where to stick 50k for 10 years

[DesertCat]

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More intuitively and anecdotally, there's giant amounts of capital swishing around chasing return. Astonishing. I watch some of it go by every day. Finding opportunities to generate returns seems to be getting harder all the time. As more and more people pile into things, returns for everyone are dissipated away (scuttlebutt going around now about some hedge funds returning 6% and such). Private equity and managements take firms private. Etc. So now having capital is not enough to generate a return. Your capital needs to be connected to get in. Things that are good, like hot IPOs, seem to go to good customers and those in the know.

This is why I flippantly tossed out there the 'stock-picker's market' thing. In a low return environment, high valuation environment, I think it's easier for individuals to outperform by picking stocks or allocating well.


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The first paragraph contradicts the second paragraph. If we are in a low return environment because there is too much money sloshing around chasing yield, it's the worst possible time to be a stock picker. You have too much competition, competition that is willing to take lower returns than you, and will make the market too efficient for you to beat it. That means index funds are even better solutions for this type of era.

Of course, my daily experience down in nano-cap/micro-cap land tells me it's just as wide open and full of opportunity as ever. But this section of the market has too many structural limitations to ever be that competitive or efficient.

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How do you know I'm not a wall street type? Or 150 IQ?

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You are probably smart, and might even have wall street connections, but I doubt you have time to post here if you are running a billion dollar fund with a team of high IQ rocket scientists using millions of dollars of computers to predict future economy/market sector trends. That's who I was talking about as your "competition". And I doubt even those guys will succeed at predicting large market and economic trends. Macro-economic & big market trend predictions are a game that doesn't appear to ever had a consistent winner (i.e. most "geniuses" appear to be as accurate in their predictions as a stopped clock is at telling time).

And for all the gloom and doom, the U.S. is in much better shape than ever before. Our "enemy" is a tiny group of bumbling religious fanatics who haven't been able to pull of an attack on our soil in years. Our economy is in good shape despite the pricking of two bubbles in the last six years.

Compare that to the late 1970s, where our enemies were a coalition of some of the most powerful countries on earth, all equipped with nuclear weapons that could have incinerated most of our population within minutes. Inflation was raging out of control, unemployment was skyrocketing, income tax rates were at an all time high and energy costs were a much larger proportion of national income.

Of course, the one similarity we share with the late seventies is that we have a moron sitting in the White House.

[gull]

Yeah, my data are dividends-adjusted.

[ayamaguc]

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I'd guess Gull is using dividend adjusted returns.

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True. And a very good point to not overlook dividends. His data are not, though, inflation adjusted.

Gull- what does your timeseries say about the peak in late 2000 vs. now? How long, how far down (or even?), etc.?

[gull]

Um, what do you want to know, specifically? I can't really tell what you're asking.

[ayamaguc]

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The first paragraph contradicts the second paragraph. If we are in a low return environment because there is too much money sloshing around chasing yield, it's the worst possible time to be a stock picker. You have too much competition, competition that is willing to take lower returns than you, and will make the market too efficient for you to beat it. That means index funds are even better solutions for this type of era.

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I'm not sure I follow. I think maybe we're not doing a good job of defining what we discuss. Here is how I see it..

I think we're in a low return environment. By that I mean the overall economy, asset growth, and the markets as a whole. Total market or S&P500 type stuff. For this discussion probably makes no difference. I possess this view b/c I have structural and macro concerns about the way things are right now. This is my read on right now. Just this hand. 3 or 6 months from now things may change as events progress. Unfortunately, the OP and myself need to put money to work. It's not a comforting time for that.

Valuation is a part of my concern here too. Multiples on the market (again, total, or s&p or some other encapsulate vehicle of the whole) are high historically and for my tastes.

What does this mean? Imagine you are your billion dollar fund manager running a huge pile of assets with a huge payroll of 150 IQ brains and massive, expensive infrastructure all around you. You make your 2% of assets to keep the lights on, but what everyone is in for, how everyone gets paid, the name of the game, and how you keep your investors money, is big returns and your 20% cut (high water mark). Or what if you're running a multi-billion elite university endowment. You are highly compensated, work in a great environment, are associated with a prestigious institution, and you have a mandate. Generate returns to fund operations, capital investment, growth, and to compound returns in the endowment. You must produce X% every year. Failing to do so means you get canned and your institution falls behind in the race to be the elite university of choice for the current demographic boom.

That is pressure. The clock is ticking and you're down a teeny on the year already.

Assume I'm right, and we are in a low return environment. GDP is not looking so hot. Total asset growth is muted. So a big index or the total market looks to return maybe 3-6% (beta). You're the elite U investment manager above, and your mandate is 8% or more. You have a problem. You can close some of the gap using leverage but you need to find outperformance or generate excess return (alpha).

Generating alpha isn't exactly easy. There's a lot of competition and capital chasing these opportunities. Hedge funds are returning 6% b/c a lot of classic arbitrage opportunities or themes are getting dissipated by the crowd, structurally changed, or going away (think yen-carry trade).

This I think is where an individual, picking stocks, sectors, and allocating, has an advantage. I do not think the competition is willing to take a lower return. Time is an edge the individual has. I can survive a 3% year as can the OP to enjoy the 20% year that can follow. I'm nimble and small, and I can get my positions in cheaply and without moving the market. I might even be able to do it for zero commission now.

Just b/c the total market or my benchmark is richly valued or potentially low-return does not mean that all components of the market or benchmark have to be the same. Am I competing with big capital and a lot of smart people to find outperformance? Absolutely. But value investing isn't sexy, and as you said, is hard to analyze/pounce with computers (unlike say, an arbitrage opportunity or cross-market mispricing).

So I disagree that low return-high valuation is a bad time to be a stockpicker. I feel like there aren't a lot of other choices. 'Everyone else' can have the index at a price I don't want. Big capital can try to be like me, but it'll be hard for them (and if I can beat them in, they will lift my boat with their water).

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How do you know I'm not a wall street type? Or 150 IQ?

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You are probably smart, and might even have wall street connections, but I doubt you have time to post here if you are running a billion dollar fund with a team of high IQ rocket scientists using millions of dollars of computers to predict future economy/market sector trends.

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Sorry. My questions were kindof rhetorical and tongue-in-cheek. Should have stuck in a smilie. [img]/images/graemlins/wink.gif[/img]

You might have noticed that as far as posting... well, basically I don't. I have my work, my life/fun/hobbies, poker, then everything else (like 2+2). I was away for the holidays, which meant no poker, so a bit of time for other things, like sharing ideas and always learning. Tuesday I was at work but it was slow (generally, and Gerald Ford holiday for some markets). So you'll definitely be hearing less of me forward.

Assuming the OP is even around, and assuming that the OP wants to more or less fire-and-forget, how about this as an approach:

-Put 50k into a a money market fund or savings vehicle. Something 5% return, more or less 100% government backed kind of thing.
-Split the money into 10 tranches of 5k each.
-Pick an investment vehicle. S&P500. Total market. PRF Fundy Index ETF. Fundy Index Fund. One of those Rydex 2x the S&P500 return nitro funds. Etc.
-Pick an investment date. Something annual that doesn't conflict with other life things. Say... 12th January or closest Friday before MLK market holiday.
-Invest 1 tranche into your chosen vehicle every January 12 on Day 0, and the ends of years 1, 2, 3, 4, 5, 6, 7, 8, and 9. 10 Total investments.
-Keep the cash in your 100% backed cashlike return vehicle.

There's an assumption here that you don't need the entire lump at the end of year 10.

-Your cash pool should return interest, compounding. Given that you should get 5% or so on 45k in the first year, you have a good shot to have at least 5k lying around at the end. Maybe 10k.
-At the end of year 10, as your first withdrawal, pull out the cash from your money account.
-If you have enough, pull out cash from your money account at the end of year 11.
-When cash is exhausted (assumed end of year 10 or 11), sell off 1/10 of your investment holdings. Last-in-first-out (LIFO) tax treatment will probably be best (depends on price vs. cost basis).
-Continue to cash a slice of your investment at the end of each year, using the most favorable overall tax treatment.


If you believe the market is going straight up from here, then just putting the slug in and walking away is the best plan. However, if you believe the market will dip, or gyrate, or you don't know, then this tries to average your money in over a 9 year period without getting too complicated. Since you build cash as you go, you can leave your investment money in for a minimum of 2 years (last investment tranche vs. first withdrawal date) to let it grow. Perhaps more. If you roll the money first-in-first-out then each slice has 11+ years (I think- getting tired) to grow.

If you need all 50k at once, averaging in still probably makes sense but there's more overall risk that the 50k won't be there on your drop-dead date.

Variation: Take half the money and make 5 slices committed over 4 years. Take the other 25k and sit in cash waiting for an 'opportunity'. Like a big correction, recession, Sept. 11 type event, etc. that gives you a better valuation. If none comes, follow original plan. But if one comes that looks appealing, get the whole block in there.



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And for all the gloom and doom, the U.S. is in much better shape than ever before.

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I entirely agree. Many of us are very lucky to have won the birth/residence lottery and live in the West.

[ayamaguc]

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Um, what do you want to know, specifically? I can't really tell what you're asking.

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Sorry. I'm assuming that we are currently in a downperiod for the S&P500, like the ones we talked about before. I know your data are inflation adjusted, but I was curious... if I was incredible unlucky and put my money into the S&P at the absolute peak of the dot-com boom, would I still be underwater net of dividends? How much negative, and how long has it been? Are we currently in one of those S&P downperiods and how bad/long has it been?

Thanks.