Dealing with Reality

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Kagord
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Dealing with Reality

Post by Kagord »

OK, let's just say someone has a large percentage of their money in a money market. And let's just say that person knows (and has known) this is a horrible, non tax advantaged, losing to inflation strategy. How does one enter in the 3 investment thing, taking into account putting it in all at once may not be ideal, thoughts?
PFInterest
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Re: Dealing with Reality

Post by PFInterest »

divide by 12.
or 18
or 6

and get to work.
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ResearchMed
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Re: Dealing with Reality

Post by ResearchMed »

Kagord wrote: Fri Nov 23, 2018 2:50 pm OK, let's just say someone has a large percentage of their money in a money market. And let's just say that person knows (and has known) this is a horrible, non tax advantaged, losing to inflation strategy. How does one enter in the 3 investment thing, taking into account putting it in all at once may not be ideal, thoughts?
Read up about "dollar cost averaging".

And then perhaps start with half (or maybe a quarter if really skittish, or 1/12), and then put something like 10%, or 1/12th, etc.) in each month or every other month (?) until all the money is "in".

So you know, "ON AVERAGE", putting a lump sum in has been "better" than dollar cost averaging.
However, that is the *average*, and some people will do much better, but some... will do worse, such as if the market suddenly heads down (impossible to predict).
So if you are starting out, it can make sense to avoid a sudden drop straightaway, and then panic and pull it out at a loss, etc.

There is nothing wrong with keeping a reasonably small portion in cash, in a high yield bank account, especially if you have no other emergency fund, which should *always* be liquid and not at risk of a decline.

And do ask questions here.
This is a great place, and no one has any financial interest in your decisions, as some outside advisors do (most of them!).

Welcome to Bogleheads.

RM
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Clever_Username
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Re: Dealing with Reality

Post by Clever_Username »

Kagord wrote: Fri Nov 23, 2018 2:50 pm OK, let's just say someone has a large percentage of their money in a money market. And let's just say that person knows (and has known) this is a horrible, non tax advantaged, losing to inflation strategy. How does one enter in the 3 investment thing, taking into account putting it in all at once may not be ideal, thoughts?
Well, there are active debates for lump sum vs dollar cost averaging. In expectations, the markets go up, so lump sum is better in expectation. DCA is better psychologically, as an early drop doesn't take all your money with it, although of course you won't have lost money until you sell anyway.

But is putting money in a money market account long-term really losing versus inflation? I seem to think that tracking VMMXX vs inflation wasn't that big a loss.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.
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arcticpineapplecorp.
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Re: Dealing with Reality

Post by arcticpineapplecorp. »

welcome to the group.

in the past, lump sum has beaten dollar cost averaging around 66% of the time (the future is unknown and unknowable)
source: https://www.bogleheads.org/wiki/Dollar_cost_averaging

But presumably you're not wanting to invest a lump sum because you believe either:
1. the market's too high/too expensive right now
2. the market's poised to crash and I'll regret buying in and then watching my money sink like a stone.

Is that it?

If so, read the following post I reference often:
by HomerJ » Wed Oct 11, 2017 12:22 am
Sure, if you could just invest in stocks during the good times, and avoid stocks in the bad times, you'd make more.

But there are too many variables to make predicting the stock market possible. A single variable like PE ratio is not enough. PE ratios have been historically high since 1992. (Since 25 years is a big chunk of history now, the current PE ratios are becoming less and less "historically high" and more and more "historically normal").

But here's the thing.. The long-term stock market returns of 10% a year INCLUDE the crashes. Read that again. You didn't have to avoid the crashes to make a ton of money in the stock market in the past.

If the money is earmarked for retirement, long-term money, just buy and hold and stay the course.

Put some in bonds to help you sleep at night (I'm 50/50 stocks/bonds), and just leave it alone. Jumping in and out of the market, you are far more likely to under-perform the market than beat it.

Timing the market is hard. Here's an example. The Shiller PE10 ratio crossed 25 in 1996. The Shiller PE10 had never crossed 25 before that except in 1929.

A total signal to sell, right? The S&P 500 was in the low 600s in 1996. It more than doubled again to 1500 by 2000 before crashing back to the 800s. Anyone who got out in 1996 was never able to buy back in cheaper.

And today it's at 2550, more than 4x what it was in 1996. And that's just the price. You also got 2% dividends each year. $10,000 invested in 1996 is worth $64,000 today... 6.4x what you invested, or a 9.3% annualized return.

Buying in 1996, right when the PE10 ratio was the highest it had ever been since the Great Depression turned out to be great time to buy, not to sell.

Weird, right? Just set a conservative allocation (70/30 or 60/40 or 50/50 stocks/bonds), and stay the course. Slowly move more and more to bonds to protect your investments as you get closer to retirement.
source: viewtopic.php?f=10&t=229429&start=50#p3567987
then read "What if you only invested at market peaks" by Ben Carlson:
https://awealthofcommonsense.com/2014/0 ... ket-timer/

You can still make money regardless of buying high or low relative to some other time when the market may be lower still. When's the end game? If you're money is earmarked for decades, then what really matters is where the market is at decades from now. No one knows of course, but we would assume it would be even higher than it is right now (or was at an even higher point earlier this year). If it isn't then our economy hasn't advanced over the next several decades and that would seem to me to be a worse problem to worry about.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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Kagord
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Re: Dealing with Reality

Post by Kagord »

52 years old, retirement in 10 years, perhaps, and worried about a 2000/2007 thing, which is why I'm, "probably stupidly" not in the market. And, yes, i was fairly heavily invested during those times, both of those years made me sick to my stomach. I feel like throwing up now just writing this memory.

Sorry, I should have provided more detail, I get the divisor and dollar cost averaging. What I don't get, is how to optimize what isn't being invested.

So, for bridge funds, I was thinking CDs, like 1 year, 2 year, 3 year, 5 year for the rest, and trying to time entry with cash becoming available when I would want it for the averaging. Or is there some other "practically no loss" bridge that could yield more? So, I guess my question is, is CDs the best no risk bridge investment or is there something else that's more reasonable to do?
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ResearchMed
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Re: Dealing with Reality

Post by ResearchMed »

Kagord wrote: Fri Nov 23, 2018 3:42 pm 52 years old, retirement in 10 years, perhaps, and worried about a 2000/2008 thing, which is why I'm, "probably stupidly" not in the market. And, yes, i was fairly heavily invested during those times, both of those years made me sick to my stomach. I feel like throwing up now just writing this memory.

Sorry, I should have provided more detail, I get the divisor and dollar cost averaging. What I don't get, is how to optimize what isn't being invested.

So, for bridge funds, I was thinking CDs, like 1 year, 2 year, 3 year, 5 year for the rest, and trying to time entry with cash becoming available when I would want it for the averaging. Or is there some other "practically no loss" bridge that could yield more? So, I guess my question is, is CDs the best no risk bridge investment or is there something else that's more reasonable to do?
That would be the high yield bank account for the rest. If the timing works and the interest is enough better, then sure, CD's.
Ditto any "short term needs". That's money that you want to avoid having taken a downturn just when you need the cash.
Let the majority of your money work for you, while the shorter term pot keeps you secure in the shorter term.

BTW: Please DO understand that the market goes up and goes down.
Decide how much you want to "risk", and then do NOT pull it out after a huge loss. That is the very worst thing to do; you lock in huge losses. Let it recover, if you find yourself there.
Over time, you'll be able to look at the longer term graph of your investments. Drop 20%? Well, then you'll be able to remember and SEE that, after all, over the previous 5, 10, 20 years, it was mostly up.
If it went up 100% or 200% (the recent runs will probably not be repeated at that level of "success", but... who knows?), then a loss of 10, 20, 30% is unpleasant, but 'it happens'. Let it recover.
And you STILL have your "short term liquid money" to tide you over.

RM
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Carol88888
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Re: Dealing with Reality

Post by Carol88888 »

Thanks for asking the question and thanks for all the replies. I am in the midst of a dollar cost averaging program ( I have been using the dividends from other stocks to get into Vanguard ETFs) and now that the market is going down I am starting to second guess my self.

Maybe I should I hold off in my buying next month, I seem to be saying to myself. But now I realize how pointless that is because it means that i know FOR CERTAIN that if I hold back I will get a better price by skipping this month.

So I will add, if you decide to dollar cost average, at whatever intervals you choose, then don't stop till the money is invested. Otherwise you are under cutting a good plan.
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ResearchMed
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Re: Dealing with Reality

Post by ResearchMed »

Carol88888 wrote: Fri Nov 23, 2018 4:20 pm Thanks for asking the question and thanks for all the replies. I am in the midst of a dollar cost averaging program ( I have been using the dividends from other stocks to get into Vanguard ETFs) and now that the market is going down I am starting to second guess my self.

Maybe I should I hold off in my buying next month, I seem to be saying to myself. But now I realize how pointless that is because it means that i know FOR CERTAIN that if I hold back I will get a better price by skipping this month.

So I will add, if you decide to dollar cost average, at whatever intervals you choose, then don't stop till the money is invested. Otherwise you are under cutting a good plan.
Right.

And perhaps choose a date each month (or two) and don't start second guessing yourself about "maybe tomorrow or next week, or not!???".
The point is, some may be "up" days, but some may be "down" days... the fluctuations average out, which is the point.

It WILL be difficult, most likely, on the "down times".
Recognize that, and remember... it's the long run that matters. You'd hate to miss a nice run up, correct?

And the short term or emergency needs, are kept nice, safe, and available.

RM
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celia
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Re: Dealing with Reality

Post by celia »

Kagord wrote: Fri Nov 23, 2018 2:50 pm OK, let's just say someone has a large percentage of their money in a money market. And let's just say that person knows (and has known) this is a horrible, non tax advantaged, losing to inflation strategy. How does one enter in the 3 investment thing, taking into account putting it in all at once may not be ideal, thoughts?
I think you may be talking about two different things. If you want a tax-efficient portfolio, you need to understand Tax-Efficient Fund Placement. And if you want a 3 fund portfolio, you need to understand Three-fund Portfolio.

So the question is how you get from all cash to both of those goals being met.


The Three-fund portfolio wiki page starts by telling you how to figure out your Asset Allocation which takes your level of risk into account and your need/want to balance between stocks (which have more growth) and bonds (which have more safety). You want a "balance" that lets you sleep peacefully at night [ie, minimal worry]. Since you seem to be more conservative (money currently in money markets), you likely won't want more than 50% of stocks to begin with, even a lower percentage than that, although the portfolio won't grow as much as one with a higher stock percentage.

After that, you choose your Asset Location, which tells you WHERE to place each holding for the best tax-savings strategy. This will work best if you have assets in taxable, tax-deferred, and Roth spaces. If everything is in taxable, you will be limited in your tax-efficiency, but might then become motivated to start contributing to tax-deferred and Roth space (assuming you are eligible).

Lastly, you will choose your funds and buy into them, putting a fraction of your cash in each month. This will give you a "diversity of costs" over the next year or so (if buying every month or quarter). By definition, one purchase will be lower cost (or give you more shares for the same price) than the others. But one purchase will be higher cost (or give you fewer shares) than the others.
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celia
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Re: Dealing with Reality

Post by celia »

Carol88888 wrote: Fri Nov 23, 2018 4:20 pm Maybe I should I hold off in my buying next month, I seem to be saying to myself. But now I realize how pointless that is because it means that i know FOR CERTAIN that if I hold back I will get a better price by skipping this month.
How are you so CERTAIN about that? I'd like to know the secret so I can take advantage of it too. :D
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tennisplyr
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Re: Dealing with Reality

Post by tennisplyr »

This Vanguard tool can help you to determine your asset allocation.

https://personal.vanguard.com/us/FundsInvQuestionnaire
Those who move forward with a happy spirit will find that things always work out.
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celia
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Re: Dealing with Reality

Post by celia »

Kagord wrote: Fri Nov 23, 2018 3:42 pm 52 years old, retirement in 10 years, perhaps, and worried about a 2000/2007 thing, which is why I'm, "probably stupidly" not in the market. And, yes, i was fairly heavily invested during those times, both of those years made me sick to my stomach. I feel like throwing up now just writing this memory.
Now that I read your second post, I think you should understand what happened and why. What if you invest in a 3-fund portfolio and the markets drop again? Will you feel sick to your stomach all over again and bail? Or are you willing to stay on the roller coaster until things level out?

You know, 10 years is a long time to allow things to recover and even grow to more that the current value. It is even possible to double your money in ten years even without adding new money to the existing accounts. Back in 2000 and 2007, your time until retirement was even longer! So you FIRST need a plan for how you will re-act next time. Coming to Bogleheads and reading what others say and sharing your thoughts is one way. Those here who have been successful will give you reasons why you want to stay invested. Especially with a conservative portfolio as I think you will have, your potential losses will not be as bad as someone who is invested 100% in stocks. And you really won't have any losses UNLESS YOU SELL! They will just be "paper losses" which will re-cover, if you let them.

So first you need to decide what you will do in the next downturn, and the one after that. (Stocks loose more than 10% every 8 years, on the average, which isn't that bad when you consider that 3 out of ever 4 years are "up" years.) Put your plan for "down markets" in writing, sign, and date it. When the markets reach a new high, read it and see if it makes sense. When the markets lose 20% off the highs, read it and see it it makes sense. Bookmark this and other threads for your moral support, which you might want to read in the middle of the night, if you are worried. This isn't a personal disaster for you. It's just the markets doing what markets do!
BigJohn
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Re: Dealing with Reality

Post by BigJohn »

While the data favors lump sum investing, I’d suggest you dollar cost average in over 12-18 months for two reasons. First,you’re fairly close to retirement so the consequences of being on the wrong side of the averages are more significant. Second, you seem nervous about going all in which has you stuck in you’re current position. Hopefully committing to making the changes over some period of months will allow you to get unstuck.

One word of caution, once you commit to a monthly or quarter investment on a certain day, you really need to stay the course and stick with the plan. Watching the market and saying “tomorrow will be a better day to invest” can be a road to getting stuck again.

Best of luck with the change.
Northern Flicker
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Re: Dealing with Reality

Post by Northern Flicker »

Kagord wrote: Fri Nov 23, 2018 3:42 pm 52 years old, retirement in 10 years, perhaps, and worried about a 2000/2007 thing, which is why I'm, "probably stupidly" not in the market. And, yes, i was fairly heavily invested during those times, both of those years made me sick to my stomach. I feel like throwing up now just writing this memory.

Sorry, I should have provided more detail, I get the divisor and dollar cost averaging. What I don't get, is how to optimize what isn't being invested.

So, for bridge funds, I was thinking CDs, like 1 year, 2 year, 3 year, 5 year for the rest, and trying to time entry with cash becoming available when I would want it for the averaging. Or is there some other "practically no loss" bridge that could yield more? So, I guess my question is, is CDs the best no risk bridge investment or is there something else that's more reasonable to do?
If you have a zero or low stock allocation, your fixed income assets should be dominated by ibonds and TIPS so that you are not taking inflation risk over the long term.

If your emotional tolerance of volatility is low, you probably should not be heavily invested in stocks.

The solution is to hold a low percentage of risky assets and a high allocation to inflation-adjusted bonds like ibonds and TIPS, such as:

15% US stock
10% non-US stock
75% ibonds and TIPS
Risk is not a guarantor of return.
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Kagord
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Re: Dealing with Reality

Post by Kagord »

Yes, exactly, I can't deal with major losses, I.E. over 50%, that folks here just weather through. So yeah, I pulled in panic in 2000 and 2008, while Warren Buffet was buying America on sale, and I still have loss carryovers for eternity. These 10-20% normal correction blips, no big deal.

Advice in 1991, I remember meeting with a very enthusiastic Schwab advisor, "What are you doing, you need put a % in every month in big diversified mutual funds, you're young, great time to do this at your age, wish I had". This may sound vaguely familiar on this forum. Well, we set up $2K in a Schwab 1000 fund right then, and went a few months adding auto scheduled $100 adds, then called in and canceled the deposits thinking we could do better because we were smarter than the average bear. It's 26K now, with reinvesting the divs. Up and to this point, that's the only thing that's been successful for me with stocks. Had I stuck with this, we'll let's just say I probably would be retired very comfortable now and have time not sucked up by work. So anyways, 27 years later, I think I'm ready to actually try to do this right, hence why I'm researching trying to unlearn my very bad habits. I'll be trying to put this in my kid's heads as well to not make the same mistakes I've made.

Other successful things over the years for me, not really stocks, direct bond purchases held to maturity and preferreds direct purchases, you know what you're getting income wise, I think of it as a contract. But direct stock purchases based on tips and articles, terrible performance for me, obviously at the point people are talking about how great something is, it's too late and you're a sucker.

I need to look at TIPS, I would like to have inflation protection, should that happen.
sambb
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Re: Dealing with Reality

Post by sambb »

Best thing is to go 50/50 - put in half over the next 4-8 weeks. Keep the other half in MM. Reconsider in 6 months based on your actual risk tolerance, rather than your theoretical risk tolerance.

I would place 25% in total stock, 15% in total intl, 10% in total bond or intermed term tax exempt. - DCA in over 4-8 weeks.

In 6 months if you can tolerate this, and not freak out with market fluctuations, then invest the rest to achieve desired allocation.

You will be challegned until you can ride out the tops and bottoms over 6-12 months.
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Re: Dealing with Reality

Post by pkcrafter »

Kagord wrote: Fri Nov 23, 2018 2:50 pm OK, let's just say someone has a large percentage of their money in a money market. And let's just say that person knows (and has known) this is a horrible, non tax advantaged, losing to inflation strategy. How does one enter in the 3 investment thing, taking into account putting it in all at once may not be ideal, thoughts?
The first thing you need to understand is you must balance need, ability and willingness to take stock risk. There simply is no exact right answer. Without stocks, it's highly unlikely you can attain the goal of having 25X more in assets than you need to initially withdrawal (4% withdrawal) and you also cannot sustain the withdrawal rate without some equity exposure. You haven't mentioned where you are in attaining the 25x goal at time of retirement, and that would be helpful.
52 years old, retirement in 10 years, perhaps, and worried about a 2000/2007 thing, which is why I'm, "probably stupidly" not in the market. And, yes, i was fairly heavily invested during those times, both of those years made me sick to my stomach. I feel like throwing up now just writing this memory.

Sorry, I should have provided more detail, I get the divisor and dollar cost averaging. What I don't get, is how to optimize what isn't being invested.
How to optimize what isn't being invested isn't going to help much. You can be a little more efficient, but you are really going to have to take some uncomfortable market risk. How much of that is the real question. It's clear that you do not have much willingness. As for need and ability, those depend on where you are right now. Unfortunately for a risk averse investor, the more need you have, the less ability you have to take the risk. You will have to find a reasonable balance. You can reduce need and increase ability if you increase your savings rate somewhat. If you are on target to meet your 25x goal, need to take risk is reduced, and at the same time ability is increased.

If you don't have a lot of "catching up" to do, then you have more comfortable options. If you are behind on savings, then choices become harder -- delay retirement or take more risk. If you don't need to catch up then you might be able to get by with maybe 45% equity overall, but that's minimum I think. 45% equity will limit portfolio losses to ~20-24% in almost all cases. Yes, that's based on a 50% market drop and the market can and has dropped more than 80% a few times. Nobody would like that, but it precisely why there is a premium for taking the chance.

Dollare cost averaging is fine, but at some point you will find yourself all in up to target AA and you will then face the risk you were trying to spread out and avoid.

Find the equity exposure limit you can handle and work from there. DCA if you want. Use target funds or Lifestrategy funds because they tend to mask equity downturns and are easier on the nerves. Tax-managed balanced (50/50) is another good choice for taxable and you can reduce overall equity percent by adjusting in tax-deferred.

To sum up, think about controlling and managing the equity (risk) side, not trying to optimize the safe side. One other way to think of this is you have 25x the money you need to capture the safe 4% withdrawal rate, let's say 1MM with a withdrawal rate 40k/year (4%), and you are at 40/60, then you have $600.000 in non-equity. That is enough to withdraw 40k/year for 15 years without disturbing the equity side. More than enough time for a full recovery. I haven't mentioned inflation, but 45% in equity will keep up.




Paul
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Earl Lemongrab
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Re: Dealing with Reality

Post by Earl Lemongrab »

DCA is a crutch. Once the money is in there, it's just as vulnerable to decline as if you put it in all at once. Just do it.
3funder
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Re: Dealing with Reality

Post by 3funder »

Kagord wrote: Fri Nov 23, 2018 2:50 pm OK, let's just say someone has a large percentage of their money in a money market. And let's just say that person knows (and has known) this is a horrible, non tax advantaged, losing to inflation strategy. How does one enter in the 3 investment thing, taking into account putting it in all at once may not be ideal, thoughts?
I'm one of those individuals who cares about valuations, but I must advise that if your 3-fund portfolio is compromised of US stocks, international stocks, and US bonds, you choose your asset allocation and invest it all at once. This is especially the case if your asset allocation is neither stock-heavy nor bond-heavy (i.e. more of a balanced allocation).
KlangFool
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Re: Dealing with Reality

Post by KlangFool »

OP,

You should use one of those Vanguard Lifestrategy all in one fund.

https://investor.vanguard.com/mutual-fu ... estrategy/#/

You cannot use the 3 funds because you would not rebalance.

KlangFool
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