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Posted by samsai on January 27, 2007, 4:58 am
I need some guidance from the group. I am 30 yr and am looking for
advice to invest about 25K cash.
Situation: I have 401K savings totaling 45K. I max my 401k currently
and plan to continue that in near future. I have no major CC/debt and
have emergency fund of 8K. I prefer at this stage moderate risk.
This 25K money I was saving for the mortgage downpayment; Due to
current personal situation, I will not be buying a home in the next 5-6
yrs. I may be looking to use this money over span of next 4-5 years on
either education (MBA) OR mortgage downpayment when that happens.
any suggestions welcome!!
I am ok in terms of investing in oversears MFs, index based funds or
bonds. I think I would not be comfortable say in REITs or individual
stocks. Please suggest which markets/style/percentage allocation I
should consider.
Thanks in advance.
Samsai
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Posted by John A. Weeks III on January 27, 2007, 8:36 am
> This 25K money I was saving for the mortgage downpayment; Due to
> current personal situation, I will not be buying a home in the next 5-6
> yrs. I may be looking to use this money over span of next 4-5 years on
> either education (MBA) OR mortgage downpayment when that happens.
The timeframe is the issue here. Under 5 years, you really
need to be in a fixed investment. Over 5 years, you really
want to be in the market. You are sitting on the fence between
these two timeframes. The option is to redo your plan and
really nail down your future timing, or error on the side of
safety.
-john-
--
======================================================================
John A. Weeks III 952-432-2708 john@johnweeks.com
Newave Communications http://www.johnweeks.com
======================================================================
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Posted by samsai on January 28, 2007, 7:04 am
Since I am ready for moderate risk, I was thinking about 5% return on
fixed investment will be low for my risk appetite. Though I dont want
to loose it all (no one wants that), I was looking for some advice in
MFs investment... Should I look into index based funds and/or bonds?
Please suggest which markets/style/percentage allocation I should
consider.
For ex. last year YTD returns on FEQIX was 19.81%... so I am think
with the right plan, if I can achieve around 8-10% returns... that
would help me with my down payment also ;-)
>
> > This 25K money I was saving for the mortgage downpayment; Due to
> > current personal situation, I will not be buying a home in the next 5-6
> > yrs. I may be looking to use this money over span of next 4-5 years on
> > either education (MBA) OR mortgage downpayment when that happens.The
timeframe is the issue here. Under 5 years, you really
> need to be in a fixed investment. Over 5 years, you really
> want to be in the market. You are sitting on the fence between
> these two timeframes. The option is to redo your plan and
> really nail down your future timing, or error on the side of
> safety.
>
> -john-
>
> --
> ======================================================================
> John A. Weeks III 952-432-2708 j...@johnweeks.com
> Newave Communications http://www.johnweeks.com
> ======================================================================
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Posted by on January 28, 2007, 7:41 am
> Since I am ready for moderate risk, I was thinking about 5% return on
> fixed investment will be low for my risk appetite. Though I dont want
> to loose it all (no one wants that), I was looking for some advice in
> MFs investment... Should I look into index based funds and/or bonds?
>
> Please suggest which markets/style/percentage allocation I should
> consider.
>
> For ex. last year YTD returns on FEQIX was 19.81%... so I am think
> with the right plan, if I can achieve around 8-10% returns... that
> would help me with my down payment also ;-)
Nothing is certain in life.
1. don't forget the impact of taxes
2. If you look at investing money in 1999, and taking it out in March
2003, that gives you an idea of the scope of how much you can lose.
About 50% I believe. Obviously in the case of the NASDAQ, you could
have lost over 80%.
Risk and return are correlated.
An US total market or large cap index fund *should* produce returns of
around 8% pa over the long haul (historically the returns were much
higher, but I think they will be lower in the future, I am assuming
inflation of 2.5%). The only sure return (nearly sure) from that is
the dividend yield though, typically about 2% pa.
By contrast, a 5 year US government bond pays about 4.5%.
Say, for sake of argument, that the risk return tradeoff looks like
this:
return risk (% change in value of portfolio y-on-
y)
Bonds 4.5% 10% (1994 was about the worst year in recent
history for bonds, bond indices dropped about 20%). If held to
maturity, US treasury bonds have no risk (of losing the face value you
invested- -inflation is another matter).
Equities 10% 20%
You can see then how you can construct a portfolio with a return of
between 4.5 and 10%, and what risk you will be taking on.
I think what you need to do is assess your own comfort level with risk
and return.
My own view is, as other posters write, no one should invest in
equities with less than a 5 year view (ideally less than a 10 year
view).
For that part of the money that you *need* to have in 5 years, you
either invest it in multi year CDs, money market funds or government
bonds.
The rest, you can *bet* on equities. In which case I preach
diversification (eg the Vanguard Total Market index fund), low cost
(ditto) and minimum capital gains distributions (again, passive
management tends to minimise these relative to active management.).
You may wish to use different return numbers, especially for
equities. My view is that in a world of 2.5% economic growth, and
2.5% inflation, profits of US companies are likely to grow at around
5.0%. Earnings per share might grow at around 6% (due to the effects
of stock buybacks, take privates etc.). Add another 1% for exposure
to fast growing emerging markets (but then do we deduct 1% for
exposure to Europe and Japan, which are growing more slowly?), and you
get to 8%. This is also the limit, long run, in growth of dividends
(you can only grow dividends faster than earnings by eroding dividend
cover).
(they have been growing faster than that of late due to recovery and
because the share of profits in GDP has risen to all time postwar
highs, or put it another way, wage earners have not been able to claw
back the growth in corporate profits in wages and salaries. I don't
expect either factor to continue indefinitely).
Now the sources of return for equity investors are:
1. profits growth (per share)
2. price earnings ratio changes (multiple expansion)
The former we've said is 8% pa. The latter has been a huge factor in
generating stock returns since 1979, but PE multiples have fallen
since 2000.
My own view is they cannot expand by much more *unless* inflation and
hence interest rates is lower in the future than they are now.
Because fundamentally there is a tradeoff between owning bonds and
owning stocks, and that is the interest cost of money*.
So my (guess) is 8% is a reasonable long run return to expect from US
stocks *unless* you think either economic growth or inflation is going
to be higher than I am forecasting (2.5% pa).
If you do, then bonds are probably very overvalued. Bond yields
should be 5 or 6%, not 4.5%.
My other view is that most US housing markets are still headed for a
smash. So having cash to buy a house in 2-3 years, when the market
finally bottoms, could be a very good thing. See the various housing
bubble blogs for more discussion and analysis.
* someone well read will note that this is called 'the Fed Model' and
it doesn't stack up. The Fed uses it to predict the stock market, but
theoretically comparing a nominal bond yield to a real return from
stocks is incorrect. All I can say is that in the long run, I have
observed if inflation rates fall, then stock market PEs tend to rise.
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Posted by HW \"Skip\" Weldon on January 28, 2007, 9:24 am
On Sun, 28 Jan 2007 06:41:14 -0600, darkness39@yahoo.com wrote:
>An US total market or large cap index fund *should* produce returns of
>around 8% pa over the long haul (historically the returns were much
>higher, but I think they will be lower in the future, I am assuming
>inflation of 2.5%). The only sure return (nearly sure) from that is
>the dividend yield though, typically about 2% pa.
Darkness I always enjoy your comments. Three questions:
1. In looking for an 8% long haul return, what time frame do you use
with the term "long haul" (10 years, 25 years, etc.)?
2. Is your 8% the total return with dividends reinvested - not just a
price-only index?
3. Lastly, is the 8% after or before the expected 2.5% inflation?
-HW "Skip" Weldon
Columbia, SC
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