Indexer Matt wrote: ↑Sat Dec 09, 2017 5:35 pm
Wow that is a lot of replies and a lot of info to digest, thanks to everyone for the advice and the time spent replying, its a bit overwhelming I feel like I have dived in head first. For the record I am 34, timeframe is 20 years + and my nestegg is a lump sum, not a few hundred.
At age 34 I suggest about 20 - 25% in bonds. This is expected to substantially reduce volatility (risk), with only a relatively slight decrease in return. Graph,
"An Efficient Frontier: the power of diversification". Please see the wiki articles Bogleheads® investment philosophy, part 3
"Never bear too much or too little risk", and
"Asset allocation".
I suggest around 20 - 30% of stocks in international stocks. Vanguard paper (March 2012),
"Considerations for investing in non-U.S. equities". Historically, allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 84% of the maximum possible diversification benefit, and allocating 30% of an equity portfolio to non-U.S. stocks would have captured about 99% of the maximum possible diversification benefit (p. 6). You can find lots of debate here on international allocation, opinions rangeing all the way from 00% to 50% of stocks in international stocks. If you want more viewpoints on international stocks please try the Google search box (upper right, this page).
This works out to about 20% bonds, 20% international stocks, and 60% domestic stocks. Asset allocation is a very personal decision. You must decide on an allocation that is comfortable for you based on your own ability, willingness and need to take risk.
Indexer Matt wrote: ↑Sat Dec 09, 2017 5:35 pmSo my conclusions are…
It seems that the hardest decision is to invest my nestegg either via Dollar Cost Averaging or all at once. (I am leaning towards going all in)
It also seems that the heart of my dilemma can be solved by asset allocation. If I were to invest a large percentage into high quality bonds I could actually benefit from any reversion to the mean in the stock market. Perhaps 70% in bonds.
You are right to feel that asset allocation is a key in controlling risk. In my opinion 70% bonds (fixed income) is far too conservative.
Market timing (waiting for a good time to buy into the stock market) is a fool's errand. No one can successfully do that consistently. If you wait for a good day to buy, you will never know if the next day, or the next week, or the next month, or the next year might be an even better time to buy. For interesting reading look at the thread
"U.S. stocks in freefall". Since the start of that thread on August 8, 2011, total return of Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) is up 150%, and $10,000 has grown to be $25,033.
It was always my policy to invest whenever I had extra money available to invest.
The compromise solution is to invest 50% in a lump sum now, and invest the rest in stages (for example an additional 05% on a predetermined date each month for the next 10 months). Don't needlessly agonize over when the best time may be to invest.
Indexer Matt wrote: ↑Sat Dec 09, 2017 5:35 pmHowever it does seem that even if the market is overpriced I agree with the consensus that it’s still a good ideal to get in the market. I just don’t think the bulk of my nest egg will be in stocks at the moment. Nedsaid has indicated that Mr Bogle does shift a percentage of assets when certain areas get overheated.
So it seems that I need to work out two asset allocation strategies, a short term strategy higher in Vanguard bonds, and a long term strategy higher in Vanguard stocks. The switching point will be when the stock market bottoms at the end of its next cycle. I agree that it doesn't matter when this happens, just that it will happen.
This means I will be pricing the market to full advantage in accordance with an inevitable reversion to the mean, without timing the market or trying to predict when things are going to happen.
I looks to me like you are over thinking this with the idea of "need[ing] to work out two asset allocation strategies, a short term strategy higher in Vanguard bonds, and a long term strategy higher in Vanguard stocks. The switching point will be when the stock market bottoms at the end of its next cycle." I think the consensus approach, and the better approach, is to select an asset allocation that you feel you can live with in all market conditions, invest using that asset allocation, and stay the course.
This could be something like what I suggested above -- 20% bonds, 20% international stocks, and 60% domestic stocks. Asset allocation is a very personal decision. You must decide on an allocation that is comfortable for you based on your own ability, willingness and need to take risk. So read the links and other information on asset allocation, and make your own decision.
As for a "switching point" when the "the stock market bottoms at the end of its next cycle", you will never know when that is until after the bottom has occured. When you think it might be the "bottom" and a good day to buy into the stock market, you will never know whether the next day, or the next week, or the next month, or the next year might be an even better time to buy into the stock market.
Indexer Matt wrote: ↑Sat Dec 09, 2017 5:35 pmWill this plan give me my Boglehead tattoo or am I still lacking?
Right now I am reading the "Bogleheads Guide to investing" lots of good info in that book as well.
That's a good choice in reading material to learn the basics and more. I suggest that you read more on general investing. Wiki article,
"Books: recommendations and reviews". My book suggestion would be
All About Asset Allocation, by Rick Ferri, or
The Four Pillars of Investing, by William Bernstein. When I first stated managing my own investments, I found this tutorial very helpful in learning investing terminology/jargon and some of the investing basics. Morningstar,
"Investing Classroom". Also take a look at the Boglehead’s wiki, the "getting started" link I give below