There were a lot of good questions this week, so let’s try to eliminate a few of the best.
A reader asks:
I listened to your interview “Bull” And I wanted to ask: If you had $150,000 in cash today, how would you enter the stock market? I was considering building a portfolio with a 1-3 year government bond ETF and gold ETF along with a global equity fund like FTSE but I’m stuck on how to get into the market.
what to do lump sum of cash is one of the most popular questions I’ve received over the years.
This has been a question for years and will always remain a question in the future because investing large amounts of money in risk assets can be scary.
Mathematics says you should invest the money and move on with your life because most of the time the stock market goes up.
But sometimes it falls.
The worry is that you will personally anger the market gods and therefore see some of your lump sum evaporate immediately after investing.
That’s why many investors are more comfortable calculating dollar-cost averaging or putting half in now and the other half periodically.
Regret minimization Although it is not always the most appropriate route, it is a useful strategy.
But this question is not just about the stock market. He talks about a diversified portfolio consisting of stocks, gold and cash.
The beauty of a diversified portfolio with a predetermined asset allocation is that you don’t really have to worry too much about timing.
If you invest in a combination of stocks, gold and fixed income or other asset classes, you have the ability to redeploy through rebalancing should prices fall.
Guess how many times stocks, gold and short-term bonds fell in the same year?
Zero times!
Gold and stocks have fallen simultaneously in the same year only four times in the last 75 years.1
Diversification eliminates the need to predict the future in many ways.
Choose an asset allocation. Spread your money. Rebalance as necessary.
Another reader asks:
My family is considering retiring in a few years. My father will receive his Social Security next year, which will cover most of his living expenses. But they debate how much they need to feel secure in retirement. Their goal is $1.5 million, but my mom is nervous that it’s not enough (what if they outlive the money). They get paid for everything and I estimate their living expenses are around $30,000 per year. They are very frugal and always have been. What would you tell them?
If you retire at age 65 with $1.5 million in liquid assets (no home equity), that puts you in the top 15% of people your age. Your parents are rich!
The average Social Security check is just over $2,000 per month. If both spouses receive average checks of approximately $50,000 per year.
Judging by the $30,000 annual employment rate, your parents are more than ready for retirement. Social Security alone will more or less cover them.
Your mother is worried about extending the life of her money. Social Security is excellent longevity insurance.
This is a government-backed annuity that automatically adjusts for inflation and pays you until you die.
Your parents can invest in a balanced portfolio, withdraw as much as $50 to $60 thousand a year, and enjoy their retirement with relative ease.
Once you work out the math part of the equation, financial planning becomes more about defining the type of life you want to buy with your finances.
Just as your parents need a plan for their money, they also need a plan for their time and fun.
Yet another reader asks:
How often do you see people with more than $5 million invested solely in things like VTI, SPY, or the usual low-cost index funds through retirement? Don’t people like Warren Buffett take a disciplined approach to market psychology? If someone is living with reasonable expenses in retirement, what if the market decline wipes out 30 percent? Isn’t the potential upside of further growth worth it?
One of the most important topics I studied for the level 3 CFA exam was how to define your risk profile.
Your risk profile boils down to a combination of your willingness, need and ability to take risks:
Need: The return needed to meet your financial goals.
Talent: Your financial situation – time horizon, income, portfolio size, liquidity needs, spending habits, savings rate, etc.
Willingness: The balance between your desire to grow your portfolio and your desire to sleep well at night.
Many asset managers assume that once you win the game you should stop playing. Why take more risks when you don’t? need with.
But at the same time with a wide portfolio talent take more risks. What’s the harm?
That’s why you willingness When you have the ability but don’t need to take more risk, taking risks becomes the emotional fulcrum of your investment plan.
Offering investment advice to ultra-high net worth clients can be surprisingly difficult because there are fewer restrictions.
With a $10 million portfolio, it almost doesn’t matter what you invest in. Overly aggressive? Certainly. Super conservative? This will work too.
A successful investment process requires some limitations.
I’ve seen ultra-high net worth clients invest most or all of their money in stocks.
I’ve also seen people with 8-figure portfolios that aren’t that high.
It really depends on your risk tolerance, time horizon, and goals.
Want to sleep better at night? Will you donate all your money to charity? Looking to grow your portfolio for the next generation?
Whether you have $150k, $1.5 million, or $5+ million, the question of how much risk to take is a personal one.
There are quantitative measurements to use, but the qualitative part will always be more important.
Knowing yourself is a good starting point.
I found all these questions and more in this week’s new episode of Ask Compound:
Further Reading:
Half a Million Dollars
1The average decline for the S&P 500 in those years was a loss of just 5%.
