go up - and the price per share is less - resulting in two reasons why reinvested dividends buy more shares month after month in a rising interest rate environment).
In addition, if you are really worried about returns on bonds (and I would not be), you can always invest in individual bonds which, held to maturity, hold zero interest rate risk (in the sense of price variance of holding bonds in a mutual fund). But, as I pointed out above, if you have 10 percent of your 401k in an intermediate term bond fund, your overall returns should be greater over 25 years than if you held 100% stocks.
You will hear about other types of bonds - long term bonds (11-30 years durations) and they have more risk because price fluctuations of bonds are a mathematical equation - and the variables are yield and duration (years left to maturity) ... so that a change in interest rates will affect a bond with 25 years left more than it will affect a bond with 10 years left; and a 10 year bond will be affected more than a 9 year bond etc etc
Some people engage in tactical asset allocation. They decide stock prices are high, so they want to "keep some powder dry" to use to buy more stocks when prices are lower. So, if their normal stock allocation is 90%, they make sell to "cash in" some gains, reducing their stock allocation maybe down to 70%, and then stay at 70% until prices are "low enough" to buy stocks again and bring their allocation back to 90%.
The trouble with tactical stock allocation is that it requires you to be right with your timing both when to sell and to buy back again - and you can have "regrets" if you sell to 70% because prices are high (i.e. most people who believe in tactical asset allocation would have moved to a lower allocation years ago in the current environment) - and then you have to know when prices are "low enough" to buy back in (and most people don't hit the low - they don't get back into stocks until the market has already hit its low and is already well back into the new market upswing)
Thus, most people who have no ax to grind and who study this for their living (university finance professors), recommend that most people are best served by maintaining steady savings every paycheck, keep a steady stock/bond allocation, and don't look at what the stock market is doing until you are 10 years from retirement (at which point you need to start slowly reducing your stock allocation and increase your bond allocation)
I'd like to see studies that show 90/10 allocation is better over a 25 year horizon? Not that I doubt you but I am genuinely curious..
It's not wrong to move some out of stock funds, as many expect a correction. The S&P just finished it's first ever year where each month showed gains. This is not expected to continue, but the stock market, overall, is expected to still do well. Last year, bond funds were my lowest performing entities, FYI.
He never hired her in the first place.
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You should fire her instantly. If you don't move your money to another firm, you should at least request a new advisor.
He never hired her in the first place.
What I'd like is to find the right person to sit down look at our finances, portfolios, etc tell us where we need to bolster up, diversify more, etc, yet leave me to manage my finances so I don't have to pay them a % of my assets.
What I'd like is to find the right person to sit down look at our finances, portfolios, etc tell us where we need to bolster up, diversify more, etc, yet leave me to manage my finances so I don't have to pay them a % of my assets.
Google 'Certified Financial Planner' ... you should be able to find one who works for an hourly rate ... with whom you consult as you deem necessary (which could be for 10+ years after your initial consultation)
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I'd like to see studies that show 90/10 allocation is better over a 25 year horizon? Not that I doubt you but I am genuinely curious..
Just to answer chucky's question -- I'm just now looking over the Study done by Trinity College covering different Asset Allocations & Withdrawal Rates. It depends on what kind of Bonds you used for the Fixed Income slice.....5 year Treasuries in this study. Some other studies use High Grade Long Term Corporate Bonds.
Link - ( New Window )
That resulted in Moskowitz creating what is known as the "efficient frontier". In its simplest form, the efficient frontier is a line on a chart showing risk/reward of two assets in various combinations from 0/100 to 100/0 - and demonstrates that, depending upon the assets selected, if the assets are sufficiently non-correlated (i.e. don't move together in market swings over time - such as stocks/bonds), that even though one asset may outperform the other (say stocks more than bonds), there will be an optimal combination that actually outperforms being solely invested in the higher returning asset (because of the non-correlation).
I believe Moskowitz won the Pulitzer prize for his work. There others (French and Fama) who have extended his work. If you do a Google search for Moskowitz or French/Fama or Efficient Frontier or "Modern Portfolio Theory" you will find tons of information about the concepts.
I hope this helps.