What to buy for a 25-year portfolio other than securities and index funds which contain them if there is a large dip or crash next week?
August 6, 2011 7:32 AM Subscribe
What to buy for a 25-year portfolio other than securities and index funds which contain them if there is a large dip or crash next week?
Let me preface this by saying that I'm sad and pissed off about the developments in the market and if it tanks it is probably going to affect a lot of people I know and a lot of people I don't who are not to blame for the avoidable factors at the heart of it. I'm lucky enough to have extra cash, so I am probably going to add to my 25-year portfolio if there is a big dip, but I hope there isn't.
I'm sort of confused about what I should buy in that case though. My current portfolio is all index funds and ETFs that track various indexes like mid-sized US companies and other related baskets. I'm happy with that as it is, it's reasonably diverse and don't really feel that driven to add securities or indexes of securities. I know my current portfolio might get pounded next week but I'm going to look away.
But I don't have any investments in, or which track, anything other than securities (e.g. bonds or precious metals or whatever else there is). Would this be the right time to buy bonds? How do I buy bonds most effectively with a normal investment account; do you purchase bonds directly or are there other investment vehicles like funds that cover baskets of bonds in similar categories? What would you buy if you were in my position (securities are also OK if you think my position on securities should be re-examined, or metals, or whatever)? The general gist of my idea is that if it is happening regardless, I guess I would want to take the opportunity to round out the type of things I'm holding so it isn't just stocks, unless that is mistaken and it is stocks which are going to be good buys.
My investment profile is that I'm not an involved enough investor to do anything other than my current "add some stuff (mostly index funds) when there is a severe market slide to a really long-term portfolio" approach and I can't change that much due to lack of time and attention and the fact that that is the extent of my risk tolerance.
For the sake of discussion, let's say I will invest €10,000 and I strongly believe that the US is going to get its act together again within my 25-year portfolio timespan. I'm in Europe but have an trading account that allows me to purchase about 75% of the US investment vehicles out there, and where there are also usually Europe-traded versions of US funds that I can't easily purchase. FWIW, where I live tax rates are effectively the same for every kind of investment over every time period, so any tax considerations that might make some kinds of investments more useful or less in other countries are cancelled out for me.
I appreciate your input and suggestions and I know that AskMe is not my investment advisor; anything recommended will be taken with grains of salt and looked into further. Thanks.
Let me preface this by saying that I'm sad and pissed off about the developments in the market and if it tanks it is probably going to affect a lot of people I know and a lot of people I don't who are not to blame for the avoidable factors at the heart of it. I'm lucky enough to have extra cash, so I am probably going to add to my 25-year portfolio if there is a big dip, but I hope there isn't.
I'm sort of confused about what I should buy in that case though. My current portfolio is all index funds and ETFs that track various indexes like mid-sized US companies and other related baskets. I'm happy with that as it is, it's reasonably diverse and don't really feel that driven to add securities or indexes of securities. I know my current portfolio might get pounded next week but I'm going to look away.
But I don't have any investments in, or which track, anything other than securities (e.g. bonds or precious metals or whatever else there is). Would this be the right time to buy bonds? How do I buy bonds most effectively with a normal investment account; do you purchase bonds directly or are there other investment vehicles like funds that cover baskets of bonds in similar categories? What would you buy if you were in my position (securities are also OK if you think my position on securities should be re-examined, or metals, or whatever)? The general gist of my idea is that if it is happening regardless, I guess I would want to take the opportunity to round out the type of things I'm holding so it isn't just stocks, unless that is mistaken and it is stocks which are going to be good buys.
My investment profile is that I'm not an involved enough investor to do anything other than my current "add some stuff (mostly index funds) when there is a severe market slide to a really long-term portfolio" approach and I can't change that much due to lack of time and attention and the fact that that is the extent of my risk tolerance.
For the sake of discussion, let's say I will invest €10,000 and I strongly believe that the US is going to get its act together again within my 25-year portfolio timespan. I'm in Europe but have an trading account that allows me to purchase about 75% of the US investment vehicles out there, and where there are also usually Europe-traded versions of US funds that I can't easily purchase. FWIW, where I live tax rates are effectively the same for every kind of investment over every time period, so any tax considerations that might make some kinds of investments more useful or less in other countries are cancelled out for me.
I appreciate your input and suggestions and I know that AskMe is not my investment advisor; anything recommended will be taken with grains of salt and looked into further. Thanks.
If the stock market dips and you have money to invest, you should be thrilled--that's the best time to put your money in stocks. If you've got mostly US stock funds, I'd look at some international/emerging market mutuals or ETFs. With a 25-year horizon, you can add more risk than you probably currently have if you mostly have things like S&P and US large/mid-cap stock funds. To be better diversified, you'd eventually want to add some bond funds, but it'd be better to get into that game when the market's been running bullish for a goodly while.
posted by drlith at 7:48 AM on August 6, 2011
posted by drlith at 7:48 AM on August 6, 2011
I should explain my statement a bit more. If you want to preserve capital, consider that bond prices will fall in light of rising interest rates. The extent to which bond prices are affected by interest rates is a function of duration and that extent is called the bond's convexity. On the other hand, if your interest is generating income via bonds, you'd want their price to fall, in order that the yield on the bond rises.
posted by dfriedman at 7:50 AM on August 6, 2011
posted by dfriedman at 7:50 AM on August 6, 2011
Dfriedman - I think you just have a typo - to be clear to OP - convexity is the move in a price of a bond relative to interest rates not explained by the duration formula. Duration assumes the relationship is linear, when it actually is not. The call the difference convexity. Frankly to a retail investor its not an incredibly pertinent concept - but what matters is duration. The higher the duration the more a bond decreases in value when rates increase. Generally the longer the term, the higher the duration. That's why generally cash is the best place to put your money when rates are low like this and you expect some sort of crash.
posted by JPD at 8:25 AM on August 6, 2011
posted by JPD at 8:25 AM on August 6, 2011
Why is it that anyone who actually knows something about bonds can't speak in plain english about them? Seriously, I've read the posts above six times and I still dont' know if it's a good time to invest in bonds right now and if so why. Can someone do it caveman language?
posted by spicynuts at 8:32 AM on August 6, 2011 [1 favorite]
posted by spicynuts at 8:32 AM on August 6, 2011 [1 favorite]
when interest rates are low don't buy bonds. if you must buy bonds be in the shortest dated instrument you can find - cash. Always used a femur bone to club a gazelle. Poop in the back of the cave, not the front.
posted by JPD at 8:35 AM on August 6, 2011 [8 favorites]
posted by JPD at 8:35 AM on August 6, 2011 [8 favorites]
A few other random thoughts on bonds etc:
-The currently fashionable things seems to be to invest a bit more in emerging market debt issued in local currencies - the theory is that they are less sensitive to the travails of US treasury bonds (obviously, they are also expected to be more volatile for US investors). Obviously, a lot of mutual fund shops are getting the same bright idea at the same time, so there are a number of options out there right now, but on the flip side, i understand that the emerging markets have about 50% of the global equity valuation and about 10% of global debt at this time. So during this global stampede to buy into emerging market debt, this will get overheated ...
- A lot of people seem to think, floating rate bonds are appropriate when interest rates may potentially go up (not that any sane central bank will raise interest rates right now in the wester economies). They are getting hammered right now, but mainly because of the panic around the exposure of financial institutions in Europe
- Treasuries still seem to be the place where people want to hide when markets crash. The valuation of the shorter duration treasuries in my 401k did not seem as impacted as that of junk bonds (at least as of now)
- A number of people whose opinions I respect (e.g. http://blogs.reuters.com/felix-salmon/) seem to think that the market has been in the process of pricing in the downgrade)
- If you are in the market for 25 years and you are already invested widely in index funds (and have the stomach to live thru the potential gyrations over the next few months :-) ), you are already in the right place (but I guess you know this already).
Finally, I dont have any special expertise on bonds or investments. I just try to keep myself educated to keep an eye on my savings. So pl. take this with a pinch of salt and do your own due diligence.
posted by justlooking at 11:09 AM on August 6, 2011
-The currently fashionable things seems to be to invest a bit more in emerging market debt issued in local currencies - the theory is that they are less sensitive to the travails of US treasury bonds (obviously, they are also expected to be more volatile for US investors). Obviously, a lot of mutual fund shops are getting the same bright idea at the same time, so there are a number of options out there right now, but on the flip side, i understand that the emerging markets have about 50% of the global equity valuation and about 10% of global debt at this time. So during this global stampede to buy into emerging market debt, this will get overheated ...
- A lot of people seem to think, floating rate bonds are appropriate when interest rates may potentially go up (not that any sane central bank will raise interest rates right now in the wester economies). They are getting hammered right now, but mainly because of the panic around the exposure of financial institutions in Europe
- Treasuries still seem to be the place where people want to hide when markets crash. The valuation of the shorter duration treasuries in my 401k did not seem as impacted as that of junk bonds (at least as of now)
- A number of people whose opinions I respect (e.g. http://blogs.reuters.com/felix-salmon/) seem to think that the market has been in the process of pricing in the downgrade)
- If you are in the market for 25 years and you are already invested widely in index funds (and have the stomach to live thru the potential gyrations over the next few months :-) ), you are already in the right place (but I guess you know this already).
Finally, I dont have any special expertise on bonds or investments. I just try to keep myself educated to keep an eye on my savings. So pl. take this with a pinch of salt and do your own due diligence.
posted by justlooking at 11:09 AM on August 6, 2011
For a 25-year portfolio? Stock in companies where the fundamentals suggest a bargain price combined with the likelihood of long-term growth and the unlikelihood of bankruptcy, and where management appears to be both honest and smart.
posted by zippy at 2:55 PM on August 6, 2011
posted by zippy at 2:55 PM on August 6, 2011
« Older Sitting on this fence is getting uncomfortable.... | So long, Screwy! See you in St. Louie! Newer »
This thread is closed to new comments.
Interest rates likely will rise; bond prices move inversely to yields. So if rates rise, bond prices fall.
posted by dfriedman at 7:35 AM on August 6, 2011