How safe is the stock market?

[mtgordon]

I agree that for an average investor they should have a less volatile distribution. However this is primarily a poker forum and I think that the people on the boards have a higher tolerance for risk (or maybe it's just me) than the average person. We also have a better understanding of EV and desire to push that as much as we can.

Also the posters on this website tend to be younger than the average investor. Therefore we have a longer time period to invest over. However I realize that these things are not true for every poster on this forum and it should probably be stressed more when people ask for a typical spread of funds.

To be completely honest though I haven't done a lot of looking into the variance of allocation and have mainly looked at the EV and tried to reasonably maximize that. I am at the beginning of a long hold (30-40 years) and am assuming that is the best thing for me to do.

[pig4bill]

The average young person doesn't have enough money to diversify into bonds. The commission charge on a few thousand dollars in bonds takes a big bite out of the yield.

On a personal note, I've never owned a bond in my life. When I was young, I thought their yield resembled a money market fund except they were much more illiquid. Now that I'm old, I have enough experience in the market to expect to be able to beat bond yields with stocks.

[spider]

[ QUOTE ]
The average young person doesn't have enough money to diversify into bonds. The commission charge on a few thousand dollars in bonds takes a big bite out of the yield.

[/ QUOTE ]

I'm really not trying to convince anyone to buy bonds, but this is not much of a reason to stay away from bonds. Plenty of bond ETFs via iShares alone that have very low expense ratios and very low transactions costs depending on your broker.

And honestly, it is someone with a small amount of savings that most needs to reduce variance. Not so much if you have backup emergency borrowing options (parents, friends, etc.), but if you really don't have much of a cushion, 100% stocks is a bad idea.

It is also occurring to me that the last couple of years have been atypical in that you can get the same yield from savings or money market funds as you can from bonds, but normally bonds are giving you an extra percent or two.

[kimchi]

[ QUOTE ]
The average young person doesn't have enough money to diversify into bonds. The commission charge on a few thousand dollars in bonds takes a big bite out of the yield.


[/ QUOTE ]

I'm not sure what you mean by this. The first balanced portfolio I tried to contruct for myself contained $200 worth of bonds & gilts held in a fund. There was no commission.

[joedot]

There is no growth in the U.S now, and will not be for a long time. The fed is wrecking the dollar, so you should be expeditious in getting rid of those dollars as soon as possible. Having said that, there are U.S multinationals that are enjoying growth from around the world particularly asia. So I wouldn't recommend these broader indexes that you mentioned which are largely tied to the domestic economy. If you don't know how to pick individual stocks, look for some ETF's. Do a search for ETF's and find the particular industry you want to index. Your best bet will always be individual stocks though, if you are decent at picking them. If you never try, you will never learn. I would recommend 40% gold equities (auy is my favorite here and will see tremendous upside in the next 5 years, abx and gg are also solid), 40% emerging markets, particularly china and india(HDB and IBN are great banks in India which should do very well as that economy continues to expand. Bidu is incredible and is only just beginning.), and 20% large U.S multinationals like PG or KO. You probably won't do what I said, but it is good advice, and I have done very well in the market for years. Whatever you do, don't buy anything all at once! Number one rule and so important. Spread out your buys over a few months so that you aren't buying in at the highs. You can pm me if you have any questions.

[jtollison78]

I own a little AUY. I don't think I like ABX. Here's a 5 part article that explains some of the nuances of buying gold companies while explaining some shady activities by Barricks execs.

http://oikonomika-blog.blogspot.com/...r-on-true.html


John

[Courtesy Flush]

So many suggestions and no knowledge to decide between them with. Sucks to be me.

[pig4bill]

[ QUOTE ]
[ QUOTE ]
The average young person doesn't have enough money to diversify into bonds. The commission charge on a few thousand dollars in bonds takes a big bite out of the yield.

[/ QUOTE ]

I'm really not trying to convince anyone to buy bonds, but this is not much of a reason to stay away from bonds. Plenty of bond ETFs via iShares alone that have very low expense ratios and very low transactions costs depending on your broker.

[/ QUOTE ]

ETF's are like a bond fund, the interest is reflected in the total tield? Not that I would want a bond anyway, but there's no way I would want any part of a fund. At least with a bond, I can't lose any of the principal unless they default.

[ QUOTE ]
And honestly, it is someone with a small amount of savings that most needs to reduce variance. Not so much if you have backup emergency borrowing options (parents, friends, etc.), but if you really don't have much of a cushion, 100% stocks is a bad idea.

It is also occurring to me that the last couple of years have been atypical in that you can get the same yield from savings or money market funds as you can from bonds, but normally bonds are giving you an extra percent or two.

[/ QUOTE ]

If I'm going to have any fixed income, it better be safe as hell. So no corporates, government only. The difference, even many years ago, between govt bond yield and money market yield was not worth the loss of flexibility and commission costs.

I'm not saying nobody should have bonds either, but you were asking why there seems to be little interest in them. I gave you one reason - too much additional risk for too little additional value.

[spider]

[ QUOTE ]
ETF's are like a bond fund, the interest is reflected in the total tield?

[/ QUOTE ]

Let's take IEF, the iShares 7-10 yr Treasuries. A simplified version of what it does is to buy a 10 yr Treasury, hold it for a 3 yrs and sell. (Of course, in reality there is going to be a mix of maturities, holding times, etc.) Any interest and gains are then passed to the shareholders as dividends. Obv, you don't have much control over things compared to buying and selling bonds, but you also have minimal transactions costs, which is definitely not true if you actually were going to buy & sell bonds.


[ QUOTE ]
I'm not saying nobody should have bonds either, but you were asking why there seems to be little interest in them. I gave you one reason - too much additional risk for too little additional value.

[/ QUOTE ]

[img]/images/graemlins/confused.gif[/img] The purpose of adding bonds to an equity allocation is to sacrifice some expected returns for a reduction in volatility (both of these from the perspective of your entire portfolio).

[spider]

[ QUOTE ]
At least with a bond, I can't lose any of the principal unless they default.

[/ QUOTE ]

Right, all you have to do is hold a 30 yr bond for 30 yrs and you are guaranteed not to lose principal.