Hi all,

First time poster here (sorry if this is a little long). As background, I grew up with one spender and one saver parent (divorced now for obv. reasons). When I first started saving money, I was very fearful that I'd end up like my poor spender parent and so held a lot of money in CDs and cash, essentially in one big emergency fund.

I'm a PhD (now postdoc) headed to academia for a faculty position sometime soon in the sciences. While this is a notoriously low-paying profession, I've found that living my lifestyle keeps costs really low. I have maxed out the 401k contribution at 16.5k *and* my roth ira at 5k for the past 3-4 years and my total net worth is fairly high given that I have had such a low salary for my 20s so far.

I'm not looking to buy a house within the next three years and I constantly feel like I have too much cash on hand/not aggressive/diverse enough investments. So I'd like some advice about where I should look for positioning myself more aggressively?

I hold a lot in Vanguard target retirement funds, Vanguard index funds (including instl and external), Fidelity Contrafund, the Vanguard tax managed small cap and Growth/Income Admiral Funds, Fidelity large cap growth, Fidelity GNMA, and some misc stock holdings. I'd be looking largely to take some cash on hand in the 20-40k range and invest in additional funds/stocks rather than reallocating existing investments.

I've looked at sites that suggest which mutual funds to get based on risk preferences, but in particular I'm wondering what a good strategy for someone like me would be to build more high risk/reward investing into my portfolio?

I've even considered actually speaking to a financial advisor, but I'm not sure it's worth it? So any advice about that would be helpful too.

Answers will depend on your goals and time horizon. For some people "investing" relates strictly to investing for retirement. For others "investing" is all about making a lot of money over the next few years, either to reinvest or to use for some near-term goal. For others it's a mix.

If you're saying you want to add more retirement investments, I'd stick with index funds and maybe learn about ETFs, which have lower MERs and thus preserve more of your growth over time.

If you want to make money in the short term, that's a whole different ballgame, but it would be good to start with a goal (why are you investing? What do you want to do with your money? Are you willing to lose it all or do you want to play it safe?).

Why? Since the amount you're putting in cash seems fixed, then the rest of your portfolio is already in equities, which is considered risky, but with high growth potential. In this case (you're in your late 20s or early 30s?), this is appropriate.

Your current holdings seem all over the map though. I'd either put it all a target retirement fund (if you don't want to mess with it and let Vanguard handle asset allocation) or dump the target funds and do the allocation yourself. At this point, I'd actually streamline my holdings. Start with a mix of Total Stock Market and Total International Stock Market funds, then fine tune by adding growth/value or large/mid-/small-cap index funds until you reach the risk level you desire. As you get older, you can sprinkle in a bond fund or branch out to a REIT. Right now, if you're really looking for potential growth and willing to take on considerable risk, the Emerging Markets Fund is a good place to put some money.

You've gotten some good advice so far so I won't repeat their points.

I'm a little confuse by the title of your post. You say you are recently less risk adverse and I wonder why - why you say that and why you are less risk adverse.

In my opinion, being too conservative is probably the most risky approach there is (in both finance and politics!). It means you are closed-minded and do not expose yourself to growth and opportunities. Sticking with CDs will give you a guaranteed return that will almost always be less than inflation. That means all that you are accomplishing is a guaranteed loss of purchasing power. If you are 5 years from retirement and "have enough" then maybe protecting most of it in CDs is a smart idea. But for a young person I completely disagree with anyone who says it is a low risk strategy.

Assuming that you have already figured that out, then I think putting most of your money in equities is a fine idea. I would echo Vintek's suggestion to put most of it in Vanguard's Total Stock Market and the other funds he mentioned. But I'd view that as a stop-gap measure and urge you to read widely about personal finance topics for the next few years until you understand things enough to make your own decisions.

I'd also like to address your idea of talking with a financial planner. I think that might be a good idea for you with the following caveats:

1. Use only a fee-only planner
2. Do not, under any circumstances, buy anything from the planner or anyone the planner recommends. Since you are paying for advice, I think you should be prepared to follow the advice, but anything worthwhile that is recommended to you can be implemented through Vanguard. Any truly knowledgeable fee-only planner will be able to give you advice with the constraint that all recommendations will be actionable on your own through Vanguard.
3. View your time with the planner as time in the classroom. Look through the advice and abstract it. Ask WHY each recommendation is made. If a specific fund is recommended, ask why for the names of 3-5 similar funds and ask why the recommended one was chosen. You should get satisfactory answers to those questions but I would not be too worried if you are told that the suggestion is somewhat arbitrary. That will be useful information as well.

Good luck and welcome to the forums.

By keeping your money in cash and bonds you are already taking on substantial risk. Ironically, moving more money into equities is less risky (over the long term). In fact, cash is one investment that is guaranteed to lose its value over time.

While I agree wholeheartedly, I wonder if "risk" is really the right term in this case. Uncertainty is a fundamental component of risk. If the outcome is certain, there is no risk. The uncertainty in this case is the inflation rate. With cash, you know for certain that your investment will lose value over time, you just don't know by how much. It doesn't represent a risk, really, as long as you plan accordingly for that loss (i.e., save a lot more cash to make up for the loss). With CDs and other "conservative" investments, you can be confident that your investment will lose value over time or at best it may barely keep pace with inflation. But you also know that you won't lose it all. If you are a billionaire, you can put your life savings into cash or CDs and still enjoy a comfortable retirement even though your investment has lost value, because you have more than enough money to live on.

This is a different than the risk you take with equities, where the uncertainties are higher: you don't even know if your investment will gain or lose value over time. You can be reasonably assured of gains with a balanced portfolio, but the outcome is far less certain. Risk increases as the diversity of your portfolio decreases. I have a couple of friends who put their entire life savings into one company's stock. When that company declared bankruptcy, they lost it all. Fortunately they're young enough that they could start over, but it was a very expensive (and stupid) mistake.

The problem is that "risk" is a very poorly defined term...or rather people define it to mean so many different things that it has little practical use.

I'd like to maximize the probability that I have "enough" money when I need it. I can define "enough" fairly easily by making myself a future budget. Inflation is an unknown but I can deal with that unknown by making everything post inflation.

Maximizing the probability is tricky, but it is not the same thing as maximizing the return or the amount of money one has.

For example, if I need an income of $60000 a year in 30 years in today's dollars and allowing a 3% withdrawal rate, then I need $2,000,000 then. That's my "enough." I can then use relatively easy statistics to calculate the probability of achieving that sum with various asset allocations and savings rates.

If I stick in typical CD rates, even with no uncertainty, I'll get a very low probability of success. Because the uncertainty is low, many people will say that it is low risk. But I'd argue it is actually high risk!

What is said above is true. It's a terrible time for cash and bonds. Sure, they might have less volatility, but in the long run, they won't beat inflation at their current rates of appreciation. Equities, almost by definition, *will* beat inflation over longer periods of time.

Too bad I'm stuck holding cash... I want to buy a house soon, so I need less volatility in that part of my savings.

I think pretty much every time is a terrible time for cash and bonds. I'm old enough to remember when a regular savings account paid 5% interest and a 5-year CD paid 10% interest. On the face of it that sounds wonderful until you remember that inflation back then was running in the double digits. If you could have locked in those 5 and 10% rates for 20 years that would be interesting, but otherwise it's not really much different from the situation we face today.

I'm still skeptical about using "relatively easy statistics to calculate the probability of achieving that sum with various asset allocations and savings rates," because those probabilities are based on the assumption that future results can be predicted from past performance. We all know that's not true for individual stocks, but I'm not even sure how true it is for broad portfolios, because the future is unpredictable. More importantly, the "long term" in the abstract is less relevant to individuals than the actual scenario that ultimately plays out during their lifetime. It's one thing to say that equities will beat inflation over the long term, but if your particular long term happens to coincide with a period of market stagnation or recession then you're out of luck.

The bottom line is that every investment has risks. With cash and bonds, you know you have little hope of real growth beyond inflation, so if you're investing for the long term it makes sense to put a good chunk of your portfolio into equities because they at least have a decent chance of beating inflation and producing significant gains.

I actually don't think it's a bad idea to talk to a fee only financial advisor. They may also advise you on other things (life goals, insurance, etc) that you may not be thinking about. If you want to do some homework on your own,
a) again think about what you are saving the money for.
b) target goal If it is primarily for retirement, then do some calculations how much money you want to save by what date.
c) Risk tolerance Then do some kind of questionnaire about your risk tolerance. To tell you the truth those questionnaires can only tell you so much. You will get a much better idea of your risk tolerance when we go through another recession and see what your reaction/response is to your shrinking portfolio values.
d) See what you have Then you have an idea of how much risk or stocks versus cash/bonds to hold. Since you have such a variety, I would suggest you analyse what you are holding to find out what you really are holding.
Can use the morningstar xray to use it. It's been awhile so can't remember if you have to sign up for this.
http://portfolio.morningstar.com/RtPort ... Entry.aspx

e) Rebalance and simplify Finally I would rebalance your various funds, primarily by consolidating what you have, getting rid of redundancies, etc. You are not really diversifying if you hold 5 mutual funds but they all hold the same stocks.

Rinse and repeat whenever you have a major life change or your priorities, etc change. Good luck!

Hi there,

I'm normally not so brief when trying to help people with their personal finance questions but Warren Buffet allows me to be this time.

If you haven't read pages 17 through 19 of the Berkshire Hathaway 2011 Annual Report it's the best two-and-a-half pages you'll ever need on investing risk and categories to invest in.

Start with the section labeled “The Basic Choices for Investors and the One We Strongly Prefer” and read for two plus pages. It's really that powerful and, based on your original post, I think it will help a lot.

Those few pages are truly required reading for everyone!

In that sentence, "this category of investing" refers to stocks, and the other two are cash and gold. I agree with this conclusion except to point out that it does depend on how you define "any extended period of time." If you're pessimistic you can cherry-pick a 10-year period to demonstrate that a portfolio built around index funds grew less than the interest on a CD of the same value. If you're optimistic you can find plenty of 10-year periods that show just the opposite.

For someone in their 20s it's pretty much a no-brainer, as I've stated above: invest in equity. But as you get older the abstractness of your future scenario gradually gets replaced by the reality of the actual scenario you are living.

There's a guy on another financial forum I frequent (for Canadians) who's retired and still has most of his investments in index funds. Setting aside the fact that you're supposed to start shifting into less volatile investments as you approach retirement age, this guy is hurting because has seen very little growth in his portfolio over the past decade. The scenario hasn't played out as expected for him. He's been holding onto his index funds too long in the hopes that the market will pick up again and they will regain some of the value they've lost, but no dice so far, and his retirement plans have gone out the window.

Over the past five years, the three main index funds he's invested in have returned +0.73%, -1.44%, and -7.99%. If he was in his 20s this wouldn't matter at all, but he's in his 60s and it matters a lot.

So the lesson here is that volatility doesn't matter when you're young, but as you get closer to needing the money it matters more and more. And as you get older, the actual scenario that plays out in the market becomes more and more important than the general rule that stocks are the best performers in the long term. So you can "set it and forget it" in your 20s and 30s, but once you hit your mid 40s you should start paying closer attention. You can have great growth for 20 years, but if it's erased by one bad decade during your 50s, that won't leave you in a good position in your 60s.

But you're not allowed to cherry pick. The extended period of time that matters is always in the future. It can only be estimated/predicted based on prior observed behavior. The underlying mechanics that CAUSED the behavior in the past don't change much over time. It's a little like the weather. You don't know which days it will rain in 2017 but you probably can make a pretty good estimate of how much rainfall you'll get between 2012 and 2022.

Past performance does predict future results. It doesn't guarantee anything though.


Warren was talking about the approach used by Berkshire Hathaway, a company. It does not have a finite endpoint like a human life. It also does not reach a predetermined point where it suddenly needs income from its investments instead of growth. So, I agree that people need to start looking at investments in different ways as they near retirement. (Or maybe only those of us without the $10 billion liquidity cushion do).

Overall though, it;s a great discussion in my opinion!

I encourage reading all of Berkshire's letters, at a minimum the last few years.