Tuesday, March 10, 2020

Event Horizon

Your investment strategy will depend a lot on your investment horizon.  What works for an old person is not what works for a young person and vice-versa.

After my last posting about a whiny 29-year-old who went to Luthern College and now works at a tire store (life choices, my friend!) I received an e-mail from a 24-year old who works for a major utility as an electrical engineer, and is banking most of their salary, but is afraid to invest in stocks. Refreshing to see that not all of the younger generation is the slackers and losers that the media likes to portray in these "Oh, woe is me!" stories.   Some folks have their shit together.

There always has been, of course, but they are never talked about - they are not protesting or making loud voices, but working hard and keeping their head down.  The media hates them - no story there. No clickbait.

But getting back to our reader, I do not give advice, investment or otherwise, as I noted before, other than the common-sense advice as to diversify your investments and play the long game - when you are younger, anyway.   Over a 30-40 year working life, you can accumulate a lot of money, a little at a time, and earn maybe as much again from investments.   And over that time period, you will see a number of boom and bust cycles - as I have.   I guess this is number three for me - or is it four?  We had the 1989 Real Estate meltdown, the dot-com bubble, the 2008 collapse, and now, well, 2020 whatever-it-is.  Add in the stagflation nightmare of the late 1970's and I guess that makes five.

In each case, some folks got wiped out - folks who invested all-in-one-thing such as dot-com stocks or houses or whatever.  They didn't diversify, and when the "one sure thing!" went bust, they did, too. And most were leveraged heavily in debt, too, so when their "investments" went south, they could not service their massive debts.  Paying down debt is an investment in yourself and should be part of everyone's diversified portfolio strategy.

Investment Horizon, however, will affect your strategy.   My reader says they are mostly positioned in cash, which at age 24 might not be so great.   After all, with a 30-40 year working life ahead, you can make a lot of money over time, if you have patience.   For me, my investment "horizon" is five to ten years, max, so there isn't much to be gained by speculating in stocks, and a hell of a lot to be lost.  So I am glad I sold out of my stocks last year.   Mark has left his money in his Fidelity accounts - which have dropped about 8% in the last few days, wiping out all of the gains since September of last year.  Over his investment horizon (10-20 years) he will do well, at the very least breaking even, most likely coming out ahead.

But what to invest in?   So much of the investments today are hyped and in fact, rigged, so it becomes hard to tell what is a legit investment from some CEO's wet dream to cash in on his stock options.  But that is precisely why diversification is so important.   Invest in a panoply of things - not all of them will go bust.

What to invest in?   Again, I give no advice, but these are the things I have put money into, over the last 30 years or so:
1.  401(k):  If your employer matches funds, there is no excuse not to join in.  Plus, you get a tax deduction.   Yes, deductions are no reason to chase things, but if your employer is matching funds, and you get to avoid taxes, why not?   Mark maxed out his 401(k) contributions for a decade or so, and it amounts to a nice half-million today.   Maybe not enough to retire on, but add it to the pile, right? 
2.  Real Estate:   Your house is not an "investment" but then again, if you plan on living somewhere for five years or more, you could save money over renting by buying a house, provided you don't succumb to "house polishing" and spending every weekend at Home Depot buying ceramic donkeys for the front yard. 
But the big money in real estate - in a normal market, not an overheated one - is in rental properties.  Buy a place and rent it out, and you can have a nice positive cash flow (or should - if not, don't buy!) plus an appreciation over time, which is taxed at capital gains rates. 
Plus, you can depreciate the property on your taxes, which means cutting your tax bill even further during your prime earning years.  We easily made over a million dollars (and spent a lot of it, sadly) in Real Estate over the years, plus took hundreds of thousands of dollars in deductions for depreciation.   Nice work if you can get it
This does not mean, of course, that going out and paying top dollar for just any old piece of property will be a good investment.  Again, why I don't give advice - people take it the wrong way.  Overheated markets are never a good bet, and how people lose their shirts.  Those same markets are due for a "correction" in the coming months.   Be the guy with the cash when they go to foreclosure. 
3.  Stocks:  Buying individual stocks can be a crap shoot.  People smarter than you and me with access to a lot more information can make a killing at this, often at our expense.  If you decide to "play the market" limit such gambling to a small part of your overall portfolio, say 10%.   No, you are not going to be the "smart guy" who outwits the market.  It just ain't gonna happen. 
There was a profile piece in the paper the other day about some insider trader who made millions by trading on information about earnings and mergers, before they were made public.  Poor bastard died of a drug overdose at age 37.  Good. 
But it illustrates how the stock market thing is rigged - if you are trying to buy and sell to make money.  Long-term blue-chip dividend-paying stocks were mostly what I bought - and did well with most of them, by holding them over time and using the dividends to buy different stocks - diversifying as I went along.
Avoid - like the plague - investing in a stock based on some social media page for "savvy investors" like the "Wall Street" subreddit on Reddit - these are just platforms for pump-and-dump artists, raging true believers, and useful idiots.
4. Mutual Funds:  If picking stocks seems too hard, mutual funds are a way to go.  And if you invest in your company's 401(k) - which is a no-brainer - chances are, you are invested in such funds.  But check out whether there are loads - front-end, back-end, as well as management fees (expense ratios) before picking a fund.
And bear in mind that some funds are indeed high-risk ventures, such as emerging markets, foreign debt, and high-tech funds.  You can make a lot of money - or lose a lot as well. 
5.  Corporate Bonds:  Bonds are another way to invest in a company, and oddly enough may give you more rights than a shareholder - in bankruptcy, of course.   But in many cases, such bonds pay out at a higher rate than the stocks.  But again, there is risk involved, and buying something trendy or putting a ton of money into one thing is a really bad idea. 
6.  Government Bonds:  You can go to Treasury Direct and buy savings bonds and Treasury Bills from Uncle Sam.  Don't expect to get rich - it is more of a place to park money.  But in retrospect, some of the savings bonds I bought there - not too long ago - had interest rates of 3% or more, considered generous in this day and age.   Others were 0.10%.   Like I said, don't expect to get rich. 
7.  CDs and Savings:   I put some money into a Wells Fargo CD once that had a good rate for the time.   People were so freaked out by the misadventures there, they shied away - and with Obama's banking regulations (being unwound as we speak) the banks needed more cash on hand, and had to offer higher rates to attract capital. 
I still have an account with Capital One, which offered a $200 reward if I deposited $10,000 for three months (or some such nonsense).   I kept the money there only because every month I get like $15 from them. whereas at Bank of America, I get 15 cents - for the same balance.  Again, more of place to park money than a major investment. 
8.  Life Insurance:  I've written about this before and it is not a great "investment" but at my age, my polices are all either "paid up" and paying me annual dividends, or are generating more in annual dividends than the premiums cost.   The latter are increasing in cash value by twice the annual premium, so it makes sense to keep these in force, for now. 
Again, like stock picking, not a place to put a lot of money - maybe 10% of my portfolio.   I have to say that buying these policies forced me to think more about investments and learn more about them.
9. Paying down debt:  This doesn't seem like an "investment" to most people, but it is.  If you have a mortgage or other debt that is costing you $1000 a month in payments, paying this off means an effective raise of $1000 a month.  Not only that, it is a guaranteed, sure-fire "safe" investment - safer than government bonds.
Of course, not getting into debt in the first place, is an even better idea.  One reason we squandered so much of the money we made in our lives was in paying interest to banks - lots and lots of interest, for things like cars, and credit cards, and a pool loan.
Debt for buying an investment property, on the other hand, actually made us money.  There is smart debt and dumb debt. And consumer debt is about the dumbest there is.
 10. Other:  I have never bought gold (or any other commodity) or Bitcoin or any IPO stocks.  These things are hyped heavily in the press, and that alone makes me nervous.  Yes, gold goes way up - but also goes down or stays flat.  It depends on your timing whether you make money.  If you bought gold in 1982, you are today just breaking even on your investment.   That's a pretty long timeline! 
Bitcoin is the same deal - it is not investing, it is pure gambling.   You can buy it and make a fortune, if you bought it very early on.  People who buy today might make a little money - or lose a lot - depending on the timing. 
Similarly, things like collector cars, artwork, and whatnot are a real crap shoot and best left to the Billionaires, who can afford to dabble in these things.  The stuff we peons can afford never amounts to much
That's about it.  I am no expert, just an observer.  I make no claim to insider information or secrets to wealth - with regard to the latter, there are none.

The problem for many new investors, is you put money into the market and then it goes down and you panic.  Our reader advises he put some money into an index fund a few days ago, hoping to time the market and catch it at a downturn.  Since then, the market has gone down further.  The big mistake, in my opinion, would be to panic and "sell it all before it goes down more!"

His investment horizon is from 2050 to 2070.   A lot can and will happen between now and then.  The market will go down and people will panic (are panicking as we speak) and then it will claw its way back, slowly, over time.

And we saw this all coming, too.  It wasn't just the Corona virus that is killing the airlines - maybe a dozen or so have gone bankrupt over the last year or two - mostly national airlines or heavily indebted low-cost carriers.  The car business started tanking last year.  Debt levels - corporate, government, personal - are all at all-time highs.   It is like the crises of 2008 - the head of the Fed told us what we all already knew - there was "froth" in the housing market.  The topic of conversation wasn't if there was a bubble but when it would burst and how bad it would be.

An astute person could read these signs and tell in advance which way the market was going to go.  The problem is, of course, timing the market.   I thought for sure we'd be in the tank by now, but Trump's tax cuts and rate cuts have kept the market going further, long after the party should have been over.

Which means the hangover is going to be much, much worse!