The Elusive 7%-10% long term average...

My choice for less active managment is to invest your money equally among large cap, mid cap and small cap index funds. You may want an international index fund also.

The best account vehicle is a Roth account; you won't pay any taxes on the gains. The second best, in my opinion, is an after tax account; you will pay limited annual taxes for dividends and capital gains. When you withdraw the money, the gain will taxed at capital gains rate. The third best is a traditional IRA or 401k, where you pay ordinary income tax on every penny you withdraw.

Frank

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Where would you get that idea from? Stocks are *precisely* the main engine of acheiving that return. If it weren't for that volatity and risk, stocks would be bid up (and their expected returns thereby bid down) to be more like lower-return, lower volatility assets.

What you can do, however, is temper that volatility via asset class diversification - a portfolio of stocks *and* bonds. And a couple of other asset classes help, too, but those are the main two for investment portfolios.

Savings accounts are not investment vehicles. They are savings vehicles and short-term stores of capital. They hold money not for growth, but for spending or future investment.

You're mixing apples, oranges and pears here.

1. a Roth is an account type, not an asset class. Within a Roth, one may own any of a variety of assets.

1. Mutual funds are, also, mostly a form of container for assets. There are mutual funds which hold equities, fixed-income securities, commodities (or exposure to them), real-estate, etc.

I'm not sure what you're really asking here, but it seems to me that you have come to the conclusion that you need to build an investment portfolio which can acheive the 7+% long-term return you'll want for building up retirement savings.

For most people, the easiest tools for doing that are mutual funds. They allow you to easily build exposure to various asset classes, to easily do so with adequate diversification within those asset classes, and to do so with relatively low transaction and overhead costs.

Similarly, for most people, the first accounts in which they should be trying to buy those mutual funds are going to be 401k accounts at work, and IRA and Roth IRA accounts outside of work.

Now, having talked about accounts and tools, it's time to figure out what to actually buy with them - namely an asset allocation - the question of what the assets you actually want to invest in? While folks can do better with some tweaking and adjustment, I believe that the best and simplest starting point is a broad equity index fund (ie. Vanguard Total Market) and a broad investment-grade bond fund (ie. Vanguard Total Bond Market if in an IRA/Roth/401k, or perhaps a muni bond fund if investing taxable money). You can get into more detail (especially on the equity side) with different kinds of equity funds, or you could keep it even more simple with a single balanced fund which invested in both stocks and bonds and be done right there. Frankly, most folks would do better with a simple *one* fund portfolio than they do with all the tinkering that they do. Fidelity Balanced Fund, for example, has a 10 year average return of 8.4%, had losses only half the size of the equity market in the '02 downturn, and only one down year in the last 10. It's roughly

60% equities and 40% bonds. It's not perfect, but it's a pretty easy no-brainer choice for long term money (though it is actively managed and not ultra-cheap, it is conservative and relatively quite cheap).

"JACK-UK" wrote

The historical volatility of a well diversified portfolio of index stock funds for short periods is high. For long periods (over say 10 years), it has been much lower. I think the interactive calculator at the following site makes this point well:

It uses historical data from the S&P 500. The lower the standard deviation, the less volatility. For ideas on what top 4 vehicles to use, experiment with the free online asset allocator tools I previously linked. They are going to get you in the neighborhood of what Franksplace said: Some large caps, small caps, international stocks, etc., plus possibly some bond funds. Some of the tools are very fast. They typically use age and risk tolerance as input. I think they help a person quickly get a handle on asset allocation.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Absolutely incorrect. Stocks are indeed the way to go.

Look into any kind of portfolio tools on the web. You'll get some advice, depending on your own risk tolerance, on some combination of stocks, bonds, and cash. And within the stocks category, you'll get some combination of big cap, small cap, and international stocks.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

I would recommend some solid research before you go too much further. One thing you don't want to do is take advice (even the great advice here) without really understanding it.

There are some books that you might want to read. I recommend starting with "The Four Pillars of Investing" by William Bernstein. This is targeted at the non-mathematical sort, but is useful to anyone. Another friendly book is "The Bogleheads' Guide to Investing" by Taylor Larimore and others.

I also found "The Only Guide to a Winning Investment Strategy You'll Ever Need" by Larry Swedroe to be useful. Bernstein's other book, "The Intelligent Asset Allocator" is more technical, but worthwhile. He also has some articles on his web site:

Some or all of these books might be available at your local public library.

Brian

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

This (the first suggestion) sounds a bit like creating a 'total market' fund which is offered by Vanguard already. I do agree that aiming toward low expense index funds makes sense, and there's a place for non-US, somewhere between 15 and 30%.

Since the OP is a bit behind and likely to be in a lower bracket at retirement, the above is reversed from what I suggest. Given he is in the 25% bracket now, he should invest pre-tax right until he can project retirement withdrawals that risk putting him into that bracket at retirement. Since it would take over $2,000,000 in income to put one into the 25% bracket at retirement (assuming MFJ, no pension, 4% withdrawal, etc) that risk is low right now. While there's always the risk of rising tax rates, I don't see that impacting retirees currently in the 15% bracket. I anticipate mort tinkering to occur at the higher levels, 25-38% income brackets.

Joe

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

I usually recommend Personal Finance for Dummies by Eric Tyson as the first book a new saver/investor should read. Before one worries about asset allocation, one needs a handle on the broader financial picture, as well as some general advice as to what kinds of accounts and investing one may do.

snip

snip

The following gives helpful perspective on the relationship between risk and time:

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

For a 7-10% annual gain over time I would consider investing in:

1) stocks (large cap, small cap, mid cap, international, growth and value) 2) bonds 3) Real estate and REITs 4) commodities, especially gold and silver

I listed the investments in the order I would consider them for a growth oriented portfolio.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Sounds like good advice. I definitely think the OP is getting way ahead of himself by trying to figure out what to invest in.

Brian

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

wrote

In my opinion, this article plays semantical games with the word "risk."

I would like the author to state the advice he would give to someone for investing for a five-year period (after which the person needs the money to buy a house) and 20-year period (when the person needs the money to do xyz) given the choices {CDs, stocks or an allocation between the two}.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Well, maybe. I think the real problem is that "risk" is not always well defined.

For example, suppose I invest a sum of money now, and want to estimate what I'll have at some time in the future based on how I choose to invest it.

It should be clear that for any given asset allocation, the standard deviation of the amount of money I expect to have at that future time will increase as the time gets further away. In that sense, my risk increases with time. This is true even though the standard deviation of my expected average return per year over that time decreases -- and in that sense, my risk decreases with time.

Finally, suppose I have my eye set on having a particular amount of money at a particular time in the future, and all I care about is the probability of success at the end of that time. It should also be clear that if the time is 20 years in the future, and the amount of money in question can be achieved with an average 3% return, then the probability of success is much higher if my portfolio is mostly bonds. If, on the other hand, the goal requires an average 6% return, then adding stocks will increase the probability of success. Moreover, keeping that 6%/year average fixed, the probability of success increases with time. So in that sense, risk declines over time.

So I've suggested three plausible definitions of "risk," each of which results in a different conclusion as to how risk varies with time. Because different definitions yield such different conclusions, I am reluctant to use the phrase "semantical games" to describe the act of trying to define the term "risk" rigorously. To the extent that games are involved at all, it would be to deny that other people sometimes use the term differently--and perhaps even vaguely.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

"Guessing" a few recent years results is VERY DANGEROUS. Actual statistics prove you quite wrong.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Actually monte carlo simulations don't agree with this statement. A $100k portfolio made entirely of diversified munis has a 40.40% chance of falling below a 3% target after 20 years. That same $100k invested entirely in diversified small cap value funds has a 9.60% chance of falling below that target. Your statements are contrary to the doctrine of "over time and in the long run, the market goes up".

[Before anyone goes nit-picking the assumptions, I didn't use any particular funds. The software uses average statistical data for the chosen asset classes (as provided by M*, I believe), not specific funds.]

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

I agree risk is not always well defined. I thought the examples given were weak. My response to risk is that risk is never eliminated, it is only managed. Risk takes on many types:

Market risk ( risk that market movements will change value of investment) Inflation risk (risk that higher prices in future will erode value of money invested or saved) Currency risk (risk that if investment was into a foreign market, one or both of the currencies could fluctuate in value, altering the value of the investment). Time risk (risk that at a given point in time, you do not have the money you intended) Manager risk (risk that the person managing the money will make bad decisions). Return risk (risk that another investment will provide better returns than the investment you chose)

and this list could be expanded to include other risks (interest rate risk, political risk, leverage risk...)

I would further argue that no one single investment will trump all the risks, manage all the risks or eliminate all the risks.

A person needs to allocate assets to various investments (cash, stocks, bonds, commodities, real estate, foreign investments) to manage their comfort level of risk. When a person is comfortable with all risks present and all risks taken, that portofolio is optimum.

And a person need to know about all the risks before they can manage them.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Sorry, I picked a bad example. The point I was trying to make was that there are time periods and minimum desired rates of return such that bonds will give you a higher probability of success than stocks.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

No that portfolio is sufficient. To be optimum implies a method to measure risk and a method to adjust risk, perhaps through allocation. Anything beyond an arbitrary allocation also requires a risk measurement. So how does our hypothetical investor get a measurement of the risks you mention in order to optimize an allocation without a strict definition(s)?

-Will

william dot trice at ngc dot com

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Ah. I understand now. The real crux of that matter is the time period. What you were referring to is the risk of volatility over a short time period.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

I read the article referenced here, and would ask, even if we throw aside the definition of risk we seemed to be comfortable with, how do you suggest one changes one's approach to investing with this new insight? Right now, if one seeks a 3% real return, there is no way to get that return with no risk. The last TIPs auction (4/30/08) shows a yield of .745% just enough to pay the tax on the 3% inflation rate, for a net real return of 0%. Joe

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.