Hello all,
I greatly appreciate the dialogue from members on MFO as I learn from each of you on a daily basis. I was hoping to get your advice. With the market turmoil, I reduced my stock fund holdings % in my 401K account down to about 50%. I did this two weeks ago. While I was able to avoid some of the carnage, I am now faced with needing to develop a strategy for increasing my stock holdings back up to their target allocation. I am 10-15 years away from retirement and my target allocation is 75% stocks and 25% bonds(38% S&P index, 16% small cap index, 21% international fund index, 20% short-term U.S. Treasury security index, 5% Barclays Capital U.S. Aggregate Bond Index).
I wanted to ask your advice on a strategy for gradually increasing my stock holdings back to their target allocation. I am thinking about increasing this gradually -- perhaps from 50% to 60% and then 60%-70% and finally 70-75%. I could make these moves on a weekly or monthly basis. Would value your advice on whether this makes sense or if you would suggest a different approach. Also, please let me know if you have any thoughts on my asset allocation. I am a member of the governments thrift savings plan so I can only choose their index funds.
thank you!
Michael
Comments
I was faced with a similar question, when I recently retired and the 401K funds were shifted from my employer to Schwab where I control the rollover account. I purposely chose not to invest the equity portion...which turned out ok to this point, as I moved 35% into equities yesterday when the market was down 10%.
Your choice is to put it in all at once per Ted's advice....which is sound if you have 10-15 years until retirement, or to invest in increments. Frankly, if you break it down, don't break it down too finely...1/3 or 1/2 at a time.
But you need to get it in play being that far out from retirement. If you see 2 big down days in a row, hold your nose and put the order in.
Just curious...are the funds taxable when you ultimately withdraw them?
Can I ask how you are allocated with your funds and where you added? thanks!
I'm about 75% equities in a taxable account, and 40% in an IRA rollover, but with additional monies to be put into play on the equity side in both as I described. I tend to shoot for 65-75% equities, but am flexible depending on the environment.
It's a bit more complicated than that, as those percentages include money in bucket 1-type funds for near term spending in both accounts. You may learn more about that as you near retirement. I'm a big fan of that type of mental accounting, and used the last 6 year run-up to fund that cushion. It makes entering retirement a bit less stressful.
What I recently added money to is in Scott's thread..."what are you buying", etc.
As an FYI...If I had things to do over again, I would have started earlier with my income sleeve consisting of dividend paying stocks. Even holding things like JNJ, PAYX, AEP as examples for the last 5 years, I have been astounded with the power of compounding dividends....and when stocks are down, is the perfect time to buy the dividend payers. That's a hint, BTW.
press.
So I sold some SCMFX, bought some FPACX. I sold some RWGFX, bought some AUXFX. No one went broke paying taxes and no one fretted about not making enough money in the market. Au contraire, I still feel like puking when I remember how stupid I was in 2000-2002 and will never get over it.
Hindsight is always 20-20. No one can predict the future. Make decisions in the present and be at peace with yourself they are the right ones. Don't let anyone tell you 5 years later you made a mistake. If they do, slap them.
Lesson for investing. Lesson for life.
I'll second this....
"Hindsight is always 20-20. No one can predict the future. Make decisions in the present and be at peace with yourself they are the right ones"
...and this.
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Most of what I own are in individual names, but there are also some mutual funds and a couple of other things, like RIT Capital Partners (http://www.ritcap.com/our-team)
For me, investing is largely a mixture of income and growth, with names that I find attractive/fall into themes that I'm interested or have other aspects that I find compelling. As I've noted before, I particularly like tangible assets (railroads, infrastructure, real estate) and needs (healthcare being a core focus there, along with things like Ecolab.)
There are large dividend payers (Starwood Property, Blackstone, etc), medium dividend payers and small dividend payers that will hopefully grow the dividend over time.
I do feel very strongly about what I consider a portfolio of best ideas. Oddly, I find owning individual names that I have a strong thesis about less stressful than owning funds because there is that connection and thesis.
Personally, while a day like Monday was disappointing and a bummer, with mostly individual names that I consider a collection of "best ideas" (and my best ideas are not going to be someone else's and that's fine), I wasn't like....
.... because I don't plan on selling these names or trying to time them (and a number of them I see as potentially multi-decade holdings.)
I am younger than most on the board and am heavily stocks. I do not recommend that those who are in retirement or nearing retirement allocate in the manner that I do, although I do think there are holdings of mine that are conservative, including Ecolab (ECL)
But yeah, I agree with what Press said: "Your choice is to put it in all at once per Ted's advice....which is sound if you have 10-15 years until retirement, or to invest in increments. Frankly, if you break it down, don't break it down too finely...1/3 or 1/2 at a time.
But you need to get it in play being that far out from retirement. If you see 2 big down days in a row, hold your nose and put the order in."
Adjusting one’s stock allocation based upon the upward and downward movement of the market can indeed be a task.
Columbia Thermostat Fund (CTFAX) adjusts its stock allocation based upon the upward or downward movement of the S&P 500 Index. Its fact sheet will provide the details on how it goes about these adjustments and is linked below for easy reference. It is the only fund that I am aware of that does this.
One of the things that I do is take a constant say 20% (you might wish to use a higher percentage) and add it to what the thermostat fund calls for an equity allocation to arrive at a target equity allocation for my own portfolio. Based upon a closing low of 1868 on August 25 calls for a 35% allocation to equities in the fund and when I add the constant say (+20%) I wind up with about a target allocation in the 55% range which is within 5% of my maximum equity allocation of 60%. Since, I wanted to leave some room for the fall rally position that I usually make I did nothing to increase my overall equity allocation at this time other to buy around the edges thus rounding out some equity fund positions. Currently, I am a little back of fifty percent equity. I will do an Instant Xray analysis over the weekend and will have a better idea of where my equity allocation bubbles. Perhaps, I'll may make some adjustments after doing this.
https://www.columbiathreadneedleus.com/content/columbia/pdf/LIT_DOC_3C97987F.PDF
In addition, I follow a seasonal investment strategy where one raises their allocation to equities in the fall and reduces the allocation come late spring. This strategy is known, by some, as Sell In May and Stay Away Until St. Legers Day. I have also linked it below for your easy reference.
https://en.wikipedia.org/wiki/Sell_in_May
And, then you might wish to become schooled on some technical analysis charting. I have linked a chart on the S&P 500 Index and the indicators that I use to help set a small part of my equity allocation.
http://www.barchart.com/chart.php?sym=SPY&style=technical&template=&p=DO&d=X&sd=&ed=&size=M&log=0&t=LINE&v=1&g=1&evnt=1&late=1&o1=&o2=&o3=&sh=100&indicators=SMA(50,);SMA(200,);PCT(20,0.01,10066431,3227936511);SMACD(12,26,9,16737792,10053375,13421721);MFI(14,255,100,39168,16711680);SRSI(14,6710886,20,255,16711680)&chartindicator_7_code=SMA&chartindicator_7_param_0=50&chartindicator_7_param_1=&chartindicator_8_code=SMA&chartindicator_8_param_0=200&chartindicator_8_param_1=&chartindicator_9_code=PCT&chartindicator_9_param_0=20&chartindicator_9_param_1=0.01&chartindicator_9_param_2=10066431&chartindicator_9_param_3=3227936511&chartindicator_10_code=SMACD&chartindicator_10_param_0=12&chartindicator_10_param_1=26&chartindicator_10_param_2=9&chartindicator_10_param_3=16737792&chartindicator_10_param_4=10053375&chartindicator_10_param_5=13421721&chartindicator_11_code=MFI&chartindicator_11_param_0=14&chartindicator_11_param_1=255&chartindicator_11_param_2=100&chartindicator_11_param_3=39168&chartindicator_11_param_4=16711680&chartindicator_12_code=SRSI&chartindicator_12_param_0=14&chartindicator_12_param_1=6710886&chartindicator_12_param_2=20&chartindicator_12_param_3=255&chartindicator_12_param_4=16711680&addindicator=&submitted=1&fpage=&txtDate=
You can click on the indicators and change the settings and also read a little about how each one is used.
In addition, you might wish to explore the Leadership Strategy that Ron Rowland publishes an up date for weekly. For easy reference I have linked it below for you. I look at where money market falls within the pecking order as a clue to raise or lower cash. Currently, it is at about the mid point so some caution might be warranted if you are short in a cash position in your overall asset allocation. In addition, it will help find the faster moving current(s) within the equity markets.
http://investwithanedge.com/leadership-strategy
In closing, I move my equity allocation form a low of about 40% to a high of about 60% from time-to-time based upon how I am reading the market. Currently, I am position around 50% equity and have not yet loaded for the anticipated fall rally. I am thinking third quarter earnings are going to disappoint and with this we are most likely looking at another pullback as a set up for the traditional fall stock market rally going into the fourth quarter.
I wish you the very best with your investing endevors as you seek ways to help throttle a moving equity allocation.
Old_Skeet
No particular order:
1. Starwood Property (STWD) Somewhat dull, excellent management, not going to be a home run ever but high income that I have a degree of confidence will remain stable and grow. Will benefit from rising rates and the presentation on the company's website has outlined how much they will benefit.
2. Ventas (VTR) Has been obliterated, but high-quality healthcare REIT that is somewhat cheaper in the literal sense now after they did a spin-off. I'm not against the major names in healthcare REITs, but feel Ventas is particularly high quality.
3. Kennedy Wilson (KW). Not much of a yield, but interesting integrated real estate company (not a REIT) that owns real estate and provides services (auctions, etc.) Somewhat volatile. Famed investor Prem Watsa's Fairfax Financial had a large stake in Kennedy Wilson (although I believe a significant amount and possibly all of it is convertible preferred) as of recently, I'm not sure what the stake is at this point. From the end of 2014 letter: "We have invested $629 million in real estate investments with Kennedy Wilson over the last five years. Through
refinancings, sale of some loan portfolios and gains on hedging contracts on Japanese yen, we have received
distributions of $465 million. Our total net cash investment in real estate investments with Kennedy Wilson is
therefore now $164 million, and that investment is probably worth about $350 million. We have yet to sell though,
while our cash flow return of 11.2% is very acceptable. Also, we continue to own 10.7% of Kennedy Wilson
(11.5 million shares): our cost was $11.90 per share, and the shares are currently trading at $26.19."
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4. Equity Lifestyle Properties (ELS). Sam Zell chaired REIT that is heavily into RV/campground/retirement communities. Lots of waterfront/near water land. Compelling (while not everyone is going to be into RVs, where the land is is the thing) but not cheap at all and not a great dividend. Still, unique and worth having on radar.
I'm trying to post the rest of this but it's not letting me, I keep getting an error.
Scott, I'm quite intrigued by your discussion of real estate investments. You clearly know this area well. If I'm somewhat limited in the amount of capital currently available I'm wondering if it might be better to with a REIT fund vs. individual names. Are there specific funds that you like a great deal in this area? If not, I can do some research on the names that you list above and perhaps just buy small positions across a few stocks. I'm also reading up on Ecolab based on your earlier posts. That also looks quite interesting. thanks so much again everyone!
Good article on dividend payers in Morningstar today -- http://www.morningstar.com/cover/videocenter.aspx?id=712994
but note that since you went to 50-50 because you were nervous it may mean that 75-25 is not truly for you and you should consider the classic 60-40
I think my issue - and I emphasize that this is a me thing - is that I don't want a lot of retail and I don't want apartments. The latter is more an instance of "at this time" and the former is more of a long-term view. I've thought for a long time that - in terms of retail - the highest quality and most innovative operators will succeed. I also have no interest in hotel REITs.
I think "dime-a-dozen" mall operators will struggle or go. DDR - which was obliterated in 2008 and is still nowhere remotely near its pre-2008 levels - is an example of what I don't want. Simon Property took its strip malls and spun them off into a different company. We are overbuilt on retail in this country and one of the reasons (among many) that I've never really been enamored with the Sears bull thesis.
"Consider this: The number of enclosed shopping malls with a vacancy rate at or above 40% – the point at which malls typically enter their death throes – has more than tripled since 2006. Nearly 15% of all enclosed malls are suffering from a vacancy rate between 10% and 40%, according to Green Street Advisors" (http://www.wallstreetdaily.com/2015/03/11/mall-reit-simon-property-group/)
I like Tanger Outlets (SKT) due to management and due to the fact that people like the high-end outlet concept. Go to one of these high-end outlet malls on a weekend and they're jammed. Go to one of them on a particularly busy period (when people are doing back to school shopping or Christmas shopping) and they're a mob scene. At least that I've seen.
General Growth (which I have exposure to via Brookfield Property) and Simon (SPG) are fine, with the latter also having a significant portfolio of premium outlets. So, I'm not a fan of malls. I do think that some large, quality operators will innovate and continue to succeed, but I really, really don't want much exposure to malls and I don't want strip malls/dime-a-dozen malls.
Retail Opportunity (ROIC), which I mentioned above, is somewhat different from the fact that it is retail, but with need-based anchors (drug stores and grocery stores), which I think gives that some level of defensiveness.
I think apartments in major cities are a compelling investment with high barriers to entry and people have to live somewhere. That said, I don't feel comfortable investing in apartment REITs with apartment rents at absolute record highs that don't feel terribly sustainable over the long-term. I like things like Equity Residential (EQR), but I have no interest in them at these levels. Again, longer-term I think quality apartments in major cities are great, but they'd need to come down quite a bit to get to an interesting entry point.
I don't own it, but I'm slightly interested in things like Lamar Advertising (LAMR), a REIT that is basically outdoor/indoor advertising spaces. I do think that with the rise of mobile phones, people who are waiting at the airport and elsewhere will have an increasingly larger level of interactivity with advertisements on a daily basis. Their website is pretty ridiculous, you can literally see every advertising space they own. I'm not looking to add to much of anything right now, but I may explore this further. There are only a few major billboard companies and those few enjoy the majority of market share. Also, regulations may limit new competition. This wasn't a REIT until a year or two ago. The real big problem here in the short-to-mid term is that it is at its core .... advertising. In a 2008 situation, this will get obliterated. Longer-term I do think outdoor advertising may become a more and more compelling space as there is more and more interactivity due to smartphones - someone's sitting at an airport and they can scan a cereal poster with their phone for a coupon and when they use their mobile wallet to buy the cereal the coupon will already be there. We're not there yet, but I think it's an eventuality.
Not a fan of hotel REITs not because, I mean, look at 2008. Many of these companies bought right into the top and not only were the shares rocked, many either cut or eliminated dividends, with some not bringing dividends back for years after - see Strategic Hotels and Resorts - while that is now entertaining a possible sale, it was $23 in 2007 and $1 by 2008 and never reinstated its dividend. Are hotels in major cities interesting in terms of barriers to entry? In theory, but geez, these are economically super-sensitive.
I like high quality office space in major metropolitan areas. Brookfield (BPY, or BAM if you want to go with the parent if you don't want to deal with a partnership) is an example. Vornado is a great example, but I think a lot of REITs ran up to a silly degree earlier this year because of a hunt for yield. Vornado's move towards $120 was way overdone and $78-82 is more fair value.
As with healthcare in general, I think healthcare REITs will continue to do well and a number of names have been unfairly taken lower. I like Ventas (VTR), but HCP, HCN and Omega Healthcare are other options. I like Industrial/warehouse, although I don't think there's tons of names that grab my interest.
Triple Nets (WPC, O) have been taken down to points where they're compelling.
Certainly, in the shorter term there's a good deal that depends on the Fed rate hike and if the Fed does hike rates in September or December you may get a better opportunity for income names.
As for income names, Pipelines have been unfairly obliterated by the combo of interest rate fears and concerns over anything oil-related. Inter Pipeline (IPPLF) just reported a record quarter and is down considerably. Quality MLPs (EPD, MMP) are down enormously and I just don't think the state of the business for these companies suggest the declines that have been seen.
As for Ecolab, that's absolutely never going to be a home run. What I want is something that I think offers a high degree of consistency and whose business provides a need in both good times and bad. It's raised the dividend every year for 30+ years. The water aspect of Ecolab (ECL) is a core element of why I find it attractive, but the company works for me on a number of levels - as for hygiene and sanitation, hospitality/restaurant and other businesses have to maintain standards in good times and bad. (http://www.ecolab.com/about/our-businesses.) Again, I'm not looking for a home run with Ecolab by any means, I'm looking for something that I think works for a number of themes and I think will be consistent and relatively boring over the long haul.
Sounds like small cap and S&P are available option in the menu. https://docs.google.com/presentation/d/1C37CJypoxHWHB09e3g25ewOGjP83wDZhj5j6tlrLJoA/edit?usp=sharing
S&P 500 can used in place of QQQ here https://docs.google.com/presentation/d/1Ua-R53o7c588nUr705hY4YaBEcG1qOrNvtonQIwpVws/edit?usp=sharing
Small cap in cash since May : https://stockmarketmap.wordpress.com/2015/05/05/model-with-sell-in-may-component-goes-to-cash/
QQQ in cash since Jan 20 : https://stockmarketmap.wordpress.com/2015/01/19/market-map-allocates-to-cash/
"was able to avoid some of the carnage"
"your advice on a strategy for gradually increasing my stock holdings back to their target allocation"
"Also, please let me know if you have any thoughts on my asset allocation."
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Ten weeks ago U.S. equity markets were sitting at or near record highs, so if you bailed than it was a precient call. After a 6-year bull market in equities (dating back to March '09) you chose the exact moment to reduce your risk exposure.
If you bailed more recently due to the increasing chaos (mainly over the past 2 weeks) than that's a very short time-frame in which to be considering reallocating back into equities. As others have said, it's impossible to make these kind of week-to-week calls with precision. If using open-end mutual funds, you'd probably run into trouble with frequent trading restrictions as well.
Ted was correct in suggesting that if you have decades until retirement it's best to take a deep breath and stay at your previously appropriate allocation. For me, up until about age 50, that was 100% in a good solid global equity fund.* In hindsight, I'm happy I didn't sell it and move to bonds or cash every time the markets swooned. I'd never have selected the "correct" time to re-invest and would have damaged my prospects for a comfortable retirement.
As you near retirement it does get a bit more complicated for two reasons: (1) your investment time horizon shortens significantly and (2) you likely lose the stabilizing benefits of dollar cost averaging that you enjoyed during your working years. Here, you'll find plenty of spirited debate about how best to allocate during those later years. But ... that's a different subject than what you seem to be inquiring about.
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* Note: 100% invested in an equity fund is not quite the same as 100% invested in equities. Most of these funds do maintain a bit of exposure to cash, bonds or alternative investments.