Full Circle’s Mutterings on Money
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01-02-2016, 11:58 AM
RE: Full Circle’s Mutterings on Money
(01-02-2016 11:50 AM)GirlyMan Wrote:  
(01-02-2016 11:40 AM)Full Circle Wrote:  Girly, I have never heard of rebalancing daily. From everything I have read and from practical experience rebalancing quarterly or yearly is sufficient. I’ll get into rebalancing soon enough.

But you are right about the necessity to rebalance, it does force you to sell high and buy low, most investors can’t get themselves to that. Many ride their winners and dump their losers only to see prices revert to their means.

To be clear, I'm not doing the daily rebalancing. It's set it and forget it for me. It is done programmatically at COB each day based on the fund managers' asset allocation percentages for that day. You are correct mine is an aggressive portfolio based on an expected retirement date of 2050 and they continually rewicker the asset allocation the closer we get to 2050 where it automatically reverts to a low-risk income fund with the bulk in Government securities. Odds of me making it to 2050 depends on the date of the Singularity but some progeny will still be alive. Big Grin

What you are in is called a Target-date Fund and I think they are a terrific, usually a low-cost way of setting it and forgetting it as you say.

In many respects this is the very kind of one-stop shopping most individual investors should make. I take a slightly more active role in selecting my Asset Allocation percentages but that is a strictly personal decision based on my past experience, and in many ways less efficient than yours.

“I am quite sure now that often, very often, in matters concerning religion and politics a man’s reasoning powers are not above the monkey’s.”~Mark Twain
“Ocean: A body of water occupying about two-thirds of a world made for man - who has no gills.”~ Ambrose Bierce
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01-02-2016, 12:20 PM
RE: Full Circle’s Mutterings on Money
(01-02-2016 11:10 AM)Full Circle Wrote:  Here is a visual of what NON-CORRELATED classes look like in the real world. Intermediate-term Treasuries compared to the stocks in the S&P 500 over a period of about a month.

Looks inversely correlated to me but tough to read with different y-axes. Should be easy enough to do a T-Test formulated properly though.

#sigh
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01-02-2016, 01:19 PM
RE: Full Circle’s Mutterings on Money
(01-02-2016 12:20 PM)GirlyMan Wrote:  
(01-02-2016 11:10 AM)Full Circle Wrote:  Here is a visual of what NON-CORRELATED classes look like in the real world. Intermediate-term Treasuries compared to the stocks in the S&P 500 over a period of about a month.

Looks inversely correlated to me but tough to read with different y-axes. Should be easy enough to do a T-Test formulated properly though.

In that time segment they look almost perfectly asymmetrical, it’s not always so clear.

The thing about choosing Asset Classes that are lowly correlated is that they aren’t static. In other words if you look at the historical price movements you will see that at times they moved in close unison and at other times (like the example) completely opposite of one another.

The best one can do is select historically lowly correlated assets and play the odds.

“I am quite sure now that often, very often, in matters concerning religion and politics a man’s reasoning powers are not above the monkey’s.”~Mark Twain
“Ocean: A body of water occupying about two-thirds of a world made for man - who has no gills.”~ Ambrose Bierce
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01-02-2016, 01:43 PM (This post was last modified: 01-02-2016 02:08 PM by Full Circle.)
RE: Full Circle’s Mutterings on Money
I’m going to digress here a bit so bare with me.

PATTERN SEEKING MONKEYS PLAYING WITH MONEY

In many respects our evolution as pattern-seeking mammals is not really well-suited for investing. We tend to see things that aren’t there.

Case in point: Technical Analysis and Market Timing

I got sucked into this about fifteen years ago. I was told that if I looked hard enough at the price movement of assets I could discern what was going to happen next. I read about head-and-shoulder patterns, death crosses, cup-and-handle patterns, MACD, stochastics and on and on.

So what did I learn? I learned that if enough people buy into an idea it is somewhat self-fulfilling for a very short time. I learned that trying to guess what other people are trying to guess is completely impossible to replicate consistently. Too many moving parts. Kind of like, “I know you know I know, so I’m going to do the opposite.” Meanwhile you are thinking, “I know she knows I know she knows so I’ll fool her and actually do what she thinks I’ll do.” Blink

You might as well read goat entrails.

Tip #7 - Prophecy in short term market moves is a fool’s errand.

Here’s an eye-opening chart:

“Time in the market, not timing the market” is the rallying cry for buy and hold investors. Charts like the one below show the damage an investor would have done if they missed out on just the best 25 days (out of 11,620) since 1970. If you somehow managed to do this, your returns would have gone from 1910% down to 371%, or 6.7% a year down to 3.4%.”

[Image: missing-best-png.jpg]
http://theirrelevantinvestor.com/2016/01...t-of-days/

You can also ask what if I missed the worst 25 days?

[Image: missing-worst-png.jpg]

I could have killed it!

We all think we can get in when it’s good and out when it’s bad, and I urge you not to try it but us monkeys don’t learn from other monkey’s mistakes willingly. Chase

ps Note to self - discuss Datamining.

“I am quite sure now that often, very often, in matters concerning religion and politics a man’s reasoning powers are not above the monkey’s.”~Mark Twain
“Ocean: A body of water occupying about two-thirds of a world made for man - who has no gills.”~ Ambrose Bierce
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02-02-2016, 08:23 AM (This post was last modified: 02-02-2016 08:34 AM by Full Circle.)
RE: Full Circle’s Mutterings on Money
ASSET CLASSES continued

So how many ways can a stock or bond be classified? A company stock is just a company stock right? And a bond is just a bond no?

You would think it would be that simple but you’d be wrong. Companies and bonds are each classified 9 different ways. Some years ago a group called Morningstar trademarked a way of pigeon-holing the two for simplicity, whether singly or held in a Mutual Fund or ETF, with a simple nine square box (brilliant).

[Image: benz_9781118046142_oeb_002_r1.gif]

explained in more detail here
http://corporate.morningstar.com/US/docu...Sheet_.pdf

And they did the same for bonds, here are the two side-by-side

[Image: dc-plans-its-time-to-fix-your-fixed-inco...ibit-5.png]

Stocks

Let’s talk about stocks/equities first and what having different types of companies in your portfolio might mean with regards to diversification, risk and reward.

Since 1926 Value stocks have outperformed both Growth and a Blend of Value/Growth and on top of outperforming they have also been less volatile. Personally I am a fan of Value for these two reasons.

[Image: 12_21_15_GF_Value_and_Growth_Ex2_RGB_02.jpg]

There are three subdivisions of Value, Blend and Growth and those are based on the size of the company, or what Wall Street calls Market Capitalization. (Market Cap is calculated by multiplying oustanding shares by stock price, currently Google just passed Apple as the largest/most valuable company in the world).

So what are the benefits to owning one or the other or all?

Large Cap companies are usually established, pay good dividends and are not as likely to fail. However due to their size their growth has slowed down dramatically as a rule.

Mid Cap companies are not as established but are still robust entities and still have room to grow and pay some dividend.

Small Cap companies are the least established, have tons of room to grow but are the most likely to fail and usually pay very little, if any, dividends. The thing is every company that is now a Mid Cap or Large Cap was once a Small Cap, including Apple, Microsoft and Wal-Mart.

There are ETFs and Mutual Funds that target each of the different classes and some include all the classes. I’ll get to specific ETFs soon enough.

Bonds

Then there are the bonds or Fixed Income instruments. These are rated by Credit Quality and Duration. Again what is the benefit of owning one over the other or all?

A high Quality rated bond is the least likely to default and the most likely to pay you back. Conversely the lowest quality bond is the most likely to default and the least likely to pay you back (just ask all those bond owners holding Puerto Rican bonds, the whole island is about to go into default. When a default happens your loan isn’t repaid Weeping ).

You would be right in asking me why in the hell would anyone hold a Low Quality bond in the first place, and the answer would be higher interest payments (also known as Yield). To entice investors to take on additional risk these bonds pay higher yields.

The other piece of the puzzle for bonds is duration. How long do these companies, States, countries, municipalities have to pay you back? A month? A year? Five years? Thirty years? The longer the term the higher the yield or interest they pay because of risk. A company probably won’t go bankrupt in a month but who’s to say what could happen in thirty years?

In one extreme you have Short-term Treasuries (Treasuries are bonds issued by the good ‘ol US of A), they pay the lowest yield/interest but are the most likely to pay you back. In the other extreme are what are called Junk Bonds, these are bonds issued by small, unstable companies unsure of their future and countries in poor financial health (think Puerto Rico, Greece) or politically unstable areas (Ukraine).

Once again some investors are willing to take on greater risk for higher yields/interest.

So as you can see there are a few decisions to be made regarding both stocks and bonds and which ones you, as an individual investor, are most comfortable with.

Diversification

In the world of investing owning every type of stock and every type of bond would be thought of as being diversified. But here is a BIG CAVEAT, the correct way of viewing this “diversification” (I’ve heard it called diworsification and diversifiction) in my opinion is really micro-diversification within macro-diversification.

In other words stocks as a whole are 1 Asset Class not 9. Especially when they are all from the same country!

If you follow the stock market antics notice than on good days or bad days every one of the 9 stock classifications rises and falls almost in perfect unison.

And Bonds as a whole are 1 Asset Class not 9. But with bonds there is a much bigger difference in their price movement correlation. Treasuries and Junk bonds do not act in the same way at all. When the shit hits the fan investors run to Treasuries and away from low quality bonds.

Currently Treasuries and Equities have a largely inverse correlation as I showed in a previous post. File that in the back of your head as I plow through the primary concepts before you attempt to figure out a portfolio that is properly weighted to your own personal needs, time frame and risk tolerance.*

To be continued.

*DISCLAIMER - Once again I’ll point out as I did in my OP that I, FC, am not a financial advisor in any way shape or form and that you, dear reader, must take everything I am saying with a grain of salt and do your own research and/or hire your own acredited Financial Advisor before investing in the stock market.

This entire thread is my attempt to share stuff I have learned through my own personal experience that might be used as a springboard for further learning on the subject of money and investing, nothing more. Cool

“I am quite sure now that often, very often, in matters concerning religion and politics a man’s reasoning powers are not above the monkey’s.”~Mark Twain
“Ocean: A body of water occupying about two-thirds of a world made for man - who has no gills.”~ Ambrose Bierce
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02-02-2016, 10:26 AM
RE: Full Circle’s Mutterings on Money
FC- one quick question- where do you start when you owe a shit-ton of debt? One of the challenges younger people are facing is ginormous student loan debt. Some people it might be medical debt, or credit card debt.

I'm thinking in the $25,000 - $50,000 or more ranges...


"Life is a daring adventure or it is nothing"--Helen Keller
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02-02-2016, 11:06 AM (This post was last modified: 02-02-2016 10:37 PM by Full Circle.)
RE: Full Circle’s Mutterings on Money
(02-02-2016 10:26 AM)Bows and Arrows Wrote:  FC- one quick question- where do you start when you owe a shit-ton of debt? One of the challenges younger people are facing is ginormous student loan debt. Some people it might be medical debt, or credit card debt.

I'm thinking in the $25,000 - $50,000 or more ranges...

Hi B&A, nice to see you out and about!

Debt is a double-edged sword as you are aware, a necessary evil and a good thing at the same time (as long as you can pay it back).

I’ve had this conversation before and the best way to put it into perspective and weigh your options is to answer the following questions:

What is the interest you are paying on your debt/outstanding loans?
What returns on investments can you safely be assured of?

As a rule first pay off the loan with the highest interest rate.

If you have credit card debt and are paying 14%-24% on your outstanding balance pay it off first.

Your home mortgage is probably in the 3%-5% range, accelerate those payments if you can by making a 13th payment every year or going for a 15 year instead of a 30 year mortgage.

Point of Note:
Interest on a $100,000 mortgage @ 3.75% for 30 years will total $66,722. Monthly payment $463
Interest on a $100,000 mortgage @ 3.0% for 15 years will total $24,305. Monthly payment $691

While the monthly nut on the 15 year loan is higher the savings over the life of the loan are substantial!


As for student loans they can range from 4.3% to 8.4% as per https://studentaid.ed.gov/sa/types/loans/interest-rates

There simply isn’t a risk-free investment vehicle that you can count on that delivers a higher rate of return than the interest you are being charged by all these loans. So mathematically speaking paying off the loans first before investing that money in the market makes more financial sense. The market returns, while over a lifetime have been positive, the vagrancies of short term returns cannot be counted on to pay off immediate financial obligations. (Using arbitrage to cover monthly payments isn’t a good idea in my opinion).

I did both. I accelarated paying off my house while simultaneously investing in the market but then both my wife and I had steady jobs and could count on a steady income stream.

Does that help?

“I am quite sure now that often, very often, in matters concerning religion and politics a man’s reasoning powers are not above the monkey’s.”~Mark Twain
“Ocean: A body of water occupying about two-thirds of a world made for man - who has no gills.”~ Ambrose Bierce
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02-02-2016, 11:44 AM
RE: Full Circle’s Mutterings on Money
yep. nailed it.


great thread. Thumbsup

now that we have been in this house 6 months (we bought this one) and got a few of the big immediate expenses taken care of, and our 2 years of moving chaos and renting is done, we finally feel like we can start tackling our demons.

Thankfully we don't have medical bills and student loans (goodbye private school tuition). I know others do carry those burdens and they are never small.

I want to be debt free and some serious savings prepped for college for the kids. The good news we have been doing all that was allowed thru employer retirements accounts.

And I have been thinking hard of leaving the stay at home mom world but it would be starting over from scratch. ugh

we need to catch up. I've missed chatting with you.


"Life is a daring adventure or it is nothing"--Helen Keller
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02-02-2016, 11:49 AM
RE: Full Circle’s Mutterings on Money
(02-02-2016 11:44 AM)Bows and Arrows Wrote:  yep. nailed it.


great thread. Thumbsup

now that we have been in this house 6 months (we bought this one) and got a few of the big immediate expenses taken care of, and our 2 years of moving chaos and renting is done, we finally feel like we can start tackling our demons.

Thankfully we don't have medical bills and student loans (goodbye private school tuition). I know others do carry those burdens and they are never small.

I want to be debt free and some serious savings prepped for college for the kids. The good news we have been doing all that was allowed thru employer retirements accounts.

And I have been thinking hard of leaving the stay at home mom world but it would be starting over from scratch. ugh

Employer retirement accounts in my experience are a bit, shall we say, limiting. They give you 3 or 4 generalized options and call it a day. We ended up filling in the paperwork for them to allow us to self-direct our 401(k).

(02-02-2016 11:44 AM)Bows and Arrows Wrote:  we need to catch up. I've missed chatting with you.
Blush

“I am quite sure now that often, very often, in matters concerning religion and politics a man’s reasoning powers are not above the monkey’s.”~Mark Twain
“Ocean: A body of water occupying about two-thirds of a world made for man - who has no gills.”~ Ambrose Bierce
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02-02-2016, 03:10 PM
RE: Full Circle’s Mutterings on Money
REAL WORLD REPORT

Today, February 2, 2016 the S&P 500 lost 1.87%

My personal portfolio gained 0.10%


However on most days when the S&P 500 is up my portfolio will also up but nowhere near as much.

Carry on.

“I am quite sure now that often, very often, in matters concerning religion and politics a man’s reasoning powers are not above the monkey’s.”~Mark Twain
“Ocean: A body of water occupying about two-thirds of a world made for man - who has no gills.”~ Ambrose Bierce
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