Long Term Investing

10407 Views 22 Replies 10 Participants Last post by takingprofits, May 8, 2009

CheckingIn

Discussion Starter · Apr 5, 2009

Hi All,

I've read about half a dozen investment books, and one of the important lessons I've learned is to hold my securities for the long-term with a good asset allocation that fits my lifestyle.

I'm in my mid-20's, and looking to invest long-term for the next 30+ years.

With the recent recession, it's got me thinking about how I view long-term investing. For some reason, I've been a bit discouraged about the principles of long-term investing.

I consider my asset allocation to be:

- 70% Equities (index funds, blue chip dividend-paying stocks)
- 20% Fixed Income (GIC's)
- 10% Cash (Savings Account)

I assume an approximate 7-10% annualized return can be achieved for my equities portion of my portfolio.

I'm also going to make the assumption that another recession will occur within my 30-year timeframe, where I will suffer a 20-50% loss in one year, for say 2-3 random years.

It seems that no matter what happens, since I have a long timeframe of 30 years, I'm bound to hit a recession where my Equities portion of my portfolio will take a huge hit, and may come close to my principle amount.

I feel that I'm following a sound strategy, I'm not taking large risks, yet I'm being discouraged and second-guessing the concept of long-term investing.

Of course I'm making a lot of assumptions here, but it does get me thinking.... I didn't really think this through in depth, and didn't consider the power of Dollar-Cost-Averaging and Re-Balancing after every year, so that will make a difference.

Or maybe I'm just in a bit of a panic

1 - 20 of 23 Posts

Financial Highway

· #2 · Apr 5, 2009

I can assure you, you are not the only one with buy-and-hold strategy that is second guessing himself, but you have got to go back to fundamentals and basics. Go back and look at your investments if the fundamentals have not changed no reason to worry.

Here couple articles might be helpful:

Is buy and hold investment strategy dead?

Keep Faith in buy and hold

Buy and hold portfolios do better

mfd

· #3 · Apr 5, 2009

CheckingIn said:
I assume an approximate 7-10% annualized return can be achieved for my equities portion of my portfolio.

Might be an incorrect assumption. I'd say assume a 5% return and if you happen to have had better results in 10,20, and 30 years then rejoice. You may be able to retire sooner then you thought.

CheckingIn

Discussion Starter · #4 · Apr 6, 2009

Financial Highway said:
I can assure you, you are not the only one with buy-and-hold strategy that is second guessing himself, but you have got to go back to fundamentals and basics. Go back and look at your investments if the fundamentals have not changed no reason to worry.

Here couple articles might be helpful:

Is buy and hold investment strategy dead?

Keep Faith in buy and hold

Buy and hold portfolios do better

Thanks a bunch for those articles! Some of those quotes in the articles did calm the nerves a bit. But yes, being fundamental is key.

CanadianCapitalist

· #5 · Apr 6, 2009

CheckingIn said:
I'm also going to make the assumption that another recession will occur within my 30-year timeframe, where I will suffer a 20-50% loss in one year, for say 2-3 random years.

It seems that no matter what happens, since I have a long timeframe of 30 years, I'm bound to hit a recession where my Equities portion of my portfolio will take a huge hit, and may come close to my principle amount.

I feel that I'm following a sound strategy, I'm not taking large risks, yet I'm being discouraged and second-guessing the concept of long-term investing.

I think these assumptions are reasonable. I would expect your portfolio to return about 4% inflation-adjusted over the long-term. It is also reasonable to expect that a equity-heavy portfolio will go down 30% to 50% in value in any five year period.

It is hard to maintain equanimity in the face of such a steep decline as the one we are experiencing now. But, what other strategy is there other than buy-and-hold where almost everyone can have a good shot at reasonable returns? I don't think there is one.

You may be interested in some of the articles I wrote on this topic:

Keep faith in buy-and-hold
Keeping the faith in stocks

You may also be interested in this post on expected asset class returns:

Expected Asset Class Returns from The Intelligent Portfolio

The_Number

· #6 · Apr 6, 2009

The "rules" I have been reading also say that the asset allocation should get more conservative as you get older. 70% (or higher) equity should be fine for somebody in his/her 20s, but it's probably too risky for somebody in his/her 50s. You don't want to be taking 30-50% loss when you are only several years away from your retirement.

CheckingIn

Discussion Starter · #7 · Apr 6, 2009

CanadianCapitalist said:
I think these assumptions are reasonable. I would expect your portfolio to return about 4% inflation-adjusted over the long-term. It is also reasonable to expect that a equity-heavy portfolio will go down 30% to 50% in value in any five year period.

It is hard to maintain equanimity in the face of such a steep decline as the one we are experiencing now. But, what other strategy is there other than buy-and-hold where almost everyone can have a good shot at reasonable returns? I don't think there is one.

Don't know if I have the expertise to judge, but I agree, I don't think there is one either, and you can't go wrong with buy-and-hold. I guess I was just having a mini panic attack with the whole situation with the economy.

CheckingIn

Discussion Starter · #8 · Apr 6, 2009

The_Number said:
The "rules" I have been reading also say that the asset allocation should get more conservative as you get older. 70% (or higher) equity should be fine for somebody in his/her 20s, but it's probably too risky for somebody in his/her 50s. You don't want to be taking 30-50% loss when you are only several years away from your retirement.

Agreed. I intend to lower the amount of equities as I get older. There is no way I'm holding a large portion of equities as I approach retirement. It's just way too risky.

I don't remember what book it was, but they said the general rule of thumb is subtract your age from 100, and that should be the amount (in percentage) you should have as Equities. But even that may seem quite high if you're somewhat conservative.

mfd

· #9 · Apr 6, 2009

CheckingIn said:
Agreed. I intend to lower the amount of equities as I get older. There is no way I'm holding a large portion of equities as I approach retirement. It's just way too risky.

I don't remember what book it was, but they said the general rule of thumb is subtract your age from 100, and that should be the amount (in percentage) you should have as Equities. But even that may seem quite high if you're somewhat conservative.

You might want to look into this further. There is a lot of thought that you shouldn't follow a simple formula like that. Some suggest only shifting enough over to bonds to meet your income requirements during retirement while leaving the rest in equities to continue growing.

Some people also keep 3 to 5 years of living expenses in cash and keep the rest in equities. When the market is good they sell some equities. If the market takes a turn for the worse then they use up their savings until the market recovers.

Financial Highway

· #10 · Apr 6, 2009

CheckingIn said:
Agreed. I intend to lower the amount of equities as I get older. There is no way I'm holding a large portion of equities as I approach retirement. It's just way too risky.

I don't remember what book it was, but they said the general rule of thumb is subtract your age from 100, and that should be the amount (in percentage) you should have as Equities. But even that may seem quite high if you're somewhat conservative.

100-age is often used by new advisors, I personally do not like that approach as it does not take into account many other factors. You could be a 24 year old who has tones of student debt and low and unstable income 100-24=76% equities may not be the best option in this situation or many others.

CanadianCapitalist

· #11 · Apr 6, 2009

CheckingIn said:
I don't remember what book it was, but they said the general rule of thumb is subtract your age from 100, and that should be the amount (in percentage) you should have as Equities. But even that may seem quite high if you're somewhat conservative.

I think 100 - age is a reasonable starting point but it has to be modified to take personal circumstances into account as other commenters have pointed out. If both earners in a household work have stable jobs (i.e. both are "bonds" in how they employ their human capital) with gold plated pensions, perhaps they could put as much as 100% of their portfolio (provided they can tolerate the volatility) in stocks. If both work in Bay Street, a case can be made for keeping a larger portion in bonds than their age would warrant.

Still, I don't think 100 - age is a bad thumb rule. Most investors don't even think of asset allocation, so even thinking about a fixed income / stock split is a huge improvement.

CheckingIn

Discussion Starter · #12 · Apr 7, 2009

Yes, I always knew that the 100-age rule was a bit high to become my Equities portion of a portfolio.

Thanks a bunch for those who responded

Jon Chevreau

· #13 · Apr 8, 2009

I did a blog on April Fool's day (but no joke) about The Investment Reporter's recent conclusion that Buy-and-Hold does work given enough time and patience.

http://network.nationalpost.com/np/...-hold-portfolios-do-better-no-april-fool.aspx

I'm going to follow this up for an upcoming feature in the paper and may refer to some of the posts in this thread. Anyone who would like to be identified with their real name and -- where applicable -- their blog, please email me at [email protected].

Rickson9

· #14 · Apr 9, 2009 (Edited)

Your expectations (ie 7% annualized return) are realistic considering your asset allocation.

Without more direct investing experience it is easy to become frustrated during bear markets (or conversely, unrealistically euphoric during bull markets).

All you need to remember is that, in investing, optimism is your enemy and pessimism is your friend.

Personally my wife and I held a huge reserve of cash up until the last quarter of 2008. Before you believe that we predicted the downturn let me assure you that that is not so. All we knew at the time was that the companies that we were interested in in the stock market were EXPENSIVE; so our cash just piled up. Once things became overly pessimistic we started deploying the capital. We have invested more in the last half year than all of the previous 3 years! It is a great time for buyers!

DrStan

· #15 · Apr 9, 2009 (Edited)

I think that someone in their 20's should look into aggressive investing right now, and Canadian Capitalist makes a great point about the other factors such as employment stability and pensions. I am one of those fortunate enough to have three sources of financial stability; eventual government pensions for my wife and myself, side income and a paid-off house. This is a huge boost to risk tolerance. The classic 100-minus-age doesn't take these significant factors into account. I can't see myself holding cash or even bonds in my long-term savings when I can buy high yielding companies (most dividend indexes are in the 5% yield these days) and hold them for the long run. If the original poster has the fortitude to go into equities, there are great opportunities. Bonds will essentially hedge against inflation; money market doesn't even cover inflation. I'm 100% equities right now, and buying more, because I won't need a penny of that money for 25 or 30 years.

Rickson9

· #16 · Apr 9, 2009

DrStan said:
If the original poster has the fortitude to go into equities, there are great opportunities. Bonds will essentially hedge against inflation; money market doesn't even cover inflation. I'm 100% equities right now, and buying more, because I won't need a penny of that money for 25 or 30 years.

I agree completely with this.

CheckingIn

Discussion Starter · #17 · Apr 10, 2009

Rickson9 said:
Your expectations (ie 7% annualized return) are realistic considering your asset allocation.

Without more direct investing experience it is easy to become frustrated during bear markets (or conversely, unrealistically euphoric during bull markets).

All you need to remember is that, in investing, optimism is your enemy and pessimism is your friend.

Personally my wife and I held a huge reserve of cash up until the last quarter of 2008. Before you believe that we predicted the downturn let me assure you that that is not so. All we knew at the time was that the companies that we were interested in in the stock market were EXPENSIVE; so our cash just piled up. Once things became overly pessimistic we started deploying the capital. We have invested more in the last half year than all of the previous 3 years! It is a great time for buyers!

Rickson9, thanks for the wise words. I must admit (as a young investor) I got a bit discouraged with the "buy-and-hold" strategy, even though I would consider my securities to be non-risky.

I like what you said about optimism and pessimism. What trying to gauge this, how do you read it? Are you looking at it from the point of view from journalists, governments, and investors? At times I try to stay away from biased comments, but even these biased comments (from say, a journalist) does cause a ripple effect of optimism/pessimism toward the investor.

CheckingIn

Discussion Starter · #18 · Apr 10, 2009

DrStan said:
If the original poster has the fortitude to go into equities, there are great opportunities. Bonds will essentially hedge against inflation; money market doesn't even cover inflation. I'm 100% equities right now, and buying more, because I won't need a penny of that money for 25 or 30 years.

I am in my mid-20's, have no debt, have a full-time job, and won't be needing my money for the next 30 years (ie, I am a candidate of your profile). However, I can't see myself dedicating 100% of my portfolio into my equities. I am investing into some good dividend-paying companies (and income trusts), but I'd also like to balance that with about 30-35% into some fixed income securities.

Rickson9

· #19 · Apr 10, 2009 (Edited)

CheckingIn said:
Rickson9, thanks for the wise words. I must admit (as a young investor) I got a bit discouraged with the "buy-and-hold" strategy, even though I would consider my securities to be non-risky.

I like what you said about optimism and pessimism. What trying to gauge this, how do you read it? Are you looking at it from the point of view from journalists, governments, and investors? At times I try to stay away from biased comments, but even these biased comments (from say, a journalist) does cause a ripple effect of optimism/pessimism toward the investor.

I buy individual stocks. I do not invest in mutual funds. I used to invest in mutual funds back in my early 20s (15 years ago), but no longer.

When I was in my 20s I was 100% into equities. After finding places to live, my wife and I find ourselves 45% into equities and 45% into real estate and 10% cash. If we didn't need places to live, we would be very close to 100% into equities.

I first read 3 books including One Up On Wall Street by Peter Lynch, then The Warren Buffett Way by Robert Hagstrom and then The Interpretation of Financial Statements by Benjamin Graham.

This gave me a foundation of being able to determine the value of a stock. When a good company's stock was beaten down unfairly and the media reports around the company were bad, I bought it. When the stock price rose or was hyped by the media, I avoided it.

I almost never sell. I don't like to sell good company stock.

With regards to overall market sentiment, I don't really follow it, but I notice when virtually all the media reports are bullish or bearish. When the general media reports are bearish I find more opportunities. When the general media reports are bullish I find a lot less. That's just an observation nothing more.

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Mockingbird

· #20 · May 6, 2009

CheckingIn said:
I am in my mid-20's, have no debt, have a full-time job, and won't be needing my money for the next 30 years (ie, I am a candidate of your profile). However, I can't see myself dedicating 100% of my portfolio into my equities. I am investing into some good dividend-paying companies (and income trusts), but I'd also like to balance that with about 30-35% into some fixed income securities.

I also agree with DrStan and Rickson9. I don't see much reason not involved fully in equities especially at your age. 30+ year time horizon is a nice to have for any investors. Recessions and depressions will come and go. Many survived through them and very good odds that so will you. Those are something you will talk to your grand kids about... "Back in the days when..."

Here's an interesting article that questions some of the "financial rule of thumbs".
http://www.marketwatch.com/news/sto...x?guid={51AEC6AA-CB7B-4803-A4D5-7036B767F215}

And here's an interesting stat on "The Probabilities of Receiving a Certain Return".
http://getrichslowly.org/images/stowerschart.jpg

1 - 20 of 23 Posts

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