Investment showdown -- beyond the Roth, SDP, & TSP

[JS]

I also try to pick stocks in the 10-20 P/E range.

This is good knowledge, generally speaking, most pros consider a PE of 10 as "cheap," versus a PE of 25+ being expensive. Of course, there are companies with high PEs that are still solid and vice versa. But stock price, market cap, gross revenues, and earnings do not have much to do with whether or not a stock is a "cheap" to buy or not.

[JS]

And remember, any time something seems to work for you, it might be more luck than skill. Most individuals don't have the knowledge to calculate and mitigate their portfolio risk. I recommend The Black Swan, or any of Taleb's other books, like Fooled by Randomness, in order to really try and wrap your mind around risk and how we not only usually grossly and dangerously underestimate it, but how it affects things like individual investments. This is one of those few books that literally changed the way I view the world - everything from stocks all the way to war and football game outcomes. Things are not what they seem, and beware of the "hundred year storm" every 15 years.

I remember in an MBA class on investements, we worked for about half of the semester building a very detailed and robust Excel file with a portfolio of about 30 stocks. I can't remember off hand, but there were like 15 or more columns in the spreadsheet with all kinds math going on to demonstrate how overall risk and portfolio risk works. The takeaway was something along the lines of this: if you have 3 low risk (beta = .5 for example) stocks and 3 high risk (beta = 2, for example) stocks, your overall portfolio risk is higher than if you have 15 low risk and 15 high risk stocks of the same .5 Beta and 2 Beta mix. Something to do with more data points modelling the broader market or something. Why do you think that all professional mutual funds have dozens of holdings? Edit: and don't forget to diversify among different industries as well.

Along those lines, my strategy, knowing what I know (MBA, short stint as a financial advisor with all the FINRA tests under my belt), my strategy is to invest my money in a fund that matches my risk tolerance. I may think I know everything, but I know I don't know as much as a dude who does this shit all day long. Fund managers should be taking into account the concepts that I have mentioned (beta, P/E, ratios), and more.

Just my strategy.

Edited November 24, 2013 by JS

[JS]

With $1K I can buy one share of Google and open myself to all the risks that come with one owning stock in only one specific company...or with my $1K I can buy 10 shares @ 20/share in 5 different stocks in different sectors and mitigate my risk.

Sorry to clog up the thread, but one more thought on this. I recently read an article about stocks that had high prices (like Berkshire Hathaway). The thinking of keeping those stock prices high is to prevent day-traders, amateurs, and greedy/corrupt hedge fund managers from doing their high-speed micro trading to take advantage of slithers of variance in the stock price. In other words, higher stock prices typically encourage people to hold on to the stock for the long run, hence why Warren Buffet has ensured that his stock never split and that only serious buy and hold investors can own it. This is the philosophy he believes in - to have investors, well, invest in his company to help it grow, as opposed to a bunch of amateur buying and dumping low cost stocks.

That being said, all other things (ratios, metrics, etc) being equal, a higher priced equity might actually be a better investment for the long run due to the lower volume of trading (due to it's higher price) and the above Warren Buffet strategy. After all, if diversity was based on owning a higher quantity of different stocks at a lower price, wouldn't a portfolio of penny stocks be very well diversified? Usually the opposite is true. Just another thing to think about.

[waveshaper]

I am a long term investor but I always keep 25% of my portfolio available for buy/sell opportunities. I rarely use it, maybe once or twice a year and I spread it out in about 5% buy/sell increments. This type strategy is not for the faint of heart. In my opinion this may be a good time to start thinking about some profit taking based on the market run-up we've had, looking at the futures markets, and pure speculation on my part. You can never pick bottoms or tops of the market and my goal with this in flux 25% is to sell high, not highest and buy low, not lowest and its worked for me so far (20 plus years). I may up my 25% target flux fund amount when it becomes clear that the Fed is going to stop pumping free play into the Wall Street casino.

[Day Man]

I agree the market has had a good run up, but what indicators are you using to justify a sell-off?

[waveshaper]

First and foremost I am an amateur at investing and always will be, I came to that conclusion long ago. I believe that current asset prices are higher than they should be based on flawed fundamentals. The fundamentals (EPS, P/E, PEG, SH&A, Growth, Margins, Revenues, etc) at this stage of the game are not very credible and getting worse (smoke and mirrors). This is mostly a result of QE3 pumping 85 billion a month into the market since December of 2012. Once the Fed start tapering QE3 you will eventually see a recalibration of asset fundamentals once again, just like what happened after the last bubble burst and that can't be good for the market. Also, 40 billion a month of free QE3 money is going right back into mortgage backed securities, imagine that.

The market has had a great year so far and most of the gains can directly be attributed to QE3; as of 22 Nov - DOW +22.5%, S&P +26.5%, NASDAQ +32.2%, RUSSEL 2000 32.5+, etc. The DOW and the S&P both are at +40 record closings for the year. I would expect the Wall Street wizards (talking heads,) to be out in force in the coming weeks talking a good game and trying to convince Fund Managers and average investors to pump new money into the market. Last week 548 million in new money was put in play. At moments like this I like to sit back and watch those around me that are even more clueless than I am about the stock market. If they start pumping vast amounts of money into the market at times like this, then that may be another good indicator its time to take some profits. You must also keep in mind that these Wall Street wizards are also the fast movers and when things tank they always cash in, don't blink or you will miss their move, and leave the average investors holding the empty bag.

This is just my amateurish opinion on how I currently see things and I very well could be completely wrong. Always seek professional financial advice before making a move.

[Gravedigger]

Warning, do not read if you listen to Dave Ramsey:

If any of you are like me and enjoy taking free money from credit card companies, there are three out right now that are giving $100 for $500 spent in the first 3 months. I am using them currently for holiday travel, which means $300 this month straight cash for stuff I was already purchasing. I applied for all of them within 15 minutes of each other and they all went through immediately.

Anyway, just thought I'd throw it out there for anyone looking for some extra bones this holiday season.

https://www.creditcards.com/credit-cards/bankamericard-cash-rewards-credit-card-22069416.php?catid=14

https://www.creditcards.com/credit-cards/capital-one-quicksilver-cash-rewards-credit-card-22109943.php

https://www.creditcards.com/credit-cards/citi-dividend-platinum-select-visa-card.php

[MilitaryToFinance]

I remember in an MBA class on investements, we worked for about half of the semester building a very detailed and robust Excel file with a portfolio of about 30 stocks. I can't remember off hand, but there were like 15 or more columns in the spreadsheet with all kinds math going on to demonstrate how overall risk and portfolio risk works. The takeaway was something along the lines of this: if you have 3 low risk (beta = .5 for example) stocks and 3 high risk (beta = 2, for example) stocks, your overall portfolio risk is higher than if you have 15 low risk and 15 high risk stocks of the same .5 Beta and 2 Beta mix. Something to do with more data points modelling the broader market or something. Why do you think that all professional mutual funds have dozens of holdings? Edit: and don't forget to diversify among different industries as well.

This is mostly true but missing a key component. I'll spare this forum the details of Modern Portfolio Theory and Capital Asset Pricing Models but Beta is only a part of the equation. Beta defines the correlation and volatility of returns compared to the market. However to reduce your overall portfolio beta you also need to understand the covariance between individual investments. If you have 3 low beta stocks but they all happen to be an oil refiner, an oil pipeline and an O&G exploration company then combining the three is not going to reduce your overall portfolio beta by much because they will all be very positively correlated.

Of course this is ignoring all the well documented flaws of CAPM and using beta to define risk in the first place but I won't go down that path tonight.

[Striper_WSO]

Why do you like a Coverdell better than 529 other than, as you sort of alluded to, potentially more diverse investment options and the ability to use for K-12 rather than just college?

I haven't really found any additional plusses when compared to 529s; I guess it depends on if your goals are primarily saving for college or saving for K-12 and if you really want to gnat's ass specific investments.

From what I understand, 529s have a higher contribution limit, are easier for multiple parties to contribute to (i.e. grandparents, aunts/uncles, etc.), and the money is treated the same as in a Coverdell i.e. after-tax contributions that grow and be withdrawn tax free and can be used for education expenses. On top of that, I think the 529 is much more flexible and has less limitations both in how you use it and how much you as a parent can make while contributing. Many dual-mil O-3s or O-4s would potentially make too much to qualify to contribute to a Coverdell. If you're saving for college I don't see how a Coverdell offers any advantage over a 529.

Fair points.

Yes, you can put it in whatever type of vehicle you want (mutual fund, ETF, stock, etc.) v. the funds run by the states. Your expense ratios will likely be less if you use an index fund v. the state accounts. I like the ability to spend the funds for K-12 too.

The rest of your points are fair.

Edited November 26, 2013 by Striper_WSO

[JS]

This is mostly true but missing a key component. I'll spare this forum the details of Modern Portfolio Theory and Capital Asset Pricing Models but Beta is only a part of the equation. Beta defines the correlation and volatility of returns compared to the market. However to reduce your overall portfolio beta you also need to understand the covariance between individual investments. If you have 3 low beta stocks but they all happen to be an oil refiner, an oil pipeline and an O&G exploration company then combining the three is not going to reduce your overall portfolio beta by much because they will all be very positively correlated.

Of course this is ignoring all the well documented flaws of CAPM and using beta to define risk in the first place but I won't go down that path tonight.

Hmmm. Read my post again, and I addressed most of those issues except for the fact that CAPM has lost some luster after the 2008 fall, mainly because risk was underestimated and misunderstood, just like Taleb specifically spelled out in The Black Swan (required reading for those who post in this thread, by the way).

I remember in an MBA class on investements, we worked for about half of the semester building a very detailed and robust Excel file with a portfolio of about 30 stocks. I can't remember off hand, but there were like 15 or more columns in the spreadsheet with all kinds math going on to demonstrate how overall risk and portfolio risk works. The takeaway was something along the lines of this: if you have 3 low risk (beta = .5 for example) stocks and 3 high risk (beta = 2, for example) stocks, your overall portfolio risk is higher than if you have 15 low risk and 15 high risk stocks of the same .5 Beta and 2 Beta mix. Something to do with more data points modelling the broader market or something. Why do you think that all professional mutual funds have dozens of holdings? Edit: and don't forget to diversify among different industries as well.

Those 15 columns were not columns for the equities (I think we had 30 equities), but they were for the various parameters we were tracking and calculating. Some of that math going on in the background between the 15 columns I mentioned was covariance. And when I mentioned diversifying among different industries, I believe we had come columns of math in the spreadsheet looking at Standard Industry Codes (SIC), and how each digit of the SIC code represented a certain amount of specificity within an industry. The farther apart the SIC digits were, the more different the industries were. That being said, most people have no idea what diversification across industry sectors is all about. For example, is a portfolio with an oil stock, retail stock, financial stock, and manufacturing stock more diverse than a portfolio with a technology stock, a healthcare stock, a defense stock, and a mining stock????

There is a lot of tricky math and analysis that goes into determining how different (or how similar) these industries are. People will buy stocks in what may seem like diverse industries - retail, technology, and oil for example - only to find out that all three move in the same direction as the market. In other words, as the economy gets better, people shop more, buy more ipads, and burn more gas. So are those three industries really diverse?

The above professor I mentioned wrote his dissertation on how SIC codes interact with each in terms of how diverse/similar industries are from one another, and how that affects mergers and acquisitions (the more similar the SIC codes were, the better the merger did). Again, knowing what I know has time and again reinforced the notion of how much I don't know about what is going on with a typical investment portfolio in terms of the math of risk, diversification, returns, fundamentals, etc. At least I can speak the language and understand the basics, but I still leave my investing to my mutual fund managers and ETF managers.

[MilitaryToFinance]

Hmmm. Read my post again, and I addressed most of those issues except for the fact that CAPM has lost some luster after the 2008 fall, mainly because risk was underestimated and misunderstood, just like Taleb specifically spelled out in The Black Swan (required reading for those who post in this thread, by the way).

Yeah you mentioned diversification I just wanted to make it clear that just focusing on diversifying via beta isn't necessarily lowering the portfolio beta. As much as Taleb is a bit of an arrogant prick I agree that his book is worth a read. Really CAPM lost it's luster before 2008. Using beta as a measure of risk is stupid for many reasons. Mathematicians and statisticians love it because it is something that can be modeled to give you a false sense of security that your risk is lower than reality. Just look at LTCM for an example of incredibly smart people thinking their models are infallible.

Think about it rationally, what is the risk when you make an investment? Is the main risk that your returns might be volatile? No. Your real risk is permanent loss of capital. What you should be focusing on is buying securities with a significant margin of safety between price and value to decrease your risk of loss of capital. Unfortunately there is no easy way to define this with a formula so we make up fancy statistics and then tell people the math is complicated so it must be true. If a good company with say $500M of assets is selling for an enterprise value of $600M, then the stock gets cut in half the beta will shoot up but now you can buy $500M in assets for $300M dollars. Has that stock gotten riskier? No, in fact the investment is much safer at the low price than it was at the high price.

[Vice]

Many of you are eligible for a VA Loan; you can pick up a very nice 4-plex that cash flows very well, for nothing down. You need to do your due diligence beforehand though, and be willing to live in the property until you PCS out since the loan requires you to be an owner-occupant. When you retire or PCS out, the fourplex will be a nice little passive income generator. Other people will be paying off the building for you, as well as putting cash in your pocket every month.

In this case the only potential negative is that you might have to to live in a property in a rental neighborhood, depending on where the fourplex is. This can be applied to a house (not as well in many cases though), duplex, and triplex as well. Anything that is five units or more is considered commercial real estate. Many times you will get PAID to live in the property, if you get a good deal. So you pocket BAH AND get a little bit extra from the property.

The only thing is that you need to invest some time educating yourself.

The tax advantages are also excellent; depreciation, writing off expenses, etc. can be substantial.

This can also be a great option to pay for a child's college tuition.

OR, if you meet me a few years from now you can just put some money into an investment pool at a competitive interest rate while I buy commercial buildings :)

Edited November 30, 2013 by Vice

[Swizzle]

Food for thought on the TSP small cap fund....

https://www.consumerreports.org/cro/money/personal-investing/post-recession-investing/overview/index.htm

"Another observation: After each recession, small-company stocks were the clear winner, something we've pointed out here in the past. Part of the explanation lies in the fact that small-cap stocks are usually sold off faster when the economy heads south. And during the latest recession small-caps lost a stomach-churning 60 percent, much more than the 37 percent that small-caps gave back in previous recessions. But as the economy improves, small-caps tend to snap back more quickly as well. In short, there's higher risk in small-cap stocks, but there's also a higher reward."

[Dukeorions]

Is there any way to transfer a Roth TSP balance to say, a Vanguard Roth IRA without leaving federal service?

[Pajaro]

This is a topic that folks are hesitant to discuss in person, so I thought it would be good for this forum. I've been pretty disciplined during my USAF career about saving and investing, but I'm not sure how I'm doing as compared to my peers. I'm just trying to get a feel if I'm doing OK as compared to other officers, or if I need to rethink what I'm doing and get more creative about saving.

My net worth is roughly $703,000 broken down into:

Cash: $10,000

I Bonds: $21,000

CDs: $60,000 (PenFed Credit Union now has some nice 5-year CDs at 3.04%)

TSP 2040 Fund: $199,000

My Roth IRA: $95,000 (all in USAA's S&P 500 index)

Wife's Roth IRA: $38,000 (all in USAA's S&P 500 index)

Taxable Index Funds: $282,000 (all in USAA's S&P 500 index)

My goal is to reach $1 million by the time I hit the 20-year point. All of this money has come from my USAF compensation, not from inheritance, second jobs, etc. I've never owned a house. My wife has never had a paying job while we've been married and brought no financial assets or debts to the marriage. I attended a private university and started my career around $30,000 in debt. I'm a Cyber Ops Lt Col with 15.5 years of service, so I never got flight pay. However, I've spent much of my career OCONUS, and have received $136,000 in COLA and language pay.

So, I'd be interested to know how you're doing so I can figure out if I'm missing anything.

Thanks, Pajaro

[Homestar]

How many years have you been making deposits?

(edit: nevermind...assume you've been making deposits your entire 15.5 year career).

Edited January 2, 2014 by Homestar

[Pajaro]

Six months after I got my commission I started investing with First Command (USPA & IRA back then). That's my biggest mistake. I had life insurance and overpriced Fidelity funds with them. It took me a few years to completely divest from them. Anyway, it taught me to really read about investments before buying.

Six months after I got my commission I started investing with First Command (USPA & IRA back then). That's my biggest mistake. I had life insurance and overpriced Fidelity funds with them. It took me a few years to completely divest from them. Anyway, it taught me to really read about investments before buying.

[Danny Noonin]

Six months after I got my commission I started investing with First Command (USPA & IRA back then). That's my biggest mistake. I had life insurance and overpriced Fidelity funds with them. It took me a few years to completely divest from them. Anyway, it taught me to really read about investments before buying.

Amen to that. Other than getting me going with investments, USPA was my biggest financial mistake.

[Champ Kind]

This is a topic that folks are hesitant to discuss in person, so I thought it would be good for this forum. I've been pretty disciplined during my USAF career about saving and investing, but I'm not sure how I'm doing as compared to my peers. I'm just trying to get a feel if I'm doing OK as compared to other officers, or if I need to rethink what I'm doing and get more creative about saving.

My net worth is roughly $703,000 broken down into:

Cash: $10,000

I Bonds: $21,000

CDs: $60,000 (PenFed Credit Union now has some nice 5-year CDs at 3.04%)

TSP 2040 Fund: $199,000

My Roth IRA: $95,000 (all in USAA's S&P 500 index)

Wife's Roth IRA: $38,000 (all in USAA's S&P 500 index)

Taxable Index Funds: $282,000 (all in USAA's S&P 500 index)

My goal is to reach $1 million by the time I hit the 20-year point. All of this money has come from my USAF compensation, not from inheritance, second jobs, etc. I've never owned a house. My wife has never had a paying job while we've been married and brought no financial assets or debts to the marriage. I attended a private university and started my career around $30,000 in debt. I'm a Cyber Ops Lt Col with 15.5 years of service, so I never got flight pay. However, I've spent much of my career OCONUS, and have received $136,000 in COLA and language pay.

So, I'd be interested to know how you're doing so I can figure out if I'm missing anything.

Thanks, Pajaro

Besides your student loans, have you ever carried any other debt, such as credit cards or car payments?

You seem to be doing quite well!

[Buddy Spike]

I can make it rain singles on a twerking stripper. How's that for net worth?

[DFRESH]

I can make it rain singles on a twerking stripper. How's that for net worth?

I make it hail on them hoes! Euro has 1 dolla coins.

[Learjetter]

I'll play:

Roth IRA: $25k

Mutual fund: $65k

Home: $130k my equity

No debt except mortgage of $220k...gonna downsize in the next yr or two...

2 kids already thru college and with wheels, no debt for either, currently working same plan on the third...

$5mil in AF retirement coming my way over the next 40 yrs...I hope...

[hindsight2020]

This thread is not gonna help our case in Congress fellas....and they read this site apparently...

[Day Man]

Pajaro- Congrats...you have a shitload of money!

Disclaimer: I am a unemployed bum with little financial education from a state school, so keep that in mind.

IMHO, you need to diversify. You have 59% of your net worth in one fund. Granted, that fund has kicked ass the past few years, but there have been a few HUGE "corrections" since its inception. You can call USAA and speak to a financial advisor (for free), and they can give you a more educated opinion about how to protect your money.

Edited January 2, 2014 by day man

[M2]

In guns or ammo, or both?