2/25/2014 7:45 PM ET|
3 reasons to be all in with stocks
It's not for everybody: Most of us can't resist the urge to sell during a downturn. But if you understand the risks and keep realistic expectations, a 100-percent equity portfolio isn't as crazy as it sounds.
My individual retirement account money is 100 percent invested in stock index funds. Let me tell you why.
It's not because I think the stock market is about to take off. It's not because I read some guru's economic tip of the year. And it's not because I don't understand the risk of owning equities (equities is simply another word for stocks).
It is precisely because I do understand the risk, I have realistic expectations, and my choice is perfectly suited for my goals. Let me explain the three reasons behind my choice:
I consider risk the most misused word in finance. Everyone thinks they know what it means, but no one really does. How about a definition of risk everyone can understand? Ask two simple questions:
- Can I lose any money? If the answer is no, it's a safe investment.
- Can I lose all of my money? If the answer is yes, find out what circumstances it would take to make that happen.
When you own a diversified portfolio of stock index funds, in order to lose all your money, thousands of the largest companies in the world would have to fail at once. Could this happen? Yes, but if it does, I don't think I'll much care about how much money is in my IRA. It's more likely I'll be figuring out how to protect my property and grow my own food.
Could my investments be worth half their value in a few months? Absolutely. But what do I care? I don't need the money in a few months. I need it in 20 years.
The fluctuations my account value will go through over the next 20 years is volatility. The risk in volatility for the average person is they get emotional, or don't understand the investments they own and exit after a big bear market. I know I'm not going to do that, so volatility is irrelevant to me.
The real risk is that stocks simply don't do well over the next 20 years, and I get to retirement and realize I would have had a better outcome by sticking with safe investments. That's a risk I'm willing to accept.
I don't expect my IRA to be up 30 percent this year. I don't even expect it to go up 10 percent this year. I don't really care what it does this year. I do expect that if I leave it alone over 20 years it will deliver a decent return.
If I get a bad 20 years, I think I'll still earn more than zero. If I get a good 20 years, I'd expect it would average 12 percent or more a year. An average annual return of somewhere between zero and 12 percent is what I expect.
Why so broad a range? Because I have no control over what market conditions the next 20 years will deliver. All I have control over is how I invest. And I know if I kept all of my money in safe choices, it wouldn't have a chance of earning 12 percent a year, although it would earn more than zero.
I also expect that around every eight to 12 months, my accounts will drop about 10 to 15 percent in value. Why do I expect that? That's about how often market corrections occur. In addition, I expect that a few times over the next 20 years, I might watch my account values drop by 30 to 50 percent. Like market corrections, bear markets are not rare.
Because my expectations are in line with reality, I am completely comfortable investing in equities. In addition, it is the choice that most aligns with the goals of my retirement money at this point in my life.
How do I know my retirement money has 20 years? Well, I think I'll likely be working until age 70. Not because I have to, but because I get bored easily and enjoy work. I'm currently in my 40s.
Retirement money is a protected asset when it comes to creditors. That means that even if I royally screw up and end up filing bankruptcy (I certainly don't anticipate that, but life can throw some nasty curve balls), I still wouldn't cash in my retirement money to try to save the situation.
I also know I won't panic and bail out of the market when it goes down, because I know it will go down from time to time.
Put all this knowledge together, and I know my retirement money has at least 20 years. My goal over that time frame is to earn the highest return possible. Deciding to invest it all in stock index funds is the option most likely to meet my goal. I realize higher returns are not a certainty. I also know that as I move closer to retirement, I will make changes to my portfolio and gradually add in safer choices.
I have other non-retirement money. And you know what? It is 100 percent invested in safe investments. It earns almost nothing. Why do I leave it there? Because my livelihood is tied to the financial markets, and when the bear markets I expect come along, it is likely my income will go down. During those times, I will need cash reserves, and I don't want those tied to the stock market.
Even if it is your retirement money, and you have twenty or more years, a 100 percent equity portfolio is not for most people. Too many people mistake volatility for a permanent loss, and are prone to buying high and selling low.
Regardless of the final allocation of your investments, you can become a better investor by asking questions about risk, setting realistic expectations and having clear goals.
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Well most of the private money in the market now belongs to boomers with relatively short investment horizons. What does that tell you? The rest of the money is from institutions that are borrowing QE money at near zero interest and dropping it into the market because money is free and if they are wrong, they are too big to fail.
If you've got 20 years before you need it, go ahead and knock yourself out. The odds are that at some point in the next 20 years you will be able to sell at a profit. I'd watch my stops though.
This article is verbatim what I have been saying for the last 15+ years. I am 35 and I am also 100% in equities and will continue to be for at least another 15 years. Keep costs low, keep plugging in money and ignore the chatter. Boring is beautiful. Yes, there are risks - but that is also true with bonds, money market and savings accounts, real estate, gold, tulips, etc.
I like where the author went with the article; liquid savings outside of retirement accounts and a plan to diversify as retirement approaches.
I would suggest two things to the younger set thinking of starting an All Equity Portfolio:
1) Be honest about YOUR ability to avoid the emotional pitfalls mentioned, AND
2) Dollar-Cost-Average in.
1)Even if you are a perma Bull, it's always good to have dry powder available. If you are the Global Feds, that's even more important. Problem is, they have already used up their Ammo. More Fake Debt will only worsen the problem.
2)Regression to the Mean, if a variable is extreme on its first measurement, it will tend to be closer to the average on its second measurement and, paradoxically, if it is extreme on its second measurement, it will tend to have been closer to the average on its first. We have gone through extreme measures to achieve higher Stock Prices. That will not come without Major Costs. There is no such thing as a Free Ride, eventually the Piper must be paid.
3)It's funny how all projections are that we will be seeing $1Trillion dollar Deficits in the near Future along with soaring Interest Rates. Yet all the financial Morons are suggesting in some Alice in Wonderland time-frame that Interest Income will still be sub par. That is about to change and will effect the ability to service the Debt and Interest Income you can receive. You can only imagine what that will due to bogus expectations 20 years out in a 100% equity portfolio.
We thrive Globally because we have relatively speaking, Cheap Energy and Clean Water. 20 years out, we will have far less of both. But sure, believe all this Alice in Wonderland BS of 100% in Stocks. This guy is totally clueless.
Uncle Ben, Aunt Yellen, and the Global FEDS have destroyed the Future of all Modern Day Economies. They will be considered the Hitlers of their time once all the damaged they have done is realized. $500-700Trillion in Scam Derivatives never solved. Massive DEBT across the Globe while the average Consumer is drowning in Debt due to stagnant or declining WAGES. Meanwhile the foolery of All in continues. Eerily Similar to just before the Dot-Com Boom and eventually Burst.
When used in the context of the Stock Market, it is often used to delude folks into thinking the past will be our Future. That is a False Assumption based on false HOPE that Robbing Peter to Paul Paul doesn't have any Major consequences.
Basically, it's terrified hold to Infinity types who want you to believe that between the bear and bull Markets, the Regression to the Mean will always be higher returns. That just ignores our current and Future National Debt issues along with current and Future Global Economic issues. IN a nutshell, it's false hope based on living with Alice in Wonderland.
Investors who are in the Markets for the long term should understand that Regression to the Means concerning Stocks is more Theory than FACT.
"Regression to the Mean, if a variable is extreme on its first measurement, it will tend to be closer to the average on its second measurement and, paradoxically, if it is extreme on its second measurement, it will tend to have been closer to the average on its first."
The Federal Funds Rate 20 years ago ranged from 3.25% to as high as 5.5%. Ten years before that, it was high as 11.75%. Today the rate is practically ZERO. There will be a Regression to the Mean.
The Average Annual Interest Expense on our National Debt Outstanding has averaged around $400BILLION per year. That's even with RECORD Low historical Rates on Treasuries. There will be a Regression to the Mean.
Seeing how the Social Security and Medicare Trust Funds have been STOLEN, there will be a Day of Reckoning concerning actually paying out benefits to future Retires. There will be a Regression to the Mean.
But sure, go all in with a 20 Year Plan vested 100% in equities. You are playing Russian Roulette with your Retirement if you never Lock in Profits and believe this BS of hold to Infinity. We are on the verge of the most Epic Global Implosion in World History and the usual Suspect are behaving just as they did just before the Dot-Com Bubble Burst and just before the Great Recession. The National Debt in 1994 was below $5Trillion, today it's over $17Trillion.
PLEASE... PLEASE BUY STOCKS... PLEASE... Pretty please? With sugar on it? PLEASE BUY STOCKS... we have no lives or capacity to survive in the real world without your money propping up our stupid hollow shallow Kool Aid addicted lives... PLEASE. Buy a stock today... we know you have no job or income or assets left. We don't really care... WE JUST NEED YOUR MONEY.
Close the banks, end the Federal Reserve and get RID of Wall Street. It's closer than you think.
There's something almost addictive about trading and/or investing. It's unlike going to the casino, the horse track or the card game at a friend's house. And even though it's a tough cookie and a tough egg to crack, we find some type of attraction to it that the casino, horse track and the friendly game of cards cannot offer. It offers us a chance to make all the calls against all the variables and odds out there. We want to --- no --- we NEED to succeed at something beyond our career, beyond the golf course, the horseshoe pits, the basketball court, the racquetball court.
We want to succeed where there's REAL stakes on the table, willing to bear possible grief and pain, but also the chance to experience the excitement and success of making the right calls.
We all want to make the right calls, then sit back and pat ourselves on the back and have a cold one. Of course, when we make a "not-so-right call, we still need to pat ourselves on the back while we have a foot up our butt...
So, we may shy away at times or become a bit less "active" --- but we don't stay away. In fact, most of us will ALWAYS have skin in the game --- as aggressive or conservative as it is --- we'll ALWAYS have skin in the game --- we wouldn't have it any other way. Without it, life just wouldn't be the same --- it would have a shadow, a cloud, a void, a limp in our step, an itch that needs scratching.
Life is (very) short and risks are part of life, for without them, why even step off the porch? I'm very, very far from being a pro on this journey. There are individuals thirty years my junior that are "better" or more knowledgeable about this stuff. But, I set my own rules, I pit myself against all the variables and odds out there, and I get into the ring --- round after round --- wouldn't have it any other way. And I know I won't get knocked out --- I may get punch drunk at times, but that in itself can be a learning experience. (Remember --- we NEVER stop learning...)
Everyone should have at least a little skin in the game. Get your head on straight, be realistic, and don't expect to be a millionaire --- ever ! --- then get in the ring. Over the long, LONG haul, you'll be pleasantly surprised (or at least content) at the outcome, and you can then give yourself that proverbial pat on the back that you deserve, that you earned. Then kick back and have a cold one while you wear a bit smile on your face.
(And make sure that many of those equities are paying you a dividend for what they put you through...)
In the end, when all is said and done --- it WILL be a good journey...
This article is a realistic take on exactly what is manifested over the long haul. When things head "south" as described in different words by the author, I always sit back and say, "This is the market..." --- pretty much summarizing quite loosely what this article's overall message is.
Investing in equities, eh hem, stocks, is not for everyone, but many more people would participate if they took the "appropriate" mental approach to the endeavor / journey --- and it IS a journey, where it's not all fire and brimstone and it's not all roses in the garden each day. Journeys are to be seen as a marathon, a long-haul trek, uphill, downhill, flat land, rest stops, breathers, jaunts, jogs, sprints, grins, smiles, grimaces and frowns. But in the "end", otherwise known as retirement and cash-in periods, things will be on the uptick --- for just about everyone.
One can be a trader at times (there's a real risk) , and it will also have its own highs and lows. Trading (versus investing) holds risk --- but that's what many of us truly (maybe secretly) seek at times. Notwithstanding the risk and thrill of trading, participating in the stock market in any manner or approach can be anything from a tidbit in our lives, to a hobby, to a way of life --- the choice, obviously, is up to each individual. (to continue)
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