the financial adviser says

[BandB]

In the words of Fox Mulder, "Trust No One."

Now I don't really mean that. In fact deal with those you do trust. But when it comes to your money, trust them to give you advice, but you ultimately must know what is going on and what you're doing. It's your future. Don't turn all the power over to someone else.

With any professionals I believe in paying them a fair rate for their time. But advice is the limit of what I would seek. It's easy to make one's on trades. Have them help you develop a strategy consistent with your age, your wealth, your goals, and your risk tolerance.

Now, one caveat. I've heard the 5% minimum stated so many times and seen so many people not achieve it. While it may be an average over some periods it is not over all periods and one or two bad investments can make you achieve less. Frankly, I'd shoot for that but also have a plan for only achieving 3%. One other factor is that the 5% is pre-tax. The income is mostly taxable at some time. Deferring it doesn't make it tax free. So 5% turns into 3%.

The plan is different for everyone. Here is ours, just as an example, and by no means presented as right for others.

We first set aside an amount we need to keep liquid. This is based on anticipated large expenditures and possible emergency needs (such as engine rebuilds on boats).

Then we have divided the remainder into five parts.

1. US Treasury Securities. Very conservative. We do not believe in Treasury Funds from Brokers or Fund managers. They introduce an added element of risk. We purchase these securities with various terms and expirations. We buy direct on Treasury Direct and we average only about a 4% return. Note that it is taxable as well.

2. Municipal bonds. States, Cities and other entities. We average about 5% and the beauty here is that they are exempt from US income tax. Now, while generally safe, they aren't guaranteed. Again we would not buy a bond fund, only straight bonds. But that does mean we don't want any single bond to be large enough that if it failed completely it would lose more than the others make in a period of say two years. That would mean no bond over 10% of all the bonds and ideally none over 5% of the total.

3. Mutual funds. Mutual funds can be the ultimate diversification. We only buy mutual funds that invest in stocks. We look at those companies that have the best long term records and so are a bit conservative. No single fund will be more than 10% of our fund investment and ideally no more than 5%. The returns here have been about 8% over the history of our investments. However, at one time that number got as low as a cumulative 3% when the economy collapsed. We also strive for funds that don't just duplicate each other, investing in the same stocks.

4. Stocks. We purchase online. Here's where I note that we use five online brokers. That's just our conservatism in spreading it out. That's mainly to protect the money we're transferring in and out. We purchase small amounts of solid companies through stocks. We don't look for the get rich quick type investment. Again, like mutual funds, we've averaged 8% pre tax but that number has been negative a couple of years and the cumulative has been as low as 3%.

5. Direct investments in income producing properties or businesses. Now we choose small businesses to own but properties are more appropriate for most. Not speculative properties, but rental properties with regular revenues and profits. On rental properties annual income may be 3% to 10% but in addition they may grow in value. However, they do have risk. Businesses can provide greater profits but have greater risks. In any of these investments, one should never invest so much in one property or business that if it failed completely they couldn't absorb it. This area of investments may not be appropriate for most people. My background makes it more so for us. As to businesses, we only get involved with those already operating and profitable.

The keys to me are diversification, risk protection, and setting moderate goals. And keep an eye on it yourself. Get good advice but keep control yourself.

We don't invest in hedge funds or options or derivatives. Yes you can make money in them but you can lose it too. No penny stocks for us.




[/LIST]

[Cheechako]

Just remember, when the housewives picked stocks at random and the advisors did... the housewives won!
I lost money with advisors most of the time, they did very well themselves though!

[Certeza]

Originally Posted by BandB

In the words of Fox Mulder, "Trust No One."

The keys to me are diversification, risk protection, and setting moderate goals. And keep an eye on it yourself. Get good advice but keep control yourself.

We don't invest in hedge funds or options or derivatives. Yes you can make money in them but you can lose it too. No penny stocks for us.




[/LIST]

You're obviously a savvy investor and I don't mean to criticize at all. Do whatever you want, it's your money. I just feel I should point out to others that equity (stock) mutual funds aren't considered proper diversification. You could literally have 50 different stock mutual funds and when the market crashes you're still gonna lose money. Bonds are not diversifying investments either. They are for capital preservation just barely beating inflation over the long term.

I agree with you on the penny stocks and options as early in my career I was an expert in advanced options strategies. But in the end, the only way to achieve proper growth diversification is through non correlated assets with high risk-adjusted returns. Hard to find these outside of the "hedge fund" industry. Also, a huge number of the mutual funds you mention use derivatives because they cannot possibly hedge risk without them. It should also be noted that although there are many jokers in the alternative investment space who really don't know what they are doing, some of us have created opportunities that offer proper diversification with very limited risk all while offering the kind of returns needed for actual long term portfolio growth. I'm not saying every hedge fund is a good investment, or even that most of them are. I don't love the hedge fund concept to begin with. I'm just saying that you don't seem to realize that there is an asset class out there that offers full transparency, control, limited risk, high potential returns, and true diversification. But you are blindly passing it by because you've lumped it in with "hedge funds".

[Certeza]

Originally Posted by Cheechako

Just remember, when the housewives picked stocks at random and the advisors did... the housewives won!
I lost money with advisors most of the time, they did very well themselves though!

That's sort of the point. Not all asset managers are "stock pickers". I haven't picked a stock in many years. My trades are much more calculated, much more consistent, and carry much less risk than "stock picking".

[2Ripples]

Well, if I listened to the financial adviser, I would not have retired at 56, sold the house, and bought a great Lagoon 440, and would not be taking possession of said boat in Guadeloupe this Saturday.
But then I would not have retired at 43, bought the Athena 38 and sailed off with the kids in 2001 - OK, that was just a 1st attempt at retirement - this time, it's for real

Yes, there is a plan. Is it perfect ? No. Does it add up ? Maybe under some assumptions. But the motto is "only one life to live" and do not want to, in 20 years, look back and say "should have done it".
Foolhardy ? Irresponsible ? Maybe, but our two kids and family are cheering us on (the kids don't yet realize we'll be living in their house later !! - joke ).

The reality is that if it works for 6 months, then so be it and we move on. If it works for 5 years or more, then so be it as well. As long as you are having fun in the process and keeping young at heart with your soulmate.

[valhalla360]

Originally Posted by Bluegrass

Here is how we plan if this helps...Our first assumption is, you should be able to make a 5% return over time, after taxes, if you invest mostly in diversified stocks such as an index fund. The last recession is a good example of what "over time" means - some years you'll make a lot, some you'll lose money. Over a 20-30 year business cycle you should make an average of at least 5% after taxes.

Our first rule is...spend half what you make and save the other half. So, a $500,000 portfolio would have an average return of $25,000/year. Of that, spend $12,500 and reinvest $12,500.

Doing this, one will never run out of money and will have a cushion for emergencies. This is probably a little over the top conservative, but this type of plan makes us comfortable.

Keep this in mind about often quoted withdrawal rates, at the end point you have zero money (if you are withdrawing your whole portfolio) and the average life expectancy figure means half the people will have die by the expectancy age - the other half are still alive. Also, if you're alive at 60, you're probably going to make it into your 80s.

Your assumptions are way more conservative but we follow a similar plan with some twists.

In your example, you are probably better off with an immediate annuity that will (depending on age) throw off 4-7% per year. $500k translates to $20-35k per year compared to your $12.5k. It will take a lot of years of inflation adjustment before your $12.5k grows to match the annuity. By then you are likely slowing down and spending less.

Our plan is to set asside enough in an annuity to cover a basic level of livings (with SS). For the rest, assuming 10% long term returns, we spend 7% (of the current balance none of the stupid 4% rule where you ignore the account balance) and reinvest the remainder. Long term, it should account for inflation.

If it's a down year in the market, we will try to pick up a little work or just live on less to minimize the impact to the account balance.

That is about as close as you can get to zero risk of running out of money while actually using your savings (never can get it to zero). Now if you goal is to leave a big pile of cash for the kids, that's a different senario.

(I should clarify: I'm talking about a simple lifetime annuity. Not the fancy ones with all kinds of variables that undermine the point of an annuity, which is to provide a guaranteed income stream.)