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 Post subject: First-time Investment - Managed portfolio
PostPosted: Sun Nov 11, 2012 4:40 pm 

Joined: Sun Nov 11, 2012 3:00 pm
Posts: 2
Hello everyone,

I'm starting to move from the world of CD's and time deposits into market investments. There's $50k in consideration, partly family savings. I have no debt.

My pending decision is to go with a managed MTF account with Schwab. I had a meeting with their financial consultant etc. I'm just trying to clarify a few things for myself before I pull the trigger.

Background:
  • These days I have very little spare time, and don't think I'd be able to make wise hands-on decisions - especially when coupled with my inexperience.
  • I'd go for Schwab's managed ETF account but the minimum is too high.
  • My goal is to save and build wealth
  • I'm working towards a career shift next year.
  • I may or may not buy a house in 2-5 years - no idea at this point.


1. What risk category am I in if I want to see a 4% annual net return over the next 5 years? Over the next 10 years?

I have trouble seeing myself in terms of risk categories. As a general character I'm no adrenaline junkie or foolhardy; I'm not interested in putting all my life's savings in penny stocks (or in Apple stock, conversely). That said, I don't want my money to lose value. I want to beat inflation, and keeping everything in 1% APY CD's (or mattresses) is unacceptable.


2. Liquidity: short-term reaction to market changes is bad, but what about reaction to personal changes?

I'm trying to understand the odd dichotomy of investment accounts liquidity. (If cell phone companies managed to lock us into lengthy contracts, I'm surprised that the financial market hasn't.) You can cash out or modify your portfolio at any time, while at the same time the advisors say "don't think of that" - just put the money in and don't touch it for however many years your horizon is.

Looking at an investment account as short-term is foolish and usually related to panic moves. I get it. But what about personal changes? What if a year from now I feel more confident in my knowledge and want to shift a significant amount of my portfolio from managed to self-traded (funds, not stocks)? Or feel confident and want to shift to a riskier allocation model? Or add money to the account and switch to ETF's? Or buy a house?

I disagree that volatility is related to liquidity. If I cash an ETF now and it's a bad time, I see it as part of the risk, not of the liquidity.


3. What do you do when your portfolio differs from your investment product's portfolio?
I'm sure any investment firm would love to manage all my available money. I'm not willing to put all my eggs in one basket at this point (if ever), so there are more traditional savings available that I'm not touching until I feel more confident.
The result, it seems, is that the asset allocation model I'm discussing with the advisor is very different than my "actual" model. He insists that I must have a cash component. What's the point of having any cash in that account's makeup if once I count my separate CD/savings the result is balanced or even conservative?


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 Post subject: Re: First-time Investment - Managed portfolio
PostPosted: Sun Nov 11, 2012 8:19 pm 

Joined: Mon Apr 23, 2012 4:35 pm
Posts: 6
Investosh wrote:
Liquidity: short-term reaction to market changes is bad, but what about reaction to personal changes?


I feel like I'm still pretty new at this stuff, so someone can correct me if I'm wrong, but it seems like you may need to narrow down the purpose for your investing more before you can really be appropriately advised. If this is money you might just decide you need 8 months down the road, but you've already thrown it into the market, yanking it back out again can have some significant consequences (taxes being one of the most out standing.) Is this money saved for a potential home? Is this money saved for retirement? All these considerations will affect the sorts of vehicles you choose. Obviously, life can blindside you and force your hand (you had an account set up for retirement, but you find yourself hit with a massive medical bill after an emergency situation and have no other resource but to full from it.) But if you are ANTICIPATING a life change, I might do some more soul searching before I plow in to the markets.


Investosh wrote:
I'm trying to understand the odd dichotomy of investment accounts liquidity. (If cell phone companies managed to lock us into lengthy contracts, I'm surprised that the financial market hasn't.) You can cash out or modify your portfolio at any time, while at the same time the advisors say "don't think of that" - just put the money in and don't touch it for however many years your horizon is.


Unfortunately, the financial sector usually profits from investors shuffling their money around like it's a puck in a hockey game. So, often there is actually disincentives for advisers to recommend that you invest inexpensively and with an eye towards the long term.

When advisers tell you not to think about cashing out and to instead think about the long term, it's usually, because--historically--the longer your investment is left in the market the more the volatility is reduced. Essentially, this just means that the more years of return your have factoring in to your average, the less of an impact that a hand full of bad years here or there will have (suppose, for instance, you choose to invest for just this one year and the market produces a nauseating -3% return. Sucks to be you, and you take it out. But suppose that you instead let your money sit for the next fifty years. When you average your total returns over the lifetime of those 50 years, that -3 percent will just be a tiny blip on the chart of your lifetime returns, rather than a massive ravine in to which all your money has sunk. Volatility is just a measure of the variation in returns from an investment, and volatility, all other factors being equal, is reduced over time.

Investosh wrote:
Looking at an investment account as short-term is foolish and usually related to panic moves. I get it. But what about personal changes? What if a year from now I feel more confident in my knowledge and want to shift a significant amount of my portfolio from managed to self-traded (funds, not stocks)? Or feel confident and want to shift to a riskier allocation model? Or add money to the account and switch to ETF's? Or buy a house?


You would would just want to read up more on investing to fully understand the consequences of all these scenarios. A lot of this will have to do with what sort of accounts you have. Are they tax deferred or not? Shifting things around in a tax deferred account isn't so big a deal (because making a profit off of a sale isn't going to effect your tax liability in that particular year), but shuffling investments around in a taxable account can put you in a position in which the additional taxes you owe at the end of the year eat up any profits you might have made from your short term investment. Moreover, you also want to be careful what you are paying to execute all these trades. If you're moving your money around because you're shifting your purpose frequently and each trade is incurring sales charges, you may make it close to impossible to actually make any money--no matter what your "return" on paper is.

Investosh wrote:
I disagree that volatility is related to liquidity. If I cash an ETF now and it's a bad time, I see it as part of the risk, not of the liquidity.


This statement doesn't really make sense to me. Perhaps I don't understand what you mean, but I don't really know why volatility would be linked to liquidity. Liquidity is essentially the measure of how easily or quickly something can be converted to cash (a savings bond, for instance, has more liquidity than an antique desk, for instance, as the savings bond can easily be converted to cash, where as to convert the desk to cash you must find a buyer who is interested in antiques and wants to buy a desk) The way I can see volatility interacting with liquidity might be if you bought some stock that was in a nose dive, then tried to sell it and found there were few buyers interested in purchasing this stock. For this reason (the lack of liquidity of the stock) you had to hold the stock for longer and incur a greater loss. Is that what you mean?

In all, it seems to me that you need to narrow down why you're investing before you invest. Is it just to beat inflation? Because if you're going to spend a bulk of this money in the next year or two during the life change alluded to, the inflationary risk is pretty minimal. Maybe just consider stashing it in the highest yield savings account you can find until you nail down your investment priorities?


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 Post subject: Re: First-time Investment - Managed portfolio
PostPosted: Mon Nov 12, 2012 9:02 am 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5399
Investosh wrote:
Looking at an investment account as short-term is foolish and usually related to panic moves. I get it. But what about personal changes? What if a year from now I feel more confident in my knowledge and want to shift a significant amount of my portfolio from managed to self-traded (funds, not stocks)? Or feel confident and want to shift to a riskier allocation model? Or add money to the account and switch to ETF's? Or buy a house?


That's right. Making a change because your personal situation changes or because of personal events is not market timing and should not be viewed in the same way. You generally should not respond to what the market does (although not everyone agree with that idea). But making changes because your life changes is not the same thing.

To give you a personal example, a few years ago I worked as an executive in a high tech company. Getting let go if I screwed up or the company going under if we did something wrong or he economy tanked was a very real possibility. So at that point I held a lot of money in cash just in case. Then I changed to a government job that I have an annual contract for. I can't be fired without being paid. I have immensely more job security. When that life change happened I quickly invested much of my cash into stocks. My investment risk went up but my overall financial risk probably went way down.

If you don't have much time and are inexperienced, the managed fund might be good for you. But you should spend the next couple of years educating yourself. Then you probably should consider being more active in your investment decisions. Schwab will try to convince you not too because they will lose out on fees. But those fees are very expensive and do not add any value. You really should be working toward become knowledgable enough to avoid them.


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 Post subject: Re: First-time Investment - Managed portfolio
PostPosted: Wed Nov 14, 2012 1:44 pm 

Joined: Sun Nov 11, 2012 3:00 pm
Posts: 2
Thanks, Liv, for thoroughly going through my somewhat meandering musings.

1. This is not tax-deferred.

2. The money is already at Schwab as cash. I can muse all I want, but I have 3 options:
  • Greenlight and invest it.
  • Wait 6 weeks for congress to figure out the globally-influential budget debacle (and then enter the market.)
  • Put everything in CD's/savings (0.8% APY or less before taxes)

3. I see how my investing goals are unclear, which is a fundamental problem. They say that investing without goals is gambling your money away. I may decide that this particular investment is a slight gamble*, while the majority of my savings are and will stay in CD's.

4. Just to clarify, I'm not talking about shuffling my investments frequently.

5. Taxes are a very valid concern. Aren't you taxed only on the income you generate? If so, how can you be taxed on more than your investment profits?

(*I think the word "gamble" is a bit extreme. Putting all your money in a casino, or emerging markets, or penny stocks, constitutes a gamble in my eyes. Putting the minority of your money in managed mutual funds with the possibility of being forced to pull out at an undesirable time is a gamble too, but not quite as risky.)


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