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Investment Advice - hedgeable, or other ideas?

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bananafish
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Investment Advice - hedgeable, or other ideas?  Reply with quote  

Any thoughts on managed portfolios?

After several conversations with a Merrill Lynch "advisor", I have come away with the impression that these guys do not have a secret sauce, but cost plenty of fees. Having significantly more income than ideas on how to spend it, I'm looking for some savings advice and a review of how I'm doing things. Your comments would be appreciated. (And I'm realizing that I'm really coming to you with "good problems to have".)

I went with Hedgeable for now, but I'm not convinced this is the way to go (vs. Betterment etc.).
Post Sat Oct 24, 2015 12:18 am
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oldguy
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quote:
"advisor", I have come away with the impression that these guys do not have a secret sauce,


I think you've got it, there is no secret sauce. Very Happy Market planners, advisers, traders, have 100s of ways to 'beat' the market - charting, elliot wave theory, fibonnaci ratio, stocastics, breakaway patterns, head & shoulders formations, cup & saucer, yada. And after you have picked a direction, you can select a risk level - options, derivatives, futures contracts, to apply leverage to your chosen direction. But all of those tools have one thing in common, they are based on market history, ie the theory that the market patterns will repeat. But that isn't true - tomorrow's market is based on something that hasn't happened yet - and no one knows what that is.

If there actually was a way to predict the future, the 100s of methods wouldn't be necessary, it could be written in a single page and we could all use it - except that would be self-defeating cuz we would all buy/sell the same thing.

Actually, it is liberation to grasp the fact that the market cannot be timed or predicted - that knowledge frees you to quit 'predicting' and simply invest.

Fact: Only 15% of professional fund managers beat the market - and it's not the same 15% every year. So you are very likely to be following one of the 85% that is NOT beating the market. The generic market has an average longterm return of 11%/yr. The most successful investors are the ones who simply buy the market (the SP500 Index Fund) from a low cost no-load provider (Vanguard or Fidelity) and have the patience to wait 30 years. Buy incrementally, never sell, just accumulate. It's not exciting ( like corn futures or writing covered calls) but it makes you wealthy.

Eg, $5000/year invested at 11%/yr for 30 years is $1,100,000. You can factor that to whatever your goal is - if you want $2.2M, invest $10,000/yr - if you want $4.4M invest $20,000/yr, and so on.

Here's a site you might like - pick a few 30-yr-blocks of time and see how close it ws to 11%/year.

http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html#.Vir91Su8k3h

Looks like the most recent one, ending in August, was 10.75%/yr.
Post Sat Oct 24, 2015 3:43 am
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bananafish
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quote:
Only 15% of professional fund managers beat the market - and it's not the same 15% every year. So you are very likely to be following one of the 85% that is NOT beating the market.


Well, you have a .85 chance if you pick randomly.

You're right about the historical returns, but inflation-adjusted, we're down to an annual 7% (investopedia.com). Either way, the question is, what is better.

My other investment is real estate. 18% ROI p.a. since I bought the rental place 5 years ago. And yes, that very much depends on the market.
Post Sat Oct 24, 2015 1:02 pm
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oldguy
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An 85% chance of failing?

quote:
You're right about the historical returns, but inflation-adjusted, we're down to an annual 7% (investopedia.com). Either way, the question is, what is better.


Yes, the general longterm market is 11%/yr raw, adjusted for inflation it is about 8%/yr. Whichever return you like to track,use the same metric for comparison purposes - eg, if you use 8% for the market, use - 2% for CDs.

With my single family rental houses, I continually refi them whenever there is equity. That pushes my Return On Equity higher. Eg, if I have a $200k house with $20k equity, and the house appreciates by $15,000/yr my ROE is 75%. And my cash-on-cash is close to zero, ie, my rental income is close to my loan servicing. Whenever the ROE gets lower and my equity gets higher, I refi. One house is on its 4th mortgage in 30 yrs. I sometimes put a large enough loan on one house tocause it to go upsideown,but other houses balance the cash-flow. That way I don't have to refi as often.

I always use 30 Fixed Rate loans, no VAR, no balloons, no designer loans - since I am investing the cash-out equity, I compartmentalize all of my risk on the investment side of the eqn. And I keep my money source safe, locked rate for 30 yrs, no surprise rate hikes, no lump sums coming due at awkward times.

I've found that over the years, a portfolio of RE and stocks makes a good diversification. As always, "risk and return are directly proportional". Some folks insist that houses are 'safer' than stocks cuz they can 'see' them - but don't be deluded. In all cases, it is important to identify and quantify risk - and then manage the risk.

In my securities accounts, I manage risk 'top down'. Ie, I have a stock fund and a bond fund. If I want to increase my risk, I move the top mix closer to 100%/0%. And if I want less risk, I move toward 0%/100%. Eg, I never try to increase risk by buying junk bonds - instead I keep 'quality' bonds and adjust the top-level mix closer to the 100/0 mix.

FYI, the rental houses did well for the 40 years that I was a landlord - but the seed money taken from the houses and invested elsewhere did even better. Eg, $50,000 invested at 11% for 30 years is over a million - as you know, it doesn't take too many refi's to exceed $50k, and scattered over 40 years, it grew faster than the houses themselves.
Post Sat Oct 24, 2015 2:56 pm
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bananafish
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Basically you're leveraging your real estate. Overall, sounds smart to me, if you are okay with having more exposure to the stock market.

I have a rental property that is almost paid off. I could now refinance it and take out, say, $100k (it's worth about 180k). 100k is the max. for non-acquisition debt income tax write-off. That's my concrete choice - and I reckon I have to do this before paying it off completely.

However, I think that I'm not happy with more exposure to the stock market - I see risk of another crash over the next year or two. 35% of my total assets are in stocks and funds, and 48% of my equity. I could reduce that risk, of course, but I think it's probably not going to be high enough to provide appreciation to match the costs of the refinance. I am a little annoyed at myself for paying off the loan so quickly (it was at 4.375%), to be honest.

The best would probably be to purchase another rental property in the same city and have it managed, but I'm thinking I lack the time to pay attention to that sort of deal right now. Also, somewhat risky because I'd be investing in the same market again. I guess, if I wanted to do that, I could put up the existing property as collateral if I needed to, so overall, it doesn't matter if I refinance it or not.

I'm 37. I guess I'll max out my 401k contributions before doing anything else. But, I'd be interested in objections to my reasoning here.
Post Tue Oct 27, 2015 2:36 am
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bananafish
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And yes, you're right. Most people probably overestimate the returns and the safety of real estate. But even if I take the new roof into account that I'll need in 30 years, it's a very nice deal for me.

The house I'm living in, probably not so much. If I keep it once I leave town, then only because it's mortgage is at only 3.1%.
Post Tue Oct 27, 2015 2:41 am
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