Looking for General Investment Advice
Ok, so as anyone that has read the site frequently knows, my wife and I are 100% debt-free. Thanks to living a relatively frugal lifestyle, and with major help from our unique rent-free situation, since paying off our student loans we have been able to save a considerable portion of our income. However, knowing what I know about the economy (both nationally and world-wide) and the markets, any sort of investment plan with said savings has been sorely lacking.
So what I'm looking for is not specific "short this stock" kind of advice, but more general advice to get me headed in the right direction with my money. Obviously I'll be setting aside some safe amount in some plain-vanilla accounts, maybe CDs or something, so I have some cash for emergencies or a job loss, and we're putting away the usual (enough for a company match) into the 401(k). However, I still have significant room to 'play' with the rest of it, and I want to make it work for me.
So what do the seasoned investors around here recommend? What kind of mix between different risk levels is reasonable? Should I put some into foreign currencies, some into index funds, and some into the really risky stuff like puts and shorts? Also, where do I even go to get started on the more complex stock trades? All I've got right now is the generic Fidelity account, which only seems to allow straight buying and selling.
Any advice on which way I should go with my research is appreciated.
So what I'm looking for is not specific "short this stock" kind of advice, but more general advice to get me headed in the right direction with my money. Obviously I'll be setting aside some safe amount in some plain-vanilla accounts, maybe CDs or something, so I have some cash for emergencies or a job loss, and we're putting away the usual (enough for a company match) into the 401(k). However, I still have significant room to 'play' with the rest of it, and I want to make it work for me.
So what do the seasoned investors around here recommend? What kind of mix between different risk levels is reasonable? Should I put some into foreign currencies, some into index funds, and some into the really risky stuff like puts and shorts? Also, where do I even go to get started on the more complex stock trades? All I've got right now is the generic Fidelity account, which only seems to allow straight buying and selling.
Any advice on which way I should go with my research is appreciated.
Comments
Using me as an example, the money I know I'll be using to upgrade to a bigger house in 2010, I'm currently keeping 75% in cash (well, CD). If the market gives me more room for hope (i.e. if it drops 10-20% tomorrow), then I might move to 50%, but given the short-term nature of our needs, I am not going to invest more than that. This, I think, is considered fairly risky and aggressive, but that's my nature.
I usually just invest in the stocks of individual companies that I think will have a good chance of doubling in value in a 2-3 year time frame. Any money I don't need for 20 years I try to keep fully invested. Again, aggressive.
Because of the nature of the market, I have been shorting home-builders (covered) and lenders (still riding them down), but I generally don't like to short.
I've never played with options.
Is this is 20-year money, or something you will need sooner?
1) Long-term 401(k) - keep on chugging, getting the company match, increase it slightly once in a while, don't touch it.
2) Short-term emergency fund / general conservative investing - CDs or something relatively safe, for things like last-minute plane tickets in the event of a family emergency, or a new car if ours spontaneously explodes, etc.
These two options make up probably 70% or more of our available funds.
With the remaining 30%, I'd like to do something more aggressive. It's money we can afford to lose. I just feel like all of this knowledge about what's really going on (dollar dropping, recession likely coming, lenders imploding) is going to waste if I don't at least try to "put my money where my mouth is." Obviously the potential for profit is pretty high, so why not go for it?
One thing I will clarify is that I'm not interested in any kind of leveraged stock nonsense. I won't get into anything where I can lose more than I put in.
My only money-where-your-mouth-is play that I could figure out was shorting what I talked about earlier. It may be a bit late to dive into that, even if you had the stomach for it.
There are probably other plays, but I'm not sure what they are.
Something you should be clear about - even if you are confident in a US recession, that doesn't mean that the stock market will follow. They often do not go in the same direction. There will certainly be sectors that will do just fine in a recession, and there are also some good foreign companies that might warrant an investment.
One play I've heard is to invest in things rich people want. The rich always buy, recession or no.
The other is to invest in staples that everyone needs regardless.
I haven't really done that. I'm still medium term bullish, and have been investing in companies I know are solid with high upside, and have also leaned towards more conservative, cash-heavy companies that might capitalize on opportunities that lots of cash might provide, like Berkshire.
If you figure out a negative housing play besides shorting, let me know.
I've heard this several times lately. There are things that everyone buys regardless of how little discresionary money they have -- toothpaste, toilet paper, etc. The companies that make those (Proctor & Gamble, Kimberly-Clark, etc) usually do well as "defensive" stocks.
Note: I am not a financial expert or even financially savy. Just passing on what I've heard.
But again I'll point out that I'm a total n00b when it comes to all this, so I could be way off base.
There are still some lenders out there that might have some solid downward risk. I'm still holding 2 that were heavy into subprime and Alt-A, and have gone down some but I think I can still squeeze another 20% out of them.
Market Ticker has taught me a lot, though at times I still struggle with slang terms and abbreviations. Also, it's been very helpful for me to have a 'game' account with fake money that allows me to make mistakes and do some trial-and-error stuff without draining my real bank account. The one I use is set up at Investopedia, though someone may have a better suggestion. That one allows trading on the short side, which so far has been more 'profitable' for me.
The guy who has a system that I know works is at http://www.philtown.com he's a true urban legend. People who I know have used his really simple system and made money.
What do you think; Fact or Fiction?
Ever heard the story before?
A good aggressive investment for money you can live without is peer-to-peer lending at http://www.prosper.com. I've got close to $5,000 in there right now making 22%, although I expect it to go down to 15% or so after defaults happen. Many people are scared to put too much money in here since it's such a new concept, but I'm all for that since it will just increase the returns for me. Again, it's not some place for a secure retirement fund, but rather money where if you lose it all you won't be too heartbroken.
Since you seem to be pretty good with statistics, I'd recommend playing with the historical performance page (http://www.prosper.com/lend/performance.aspx) to determine what good investments are.
Also, if you sign up via the link below, we both get $25 dollars.
http://www.prosper.com/join/Dave0
1. High risk, high return, small-cap growth stocks
2. Mid-cap stocks with strong fundamentals (low P/E, low debt, long history of growing earnings, etc.)
3. Diverse mix of International ETFs with low expense ratio
4. Large-cap stocks with high dividends (and strong fundamentals so they can grow their dividend yield)
5. S&P Index Fund (ticker: SPY)
Good luck with your investing!
Tim, you seem like a well read guy who does his own research. So I'll skip nitty details and just provide a general summary of what I expect to happen.
1) Dollar will continue to weaken, this will pick up as the dollar trends towards not being the global monetary reserve.
2) Global recession led by USA.
3) Other economies recover strongly.
4) Eventually USA follows suit.
In the short term and long term, the dollar sucks so consider moving out of assets which will keep the same price as dollars lose value. This includes dollars themselves and housing. For this phase of the game I like mutual funds in foreign currencies and precious metals. As foreign nations recover from recession will be an especially good time to invest in foreign stocks, but you can also invest in foreign stocks now. Finally, when the USA economy begins to grow again, it will become wise to move money back to the states.
Of course, keep some short term money in dollars for emergencies and the like.
I enjoyed this book with similar advice. Check it out from the library.
Given that you're renting, I'm assuming that you're probably paying a pretty high amount of tax. Without itemizing, reducing your income through deferral is probably the best way to reduce your taxes. This is especially true if you're on the edge of a tax bracket.
You talk about increasing your 401K contribution over time. This indicates to me that you're not maxing it out. If both you and your wife (married?) are not maxing out your tax deferred investments, I would recommend that as step 1. This assumes you don't mind locking this money up to reasonable degree.
One extra thing to consider is that if you're job is pretty stable, you can take a loan from the 401K if you wanted the cash for a house. Most 401K's support this and you can usually borrow the lesser of 50K or 50% of the total amount. You pay interest on the amount, but to yourself. And the terms are often 10 years for house purchases, or 5 years otherwise. Keep in mind that if you leave your job you'll have to pay it back immediately, either by the payment of tax and penalty from the remaining funds in the account, or by giving them the money back from your pocket.
As an example, if you're in the 25% tax bracket it would "cost" you $7500 to put in $10,000 into the 401K. Then, you can go ahead and borrow $5000 of that $7,500K (after tax)! In the end, you pay this back (with interest, to yourself) and get to have had the cash in your hand, AND benefited from that year's tax deferral. Once a year is gone, you don't get it back.
If you're worried about the risk of the 401K, just invest it in money market or safer bonds. Don't do an Enron and invest in your own company!
You may be concerned about having this payment and how that would affect your mortgage. If indeed you have no debt (including cars, student loans) then this does not mean you'll get more of a loan. Due to the front and back ratios for debt, there is a "window" of about 8% of "other" (non mortgage debt) that you're allowed to have. i.e. 28% of your income for your house payment, and 36% of income for all debt. So that 8% is for your car, your bulging credit card, etc. Don't "waste" it!
For what it's worth your current strategy sounds solid. Keep plugging away at your 401k, keep that debt at zero, and maintain your rainy day fund. Remember that timing financial markets is difficult to do (I would say impossible unless you count luck), even if you think we're entering a recession. In the last 40 years, the single worst year for the S&P 500 was in 1974 (down 29%). The next year the S&P gained 31%. The sticky prices for SFH's are an anomaly, and trying to time financial markets can be costly.
As for shorting the market, you are correct that put options offer an alternative to the short sale of stocks without the unlimited liability. You can buy and sell options with a standard brokerage account. However, because puts are a levered play, they can carry more risk than buying or selling an underlying stock. Puts carry an expiration date as well, so you've got to keep an eye on trading dates and the news for a particular company. You can buy longer term puts a year or two out, but you pay a premium for them.
Finally, I would really discourage messing around with foreign exchange or commodities trading. There are so many variables that determine these prices that are difficult to predict. It's always a bad sign when you start to see the infomercials any get rich scheme, and I'm seeing more late night commodity and forex trading nonsense. A chump a minute is being wooed with talk about buying gold/silver (keywords: Bretton Woods/fiat money/M3 etc. etc. etc.) or British Pounds. Even if you're playing with money you don't immediately need, think how Mrs. Tim is going to feel if you lose 20 grand because you had a hunch the dollar would weaken.
Here's my hunch:
http://quotes.ino.com/chart/?s=NYBOT_DX&v=d12