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Help me with my investment strategy

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Disappointed with my investment advisor's choices and the limited selection of my company-sponsored retirement funds, I have decided to consolidate all my investments into an online brokerage and stake out on my own. I would like to share my strategy and solicit advice to profit in the current turbulent economy.

My strategy is:

  • 1/3 precious metals – Physical bullion, GLD, and mining ETFs
  • 1/3 S&P 500
  • 1/3 foreign stocks & currencies
  • Get a discount warehouse club membership and hoard supplies

My assumptions:

  • The dollar will fall dramatically, along with most domestic stocks. (0-2 years)
  • Gold will rise (0-3 years)
  • Foreign markets will crash when U.S. debt is discovered to be worthless (0-7 months)
  • Unburdened of worthless U.S. debt, foreign markets will outpace USA (1-10 years)

Some questions:

  • What are strong and broad foreign investments?
  • What is a good growth small-cap domestic ETF?
  • What should I do with my tax-free accounts?
  • What specific funds would accomplish my strategy?

Edited by GreedyCapitalist

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The S&P 500 took quite a tumble in 2008. If you went long, does anything make you think it has reached a bottom? If you shorted it, what do you think the minimum will be in 1-2 years?

Edited by AulusAemilius

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What is your time horizon, and what is your age?

Consider adding to your list shorting the US Treasury market as well. As inflation creeps up, bond yields will have to rise dramatically, i.e. bond prices will fall.

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The S&P 500 took quite a tumble in 2008. If you went long, does anything make you think it has reached a bottom? If you shorted it, what do you think the minimum will be in 1-2 years?

I edited my post because I meant that the expected effects will happen anytime from now till two years from now. Two years is just the range beyond which I'm not sure which direction the domestic markets will head.

I knew that the post dot com housing bubble would collapse, but didn't really prepare for it, other than by hoarding cash. Based on the sheer size of government spending, I expect the current inflationary policy to be far more disastrous, so I expect the markets to react far worse.

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What is your time horizon, and what is your age?

I'm 28, and I don't plan to start withdrawing on my funds until after 55. I have about $80K to invest right now. I have a good, stable income, but I don't have time to follow the markets, so I want to invest aggressively, but long term.

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I don't have time to follow the markets, so I want to invest aggressively, but long term.

You don't need to be diversified for diversification's sake. Historically, you would have done exceptionally well by having a majority of your money placed with conservative life insurance companies and buying gold (the mix being dependent on your particular financial situation). Some of this savings could also have been invested in mining stocks and energy companies to push your returns higher while still preserving the bulk of your savings.

I think what you are proposing though is a recipe for disaster. I think the combination of not having the time to follow the markets and wanting to invest aggressively will do you in, if you go down that road. Investing, like anything else, is a skill. The more time you put in, the more knowledge you gain, the better you develop your ability and skill level, on the whole...the better your results. There is no such thing as automatic profits, which I'm sure you can understand.

Usually for individuals who don't want to or can't learn how to invest, their best alternative is to bump up their savings by quite a bit and allow professional money managers to invest your savings in more conservative investments, the bulk of which would be placed in high cash value insurance, short-term bonds, and gold. The higher savings rate can offset the lower returns you'll be getting.

Of course, when I lay it out like that for most people they don't like that option either, haha.

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There are a few things that I don't like about this article. One is that it seems to be saying that the EMH is valid, and that the "best way" to invest is passively (this strategy only works when a minority of investors use it). It represents the intrinsic approach to investing which I think is highly suspect.

The other issue presented is whether the average "joe" should even attempt it. I like that the article points out that you have to have an interest in investing. It really depends on the skill level of the investor, and whether or not they are willing to learn how to invest on their own. But, to say that the average Joe can't or that the odds are stacked heavily against them I think is overstating it.

If you don't have an interest in finance though, even a little, and here is where I deviate from the article, I don't think that you should invest at all. At least not using any type of financial product with variable returns. You are essentially placing all of your financial future in the hands of another person. You wouldn't do it in any other area of your life and I don't think it makes sense here either. You might hand your money over to someone else (like a Bernie Madoff) or an adviser who you *think* is competent but who is not (since you don't know anything about finance and have no interest in it, you've no way to judge their competency), and you wind up with an entirely new problem.

Also, there are more reasons than what the article tells you as to why large pension funds and mutual funds do so poorly. It isn't because they're trying to beat the market per se, it's because the friction of costs associated with the funds, Government regulations on allocation of funds, liquidity and reserves, and the fact that they get to be so large (they run out of places to put the money) that accounts for a lot of funds being long-term poor performers. Of course, there is not really a huge incentive for the funds to do well to begin with, and also the obvious - that some managers just aren't that good.

Edited by prosperity

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But, to say that the average Joe can't or that the odds are stacked heavily against them I think is overstating it.

Yes of course you are right. This should not be taken as an out of context truth. However, statistics show that many (a lot) people are not doing as well in their self directed plans as, in the past, their employers did when they invested their money for them (contracting professionals).

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When you have a leak, you call a plumber. When the lights go out, you call an electrician. When you need financial advice, you contact a financial planner. There are good and bad plumbers, electricians and financial planners, as with all people and professions. That's why you should get referrals from trusted friends, family members or coworkers and consult with several specialists before choosing one. Initial consultations are/should be free, so it's just a matter of taking some time to find the right one for you.

EDIT: I thought of an example that might illustrate why going it alone is not a profitable idea, in the vast majority of cases.

The last quarter, as you are well aware, the market tanked. As a result, many investors bailed out of their mutual funds. (Way to buy high and sell low, morons!) Anyway, the panic selling forced many mutual fund managers to sell securities within their fund's portfolio (whether they wanted to or not) to generate the cash for the redemptions, thus creating capital gains for the mutual fund's shareholders.

Shareholders in taxable accounts must pay taxes on these gains, so in a year when our clients had unrealized losses in their portfolio, they were going to be hit with taxes too. (Gotta love the government!) To offset those taxes, we sold portions of our client's funds at a loss so they would have a realized loss to report, thus offsetting the capital gains taxes.

Now the government is on to this, so in order to prevent a wash sale, we invested our clients in a fund similar to the fund we sold them out of, then in 45 days, we will purchase them back into the original fund, using systematic trades which will prevent them from being charged trading fees.

As an investor going it alone, would you have even understood all of that, much less been able to perform the calculations necessary to determine how much of which fund(s) to sell? Would you have had time? (Capital gains are typically paid in mid-December, so you would've had to realize the situation, make the necessary calculations and trades prior to December 31st for it to be effective with the 2008 tax year...and all this while you're dealing with the holidays, family, your job and everything else that life and the holidays bring.) Oh, and don't forget to avoid a wash sale!

Edited by K-Mac

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When you have a leak, you call a plumber. When the lights go out, you call an electrician. When you need financial advice, you contact a financial planner. There are good and bad plumbers, electricians and financial planners, as with all people and professions. That's why you should get referrals from trusted friends, family members or coworkers and consult with several specialists before choosing one. Initial consultations are/should be free, so it's just a matter of taking some time to find the right one for you.

EDIT: I thought of an example that might illustrate why going it alone is not a profitable idea, in the vast majority of cases.

The last quarter, as you are well aware, the market tanked. As a result, many investors bailed out of their mutual funds. (Way to buy high and sell low, morons!) Anyway, the panic selling forced many mutual fund managers to sell securities within their fund's portfolio (whether they wanted to or not) to generate the cash for the redemptions, thus creating capital gains for the mutual fund's shareholders.

Shareholders in taxable accounts must pay taxes on these gains, so in a year when our clients had unrealized losses in their portfolio, they were going to be hit with taxes too. (Gotta love the government!) To offset those taxes, we sold portions of our client's funds at a loss so they would have a realized loss to report, thus offsetting the capital gains taxes.

Now the government is on to this, so in order to prevent a wash sale, we invested our clients in a fund similar to the fund we sold them out of, then in 45 days, we will purchase them back into the original fund, using systematic trades which will prevent them from being charged trading fees.

As an investor going it alone, would you have even understood all of that, much less been able to perform the calculations necessary to determine how much of which fund(s) to sell? Would you have had time? (Capital gains are typically paid in mid-December, so you would've had to realize the situation, make the necessary calculations and trades prior to December 31st for it to be effective with the 2008 tax year...and all this while you're dealing with the holidays, family, your job and everything else that life and the holidays bring.) Oh, and don't forget to avoid a wash sale!

I see your point in terms of mutual funds. But this assumes that an individual "going it alone" would use a mutual fund as his best alternative. I don't think that that would be the case. If it were, I think most people would use IRAs or 401(k)s so the impact of taxes would be minimal to them (at least at that point)...they just wouldn't sell...the so-called "buy and hold" mentality.

But, even if you weren't buying into a qualified plan, if you bought a random selection of about 40-50 different stocks, you could mirror the underlying index - if that was your goal. You don't even need to do any analyzing. Just throw darts at a dart board. It's cheap to buy stocks this way and you avoid the complexities of the mutual fund, have full control, and all the perceived advantages of indexing.

Referrals from family and friends and consulting with specialists wouldn't have helped you avoid a Bernard Madoff. In fact, most of his clients were from referrals. Not all scammers twist their mustaches and look like a crook. This guy was very well respected.

The ONE THING that was common among all of his clients though was that they were ignorant of how he was making those returns. This sort of comes back to an earlier idea about investing I had which was one of the major problems is education. Not everyone is going want to learn how to do that...and that's OK. And...maybe a majority of people shouldn't. I think there is a lot of value in the research and analysis done by professionals.

I still maintain that it is necessary to have at least a basic understanding of how to invest in equities if you are going to put your money there though. A basic understanding...not necessarily a professional's level of understanding.

I think it's a cop-out for investors to say that they don't have time or that it's "too complicated" to understand. Not only is that a pragmatic answer, it's simply not true...books like "one up on wallstreet" are an easy read and well worth it.

As far as going to a plumber or a mechanic or any other professional, I agree in most situations. But, this does not:

1) eliminate the need to have a basic understanding of what the professional does.

And

2) I don't think that example applies in the same way when you are talking about finances because the nature of a financial problem and the nature of a plumbing problem are very different. What you do with your money has a lot to do with your values. You could happily go your whole life just turning on and off your faucets and not really worry about it too much. If you have a problem with your plumbing, it's a metaphysical problem. That's just not true with financial planning, of which investing is one component. It's more than just a metaphysical problem

As an example, you could say when you are having a psychological problem, you go to a psychologist. Or when you are facing an ethical problem you go to a philosopher. I think that this would be a valid assumption. However, in these two instances, neither the philosopher nor the psychologist is going to solve your problem for you (not a proper one anyway). As the patient, you'll need to learn a bit about philosophy and psychology in order for the professional to help you solve your own problems.

I think it is similar in the financial planning profession (or it ought to be).

Edited by prosperity

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Yes of course you are right. This should not be taken as an out of context truth. However, statistics show that many (a lot) people are not doing as well in their self directed plans as, in the past, their employers did when they invested their money for them (contracting professionals).

I think there is a good reason for this. The stats I've seen...from DALBARinc. show that it is largely an emotional problem. Those who do have some knowledge of investing are still either undereducated or investing on whim. That can be solved by proper education and dedication to a rational approach to investing.

There is no inherent reason why people cannot be better investors. You need basically two things: money and information. The latter is what is going to drive your success.

The information part is where I think there is value in research firms and investment advisers, though you could - if you were ambitious enough, do the research on your own. The research aspect I think is where people will run into a time issue (and probably a skill and ability issue). But learning the basics of investing isn't THAT difficult, and the transactional process of buying and selling doesn't take much intelligence to do and could probably be done by the investors themselves.

...but yeah...if you are saying that R&A could probably be done better by professionals, I'd have to agree.

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Thanks for the advice, everyone. I just spent my life savings on the strategy I outlined.

I decided to invest almost exclusively in ETFs, with a single mutual fund. Peter Schiff would say that I'm too optimistic about the USA, but I did weight my S&P's towards utilities, energy, and staple goods. I also weighted my international towards Asia.

Besides my bullion and checking account, I'm now 100% invested into stocks, so there's little margin for error in my strategy ;-)

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Usually for individuals who don't want to or can't learn how to invest, their best alternative is to bump up their savings by quite a bit and allow professional money managers to invest your savings in more conservative investments, the bulk of which would be placed in high cash value insurance, short-term bonds, and gold.

I'm sorry I didn't read your posts before I invested, though I probably wouldn't have changed my strategy much. I did have half of my investments with a broker, and lost over 50%. I kept "my" half mostly in cash through 2008 and almost broke even. So, after that, I decided that I could do a better job on my own. I don't intend to try to beat any particular sector, but I will try to predict which sectors will do better. I think I can predict this better than non-capitalist money managers. When I have a decent sum, maybe I will get the attention of someone I like.

I'm not sure why you suggest bonds - they will collapse with the dollar. Insurance I never understood either - I self insure. Gold I think is a good idea, but for non-professionals, I think it's only good for wealth preservation, not as an investment.

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Thanks for the advice, everyone. I just spent my life savings on the strategy I outlined.

I decided to invest almost exclusively in ETFs, with a single mutual fund. Peter Schiff would say that I'm too optimistic about the USA, but I did weight my S&P's towards utilities, energy, and staple goods. I also weighted my international towards Asia.

Besides my bullion and checking account, I'm now 100% invested into stocks, so there's little margin for error in my strategy ;-)

GreedyCapitalist, this discussion parallels (somewhat) my question in another thread regarding Bullionvault.

A couple of questions: 1)Could you tell me the name of your single mutual fund that focuses on ETFs? If you would prefer, you can PM me. 2)Regarding your gold bullion, did you buy it from a local coin dealer or an online service like Bullionvault?

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GreedyCapitalist, this discussion parallels (somewhat) my question in another thread regarding Bullionvault.

I think I already answered your questions in my latest post. The mutual fund was FCNTX - not part of my gold investments.

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http://ticker-classics.denninger.net/archives/2008/03.html

http://market-ticker.org/archives/748-Why-...Should-Too.html

FWIW, I have gone into nearly full "Capital Preservation" mode. My guy at Morgan Stanley says that even utilities are getting pooh-poohed now. I hate to be a wet blanket, but I see very hard times ahead. :P

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I'm sorry I didn't read your posts before I invested, though I probably wouldn't have changed my strategy much. I did have half of my investments with a broker, and lost over 50%. I kept "my" half mostly in cash through 2008 and almost broke even. So, after that, I decided that I could do a better job on my own. I don't intend to try to beat any particular sector, but I will try to predict which sectors will do better. I think I can predict this better than non-capitalist money managers. When I have a decent sum, maybe I will get the attention of someone I like.

I'm not sure why you suggest bonds - they will collapse with the dollar. Insurance I never understood either - I self insure. Gold I think is a good idea, but for non-professionals, I think it's only good for wealth preservation, not as an investment.

I hope you do well.

..last year you could have done very well with energy companies. But I was just reading something rather disturbing the other day and was thinking about how it would affect investments this year. You know with Obamanation's forthcoming energy policy, I don't know how good most of the energy sector is going to fare this year, save maybe wind power (through government subsidies)...maybe nuclear if he can get off the fence. It's going to be an interesting year.

Some brokers will do that (lose 50% of your holdings). It depends on your investment strategy. The reason I say high cash value insurance and short-term bonds (short-term not long-term) is because they are relatively stable. Insurance is backed by bonds, high quality mortgages, and some common stock. High cash value is very liquid in case you need to exit stage left quickly, and it leverages your savings through a death benefit until you have accumulated what you intended to save. The bonds, as long as they are 5 years or less provide stability without a long-term commitment.

The other thing I like about both of those options is that if enough people put their money there...that's the real stimulus package. It gives money to businesses to help fuel job creation and expansion, and does it of course through free market dynamics. Part of the equation is getting people to save more money which will help to get this economy back to where it needs to be. The other half of course is cutting government waste and reducing spending. That, we cannot control. The savings aspect, we can.

As far as the collapsing dollar, that is an issue of course, but not a guarantee. It depends largely on whether people in Washington wake up in time. They are going to have to deal with some major issues before too long here. I agree that Gold is more of a preservation measure, but think about what all of your investments are pegged to - the dollar. So...I think it's nice to have some kind of hedge in gold. The problem is that gold is also priced in terms of fiat currency, so it looks volatile short-term.

I've heard of some of folks advocating putting all of your money into gold, but chances are your local grocer, the car dealership down the street, and most other people don't take gold as payment (and they can't make change for it either). So...you have to weigh out what percentage you want to "risk" long-term in fiat currency and what percentage you want to "risk" short term in gold.

Also, I'm not saying that anyone would put 100% of their savings in these three options. I personally like the 90/10 approach or the 80/20 approach. 80/90% in fixed/gold, 10/20 invested in equities or options. With the right investments you could do very well and limit the downside to about 10/20% of your portfolio if something goes wrong.

http://ticker-classics.denninger.net/archives/2008/03.html

http://market-ticker.org/archives/748-Why-...Should-Too.html

FWIW, I have gone into nearly full "Capital Preservation" mode. My guy at Morgan Stanley says that even utilities are getting pooh-poohed now. I hate to be a wet blanket, but I see very hard times ahead. :P

From that website:

But this sort of "performance" belies the pitfalls of having someone else run your money for you, chief among the problems being that nobody cares about it as much as you do.

I think this goes hand in hand with the idea behind the corporate raiders in the 80's...if your interests (or the interests of your money manager) aren't aligned with your investments, it's a recipe for disaster.

Also, I think it's a good point that someone else isn't going to care as much about your money as you do.

Edited by prosperity

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I see your point in terms of mutual funds. But this assumes that an individual "going it alone" would use a mutual fund as his best alternative. I don't think that that would be the case...

Good lord...I said that is ONE example.

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Good lord...I said that is ONE example.

I know, you said

I thought of an example that might illustrate why going it alone is not a profitable idea, in the vast majority of cases.

I took this to mean that your example applied to a vast majority of cases if they did it themselves - meaning, they would invest in mutual funds.

Sorry if I misunderstood you.

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No, I meant going at it alone is not profitable in the vast majority of cases.

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Just thought I'd brag a little about my progress so far. As you can see in the chart, I'm beating the S&P - I'm in the black as of today, whereas the S&P is down almost 15% for the year. I had some good luck with my timing, but I made a mistake in not selling the investments my broker purchased, which are way down.

post-1-1237849021_thumb.gif

I learned some beginner lessons too: even though I knew the importance of having a plan, I got emotional a few times and bought high and sold low. I'm trying to make some firm rules so I don't do that again.

So far, I'm losing money on gold (but not gold mining), but the socialist rhetoric is getting worse, so I'm considering selling off my U.S. stocks and trading it for gold.

Edited by GreedyCapitalist

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So far, I'm losing money on gold (but not gold mining), but the socialist rhetoric is getting worse, so I'm considering selling off my U.S. stocks and trading it for gold.

Join the club. I really like the Silver Wheaton Corp (SLW) and the Kinross Gold Corp. (KGC).

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Is there a reason you choose to invest in gold rather than platinum? Once demand for automobiles (and thus catalytic converters) picks up in a few years, the spot price should recover to levels seen in early 2008.

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Is there a reason you choose to invest in gold rather than platinum? Once demand for automobiles (and thus catalytic converters) picks up in a few years, the spot price should recover to levels seen in early 2008.

Isn't platinum a bullish investment? Why should it recover?

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