I have about $50K in an index fund, own land worth $150K (paid off) and another $200K in industrial real estate investments.
Given this spread, what should I do with the cash? I'm not comfortable investing the entirety into an index fund, given the current socio-political climate.
I'm located in the Midwest, USA.
You can use a variety of online calculators to back test a 4% withdrawal rate - maybe 80% safe, but 20% of the time you'll go broke before dying.
The first is going back to the origins of the 4% number in the first place, the trinity study. The parameters for that were a 30 year retirement period, and success was "not completely run out of money after 30 years, 95% of the time". If you extrapolate from that original study, if you retire for more than 30 years (FIRE includes retiring early), success drops from 95%.
There's articles exploring that, e.g.
And then there are a variety of online calculators where you can play with the numbers yourself.
The other elephant in the room is pre-Medicare healthcare costs.
VOO and TLT have limited correlation as treasuries are seen as a safe-haven. We've seen huge spikes in treasury funds recently, since they go up in value when interest rates go down. It's a bit unintuitive, but treasury funds have to cycle through their holdings over time to track the index, so when interest rates on new issues go down, older issues command a premium in the amount of pre-paid interest.
I'd suggest something like this.
(1) Have 6 months of expenses set aside.
(2) Max out your tax-advantaged retirement accounts.
(3) Allocate some amount of capital to traditional or conservative investments, and some amount to more aggressive plays. The more time you have in the market, the more aggressive you can afford to be. Having both types of investments will give you the comfort you need during rough times that your riskier plays come through eventually.
(4) If you're looking at property, consider setting aside a down-payment. Keep in mind that if you're employed, buying a house in cash may not be the optimal strategy as you can deduct large quantities of your mortgage payments, giving you, with 20% down, a 5X leveraged investment in real-estate with deductible expenses and historically-low interest rates. Mortgage interest rates are just a hair over inflation, and when you deduct the interest from your taxes, you're actually saving money with a mortgage.
(5) Now that you have a large chunk of capital, you can consider financing some purchases yourself at extremely low rates by taking advantage of margin borrowing. InteractiveBrokers offer 1.5% interest margin loans, and you could, if within your risk tolerance, borrow some amount of money collateralized by your (safe) equity positions. This 1.5% interest is also tax-deductible. Obviously be careful, a margin call is something to avoid, but against a $450K portfolio, I personally wouldn't sweat borrowing $45K.
One thing I was able to do personally is borrow enough on margin to make a down-payment on a property. This allowed me to deduct the entire balance of my mortgage, beyond the $750K cap, and at 1.5% the margin interest is much lower than if I'd financed the whole thing.
Edit: For more clarity - risk parity can make sense, but I don't think you ever need to use leverage on your equities to get risk parity. The fundamental insight of risk parity investing is that at commonly recommended ratios (50/50, 60/40) the risk (variance) from equities totally dominates the risk from bonds. So the risk parity advice is usually something with a much higher bond mix, but the entire portfolio is leveraged. But DO NOT use levered ETFs that recognize, say, 3x the DAILY movement of the S&P to do this. They don't do what you think. Read that link, or compute the following two scenarios:
1) Market goes up 1.1% on odd days, down 1% on even days. That yields about 9% (200 trading days). But a 3x daily etf product would only get you about 22%, not 27%.
2) Market foes up 1% on odd days, down 1.1% on even. That, sadly, means you lose about 11% on the year. If you use a 3x DAILY etf product, you lose around 75%.
That issue is addressed in the bogleheads post explicitly ("How much does the leverage cost?" and "Don't you know that leveraged ETFs are only intended to be held for one day?"), basically the ETFs are risk parity adjusted, and the volatility in the ETFs actually what generates the returns. The strategy makes money from volatility, and the 3X leverage is used to add volatility in, exaggerating the returns.
I think you might find the post interesting because it seems like you are interested in investing. What you're saying is again explicitly addressed there, and factored into the calculation. They work an example of that kind of decay, and how it's mitigated. Specifically, it doesn't matter that you have volatility decay in one of the ETFs because they're uncorrelated, and when one goes up the other goes down, canceling out the effect.
Your blanket statement does not apply to this specific strategy. It's not wrong in general, but it's not relevant here.
If you don't want to read the bogleheads write-up it's also addressed on Seeking Alpha .
> "That, sadly, means you lose about 11% on the year."
Not if, as you see in the write-up, you pair it with an uncorrelated 3X leveraged asset and rebalance periodically.
The post includes a backtest to 1987.
Low net volatility, high returns. Backtesting of the strategy shows total returns just under 3x the return of the unleveraged portfolios, just what I expect given the leverage costs.
I expect both strategies to be both market-agnostic and age-agnostic. About as close to fire and forget as you can get.
I've made good money on them as well, but I shuffle money in and out frequently.
It's not a good strategy unless you really want to study things.
(1) What people refer to as "decay" is just the way the the daily exposure works on these ETFs. To quote the article:
"Let's say over five days the daily returns of the index are +1%, -2%, +3%, -4%, +5%, and you start with $100."
"At the end of the five days your $100.00 becomes $102.76."
"Now let's use a 3X leveraged ETF. Ignoring ER and other costs, the daily returns are +3%, -6%, +9%, -12%, +15%."
"At the end of the five days your $100.00 becomes $106.80."
6.80 is not 3X 2.76, and it's because down days leave you with less exposure the following day, so you need a bigger up day than the preceding down day to make up for it. However, as the article points out, this dynamic works for you in ETFs that exhibit positive momentum. Since "stocks always go up" -- at least the S&P always goes up over time, so far -- this dynamic works to your favor and the total return of UPRO to date has been 5X the return of SPY.
(2) UPRO and TMF are uncorrelated, and so the positive momentum of SPY causes UPRO performance to exceed 3X, and offset some of the lower-than-3X performance of TMF over time. For the record since 2017, the performance of TMF is 2X that of TLT, give or take.
(3) Further, the way this makes money is actually when the S&P drops 10%, UPRO drops 30%. As people flee assets, they buy treasuries, pushing TLT up 6-7%, which causes TMF to go up 20%. Then at rebalancing time, you sell TMF and use it to buy UPRO, so you sell the 3X winner, and buy the 3X loser at a deflated price. When prices normalize, the extra shares on the losing end in conjunction with positive momentum (and the fact you've reduced the size of your winner before it falls) put you much further ahead than if you weren't using leveraged ETFs.
This strategy makes money on volatility, and should be agnostic to market performance. It actually held up really well during March.
This will very likely make less money but really, I can pay all my (admittedly very modest) bills with my portfolio and have returns left over + my actual day job income so honestly, why do I care?
I come from a privileged background and I lived that life. I didn't like it and have no interest in returning to it.
People have to find the strategy and mix that works for them.
Also, that strategy fails in a rising interest rates environment like in the 50s and 60s (not sure of exact years). Fed has indicated keeping rates low for the next two years, but if they start hiking rates after, I think the strategy would underperform.
The strategy would fail if both interest rates went up and equities went down or stayed flat. While the potential exists for an underperform condition there in a couple of years I personally suspect the fed won’t raise rates unless equities are performing spectacularly. I’m quite skeptical if their 2 year time frame, even to say we may be looking at the new normal.
If it were possible (I recognize it isn't, due to margin limits), would it not be better to be 3x leveraged in your margin account, and simply buy the basic S&P and bond products? Wouldn't that avoid the "drag", and you'd end up better off?
(1) Sell $80K in assets, and use the proceeds, on top of your checking account balance to make a wire transfer.
(2) Now you have $360K in your investment account. You take a margin loan out in the amount of $80K.
(3) Use that $80K to re-establish your $440K investment portfolio.
You haven't used your margin loan to make a down payment, you've sold your assets and used the proceeds to make a down payment. You've then re-taken your investment position using a margin loan. The margin loan isn't collateralizing your down payment, it's making up for a reduction in the net liquidation value of your investment account as a result of your having used it to make a down payment, allowing you to retain your the prior level of exposure to equities in your trading account.
You don't have to go through the actual song and dance, and re-taking your equity positions would result in an IRS wash sale anyways, but that's why withdrawing cash on margin to make a down payment means the margin loan remains an investment expense -- it's there to allow you to retain your desired level of exposure to equities.
As time goes on, a site remaining minimalist like this is a good indicator of value. I'll never understand the desire to move away from high density UX like this to the modern web junk UX that looks more appealing but makes everything more convoluted.
What I was trying to say, but didn't have the space to fully articulate, was that it can look a little noisy and random at first glance. As I write this some of the top threads include posts about replacing a toilet valve, herbicide use, and motivating a son in law. Once you filter through some of this though there are a lot of really smart people giving pretty good financial advice.
Writing an investment policy statement is something bogleheads recommend doing which I would suggest as well. The statement helps guide investment decisions based on goals you wish to achieve.
The most important part of investing is staying the course. Staying the course is hard in bad markets like 2008 or during the pandemic which is why accurately assessing your risk tolerance is so important.
1. put 6 months of expenses in a high-yield savings account that is easily accessible + liquid in case of emergencies
2. max out tax-advantaged accounts. $19.5k/yr 401k + $6k/yr IRA. allocate into anything similar to a target date retirement fund with healthy exposure to US total market/probably light bonds depending on age
3. put the rest in a brokerage account, allocated in the same things your 401k + IRA are allocated in (target date retirement funds that track things similar to VOO/SPY/VTI/FZROX/etc.)
I don't think most people need a financial advisor, but if I had a $450k pile of cash and I wanted to understand the tax consequences of various investments I would definitely pay for a consultation.
1. In general, since the 1970s, house prices have across the United States tracked inflation. The price per square foot on a house, on average, is exactly the same as it was back then (houses are more expensive because the average US house has gotten bigger, and in some metros like SF, city councils have flatly refused to allow building to buff up house prices).
2. A mortgage is basically free when you discount inflation and deduct the interest. The fed target for in the US is roughly 2%. This means that a 2% interest mortgage is free money, i.e. while you pay a 2% interest rate, the principal is worth 2% less, as you get to pay off the 2020 house price using 2021 dollars. So a 2.675% APR mortgage has an effective cost of 0.675%.
3. If you're working you get to deduct the entire 2.675% (of the first $750,000 in mortgage), so you get back up to 45% of it if you're in the top tax bracket. As such, the effective interest rate discounting inflation and interest tax deduction is negative, -0.53% APR.
4. On top of the interest rate on a 30-year fixed being effectively negative (i.e. generating value), you can invest the other 80% of $450,000. You should have no trouble generating 7% per year on that $360,000.
5. In aggregate, your return on capital by making a 20% down-payment on a $450,000 house at 2.675% APR in the top tax bracket could easily be ((0.53% + 7%) * $360,000) per year, plus your house should appreciate in value at inflation, but because it's a 5X leveraged investment, you're generating (2% * $450,000) per year on a $90,000 down-payment.
So, your total return could be:
1. $90,000 @ 10% + $360,000 @ 7.53% or...
2. $450,000 @ 2%.
Given the lack of fees or penalties for pre-payment, you can always pull the ripcord if your situation no longer makes sense by just paying it off.
2. homeowner's associate fees
3. property taxes
don't those cut into your "compare a house to investing in index funds" example?
Also, why is option 2 @2%? If you're investing the $360k at 7%, you should compare it to the same investment at 7%.
Option 2 is a $450K cash purchase of a house, which, on average, appreciates at the fed target inflation rate of 2%.
Indeed although in both cases you own the home and are subject to the same depreciation risk right? Although if you're willing to take a credit hit, I suppose you're shifting that depreciation onto the bank.
I think you have to be a little careful with this.
Shockingly, most financial professionals do not have a fiduciary duty to their clients. If you pay for advice, I'd definitely recommend getting one that does have a fiduciary duty to their clients.
There are quite a few caveats in that wiki article, e.g. stuff like this:
> Your actual tax cost will be higher if you owe state taxes (add your state tax rate on the dividend yield, reduced by your federal tax rate if you itemize deductions and are not over the limit for deducting state taxes) or are in the phase-out range for some tax benefit such as the child tax credit (add 5% to all tax rates) or the personal exemption phase-out for the Alternative Minimum Tax (add 7% to all tax rates, but your overall tax on non-qualified dividends is 28%).
That's a bit complicated. I would still recommend paying for at least a one-time consultation with a financial and/or tax advisor before choosing where to put $450k.
1. Something like Series I bonds for long-term future economic downturns or inflation
2. A CD ladder or money market for temporary job loss
3. Cash in a mattress and food/water for natural disasters
4. Guns, ammo, and containers of gasoline for the zombie apocalypse.
Weight each tranche by your assessment of each event's probability. You diversify the rest of your portfolio, why not diversify your emergency fund?
Over the the long term there is not really anything better to do with it than equities: the Great Depression, World War 2, gold standard retirement, 1980s inflation, etc. Even if you only invested in the peaks, you'd still do quite well over the decades:
Jumping in with a lump sum amount can be quite daunting, so what you can do instead is put in (say) 40K every month over the course of a year or so:
Certainly better than sitting in cash. If you're worried about volatility, then also invest in some bonds funds: 60% stocks, 40% bonds? If you want more growth, 70/30 or 80/20 maybe.
And while the S&P 500 gets a lot of the press, a total market fund is what Vanguard is steering their own employees to:
Something is true with index funds that was less true historically, which is the concentration of a few large companies in the largest indexes - as in, the amount of percentage of capital they have. Fact, FAANG make up 10% of the s&p 500 index, tech makes up 20+ %. It's NOT at all averaged out in the way the Bogleheads might think it is. Is it a "bet on the economy," or is it a bet on the stocks of big tech?
Which brings me to something else that appears to have changed: big tech stocks are viewed as a safe haven, increasingly. With the overall economy being in a shambles combined with a virtual work world, this is even more important.
Put those two things together, and the S&P 500 index isn't diversified.
Edit: we're at the top of the cycle right now, or so it seems. We're all waiting for the other shoe to drop.
But it's worse. What happens if you stick everything in there, you need the money in 5 or 10 years and you just hit the bad part of the cycle (look what happened in March).
I'm doing the opposite of what the Bogleheads do, even though I'm extremely familiar with this extremely conservative approach. What's the fun in risking my capital with some index fund that's tied to concentrated entities like that, when I can risk a small percentage of my capital on highly volatile stocks, and make a similar return? You can repeatedly swing trade stocks like SPCE and some of the biopharma stocks and make money over and over again with a tiny percentage of your capital.
I'm more interested in understanding how the bond market will work now in this strange new reality. Are bonds not a safe haven place to park cash?
Looks like we "picked stocks" by picking the indexes here, too?
I just don't understand the insistence on indexes. We're afraid of picking stocks that go bankrupt?
We work in tech, and a lot of us are science nerds. Surely we can pick names based on how we think those technologies are likely to be successful. We have access to a lot more information than people did in the 1990's with this Boglehead stuff.
>Surely we can pick names based on how we think those technologies are likely to be successful.
Time and time again, especially now, "fundamentals" has proven to be a poor predictor, at least in the short term. You have companies with P/E ratios of 20-30 right now.
It's not just about the underlying product, perception and all kinds of human effects also matter, which makes it a perilous place to be.
Throw your money in a big bucket and over 20-30 years, you'll be up. That's the point.
I'm not that active trading, maybe I perform an action once every one to two weeks. I spend almost all my time just trying to absorb information.
Honestly, with all my questioning of index funds and contrarianism in comments above, I am slightly skeptical that the average person should have this much access to these types of tools. I could instantly blow away all my money and be left in debt (given they allow margin).
Correct. There are smart people doing research out there right now demonstrating that "passive" isn't really passive, and that people regularly buying into indices at any price is skewing the market.
No one is clear on what the ramifications of this are, but as the old adage says, "past performance no guarantee of future success". The same goes for buying the SPY and forgetting about it.
And at what price should people be investing in the market? Sitting on the side in cash, waiting for the dips and crashes to occur, will give you mediocre results:
Further, trying to miss the worst days on market down turns often means missing the days with the best returns:
For most people, most of the time, the best thing they can do is just chug along putting a little bit of money away every month. Put in what you can, but a good goal (if you can afford it) is to put away at least 5% of your income (and maybe up to 10%).
> The same goes for buying the SPY and forgetting about it.
You're not wrong, but: what's the alternative? Unless you can show something that's demonstratively better than a low-fee S&P 500 or Russell 3000 index fund (perhaps tempered with some bonds for risk/volatility management), bemoaning the situation is not very productive.
Edit: This ignores dividend reinvestment as ummonk noted.
https://www.officialdata.org/us/stocks/s-p-500/1900 suggests 1929 - 1944 was probably the longest time.
We are in unprecedented times. Highest debt, lowest bond yields, crazy P/Es, historic GDP drop (worst since 1929, or since WW2 for some). We don't yet know how inflation/deflation will play out. CPI is useless. A lot "inflation" is going into real estate / land and the stock market.
I don't think past wisdom applies anymore. If you put money into most products (including most index funds) on the stock market today you are in fact stock-picking / gambling.
Also tech companies are partially up for a good reason.
Small caps have lost a lot earnings power.
Much much more than tech stocks.
E.g. tech stocks were almost the only ones doing any buybacks last quarter.
Stay-at-home companies, solid/value companies, and cheap stocks is where hedgefunds seem to move to. But yes, some valuations are bonkers. EV stocks, CVNA, W, ...
Personally, I've been late to the party, and needed to learn on the fly, BUT:
I now own a portion of gold and royalty and streaming companies (mining exposure with less risk of badly run mining companies. They lend money to miners in return for metal. I.e. miners don't need to worry about the price of the metal.)
Mind that GLD and SLV are not fully backed by gold and silver. There is significant counter-party risk (E.g. if the bank goes bankrupt you might not receive anything). They also haven't really been audited, and JP Morgan employees have been charged for price manipulation of metals.
I reduced my bond exposure, and I will probably soon move into gov bonds exclusively. I don't want to gamble on MBSs, CLOs, corporate bonds being bailed out. (The Fed and ECB's policies skew the bond market. Ratings and yields are (increasingly) not great indicators of company health).
There is little room for lower yields.
Real yields (bond yield - inflation) will turn negative or are already.
When rates eventually will be hiked, both stocks and bonds will fall. (See 2019 / December 2019)
I started stock picking. Mainly value, but really random stuff I find on Youtube investment channels and Reddit (Of course I read up on them, listen to financial calls. Balance sheet. Cash flow. Exposure to potential problems.).
I sleep better at night with a cheaper stock that has less downside, even if it isn't riding the current trend/bubble.
Other than that I'd keep a good amount of cash for potential opportunities. In the current climate, stocks could fall any week, real estate will likely be on sale (depending on how many rich people will try scoop it up at the same time), or perhaps you can buy a share in a local business.
It baffles me how this Bogleheads philosophy has taken tech people. People can't wrap their heads around the idea that gold goes up in times of trouble, or that work from home tech is likely to go up, or that oil is likely to go down, or whatever other myriad bets one can make.
My approach is to maintain almost all cash and to trade a small percentage of the cash on extremely volatile stocks, preparing to hold long-term if necessary. I rarely invest in fully scammy pump and dumps (but lately pharma has paid off, for obvious reasons).
I use the news cycle and try to anticipate what others are doing. You don't need to sell at the top and buy at the bottom to make money.
In contrast, I'm looking at my work 401K which is managed with those mathemetically unstoppable index funds. It's down 2 percent while I'm up 30.
Now what am I to do with the cash portion of my investment. I'm leaning in bond funds (because bond picking is something I have no idea about).
Because while I might be lucky enough to trounce the market right now, that doesn't mean I'll trust anyone to pick the right companies. It's safer to go for average returns than to risk the market trouncing you, especially with the vast majority of your wealth. And no, this etoro account is not my main investment account.
Which is to say, exactly like has been for the last several decades:
That's the definition of the S&P 500: the largest five hundred companies publicly traded companies.
> Fact, FAANG make up 10% of the s&p 500 index, tech makes up 20+ %. It's NOT at all averaged out in the way the Bogleheads might think it is.
Why do you fixate on the S&P 500? If you want something more diversified, you can own a piece of all ~3000 publicly traded companies in the US:
John Bogle and Vanguard themselves recognize(d) this:
And many Bogleheads also examine the performance of many different types of indexes:
> Put those two things together, and the S&P 500 index isn't diversified.
You're not wrong, but trying to explain to the layman about all this technical minutiae will cause their eyes to glaze over. So for the average Joe the Plumber the easiest message to get across is "invest in 'index fund' (=S&P 500)". Once you get people to actually save on a regular/monthly basis in low-fee funds, you're >80% of the way to a somewhat successful retirement strategy.
If you want to argue about &P 500 vs 400 vs 600 vs 1500 vs Russell 3000: that's for later once people actually have something going into a retirement account.
$PUTW is an ETF that implements the strategy and it has not done well in recent years.
"The strategy is designed to receive a premium from the option buyer by selling a sequence of one-month, at-the-money, S&P 500 Index puts (SPX puts). If, however, the value of the S&P 500 Index falls below the SPX Put’s strike price, the option finishes in-the-money and the Fund pays the buyer the difference between the strike price and the value of the S&P 500 Index." 
They aren't selling puts to open a position, they're selling SPX puts. SPX is a cash-settled, European-style option derivative product tracking the S&P index at a notional value of $100 per index point. When they get assigned because their position closes in the money, they write a check, instead of taking delivery of shares they bought at a discount and waiting for a recovery.
So what this ETF tracks is basically the spread between realized and implied volatility. When the implied volatility is higher than the realized volatility -- which is most of the time -- it tends to be a little bit lower. When the realized volatility is higher than the implied volatility -- which tends to only happen during dramatic market moves -- it tends to be a lot higher.
If you zoom out, they basically go up nice and smooth, until a major market event hits, then they get practically wiped out. Then they start recovering again.
If you sell puts with the goal of getting assigned on the underlying, and riding it back up, you actually want to get assigned at some point. These folks instead cut a check for their losses, don't take delivery of anything they bought at a discount, and start selling premium again, hoping the premium will make up for their losses. Doesn't look like a winning strategy huh?
tl;dr: $PUTW does not use the strategy I suggest. Did that address your question?
If you would have otherwise bought 100 shares of SPY on Friday, it would cost you $326.52 (x100, so $32650). If you sell 1 put option expiring 8/31 "at the money" (i.e. a $326P) you will receive a net credit of $7.20 per share today ($720).
That money is yours at the moment you sell the put option, so if SPY closes at or above $326 on 8/31 (excluding early expiry), you've made $720 on $32600, or a one-month gain of 2.2%. That is an annualized return on your staked capital of 29%. You can then keep making an annualized 29% return every month until you get assigned (assuming IV rank remains stable).
Alternatively, if SPY closes below $326, you've actually bought it for a $7.72 per share discount ($7.20 + $0.56), or $318.80 over what it's trading at right now. As you plan to buy and hold for the long run, you got a much better entry price than you would have with a market order.
If you're planning to buy and hold today, it's hard to lose with selling a put to open. You either collect a nice premium, or you buy the shares at a discount. If your goal is to own the shares long term, you're feeling good either way. Make sense?
What you could theoretically miss out on is a big run up from the moment you bought the shares in excess of the premium.
You can get more aggressive too, and sell puts you don't think you'll get assigned on, at the highest price you'd be willing to pay for SPY and play the long game. Sell $300 8/31 puts for $2. There's a 80% chance you'll keep that premium, and it's an annualized 8.2% return on staked capital. Then if you get assigned it's actually a $28/share discount -- 8.5% -- below today's price.
For instance, in 2020, the massive stimulus by the Fed almost certainly will create a rising stock market. It deviates of course in the short term 6-18 months, few years etc.. In short, if you go that route, buy on the 1-2 year dips.
Invest would certainly be the way to go, although if you have a certain talent.. For instance, house flipping or starting a business. You can get better than the 5% or whatever you get after inflation in stocks. If you're really good at what you do, your odds of getting a better return go up.
Ben Felix, a portfolio manager at PWL Capital in Canada, just released a video explaining why this is completely wrong:
> Quantitative easing is a monetary policy whereby a central bank buys government bonds or other financial assets in order to inject money into the economy to expand economic activity. But what exactly does that mean? In today’s episode, Benjamin and Cameron are going to address this topic, avoiding highly politicized aspects, like whether or not central banks should be involved in the economy in the first place, and focusing purely on the operational perspective of quantitative easing – what is it, how it works, and what the intended transmission mechanisms are.
> For instance, house flipping or starting a business. You can get better than the 5% or whatever you get after inflation in stocks. If you're really good at what you do, your odds of getting a better return go up.
That's nice if you want a different/second career or something. But there are those of us who are happy with our careers/jobs, and simply want something to do with our retirement savings… ain't nobody got time for that.
Of course the half-life on any new business is quite abysmal, so I'm not crazy/ambitious enough to take on that kind of risk.
I'd also throw out the assumption that the Fed will reduce the balance sheet eventually.
They tried and failed in 2019.
It's not going to happen.
They are in fact "spending" (through the Treasury and their bond-buying programs), even though Powell likes to say that the Fed doesn't have spending power, but has lending powers.
That's because COVID-19 happened. :)
The Fed is buying up bonds: at some point they will mature and the US government will have to either (a) increases taxes to come up with the money to repay them (thus taking money out of circulation via the IRS), or (b) roll the debt forward by issuing new debt to pay the old debt.
Given that a few years ago the UK rolled forward some debt from the South Sea Bubble, Napoleonic Wars, WW1, etc, rolling forward debt is not as big a deal as most people think:
> Quantitative easing is a monetary policy whereby a central bank buys government bonds or other financial assets in order to inject money into the economy to expand economic activity
You implied this would be wrong, but it looks exactly right. Nobody is confused about how this works, which is why you response is just puzzling.
> (b) roll the debt forward by issuing new debt to pay the old debt.
There's no question as to what happens here (a) vs (b) false choice. It's printed money that is accounted for as new debt, as per the original assertion.
This is not true for a 10 years period though
You might to add that even though in the past economic growth has always been the case, it doesn't mean it will always be the case, especially now that the energy consumption more or less reached a peak
That's for the S&P 500. How would have a portfolio using (say) the Russell 3000 have done? How about adding some international/EM component? What about a portfolio wish some bonds to control for volatility and allow for rebalancing?
That is to say: does diversification help?
It was true in this ten-year period (2000-2009) if you rebalanced between VFINX (S&P) and VBMFX (bonds):
A smart individual retail investor is statistically unlikely to “beat” those people, and should buy index funds.
It's not a zero sum game necessarily. A stock picker approach that you have as a retail investor that many trading shops do not have is this: time. You can make your bet, and if it fails in the short term you can hold onto the stock long term, unless the company is going bankrupt (which hasn't been a common occurrence up to now, given the overall number of stock symbols). Traders are individuals and groups with books, quarterly numbers to meet and yearly returns to care about. They'll beat you if you're a day trader, sure, but I think it's a false dichotomy to say, you're either a) a day trader or b) a boglehead.
It is, actually. William F. Sharpe laid it out in the 1991 paper "The Arithmetic of Active Management":
Sharpe won the 1990 Economics Nobel for other work:
The more active a trader is, over a longer time frame, the more likely they are to underperform the market. This has been shown through SPIVA over 15+ years, at least in the US and Canada:
As of the end of 2019, internationally active managers didn't do too well either:
This has been known to varying degrees since at least the 1970s:
The question is how high the share of passive investment can go before we see misallocation.
I recommend you read up on the following (from me elsewhere on this topic):
> So what would happen if the majority of investors started to buy the market and stopped trying to beat the market?
> Mispricings would start to develop regularly, and the people that had continued to try and pick stocks would be able to profit. The profits that these people made would attract other people, and eventually everyone would return to chasing the dream of beating the market. Behavioral finance plays a huge role in market efficiency; nobody wants to accept being average by taking what the market gives them when there are hot shot managers that promise to consistently beat their benchmark. There is a lot more emotional attraction to investing with the guy, or to being the guy that can beat the market.
The concern that passive/index investing will ruin The Market is just not something we need to worry about.
Jack Bogle made the claim that even if 90% of the market went passive, the remaining 10% would probably be enough to keep things going:
I'm less worried about the issue of market and price efficiencies, and more about shareholder votes and company management decisions. How do passive, potentially 'non-opinionated' index funds vote on various measures?
Someone could make their own "index fund" with 10% of it allocated to FAANG, maybe 20% of it in the largest tech names overall, and then a distribution of the largest market cap names, and lo and behold, one has an s&p 500 "index fund". Tesla's about to be added to the S&P 500. There are strong opinions on both sides - it's going up, no, it's going down. You don't have much of a choice if you're a Boglehead who bought into the S&P 500, you're just in it for the ride.
There are index funds of every publicly traded company in the US:
Vanguard themselves have changed things so that employees no longer have the option of choosing the S&P 500 fund in their own retirement accounts, but rather the Total Market fund:
> You don't have much of a choice if you're a Boglehead who bought into the S&P 500, you're just in it for the ride.
Anyone investing in equities is just in it for the ride, as it is impossible to predict what will happen:
An individual's best bet, long term: buy as much of 'The Market' as you can. The greater, the better. The S&P 500 is simply a smaller portion of the market, and while not bad, may not be ideal:
So people like Jim Simons are merely the luckiest people alive?
The average person earns the average market return, less fees; that's a tautology. Unless you have some reason to believe you aren't average, most people are better off following your advice. It's what I do, personally.
But the idea that no one is winning at this game flies in the face of a lot of evidence.
No one reasonable, not even Fama and French who came up with the Efficient Market Hypothesis, claim that the market is 100% efficient.
And given that no one knows anything about Jim Simon's Medallion Fund, we actually have no idea how successful they are. But given the quantities and/or trading volumes possibly involved, they don't have to be right very often.
In a perfectly efficient market, it's 50/50 whether you'll get the better end of the deal. Now think of a casino: for many games the house's edge is only 1.5% (e.g. blackjack, baccarat, three-card poker).
But that's still enough for a casino to make make money.
It may be the Simons et co have just an edge of a few percent points, but they make up their profit on volume.
> But the idea that no one is winning at this game flies in the face of a lot of evidence.
There are plenty of people that are winning. It's just the people that win one year rarely win a few years in a row (never mind 10+):
But of course, a properly diversified index fund portfolio contains much more than just the S&P500. Mine has some thousand global stocks, on the order of 5000.
SPY is hardly diversified. A far better and pretty easy portfolio consists of a global financial assets allocation: US stocks and bonds, developed world ex-US stocks and bonds, emerging markets stocks and bonds, real estate and commodities. 10-12 ETFs will do it.
Some of your links are for active fund managers versus passive fund managers. Again, a red herring. No, there's not JUST a choice between bogleheading and day trading, and none of us here are active fund managers? Are fund managers (who have clients) compared to the likes of you and me ?
Some individual stocks you buy for the long term, others you trade short term. And sometimes, you can long a stock but only trade a percentage of the holding. You can keep it for a day or for years.
Yes, it is the same:
> with money printing,
I do not think this actually does what you thinks it does:
> […] Talk shows about stocks and news algorithms pumping stocks to the masses?
Please see the 1990s and "irrational exuberance". I live in Canada: ask anyone here above a certain age (40s) about Nortel and Bre-X.
> Are fund managers (who have clients) compared to the likes of you and me ?
Fund managers have more resources than you and me, and thus probably have better information to base decisions on. Unless, of course, you are using satellite imagery in your investing workflow:
> Currie’s prediction proved correct. As word spread that satellite images were a reliable predictor of corporate profits, a range of investment funds began buying retail-traffic data from RS Metrics. In the following years, the company expanded, tracking not just parked cars but solar-panel installations, lumber inventory at sawmills, and the mining of metals worldwide.
What "index funds" are you referring to? The S&P 500? Dow Jones? NASDAQ 100?
If you purchase a Russell 3000 index fund you are purchasing a piece in every publicly traded company in the US:
Any 'pricing irregularities' are discovered, then they will be pounced on any few remaining active investors. I recommend you read up on the following:
Probably an interesting number itself knowing what the fractional amount of money flowing through Vanguard is as a proportion of the total.
Personally, I think that as more people put their money into index funds, active funds may look more attractive as they can potentially exploit market misprices quicker than passive funds can, but that's just me.
Some people upvote or downvote because they agree or disagree. They view it as a "vote" for the opinion.
Others upvote or downvote because they thing the argument is strong or weak, or maybe because someone said something nice and positive to another person or someone said something mean or hostile to another person.
I strongly favor the second approach.
One of the early slurs was that index funds were communism (pretty daft, but probably effective in the US). The latest is this scaremongering "what if all investment were into index funds" (answered several times in this thread).
From the perspective of index fund advocates, unsophisticated investors are systematically getting ripped off and the daft propaganda only adds to the offense.
This is probably why you're picking up an aggressive preachy vibe from advocates.
The empirical data is however unambiguous and there is now a lot of it.
The reason that I'm personally an index fund skeptic is that I like to understand what I'm invested in. If you look through the S&P 500 members, there's dozens to hundreds of companies basically no one's ever heard of, and companies that I personally don't see a big future in. If index funds didn't exist, why would I take $100 of Fifth Third Bancorp or TechnipFMC when I could get $100 of Apple or Slack instead? The former is what you get when you invest in the S&P, while the latter are products I use everyday, and I feel that I understand how they make money.
If you hang around investing subreddits long enough, it starts to feel like everyone's parroting the same 5 sentences about expense ratios and diversification, with no analysis or critical thought put into what the actual investments are.
Because you don't know which one will become the next Apple or Slack and will invest before they are valued as the next Apple or Slack benefiting from all their growth. Some of them will die, but the effect on the overall holdings will be small given their small size.
You are basically investing in the idea that:
‘On average, these companies are run by people who want the company to succeed, and as long as the population of the world grows, and the middle class grows, this will make money’
Everyone could invest in index funds, and this would still be true, because if the stock price gets too low, it would be rational for the company to purchase its own stock on the cheap which would set the price floor.
The thing you should spend some time doing is deciding what your risk tolerance is and how much variance in your portfolio you can stomach. Then you can start talking investment strategies.
I would put X% in Vanguard 500 Index Fund, and in Y% Vanguard Total International Bond Index Fund.
X% should represent the amount of money you can afford not to touch during the entire economic downturn.
Y% should represent the amount of money you want to be able to cash out at any point during the economic downturn.
Another alternative to S&P-500 for putting X% in is Nasdaq-100. It has performed much better over the years, but it's significantly more tech-focused:
> The table below and the charts above display historical performance figures for both the Nasdaq-100 TR and the S&P 500 TR between Dec. 31, 2007 and June 30, 2020. Despite recent overall market volatility, the Nasdaq-100 TR Index has maintained cumulative total returns of approximately 2.5 times that of the S&P 500 TR Index.
(20xx is the year you should be retired)
> Mean reversion in finance suggests that asset prices and historical returns eventually revert to their long-term mean or average levels
The avg. 7% per year will break down into very good years and bad years. Let's say the S&P500 is already down -5% YTD and has underperformed over recent years, then you would it considered to be low, because you would rather expect the performance to increase in order to match the long-term avg. of 7%. So at this point you would happily buy in and expect mean reversion. But of course there's no such thing as perfect timing (except in hindsight) and no guarantee for mean reversion to happen.
The 4% rule of thumb was calculated to minimize risk of running out of money during the time period. 1.5% * 30 years = 45%, so an investment that simply keeps up with inflation would leave you with more than half your cash after 30 years.
And note that the stock market almost always has positive real returns over periods as long as 30 years (see William Bernstein’s book Deep Risk), so the assumption “just keeps up with inflation” is already very pessimistic.
For most people, being able to retire and never work again with 95% certainty enough, especially when tweaking consumption and tweaking side income are easy knobs to turn. No reason to delay retirement 20 years to be 100% confident. Raises the risk a lot you just die before you retire.
What is your basis for believing that the safe withdrawal rate will be less than half this, at less than 1.5%? That sounds excessively pessimistic to me.
That's very simplistic one-sided view of interest rates. If interest rates stay low or go lower, the stock prices will keep skyrocketing which balances the equation on the other side increasing your stock portfolio returns. The P/E capacity will be much higher than it is today in a perpetual low-interest-rate environment.
But there are other good dividend funds and/or individual equities.
Edit: if it helps you to invest, by all means, do it. But since dividends are mostly psychological, there is no point in limiting your stock picks to companies with a high dividend.
> a management culture that appropriately balances shareholder interest (by paying dividend)
In theory a company should invest in whatever has the most favorable risk-return profile. If it pays dividends, that means dividends are judged by management to be the best risk-return profile among all other alternatives. A company can pay zero dividends and still protect shareholders interests.
If the reason they "prefer" dividends is not because they evaluated the alternatives and decided that the risk-return profile was favorable (for the company, not for themselves in particular)), then they are acting against the interests of the minority shareholders. That may carry legal consequences or not, depending on your jurisdiction. In my country (Brazil), there are laws protecting the interests of minority shareholders. If you have 51% of a company that is listed on the stock exchange, you have significant but not unlimited power.
Also, maybe the company sees it as a risk that, in reducing the dividend, it may suffer in the short term due to the outflux of shareholders who see it as a dividend play. In that case, the risk-return profile of paying zero dividends is not favorable.
1. I did not say anything about how high the dividend is, only that it has been sustained and has not decreased for a long period of time (multiple decades). Some companies on the list currently pay relatively low dividends as well.
2. It is a heuristic, so it will definitely miss a few great companies and some companies on the list will go on to do poorly (not that any method of stock picking will be any different).
Everything else is the typical movement of any stock, that of course can be detached from reality. The thing is: people are way too focused on the dividend part as if this was the only valid way to investing.
Also note that long-term capital gains are also taxed at the same rate as qualified dividends, but can be deferred into the future. Your argument doesn't seem to advocate for the thing you think it does.
People don't regard variance as the same thing as risk, and that's why they buy lottery tickets. It's a sign the math is wrong, not that the people are wrong.
That said, modern portfolio theory and portfolio optimization is pretty easy.
Whatever you do OP, please don't put it all under your mattress.
My chips are mostly off the table right now, in bond ETFs, but we'll see if the market tanks or not. I'm quite surprised that Q2 earnings this past week was not a bloodbath.
Risk adjusted, almost independent of your risk metric, it is always horrible.
First, the urge to put money somewhere could be a problem. Examine why you feel this way - closely. It could be you're letting emotions take over and that's rarely a good thing.
Second, you didn't mention debts. If you have any, you might look at the interest rate (including government freebies) and compare that to the most likely return you'll get. If your interest rate is higher than your expected return, paying off the debt wins.
Third, what kind of reserve fund do you have? If you don't have 3-6 months of expenses in a ready cash, consider creating an emergency fund.
Fourth, if you have not maximized contributions to tax-advantaged accounts, consider doing that. If your employer offers a match, really consider that.
Fifth, avoid the temptation to tell others about your windfall.
Sixth, has someone helped you who is now in need? Think hard about it. If so, consider helping them out.
Seventh, be sure you understand the tax implications of receiving the money. How much will you owe, if anything. Make sure that money is securely set aside.
Eighth, if everything else is taken care of, think about the lifestyle you want to lead. Do you have enough money now to retire? How attractive does that possibility sound? Taking that path means taking less risk with the money.
Much like having enough in savings that you don't have to fear a few months without a job drastically changes what you'll tolerate from an employer, not having the weight of debt, however advantageous leverage might be, does grant the ability to look at opportunities large and small without the "but ..."
It may be hard to realize, especially at times like this when the market doesn't seem to reflect reality, but when investing on a long time frame the best advice is always simply to put your money in and to not try to time the market. On a long enough time frame, it will all come out in the wash.
The key, of course, is "on a long enough time frame". If you think there's a reasonable chance you might need the cash in two or five years, then you should either significantly reduce your exposure to equities like the S&P 500 or eliminate it entirely. The question then, of course, is what do you put your money into? Well, there are plenty of options. While the S&P 500 returns around 9% before inflation, you have a number of options that are lower returns, lower risk. For that, you have the entire spread from a savings account (1% right now) to short term Treasuries (2%ish right now) to various kinds of bonds. The simplest way to get, say, 50% of the reward for 50% of the risk is to have (for example) 50% in SPY and 50% in Treasuries.
Whatever you do, good luck, and I highly recommend the Bogleheads forum for good advice on any situation.
So the peaks I see now in Nasdaq actually look very scary to me. Anyway, I think if they decide to go ahead with equity, they should spread it out over a period.
This is why one diversifies. Only investing in the stocks of the country you live in is called "home country bias":
Using a football ('soccer') analogy:
Being slightly over-weight at home isn't totally bad (it helps with currency swings), but for most folks they'd do well to go international to a certain extent. An analysis for a bunch of Anglophone countries (US, CA, UK, AU):
That said, I would not make the UK stock market any significant part of my portfolio. It's an island of 0.06 billion people trying to go it alone in the world, under delusions of being a grand colonial power, while its economy has shrank since 2007. If I was trying to _grow_ my money I'd put it elsewhere. While I'm upset with recent US leadership as well, the US has a massive advantage in that it is the world's largest economy and enjoys the results of innovation that you won't see in the UK.
I gave the example of UK as UK was precisely a power in the past and lost the lead somewhere and never recovered well. I think US is sound for foreseeable future but with the rising geopolitical tension and the sort of signals coming from China, if they become stronger in the future and have the ability to influence more markets, we might see influence of US waning as well.
Do you have a typo?
The shorter the timeframe that the money is needed, the higher the allocation to bonds. Vanguard has (in Canada) a bunch of 'all-in-one' ETFs that have as their holdings other ETFs in various asset groups: Canadian equity, US equity, international equity, bonds.
Shortly after they were announced, someone back-tested their returns to determine which of the offerings a person should get:
> I analyzed hypothetical Vanguard asset allocation ETF performance over the past 20 years ending June 2019, and here’s what I found:
> The worst 1- and 2-year periods were negative for all five ETFs.* [i.e., put it in term deposit to at least try to keep up with inflation]
> The worst 3-year period was negative for all ETFs except the Conservative Income ETF Portfolio (VCIP), which holds 80% in bonds; even still, VCIP only returned 1%.
> The worst 4-year period was negative for all ETFs except VCIP and the Conservative ETF Portfolio (VCNS) [60% bonds]. But these only returned 2.2% and 0.2% respectively.
> Looking further out:
> If you need the cash in 5–9 years, VCIP or VCNS should be the only Vanguard asset allocation ETFs on your radar. Even the Balanced ETF Portfolio (VBAL) [40% bonds], which allocates 60% to stocks, returned only 0.3% over its worst 9-year period.
> If you won’t need the cash for 10–14 years, VBAL could be an appropriate choice, as even its worst 10-year return during this period was around 2%.
> If you don’t need the cash for 15–19 years, you could look at a more aggressive ETF, like the Growth ETF Portfolio (VGRO). [20% bonds]
> If you’re investing for 20 years or more (and you are comfortable dialing up your portfolio risk to eleven), the All-Equity ETF Portfolio (VEQT) might be right up your alley. [0% bonds, 100% equities]
Note: if you're looking at long time-horizons (e.g., retirement in 20 years), and you can take higher risks, does not mean you have to: you need to first determine what your goal is (e.g., how big of a pot of money you need), and then work backwards from there to determine what kind of returns are needed to get there. If you need 'only' 3% returns, it probably is not necessary to take on extra risk to chase after 6%.
Historically low bond yields: The room for rates to go lower is low. I would suggest to be careful with investing in them. If a rate hike comes eventually, both bonds (depending on maturity) and stocks (see december 2019 S&P 500) will fall. With negative real yields (bond yields - inflation), precious metals and related companies are lot more interesting. Perhaps REITs or some blend of solid dividen-paying companies. Anything that is somewhat inflation resistant.
Did you adjust your calculations for inflation?
For the S&P 500, the absolute worst-case is 58 years of not being up, I believe. 1929 - 1987.
Edit: This ignores dividend reinvestment. It seems to be 1929-1944.
How do we calculate that in the total risk assessment? For this outcome to be true, you would have had to invest all of your money in a 6 month period and then tried to exit in a 3 month period during those referenced years.
It would also assume that you are not investing at any other period in between, which is typically advice that goes hand in hand with index funds and tracking the market. In theory and all things being equal, it sounds like that is neutralized if we try to get out in the periods I mentioned above, right? This also assumes no dividends have been paid out.
It seems like the maximum risk is high since the return could be 0% in theory but it also seems like the chance of that happening being _very_ low.
Genuinely curious how you think about it and what else is missing. It definitely makes me want to learn more about how we've stabilized the economy after The Great Depression.
I cannot really gauge risk in a systematic like you'd like to.
I'm generally pessimistic, because GDP growth is low, central banks have rates in a choke hold promoting misuse of capital. (In theory many existing companies shouldn't exist. Many are unprofitable, but they get by on cheap loans. Thereby taking away resources/people from potential/future profitable businesses). The ECB couldn't even raise rates in a supposedly economic growth period.
The Fed did in 2019 while reducing the balance sheet, and it ended in a correction and lower rates and a restart of QE.
Low rates also put a lot of pressure on banks and local banks.
Economies and the world are increasingly financialized. The financial market adds little value to the real world aside from "productive" (think GDP-increasing / not consuming) lending.
Consumer loans are awful. Buying your first house/land on a loan is good, though.
Interest payments reduce economic output in the present.
Individuals spend income of the future now, and depress future spending.
E.g. interest payment of the U.S. are ~300bil/year right now ~10% of the budget.
And for many economies and governments there is no end in sight.
Ultimately this can only be solved by reducing spending (which doesn't seem likely for many governments), inflating it away, keeping rates at 0% forever effectively spending printed money, i.e. inflating it away.
Also central banks can buy assets in the open market at face value to lower yields and swallow the coming defaults (which again means inflating it away, and also sending the clear signal that everyone will be bailout, perhaps again in the future).
One aspect of this dynamic is currency demand through e.g. being an important world currency or having export surplus. Some countries can print money better than others.
When I say "inflate" I don't only mean according to CPI. If all the money goes into assets like equities or real estate, it is inflating that.
The stock market feels like a ponzi scheme more than anything.
I'm simplyfing here.
Some countries are better than others.
Perhaps a valid investment strategy would be to invest into indexes of good countries.
That felt a lot like rambling, but I hope you get some value from it.
I'm interested in your thoughts.
I'm guessing you're in the US. I'm sure you can find papers and articles doing back-testing to the 1920s, which would include the Great Depression. If you can wait long enough, things have always recovered and earned a return.
> Did you adjust your calculations for inflation? For the S&P 500, the absolute worst-case is 58 years of not being up, I believe. 1929 - 1987.
Not my calculations. That's also assuming that one has zero bonds: for most people, who are saving for retirement, the component of the portfolio that goes into fixed income rises as age approaches 65. What were bonds during that time?
Most average people don't have the stomach for 'raw' 100% equity holdings, and so bonds are often present; bonds also allow for having 'dry powder' available for rebalancing. Scenarios like these are why portfolio theory can be complicated:
For good layman treatments on the subject I recommend the works of William J. Bernstein, The Intelligent Asset Allocator, The Four Pillars of Investing, and Rational Expectations:
* https://rationalreminder.ca/podcast/108 (podcast)
* https://www.youtube.com/watch?v=haLGx8KlFvk (same, but video)
> Historically low bond yields: The room for rates to go lower is low.
One does not necessarily buy bonds for returns, but also (perhaps) to manage volatility (which is often used as a proxy to measure risk). And low bonds are not anything new:
And one has to look at the real return of bonds over the decades: yes nominal numbers are low now and were high in the past, but inflation was high in the past as well (e.g., 1980s).
I'm pessimistic about bonds because of the debt bubble (gov debt, MBSs, CLOs, corporate bonds) and low yields.
Governments couldn't stomach higher rates, either.
In the big sell-off we have seen in March everything went down together margin-call style. I guess it did lower volatility, but it also provided little upside.
Euro yields are even negative.
I don't see how any of the countries possible exit strategies could be good for bonds.
Thanks for the links!
First: 2.5 years is a ridiculously short investment timeframe. I have sneakers older than that.
Second: perhaps it would have, but there was no way you could have known that ahead of time. Yes, from 2010-2019 the US markets (often measured by the S&P 500) has seen high returns. Now go back to 2000-2009 and see how things faired.
As a Canadian I often see often asking "why invest in Canada at all? why not go all-US?". This is often asked by people younger than 35 or so, who haven't looked up a bit of history, and only know about the last few years (look up the term "recency bias"). There have been times where Canadian equities outperformed the world, and also when international has outperformed the US:
You can make a good decision with the information you have available, but the result still be disappointing. See the video "How to Evaluate Your Investment Decisions":
However, one adjustment if you have a bullish outlook is to reduce the delta from 30 to 20 or 10. Premium would go up and assignment is more likely.
OP, do it and report back :-) Even if you don't have any options experience, I am sure any broker will be happy to give you level 4 options (or at least level 2 which is what you need for cash secured puts) if you deposit $450k capital!
A last word of caution: maximized returns come with maximized risks
Helps that the first sublink in there is bogleheads :)
Go to a fee-only financial advisor something like this https://www.feeonlynetwork.com in your state and take their advice that is a fiduciary. It will cost you a few hundred dollars but that is entirely worth it, we don’t know your whole tax and risk situation.
The government is printing an awful lot of money right now.
Keeping your money in cash isn’t a guaranteed return if inflation goes up significantly. You’re much better having it in assets with intrinsic value. (Stocks, real estate, etc)
I would suggest investing the money over the course of a couple years into an index fund, probably S&P 500 or total market.
Even if you invest at the worst possible times (right before crashes) you’ll come out way far ahead of leaving it in cash.
I don't like this argument, because it seems to imply you would indefinitely leave it in cash. In this hypothetical situation, where a market crash is impending, and individual could invest at the bottom and make significantly higher returns than investing prior to the crash.
This of course goes without saying, "you can't time the market", but it's a bit dishonest to indicate that you can't beat the market here.
Depending on what kind of changes OP needs to see, they may not feel comfortable investing for years or even decades. And those years add up to many missed dividends and price appreciation.
It sounds like your asset allocation is currently:
- $50k "index fund" (S&P 500?)
- $150k land/home
- $200k industrial real estate
- $450k cash
I would suggest you start at Asset Allocation  and as an example read through the "Three Fund Portfolio" . Before this cash, you were nearly 90% real estate. At the very least, you can outperform "cash at a bank" by at least keeping that $450k in a Vanguard or similar Prime Money Market Fund . So as you think about what to do, take the 1.3% or so :).
My random suggestion here is diversify in to a few different equities areas. US, international, etc. I mostly have a few 'general market' funds, but a couple that are focused on tech companies, and they've outpaced the general market over the last several years.
Keep some in cash - ally and others have around 1% return on cash. not great, but it's something. keep maybe $80k or so in there.
put some in general 'broad market' index funds - total market or S&P or something - maybe $150k in that.
find some international funds - put $80k in that.
pick a precious metals fund - put $40k in that. Alternative, take some of that and put in to crypto if you've got an interest in that.
This would leave you with around $150k. Consider some more real estate - perhaps just land and let it appreciate, or a small house you can use as a rental, or more industrial. Or just hold that in cash for a bit longer while you wait and see what happens. You already have $200k in industrial real estate. If you're comfortable with that, and you're getting a return that from area, increase your exposure there.
Watch the investments - readjust portions to your comfort level - perhaps every 3-6 months - as things change. Keeping cash will give you some cushion if there's a downturn, either to weather a storm, or give you some ability to throw a bit more in to a specific market.
There's no rule that says you have to put it all in one index fund right now. You're in a fortunate position, and can afford to take this slowly, and spend time learning more about these various instruments before blindly throwing in hundreds of thousands of dollars.
Part of that learning can (and probably should) be meeting with a fee-only advisor who can review your situation in more detail and give you a more comprehensive set of recommendations more suited to those aspects we can't tell from your post (risk tolerance, life goals, etc).
Another good book to read is “A Random Walk Down Wall Street”.
I firmly believe that only when you are clear on your goal and having invested in oneself and having thought of everything else should you get to the problem of whether a particular etf is better or whatever.
What are possible answers to this question you're looking for?
The expected answer is mainly about what risk you are able to tolerate, i.e. how soon you will need the money back again.
- how many years until you plan to retire?
- how much do you need in retirement? How much do you expect to receive from social security/other income sources?
- do you have/are you planning to have kids? Are you going to pay for college? If yes, how much might that cost?
- are you expecting any other big expenses in the future? e.g. wedding, down payment on a house
- are you planning to take a sabbatical at any point? If yes, for how long and how much do you expect to spend?
Also "minimize risk" is not consistent with "maximize return" so that's not even a valid answer. Someone might say "I wanna put it all on Black", and someone else might be saving for their child. Lots of really varied answers are possible.
Your goal could be to live on an island mansion in 20 years.
Use this money to max out all tax advantaged accounts available to you (401k, IRA, HSA), and invest the rest in a brokerage account. When in doubt, invest the money in a target date fund at Vanguard or Fidelity that most closely matches the date you plan to start withdrawing from the account. A total world fund/ETF, like VT, is also a fine option.
Long term VTSAX or FZROX are probably good places to hold most of that. You could keep $30k in cash for emergency fund.
The other comments suggesting the bogleheads forums are also right. Most of the other comments are a total disaster I’d be cautious about following any of the advice here (it’s also surprising to me how bad it is).
I also personally do some individual stock picks of companies I know in the field I’m in, but that’s still quite risky and not advised unless you like this kind of thing (Amazon, Apple, PTON, Nvidia, previously tsla). I hold long term for capital gains.
Long term index funds are the best bet, even if the market goes down you can wait it out if you’re young. If the current conditions scare you, you can “dollar cost average” entry which just means buying $X amount each month/week until you’re fully invested. Long term this kind of thing doesn’t matter though.
Are you looking to use the cash soon? If so you may want to not invest it. Being forced to withdraw is where the problems come from.
Don’t listen to anyone on here about bitcoin. That’s gambling, if you want to do that know it’s gambling and expect to lose everything.
In 2000 investors were screaming at buffet because he was sitting on billions in cash. They were saying he had lost his touch, he should pay a dividend etc.
Then in 2001 the crash happened and he was able to get some great deals.
The time to buy is when everyone else is saying dont buy, things have fundamentally changed.
The fact that a lot of people think this gives me confidence that it isn't going to happen anytime soon. I'll get nervous when the rhetoric is "The market is looking great for years to come!", like back in 2005/2006.
Figure out how much that is, and leave it in cash or other extremely safe assets. This is a highly personalized number and it's hard to give good advice for it.
For the rest of your money, you now know that you'll basically never need to sell it. The only thing that matters here is the total return over thirty-plus years. This is broadly-diversified stock index funds - the standard boglehead advice works great here. There's always a risk that today's stock price is the best you'll ever see, so the historically superior plan for how to get money in the market is to just dump it all in and ignore the current price.
So yeah. Enough cash to make you "safe", rest in the stock market and ignore the current price and any price movements over the next three decades.