Advice on whether I should diversify.

[manwithaplan]

Long term lurker, first time poster.

So, am looking for advice here on what to do.

Am 48, wife is 51. Combined income is around 150K, but a lot of that is OT which can be stopped at any time. I'm on a salary of approx 85 k, wife works part time, her salary is around 40k.


So, my question is, where do I invest?. Our house will be fully paid off by the end of the year, and we're sitting on retirement funds ( 401 k, IRA, ESPP) of around 700 k. Once the mortgage is cleared we'll have no debt, outside of everyday living expenses like utilities and food. We have about 40 k in cash. I max out 401 k and IRA, my wife can only contribute a max of 30% of her salary to her 401 k, which she does, and she does max out her IRA. We have one son who is grown up and living out of state.

With no mortgage payment starting next year, ( current mortgage payment is $1535 a month), should I continue to invest in stocks, or should I diversify into other income streams like property? Is there anything else I should consider besides property?

My concern is that although our retirement funds are spread out between indexed funds, some self selected stocks and target retirement IRA funds, if the stock market takes a nose dive, we'll be hit hard.

Both my wife and I hope to retire when we each hit 62, so if I need to diversify I'm thinking it'll need to be done soon.

Thanks in advance for any suggestions.

[Fishindude77]

I'm kind of like you in that I don't want all my investments in the stock market, so I've invested pretty heavily in real estate. Lots of different things you can do here; single family homes, multi family homes, farm ground, vacation rentals, commercial rental space, etc.

I think it would be bad business to give specific advice, but if you do decide to get into real estate, I would suggest you invest in an area of real estate that you clearly understand, and ease into it, don't dump everything into it at once. Also, don't get yourself heavily leveraged on investment real estate.

[Jluke]

Great numbers thus far and congrats on being close to paying off the house.

Is the $1535/month just P&I? Want to be sure you also account for property taxes after the payoff.

For your existing investments in the stock market you need to determine your current asset allocation (stocks:bonds) across all of your accounts, if you haven’t done so already.

Simple example of 100,000 and stocks lose 50%:

100:0 would leave you with 50k in stocks.
70:30 would leave you with 35k stocks, 30k bonds.
60:40 would leave you with 30k stocks and 40k bonds

And so on. 40:60 to 60:40 might be the range you want to target.

As far as Investing outside of the stock market, others can give ideas and their experiences from real estate, franchises, etc.

[manwithaplan]

The $1535 covers principal, interest and escrow from which property taxes and insurance are paid from. Thankfully I live in a low property tax state (AZ), so our property tax isn't as bad as a lot of other states. Last year we paid approx $1700.

[james.hendrickson]

Why not buy some bonds?

Interest rates are going to increase, so the bond market may be a bit choppy, but a good bond fund may help diversify and protect you from the worst of the pricing changes. If you don't like that idea, you could always buy some treasuries and hold them to maturity.

The treasury will let you get into bonds for as little as $100 and some companies issue bonds in $25 dollar denominations, so you don't need a lot of money to make this move.

Other options to consider would be:

1. Precious metals
2. Peer to peer lending
3. Land
4. Real estate (a rental property or two is a good side gig)

[disneysteve]

Why not buy some bonds?

The target fund already has you in some bonds but I would check the allocation there and see if you want to up the bond allocation of your portfolio.

I'm 53 and my wife is 54 and I did exactly that earlier this year. I took us from 81/19 to 70/30. I felt it was time to dial back the risk a bit.

[TexasHusker]

This is always the paradox when in sight of retirement that the averages simply don't tell: This bull market is very long in the tooth. Valuations are high by almost any measure, interest rates are rising, and this has been an incredibly long economic expansion.

But bull markets and expansions cannot go on forever. And a robust bull market has to be followed by a robust bear to achieve equilibrium in the markets.

Will the bull market go another year? Two? Three? What will be the impetus to bring on the bear? These are questions that no one can say for sure, or they would be fabulously wealthy.

If you look at this bull market, it's one of the longest EVER. Does that mean a long and protracted bear? Maybe, and maybe not. But if you look at the 2000s, many investment gurus call this the "lost decade". There were a lot of investors, including me, that didn't make a dime in that decade.

The question is, are you in a position to recover if your holdings sustain a 20, 30, 40 percent decline in value? How long would it take for you to recover that loss after the bear market subsides? If your holdings drop 50 percent, remember that it takes a 100% gain to get you back to where you were. I'm not saying you will suffer a 50% drop, but just using the illustration.

I've lived through a few bears. True bear markets will shake investors' confidence to their core, with declines sufficient to drive many away from the markets "forever." Every bear market does it. The last one did it for me. I made an inner vow "never again". In a bull market, there is seemingly no news that causes the markets to decline. In a bear market, there is seemingly no news that prevents the markets from declining further. The next bear will usher in a new round of understanding in this reality. It is a harsh reality that folks who haven't lived through a bear market simply cannot understand until they are there.

In the late 1990s, I had a 401K worth almost $550K. Two years later, it was worth less than $200K. It's a physically sick feeling in your stomach that goes day after day.

Only you can decide for yourself "when" or "if" you're removing your chips from the table and moving on.

P.S. Bonds are NOT necessarily a safe haven in a recession or equities bear market. That is a common misnomer. You can lose your ass in bond funds.

[corn18]

This is not the longest bull market ever.



That is for 100% equities. If you are a 60/40 stock/bonds portfolio, then this is approaching the longest bull ever:

[corn18]

This is always the paradox when in sight of retirement that the averages simply don't tell: This bull market is very long in the tooth. Valuations are high by almost any measure, interest rates are rising, and this has been an incredibly long economic expansion.

But bull markets and expansions cannot go on forever. And a robust bull market has to be followed by a robust bear to achieve equilibrium in the markets.

Will the bull market go another year? Two? Three? What will be the impetus to bring on the bear? These are questions that no one can say for sure, or they would be fabulously wealthy.

If you look at this bull market, it's one of the longest EVER. Does that mean a long and protracted bear? Maybe, and maybe not. But if you look at the 2000s, many investment gurus call this the "lost decade". There were a lot of investors, including me, that didn't make a dime in that decade.

The question is, are you in a position to recover if your holdings sustain a 20, 30, 40 percent decline in value? How long would it take for you to recover that loss after the bear market subsides? If your holdings drop 50 percent, remember that it takes a 100% gain to get you back to where you were. I'm not saying you will suffer a 50% drop, but just using the illustration.

I've lived through a few bears. True bear markets will shake investors' confidence to their core, with declines sufficient to drive many away from the markets "forever." Every bear market does it. The last one did it for me. I made an inner vow "never again". In a bull market, there is seemingly no news that causes the markets to decline. In a bear market, there is seemingly no news that prevents the markets from declining further. The next bear will usher in a new round of understanding in this reality. It is a harsh reality that folks who haven't lived through a bear market simply cannot understand until they are there.

In the late 1990s, I had a 401K worth almost $550K. Two years later, it was worth less than $200K. It's a physically sick feeling in your stomach that goes day after day.

Only you can decide for yourself "when" or "if" you're removing your chips from the table and moving on.

P.S. Bonds are NOT necessarily a safe haven in a recession or equities bear market. That is a common misnomer. You can lose your ass in bond funds.

This is an excellent summary of the risks of being in the markets (stocks and bonds). As you can see from my charts, at some point, you WILL lose 20-50% of your portfolio value when the market tanks. And it ALWAYS tanks. How much you lose depends on how much you have in equities/bonds/cash.

The paradox comes on the upside. How much you make also depends on how much you have in equities/bonds/cash. Go all cash and you have no downside risk but you also have no real upside because inflation will erode your buying power. All equities has great upside and great downside, but on average a 7% real total return. The problem with averages is you don't live on averages, you live in the moment. A 50% drop in equities the year you retire = a serious sequence of returns risk.

While bonds were complete dogs from 1966 to 1981, they do provide some downside protection. But you lose a lot of upside as well. And bonds have been in the longest bond bull market ever (the data show this).

So. what's an average Joe to do? To answer the OP's question, if you have the guts to try something outside the markets, I would definitely look at real estate to diversify. Or start your own business. If you aren't brave enough and want to optimize your market investments, I can help with that. For RE, we have a few members on here that are successful at it and can help with that.

[disneysteve]

This is not the longest bull market ever.

No, but it's in the top 5. As TH said, it's one of the longest (and still going).

The problem with bull markets, especially late into them, is people start to get in the mindset that it will just keep going. That's when people get in trouble because they forget about the downside risk.

[disneysteve]

In the late 1990s, I had a 401K worth almost $550K. Two years later, it was worth less than $200K.

That can certainly rock your world and make you sick to your stomach for sure. And not to discount your experience at all, but I would make a couple of points here.

1. What were you invested in? Your portfolio lost about 64% of its value which is way more than what the broad market lost. That would suggest that you may not have been well diversified and may have been in some riskier than average investments.

2. How long did it take to recover? I think people often forget that part. I just looked at my 2008 "Great Recession" numbers. We ended 2007 with $393,000. We ended 2008 with $260,000, a loss of 33.8% of our money. That's certainly enough to lose some sleep over. However, we ended 2009 with $395,000, back to where we were pre-recession and by the end of 2010, we were at $470,000, well above the pre-crash level. The people who really lost their shirts are the ones who sold out at the bottom and sat on the sidelines, entirely missing the recovery.

None of this is to suggest that everyone should be all stocks, all the time. I absolutely think you need to diversify, and that doesn't just mean stocks and bonds. It also means a cash reserve and perhaps some other income streams whether it be some sort of side business or real estate or collectibles or whatever works for you.

[corn18]

No, but it's in the top 5. As TH said, it's one of the longest (and still going).

The problem with bull markets, especially late into them, is people start to get in the mindset that it will just keep going. That's when people get in trouble because they forget about the downside risk.

BINGO! I find my mind wandering in that direction even today. I have my EF and college savings sitting in a money market account making 1.46% interest ($100k). I have a stable job and can cash flow college with $5k/month left over. No need for the EF or college fund, so why not just dump it in the market and make some good returns? Yikes!

[disneysteve]

P.S. Bonds are NOT necessarily a safe haven in a recession or equities bear market. That is a common misnomer. You can lose your ass in bond funds.

Definitely. I often wonder why buying individual bonds gets so little attention. Many of the risks of bond funds vanish when you buy individual bonds. You still have the interest rate risk but if you stick to short to intermediate terms and ladder your maturities, you can offset much of that as long as you hold the bonds until maturity.

That said, I don't currently own any individual bonds but as we get closer to retirement, I probably will move in that direction. Individual bonds give you a much more predictable income stream than bond funds which is important once you are living on your investment income. My mom gets most of her non-SS income from her bond portfolio.

[disneysteve]

BINGO! I find my mind wandering in that direction even today. I have my EF and college savings sitting in a money market account making 1.46% interest ($100k). I have a stable job and can cash flow college with $5k/month left over. No need for the EF or college fund, so why not just dump it in the market and make some good returns? Yikes!

I will always remember the commercials for financial services that started popping up during the dot com craze. There was one where a guy gets into a taxi and the driver has a photo of a gorgeous mansion taped to the rear view mirror. Turns out the driver got filthy rich investing in the tech market (I have no idea why he was still driving the cab). The point was that it's so easy anybody can do it and you should to. All of those sorts of commercials instantly vanished when the tech bubble burst.

[rennigade]

In the late 1990s, I had a 401K worth almost $550K. Two years later, it was worth less than $200K. It's a physically sick feeling in your stomach that goes day after day.

You were invested too aggressively. No one to blame but yourself.

If you're not prepared for a massive swing then you shouldnt be swimming in the deep end.

A lot of people make this mistake. Everything is fine and dandy until the market crashes/corrects...then you see real panic. Those people were out of their element from the get go and didnt even realize it.