Stocks/Bonds are money converted into "abstract human output". You are taking a bet that the group of humans that work at the companies that you've invested in will continue to become more advanced and efficient as to "generate value".
The stock market is "sentiment". It is collective group think as to what those companies are up to.
This is why you see people say "don't touch it". If you don't need the money now, the advances in "value creation" will possibly give you more money in the future.
I think the number one disservice that "stocks/investing" do is pretend it's not "gambling". Sure, you can minimize risk, and choose instruments that are 99% sound (gov bonds) but it's still _a gamble._
You are scared because you don't understand your risk exposure. (also, black swan events could change the exposure, but they are exactly that -- black swans)
You can:
- Decide to stop playing the game, convert your stocks/bonds into money which gives you absolute units and pegs your risk to inflation/deflation/government default.
- You can continue playing the game, and decide what your risk tolerances are, and adjust your strategy accordingly. This should give you a little bit more peace of mind.
If you want reasonably accessible exposure to these concepts, Khan Academy videos are free, you don't have to sign up to watch, and can fill in some gaps:
https://www.khanacademy.org/economics-finance-domain/core-fi...
Strictly speaking your exposure never changes, only your perception of your exposure as your sure-bet real estate portfolio crashes to zero.
Let's say you have $100.00, and the market figures that you need to make a return of 4% per year. If you find a stock that gives dividends of $4.00 per year, that stock will then be worth $100.00. This is assuming that there is a really strong trust in this company, that it won't go out of business, won't grow or shrink in market share.
Now let's add onto this that based on what the company is doing, and an analysis of their competition, and their ability (track record) of execution, that there is a really good chance that next year they will be able to make enough money to return $8.00 dividends per year. Well, that means that next year the stock will be worth $200.00 per share. And if it is going to be worth $200.00 per share next year, well this year most people will probably be willing to pay about $192 per share (that gives a 4% return on investment just in the stock price).
You can extend this line of reasoning to factor in forecasted growth for a number of years into the future. Which is how you get stocks that currently only return a small fraction of a percent of their stock price in dividends (i.e., a $100.00 stock may pay 4 cents dividends, instead of $4.00, since market sentiment thinks the company will grow a lot in the future).
So based on this, I would like to pick stocks that don't have a lot of growth forecasted, but do pay good dividends. Especially stocks that are in a market where they are protected from competition, or otherwise have a strong likelihood of not going out of business but provide the same thing they've always done, without growth but with good dividends.
Also, be aware that even when you do educate yourself and you do everything you think is in your power to 'safe guard' your nest egg, that there are are still a billion and one ways that it can all be wiped out tomorrow.
Micro managing you're finances if you don't know what you're doing is a fantastic way to wipe it out. As the good old saying goes, “The market can stay irrational longer than you can stay solvent.”
These are Bad Answers and instead you just need to read and obey two books and two books only:
1) https://www.amazon.com/Bogleheads-Guide-Retirement-Planning/...
2)https://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Lar...
If you do this, it will prevent you from being any more screwed than anyone else, regardless of market conditions. You will also not become flamboyantly rich overnight in the way that Crypto speculators do.
Yeah who would want that???
I second this. Lot's of good advice here about letting the 401k ticking along. In the meantime start building some knowledge. It may take a bit of time but it will be worth it. But the basics should be accessible to everyone. There are many sources of information (of varying quality). Youtube, blogs, financial section of major newspapers, MOOCs, and last but not least books
What i want to really know is what people with a lot of money actually do - and when i say a lot, i meant a lot. networth in excess of 8-9 digits. What do they invest in? What diversification measures do they do? Which country? And finally, how they dodge taxes (as they inevitably seem to be able to - so if you can't defeat 'em, join 'em?)
The permanent portfolio was constructed by Harry Browne to be what he believed would be a safe and profitable portfolio in any economic climate. Using a variation of efficient market indexing, Browne stated that a portfolio equally split between growth stocks, precious metals, government bonds and Treasury bills would be an ideal investment mixture for investors seeking safety and growth.
But that doesn't always happen. Sometimes the correlations flip, and everything becomes positively correlated, and everything crashes at the same time.
Today, there's about $20 trillion in the global government bond market that actually has a negative yield, which means the borrower gets paid to borrow.
And in the remainder of the government bond market where rates are still positive, rates are the lowest they've been for 1000 years.
When interest rates are near zero or even negative, it's unclear whether historic correlations will continue, so the concept behind the "permanent portfolio" may not continue to work in this environment.
Not really. The yields are negative, but the coupon rates are positive. Most of those were initially sold with a positive rate, then went negative as buyers bid up the prices. The issuing governments don't get that appreciation, and are still obligated to pay the coupon rate. If the yield is positive at auction, the borrower is still paying to borrow the money.
The only way the "borrower gets paid to borrow" is if the initial auction sees bonds sell at negative yields. That's quite possible when coupon yields are 0.100% or less (which has been common in Europe and Japan lately).
Bonds doing terribly means interest rates spiking, and potentially defaults, or massive inflation. Which are all possibilities.
In those cases, you’re probably going to be very happy for the gold portion of the permanent portfolio. And it has been on a bit of a tear, recently, rising ~15% vs USD.
- 25% in cash (short term treasuries actually): currently returning ~2%, approximately the returns of a higher yielding savings account.
- 25% in gold: historically does only very slightly better than inflation. Currently price of gold is inflation adjusted the same as it was in 1979, which was followed by a ~50% loss that took 30 years to recover [0]. TIPS are probably a better choice for people extremely worried about inflation.
- 25% in long term bonds: a sensible allocation to bonds, though I'd prefer intermediate term, personally.
- 25% in stocks: extremely low allocation. Generally 60% allocation to stocks is considered fairly conservative - it gives you some of the increased return of equities while reducing the volatility of exposure to the stock market. Lower allocations definitely make sense for some folks, though I've yet to see a compelling case made for anyone still in their earning years doing less than 40%.
[0] https://www.macrotrends.net/1333/historical-gold-prices-100-...
If you're interested in further study: the Gyroscopic Investing community [0] is a great forum supporting the late Harry Browne's investment/asset allocation philosophy, as are Harry Browne's original (short) book [1] and the modern treatment [2] by Craig Rowland and J. M. Lawson.
[0] https://www.gyroscopicinvesting.com
[1] https://www.goodreads.com/book/show/82103.Fail_Safe_Investin...
[2] https://www.goodreads.com/book/show/13838783-the-permanent-p...
[1] - https://www.amazon.com/Random-Walk-down-Wall-Street/dp/03933... [2] - https://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Lar...
Remember, the market can remain irrational longer than you can remain solvent.
Also, how can you know when the market has bottomed out? Why not use that same strategy to invest now and figure out when the market has peaked and pull out then? Sitting on money loses value due to inflation.
Asset allocation is one of the few levers to control risk that you have. The more you have in safe assets (bonds and cash) the less likely to lose money in a downturn. Nothing's free, however, and that stability will cost you long term growth. Only you can figure out what level of risk you can love with (are you ok losing 10% during a downturn? 25%? 50%?). An advisor can help but you need to look in your heart of hearts and determine the number.
If you don't want to educate yourself or need a helping hand, get a fee based financial planner. Last I looked (years ago) was a couple thousand bucks to have a financial assessment. Ouch. But cheap compared to the 1% of assets the other kind of financial planners take annually. More on that here:
https://www.napfa.org/financial-planning/what-is-fee-only-ad...
It was assigned to me at Princeton in my intro to finance class and was formative to my financial education. It’s also very readable.
I am now a CFA charterholder working in finance, and I still love that book.
But since you can't predict it, there's not much point doing anything (you can rebalance a bit from stocks to bonds if it makes you feel better but the impact will be minimal). The growth you'll miss out on from selling too early and buying too late will almost certainly outweigh the benefit.
There’s nothing wrong with playing with a portion (up to you 20%) of your nest egg but only if you enjoy it. If your reptilian brain is steering the ship and you’re reacting based off of fear or greed you find yourself on the wrong side of trades.
Your 401k no doubt is holding mutual funds that are tremendously expensive and practically just robs you. https://www.sec.gov/fast-answers/answersmffeeshtm.html
If the mutual fund charges 3%. Then the underlying securities have to increase 3% before you have broken even. Which if you're mixing bonds and such, you're probably not getting yearly returns much higher than that. So your money is literally doing nothing for you. Then during a market downturn, you just plain lose. You're down the market amount AND the 3%.
Flipside, ETFs like Vanguard have fees of 0.05% on some of the big ones. So when the stocks increase in value, you pretty much get all of the benefit.
You're not making some banker and financial advisor rich off your money. You're retiring sooner.
Nobody really knows how money works.
The average 401k holder has one because they don't have a good idea of how money works or what they should do with it. If they really understood their 401k, they'd know that they're probably getting ripped off in fees over their lifetime.
If economists and financial analysts completely understood money, they wouldn't be in such disagreement all the time over basic things. A financial advisor might tell you to leave your money in a 401k, and the next one might tell you the same, but it's not that hard to find one who will tell you to get your money out of your 401k ASAP for a variety of reasons.
At the end of the day, you have to trust your own judgment. People don't get rich doing the easy thing.
By the way, here's some things you should think about with 401ks:
- Someone with an average salary pays $138,336 in 401k management fees over their lifetime. Not only are you the only party taking a risk, but you're getting charged for taking that risk. Advisors and broker dealers aren't risking anything except your money.
- You don't own the money in your 401k. Read the fine print and you will find "FBO" (For Benefit Of). The tax code makes it technically owned by the government, but provided for your benefit. In a crisis, the government can confiscate any amount of your 401k to pay off debt and pensions.
- 401k teaches people to cluelessly invest. Do you know if your money is being invested in big tobacco or big oil?
- The government has the advantage with your money. Because you can't cash out without penalties, when you die, whatever's left over for your children is not only subject to income tax but to estate tax as well. They want your 401k money to be gifted to someone else because that means they don't get to cash in on your pile of money.
Advocating that people not take advantage of a 401k because something about the government potentially seizing it is basically saying you shouldn't save money at all.
No, the assets in the fund are owned by the plan administrator, and held for your benefit; this is in some ways better than you owning them, as it makes them generally immune to seizure/garnishment by creditors other than the IRS, and only by the IRS to the extent you could take a no-penalty distribution.
That's a pretty basic error in a rant about how everyone else doesn't understand the basics...
My counterpoint is that my wife would kill me if I cashed out my 401k.
* Yes, 401k plans usually have high fees, however the tax advantage they provide should more than offset those fees except for the very worst plans. And there are exceptions too: some 401k plans offered by very large companies actually have lower fees than popular low-fee IRA providers.
* When you say "get your money out of your 401k" are you referring to moving it to a low-cost IRA or cashing it out? The former is good advice if you have a 401k from an old job (that is not one of the aforementioned "very good" 401k plans). I don't think there are any reputable financial advisors that would suggest straight-up cashing out a 401k before retirement due to the taxes and penalties. The only circumstance I can think of where that would make sense is if it was necessary to avoid homelessness or pay for necessary medical care and you had already run through your non-retirement savings.
* You absolutely do "own" your money in your 401k as much as you own shares in a brokerage account or deposits in your bank account. If we're at the point where the government would confiscate funds in 401k accounts instead of just issuing new debt then the economy has probably already collapsed to a point beyond recognition.
* Your point about "clueless investment" is a critique of mutual funds and index funds not 401k plans. Someone holding an S&P 500 index fund in their IRA or brokerage account is no smarter than someone holding that fund in their 401k. Additionally, history has shown time and again that the only thing you can say with certainty about the stock market is that its aggregate value increases on average over time. The average person attempting to pick stocks, even at the sector level, is a recipie for them to miss out on the gains they need to have sufficient funds for their retirement.
* Your point about estate and income tax: and having the money in any other form would do what? You need to pay income tax on funds drawn from a (traditional) 401k plan because you deferred the tax when you deposited the funds. Whether you or your heirs are drawing the funds is immaterial in that aspect. If you have funds in a Roth 401k or Roth IRA or a regular brokerage you have already paid the taxes and as such you will not be taxed on withdrawls (except capital gains from brokerage accounts).
Similarly for the estate tax, if you had the money in cash at time of death you would still owe the same amount. On top of that, you'll be dead! What do you care what happens to the money after you're gone? Not to mention you need literal millions of dollars of assets upon death to get hit with the estate tax in the US so this will only apply to the literal 1%.
I haven't seen these "high fees" in any of the five 401k plans across 4 providers that I have had since I started my career 17 years ago.
Well, perhaps pedantic, but the exemption effects 100% of estates. Less than 1% face any tax after the exemption.
Less pedantically, the exemption is actually $11.4 million for 2019:
https://www.forbes.com/sites/ashleaebeling/2018/11/15/irs-an...
You're not alone in this.
I've found that most people who think they know how money works often just repeat conspiracy theories that don't hold up to critical examination.
While I'm pretty good at spotting bogus theories, I'd be hard-pressed to offer a coherent explanation myself.
That is: diversify. You don't want your entire 401k in one stock. An S&P 500 index fund is better, but you might want to put a bit of money in an international stock fund, and a bit in a bond fund. (You probably still want to be mostly in stocks at your age, but note well: I am not an investment advisor.)
All asset (and storage) types have their advantages / problems, you should read about it of course.
Am I right in thinking that gold/silver are widely thought to be inflation proof? So I wasn't so concerned about growth could I just park my money in gold?
That being said, over very long time horizons it is difficult to see why the real price of gold would change. They probably aren't going to mine it any cheaper and it isn't crazy to handwave an argument that demand can't drop all that far from where it is now. On that basis it easily outperforms cash.
If interest rates stay near 0 or drop negative gold might outperform bonds too. It is hard to say; the central banks do strange things to the bond markets.
Also, note that all these graphs only go back to the 1970s. Bit of a mystery why [1]. Gold's value tends to transcend such short-term concerns as the current global financial regime and that is a draw for some. Personally I think the current US dollar system is getting a bit long in the tooth. The biggest draw in this regard is that gold is a real expensive thing that is exceptionally easy to store (ignoring theft risks) and it is just hard to see how it could become less valuable than it is right now (short of government bans on gold trading).
[0] https://upfina.com/gold-vs-inflation/ particularly "Longer Term Correlation Between Real Gold & TIPS Doesn’t Hold Up"
[1] That was when the last monetary system failed https://en.wikipedia.org/wiki/Bretton_Woods_system
There are still market cycles for gold, and also if you're going physical, there's 2-3% exchange cost as well.
Silver may or may not have a VAT problem in your country.
Mine in part index fund/part bonds and I move around the % based on the market sentiment.
Stop reading the news.
My understanding is that generally you do not want to touch your 401k. If you do then usually it's because you screwed up.
You are (obviously I thought) supposed to be saving and investing in addition to the 401k. 401k is supposed to be low risk. The backup to that is something entirely different.
I have a 401k, it's got more in it than the median 60 year old in the united states, and I'm 20 years from that.
And I am terrified of how little I know about how it exists or survives.
I read these articles and get a sense of overwhelming urgency that, without any explicit indication, I should do something with my nest egg to make it safer to survive a crash.
And then I keep reading, "don't touch it" when I go to read about what I should do.
So I sit here, not doing anything at all about it, crippled with dread.
What's the best strategy for someone like me, who has absolutely no idea how their retirement account exists?