As I've mentioned before, earlier this year I took over actively managing my mom's IRA account. Aside from future SS income, the IRA is her only source of retirement income. She is too young to really let the money sit in cash, but is obviously unable to really take big risks with the market either. That all being said, I would be able to pull gains out today such that it would lock in her return for this year at slightly over 10%. In my/her situation, would you go ahead and do this, and call it good for this year at 10%, or roll the dice a little and hold until year end and re-evaluate then?
Well, she dips into principal every month, this is not an issue of living off the earnings.
My concern is that really, she can't afford to lose principal above and beyond what she withdraws. I sort of feel like I am playing with fire investing the money at all, but the realist in me knows that she should get at least a modest return on the money, and that would give her at least some cushion and the money would last a bit longer.
So this is the hypothetical situation. She has $100k invested, plus a smaller amount in cash holdings. Her monthly withdrawals come from the cash portion. Over the year, I've been pulling out earnings over the $100k whenever there is a market upswing and instead of reinvesting those earnings, I've been moving them to the cash holdings (essentially, to guarantee some return). As of today, I can pull an additional amount off the top of the $100k that would bring the YTD earnings to $10k, so 10% return on the investment. I am concerned with a potential extended downturn over the next few months/next year that would negate that 10% return, so I am considering pulling the investment now, calling this year good at 10%, and then starting over again January 1st.
You're no more likely to make money (or avoid a downturn) starting Jan 1st. You're focusing on the wrong thing here, IMO.
I think you should stop trying to time the market and instead make sure the portfolio is invested such that the risk is at an appropriate level - to me this means keeping only a small portion in stocks since she is in the withdrawal phase. To get even more specific, I'd take a look at how Vangaurd's Target Retirement funds for 2010/2015 are invested and try to mimic that. Unless she needs more growth to avoid outliving her money, she should not be taking a lot of risk.
Post by njohnson1972 on Oct 30, 2014 11:30:12 GMT -5
So with this strategy, what do you do when the markets turn down for some time and that $100k is now worth $90k. And say it takes another year to get back to $100k - do you take no withdrawals for that year?
Also, if you keep the base at $100k, when inflation kicks in, she is going to have a hard time since she will still only be earning on the same base as when there was no inflation. Just a thought.
When you say "pull gains out" you are talking about selling certain securities to lock in gains, right? Not actually pulling the money out of the IRA account?
I would not sell the whole portfolio to lock in gains (ie if you started at 100K invested and now it's worth 110K, I wouldn't want to liquidate the whole thing), but there is certainly nothing wrong with selling a few positions that have done well and that you think may not continue to do so. Do you have a "buy list" or ideas of what you will reinvest in when appropriate?
You're no more likely to make money (or avoid a downturn) starting Jan 1st. You're focusing on the wrong thing here, IMO.
I think you should stop trying to time the market and instead make sure the portfolio is invested such that the risk is at an appropriate level - to me this means keeping only a small portion in stocks since she is in the withdrawal phase. To get even more specific, I'd take a look at how Vangaurd's Target Retirement funds for 2010/2015 are invested and try to mimic that. Unless she needs more growth to avoid outliving her money, she should not be taking a lot of risk.
The investments are low-risk, but have done OK this year. She needs some growth, yes. The point of me managing the money is to manage the risk. I would never leave more invested year to year that she couldn't afford to ride out a downturn with - ie., each year, I will put money into the cash holdings to cover her projected withdrawals, and deal with the investments separately.
So with this strategy, what do you do when the markets turn down for some time and that $100k is now worth $90k. And say it takes another year to get back to $100k - do you take no withdrawals for that year?
Also, if you keep the base at $100k, when inflation kicks in, she is going to have a hard time since she will still only be earning on the same base as when there was no inflation. Just a thought.
Your first point is my concern. This is the first year. As I'm sure you know, the market has been fairly volatile this year, so I have just let the account ride out the downturns and not touched it when it's been below $100k. But I worry a bit about in for the future, at some point there won't be enough money/time to ride it out if it came to that.
I'm not concerned with your second point, I don't think. She will likely spend through this money before it gets to a point where inflation would be an ongoing issue.
When you say "pull gains out" you are talking about selling certain securities to lock in gains, right? Not actually pulling the money out of the IRA account?
I would not sell the whole portfolio to lock in gains (ie if you started at 100K invested and now it's worth 110K, I wouldn't want to liquidate the whole thing), but there is certainly nothing wrong with selling a few positions that have done well and that you think may not continue to do so. Do you have a "buy list" or ideas of what you will reinvest in when appropriate?
Yes, sorry, just selling the securities.
No to the buy list, I need to do some more research on the funds.
You're no more likely to make money (or avoid a downturn) starting Jan 1st. You're focusing on the wrong thing here, IMO.
I think you should stop trying to time the market and instead make sure the portfolio is invested such that the risk is at an appropriate level - to me this means keeping only a small portion in stocks since she is in the withdrawal phase. To get even more specific, I'd take a look at how Vangaurd's Target Retirement funds for 2010/2015 are invested and try to mimic that. Unless she needs more growth to avoid outliving her money, she should not be taking a lot of risk.
The investments are low-risk, but have done OK this year. She needs some growth, yes. The point of me managing the money is to manage the risk. I would never leave more invested year to year that she couldn't afford to ride out a downturn with - ie., each year, I will put money into the cash holdings to cover her projected withdrawals, and deal with the investments separately.
Ok, well put aside any specific advice of what to invest in.
Let's just talk about this strategy of locking in gains "for the year". I understand that you want to get a certain rate of return on paper each year, but this "hit 10% for the year and sell" strategy is flawed. The market moves up and down constantly but on average moves up more than it moves down. Agreed?
Whether it's moving up or down at any given time has very very little to do with what time of year it is. So to be able to get a certain rate of return, the way to do it while taking the least amount of risk in the underlying investments is to leave it in for as much of the time as you can. Sure, it'd be nice to be able to have it in only while the markets are going up, but good luck predicting that with any accuracy. If it were that easy, everyone would be doing it. (Read some books, like Random Walk Down Wallstreet, if you want data on how well the pros predict downturns. Even Warren Buffet stays in the market basically all the time.). So anyway, you want to be able to keep things invested as much of the time as possible in order to maximize risk-adjusted return. Some years will be losers and you will not be able to make money if you invest on Jan 1st. And then how do you get back to your paper rate of return? The next year you will need an even higher rate of return. Even though it sounds good in principal to walk away while you're ahead, the key to growing money is to leave it invested for as much time as possible so that you capture this average rising of values (instead of trying to capture just upswings).
Even though investing has a lot in common with gambling, the difference is that with a casino, your expectation value on return on investment is to take a loss. With stocks, your expectation value is to gain money. So you need to keep playing.
Post by barefootcontessa on Nov 1, 2014 5:44:04 GMT -5
You might want to take a look at Investors Business Daily and its associated Meet-Up groups. IBD does not predict the market but uses historical data to determine whether the market is in an uptrend, under pressure or in a correction. I know lots of successful investors who have used the "big picture" approach of IBD to determine when to move to cash and win to invest. For this reason, I personally am no longer a buy and hold investor (with my non-retirement funds).