If You Believed ... What Would You Invest In?

[orlandoman]

If you:
- Were 95% invested in cash ($500,000)
- Had a 10 year time horizon before you needed the money
- Believed the stock market was overvalued based on P/E
- Believed inflation was going to rise

What would you invest in or just continue to sit on cash for a while?

Thanks!

[downshiftme]

You are asking, if the crystal ball says all other investments are overpriced and large inflation is just ahead, what to do with your money? This seems like exactly what TIPS are for. Although I wonder why you think this particular crystal ball will be reliable.

[orlandoman]

Here's a little more info. on what I base my 'beliefs'.

Here's a link to an article posted today that confirms everything that I personally believe, based on similar statistics about the market being overvalued when looking at future growth potential:
http://seekingalpha.com/article/268944- ... macro_view

TIPS do not appear to be a positive earner currently, as suggested in other threads on this forum. And, TIPS, although they are supposedly an inflation hedge, your inflation appreciation is taxed, which reduces the inflation hedge advantage.

Looking for other options I have not considered.

[Dandy]

What I believe is that even true believers don't know. I would dollar cost average into the allocation that fits my risk tolerance. i.e. if I was 60% equities/40% bonds I would allocate those percentages each month over a year or two.

[staythecourse]

You are asking, if the crystal ball says all other investments are overpriced and large inflation is just ahead, what to do with your money? This seems like exactly what TIPS are for. Although I wonder why you think this particular crystal ball will be reliable.

I would disagree. If inflation is expected then nominal of the same duration will do better. TIPS are for unexpected inflation, whatever that means.

Nominals already have a inflation risk premium built in so TIPS will only do better if the real inflation becuase larger then the built in premium on nominals.

Good luck.

[nisiprius]

If you:
- Were 95% invested in cash ($500,000)
- Had a 10 year time horizon before you needed the money
- Believed the stock market was overvalued based on P/E
- Believed inflation was going to rise

What would you invest in or just continue to sit on cash for a while?

Well, it depends. How much money do I need in ten years?

In "normal" times cashlike investments sorta-kinda-pretty-much just about keep up with inflation. In the case of ordinary bank accounts, with a lag both going up and coming down. An investment in Treasury bills from year-end 1970 to year-end 1980, with interest reinvested, experienced about a 10% loss in purchasing power. A sane person who was extremely bond-averse and stock-averse, and could tolerate only being able to buy $450,000 worth of stuff after ten years, could just stay in cash, and shrug off all the idiots telling him that he has some sacred obligation to make his money work harder.

TIPS are the obvious answer. Particularly if it's really exactly a ten-year period. Buy ten-year TIPS at auction, boom, problem solved. Or, at least, problem solved if I state the problem carefully. If

a) I am certain I don't need any of the money for ten years,
b) the investment is in a tax-advantaged account,
c) I wish to reduce inflation risk--minimize the uncertainty in how much the investment will be worth in ten years--am willing to trade off the possibility that some other investment might do better if inflation doesn't increase, in return for assurance that my investment won't be hurt if inflation does increase--

--then it seems to me TIPS would be just plain better than cash.

Of course I do my best not to base my investment decisions on my beliefs about what will happen in the next year or decade. It's a terrible mental trap. The sellers of investments know better than to promise results, so they put the onus on you by encouraging everyone to ask questions like "If I believe that the roulette wheel is due to come up red, then what sized bets should I place, in what order?"

[Grt2bOutdoors]

Judging from initial post - I would venture to say you are extremely risk averse. My suggestion is to invest 25% of it in a 60/40 mix of Total Stock Market Index/Total International Stock Index, remaining 75% in a 5 year ladder of CD's. If inflation does show up you can reinvest at higher rates.

[Sidney]

You are asking, if the crystal ball says all other investments are overpriced and large inflation is just ahead, what to do with your money? This seems like exactly what TIPS are for. Although I wonder why you think this particular crystal ball will be reliable.

I would disagree. If inflation is expected then nominal of the same duration will do better. TIPS are for unexpected inflation, whatever that means.

Nominals already have a inflation risk premium built in so TIPS will only do better if the real inflation becuase larger then the built in premium on nominals.

Good luck.

I think you need to distinguish between what the OP believes and what the market believes. If the OP believes that inflation will exceed the levels expected in the market, then TIPS might be for him.

[greg_bhs]

Funny, I was looking for an answer to this same question (more or less) a few days ago.

You'll find it at /forum/viewtopic.php?t=74127 - I'm a new member so can't past links!

Still looking.

[dnaumov]

If you:
- Were 95% invested in cash ($500,000)
- Had a 10 year time horizon before you needed the money
- Believed the stock market was overvalued based on P/E
- Believed inflation was going to rise

What would you invest in or just continue to sit on cash for a while?

Thanks!

10% Total Stock Market
10% Total International
30% Total Bond Market
30% TIPS
20% Short-Term Investment Grade

[Jacobkg]

I'll bet dollars or donuts that you already have a view on the matter and what we discuss today won't change your mind one way or the other. But that's how it goes for investment research -- we look for stuff that confirms our preconceived notions and discard information that refutes it.

That's a quote from the seekingalpha article you mentioned above. I think that was the most insightful comment in the whole article.

[Don Robins]

I vote for the 5 year CD ladder.

[fundtalker123]

If you:
- Were 95% invested in cash ($500,000)
- Had a 10 year time horizon before you needed the money
- Believed the stock market was overvalued based on P/E
- Believed inflation was going to rise

What would you invest in or just continue to sit on cash for a while?

Thanks!

10% Total Stock Market
10% Total International
30% Total Bond Market
30% TIPS
20% Short-Term Investment Grade

That's it!

[HomerJ]

If you:
- Were 95% invested in cash ($500,000)
- Had a 10 year time horizon before you needed the money
- Believed the stock market was overvalued based on P/E
- Believed inflation was going to rise

What would you invest in or just continue to sit on cash for a while?

Thanks!

10% Total Stock Market
10% Total International
30% Total Bond Market
30% TIPS
20% Short-Term Investment Grade

You don't know if the stock market is overvalued, and you don't know if inflation is going to rise.

Investing based on those beliefs is more likely to lose you money, than if you just accept you don't know what the hell is going to happen next, and certainly not over the next 10 years...

Since we don't know which asset class is going to do well over the next 10 years, we invest in all of them... The portfolio listed above is diversified and very conservative. You still MIGHT lose money over 10 years with that portfolio, but it's unlikely. I think it's a very solid portfolio for you.

Staying in cash just means you're losing 2%+ a year due to inflation.

Read some of the books on this board's wiki, and quit looking at websites that try to predict the future. No one knows.

[peter71]

Even as a valuations matter person the seekingalpha article strikes me as dangerously simplistic . . . see many previous threads on valuations (and on the very charts discussed in the article) for details and/or just know that current P/E's make the market look much cheaper than P/E 10 (and that this has rarely been the case in the past).

All best,
Pete

[Taylor Larimore]

Hi Orlandoman:

What would you invest in?

Jason Zweig is one of the best informed financial writers in the business. This is what he wrote:

I don't know. I don't care.

[pkcrafter]

Orlandoman wrote:

Here's a link to an article posted today that confirms everything that I personally believe

This is a major behavioral error of confirmation bias.

Rule No. 1. Never assume that what you hear (especially what you want to hear) is going to happen. Don't overlook what the author of that article said: "So far, I've been dead wrong on that one"

It's OK to know what's going on, it's bad to get rattled to the point of making major short-term allocation changes.

Rule No. 2. If you do believe something, then tilt that way, but never make the bet of adjusting all the way because you might be wrong. You do sound risk averse, so an AA that favors your thoughts is appropriate. There are a couple of good suggestions in the thread already and my suggestion would be about 30-35% equity, which is between what I might recommend for someone else (50%) and a minimum of 20%. Use TIPs, short term bond index, or CDs for non equity. For equity, TSM plus either Dividend Appreciation or Equity Income, and Total International.

[Scott S]

The words "believe" and "belief" are nowhere in my investment plan. I invest in stocks and bonds because cash has a miserable historical return, and there's no reason to think that'll change.

That said, if you need your money to do nothing but possibly lose a little value each year, cash is where you should be.

- Scott

[trico]

I would study next years Kentucky Derby and try to pick a 10-1 horse. You could have then $5,000,000.00 in just one year. The next year you would have $500,000,000,000.00. I know this works because it happen to a guy last year that really studied hard.

[renditt]

If you:
- Were 95% invested in cash ($500,000)
- Had a 10 year time horizon before you needed the money
- Believed the stock market was overvalued based on P/E
- Believed inflation was going to rise

What would you invest in or just continue to sit on cash for a while?

Thanks!

- Cash 100k
- TIPS 100k (if in tax advantaged)
- Total Bond fund (tax advantaged) or Muni intermediate (taxable): 100k
- Short term corporate bond fund: 75k
- XLU 75k (Utilities ETF, dividend yield over 4%)
- VGK 50k (European market, dividend yield over 4%)

Should the market dip a lot in the next 2-3 years, invest another 50k of the cash in total stock market.

[Sophie Spence]

deleted comment

[biasion]

If you:
- Were 95% invested in cash ($500,000)
- Had a 10 year time horizon before you needed the money
- Believed the stock market was overvalued based on P/E
- Believed inflation was going to rise

What would you invest in or just continue to sit on cash for a while?

Thanks!

Assuming 100% tax free or deferred:

30/70:

Equity risk:
5% total US stock market
5% small US value
5% REIT
5% total international
5% emerging Markets index
5% PCRIX (commodity fund)

Fixed
25% intermediate treasuries
25% tips
10% cash/money market

If taxable, I'd keep the total market equities in taxable, use part of the TIPS and cash allocations w/ I bonds in taxable again, and use AA/AAA or pre-refunded individual municipal bonds or direct FDIC insured CD's from crappy banks with negligible early withdrawal rates (read high interest) to substitute the intermediate treasuries.

Gives plenty of inflation protection, enough equity to diversify various fixed income risks, risky equity into which to rebalance safer fixed during bears, and commodities allowing you to extend durations somewhat and improve efficiency over a variety of market conditions.

This portfolio has moderate expected returns, low volatility, very low correlation and is very likely to somewhat outpace inflation year after year provided that you, your own worst enemy, rebalance to keep those allocations in place.

[tadamsmar]

- Believed the stock market was overvalued based on P/E
- Believed inflation was going to rise

Dear Orlandoman,

I believe that only a moron would believe stuff like that.

I believe in a diversified portfolio with a risk level that is appropriate to it's consumption time horizon.

Sincerely,
Tom

[jidina80]

Here's a link to an article posted today that confirms everything that I personally believe, based on similar statistics about the market being overvalued when looking at future growth potential:
http://seekingalpha.com/article/268944- ... macro_view

The author of the linked article shared plenty of good information but failed to consider that corporate earnings likely have a few more good years ahead of them. During the last decade, we've suffered through an investing hangover from the dot.com boom, and then the hangover from the real estate boom, but I see sunny skies unless we get a black swan.

The original poster would be wise to acknowledge that there is a very remote possibility that he might be wrong, and put at least 30% of a ten year investment into a low-cost global stock market index fund.

The remaining 70%? Well, I'd put half of that in a low cost total market fund, too. If risk averse, stuff it into a total bond market fund and forget about it.

How's that for market timing?

Just.

[jmbkb4]

Judging from initial post - I would venture to say you are extremely risk averse. My suggestion is to invest 25% of it in a 60/40 mix of Total Stock Market Index/Total International Stock Index, remaining 75% in a 5 year ladder of CD's. If inflation does show up you can reinvest at higher rates.

I agree 100%

[Nathan Drake]

Here's a link to an article posted today that confirms everything that I personally believe, based on similar statistics about the market being overvalued when looking at future growth potential:
http://seekingalpha.com/article/268944- ... macro_view.

There's a few problems with the assumptions in his article:

1) We've encountered two large market crashes in the past decade. P/E's may be high just because earnings are artificially low because we've had those two major events distorting the earnings of the PE10.

2) He's assuming that the trend will revert back to the pre-1990s trend line, and that the 1990's trend is entirely based upon fiscal policy and not other factors. It could be entirely possible that due to the internet era, the establishment of investment incentives like the 401k and IRAs that now more than ever before it's not only easier to invest in stocks (even for unknowledgeable investors), but there's also far more incentives to invest in stocks. These factors could easily establish a new 'normal' trend for P/E relative to expected investment returns as more money is entering the market.

Looking at his chart, assuming he is wrong, and that fiscal policy does not change and/or the post-1990s trend line remains in tact in spite of a shift in fiscal policy, then the present PE of 23.7 looks incredibly cheap and would yield a return of ~200% over the next decade.

It's hard to beat that.

Further, his next line is particularly anti-Bogle in its approach:

In fact, if you're going to draw one conclusion from this article, I hope it's not that you should buy the market or sell the market. It's that this is an environment where you'll probably be better off with active strategies and picking specific stocks than with passive strategies and positioning yourself like an index.

So, he advocates market timing. He advocates 'active' investment approaches, picking specific stocks and sector funds which is costly and does not yield better returns on average than the market. All of this advice has been consistently proven to be a dangerous investment strategy for the long term investor, and you will lose out by employing it.

As for what you do with your money, that's entirely up to you. Worst case, you end up with a 'lost decade' and your investment remains flat. But if you stay the course and keep investing into the market every month, you'll likely end up ahead of other investment approaches.

Research suggests that the best time to buy is always now. Putting your paycheck to work as fast as possible, every single month, gets the greatest possible return because you will be buying when stocks are high and have momentum swings that keep them high, and you will also be buying when stocks are cheaper after dips all the whole collecting regular dividends.

Current corporate earnings look strong, I don't need to touch my money for decades, and looking into the future stocks will seem very cheap today versus what they will be in 2040 in retrospect. So I am always a buyer.

[JMacDonald]

Hi,
Are you going to need all of that money in 10 years?

I don't know what the market is going to do for the next 10 years so I have just split my portfolio down the middle: 50% bonds and 50% stocks. At least I hope to be half correct.

[Noobvestor]

I'm on a PP bender, but I think it fits with the 10-year goal, inflation aversion, etc... so here goes my variant o the day:

25% Equities [Total World and maybe some Small/Value/Emerging Tilts]
25% Bonds [Combination of Long-Term TIPS and Treasuries]
25% Commodities [GCC - equally-weighted fund - and some GLD]
25% Cash [Could include some Short-Term Treasuries, or Treasury MM]

[happy2]

If you really believe it, and want to act on it, try a bear fund, like BEARX. But don't expect much sympathy here when that doesn't work for you.

Like almost all the other posters, I'd recommend you diversify, and don't invest based on gut feelings.

[empb]

Does it seems strange that you're blessed with insights into the market but you're asking here how to take advantage of it?

Reminds me of the Andrew Tobais snippet Nisi puts up when someone suggests deposits in a foreign currency to take advantage of higher interest rates...

To answer your question: I'd probably just use a CD ladder.