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GoGoGadgetChris posted:Just remember that "I'm young" is the strongest possible reason to save as much as possible! It only gets harder with kids, mortgage, car payment, and not having time (and compounding interest) on your side. Oh, amen. It's just over the last two years that I've become more responsible with my money. I sat and read about my 401(a) and Roth accounts most of the day yesterday. I think I've got a plan now, but we are only allowed to change our contribution rates in January.
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Sep 8, 2013 19:20
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Not sure if this question belongs here or in the housing thread, but I think it ties in more with long term investing because it can apply to any type of debt. In reading through the housing thread I saw a few situations where people with mortgages came across big windfalls and asked if they should use it to pay off their mortgages. The consensus that I got from the thread was that it was better to keep the cash (and presumably invest it long-term) than to pay off the balance. The typical reasoning was based on diversification of assets. I disagree with this reasoning, on the grounds that the point of diversification is to decrease the volatility of your wealth, speaking mathematically, but the recommended strategy actually does the opposite. Making extra payments on fixed rate debt is effectively a tax-advantaged investment with a return equal to the interest rate and a standard deviation of 0. If we consider two homeowners, A & B, who own identical homes with a $200k balance left on their mortgages. Both inherit $200k from their crazy dead uncle. Homeowner A follows the standard advice and invests it all in a typical balanced portfolio. Homeowner B pays off the mortgage. Both have the same net worth ($200k). The variances in their net worth will be as follows: code:I can't help but think that the advice I've seen is tunnel vision originating from "do-never-buy" rationale of the thread (which I wholeheartedly agree with) without considering the actual math that props up that rationale. Given that someone has already bought and does not plan to go back to renting, their best course of action is to pay down the debt as soon as possible. Thoughts?
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Sep 8, 2013 19:47
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spinst posted:No company match on the 401(a). They fund the pension side of it. If it's one or the other I'd go with the Roth unless your 401(a) options are really nice. Since we're talking about pensions, that implies a more long-term situation where the expense ratios matter more.
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Sep 8, 2013 21:05
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That the point of diversification is not to decrease all risk. It's to decrease unsystematic risk. You cannot gain money off an investment without some degree of risk. That decision would heavily be based on your mortgage rate and age. If you believe over the long term that you will be able to exceed the mortgage rate through a separate diversified portfolio, then it may make sense not to pay off the mortgage. This assumes that you have a mortgage that exceeds 10 years, and that you would be completely financially stable (or have an emergency fund to cope) over a long period of time.
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Sep 8, 2013 21:14
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Harry posted:If it's one or the other I'd go with the Roth unless your 401(a) options are really nice. Since we're talking about pensions, that implies a more long-term situation where the expense ratios matter more. The 401(a) confuses me a bit. I can choose to either manage how it is invested myself, or have the WSIB (Washington State Investment Board) do it for me. I don't get charged any management fees, so I've been letting the WSIB do it. It's gotten a modest return so far. I am required to put at minimum 5% of my pre-tax income into the 401(a). So the Roth would be in addition to it. So instead of putting 10% into the 401, I'd put 5% into a Roth and 5% into the 401.
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Sep 8, 2013 21:55
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spinst posted:The 401(a) confuses me a bit. I can choose to either manage how it is invested myself, or have the WSIB (Washington State Investment Board) do it for me. I don't get charged any management fees, so I've been letting the WSIB do it. It's gotten a modest return so far. Government owned boards tend to be less likely to try to rip you off, and I see from the website that their focus is on index funds. Having them manage isn't bad, but just make sure that the asset allocation that they use is reasonable for you specifically. If it's having them manage is akin to using the exact same fund for all employees, then you may want to directly select options yourself. Does your 401 plan offer a Roth option? I ask this because you may have a plan where it is more advantage in sticking with the plan instead of opening a separate IRA. spinst posted:As far as why I'm not contributing more... I'm young and haven't honestly thought about it much. Those are financially wise ways to spend your money. Just make sure as you go along that you are keeping up progress for retirement (ie. 0.tx salary at age 30, 1x at age 35). In general, I'd suggest more just in case something major happens. Also, you can take out 10k out of a Roth IRA at any time to buy a first house. ntan1 fucked around with this message at 07:07 on Sep 9, 2013 |
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Sep 9, 2013 06:45
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Eyes Only posted:
I am not sure where you got that formula from, but conceptually it is flawed. You do not just add individual assets volatility together to get total volatility. In fact adding more assets will decrease systemic volatility which is why people advocate a well diversified portfolio (see: Modern Portfolio Theory). Consider two people, each one has $500 dollars. Person A puts $500 into a single stock. Person B puts $1 into 500 different stocks. Who will have a lower volatility? Person B - because the various winners and losers even themselves out
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Sep 9, 2013 07:06
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kansas posted:I am not sure where you got that formula from, but conceptually it is flawed. You do not just add individual assets volatility together to get total volatility. In fact adding more assets will decrease systemic volatility which is why people advocate a well diversified portfolio (see: Modern Portfolio Theory). Just to make very clear. What kansas and I said are exactly the same, except we used different words to describe it. Note that 'systemic' is not the same as 'systematic'.
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Sep 9, 2013 07:13
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kansas posted:I am not sure where you got that formula from, but conceptually it is flawed. You do not just add individual assets volatility together to get total volatility. In fact adding more assets will decrease systemic volatility which is why people advocate a well diversified portfolio (see: Modern Portfolio Theory). I am aware of the point of diversification and the existence of systemic/market risk. I did not say the point was to reduce all risk, just to reduce risk in general. The formula can be found in any intro level stats course or online tutorial, and it does not simply add them; the total volatility is based on the correlation between the two (which can be -1, 0, 1, or anywhere in between). It isn't something you can rationalize around, it's quite literally the mathematical fact that these rationalizations are based on. Your example is correct, but it is not analogous to mine; I am not posing the question of person A having $500 in a single asset and person B having $500 spread across multiple assets. My example is person A having $500 in a single asset (in my example, a house) versus person B having $500 in a single asset (a house) as well as $500 in the stock/bond market and $500 in debt. Both have a net worth of $500, but they have different amounts of money at risk ($500 vs $1000). Person B's portfolio can be said to be more diverse but it is not diversified in the sense that you are thinking because the benefits of being diverse are overwritten by putting more money at risk. It is like comparing a gambler who bets $100 at blackjack and then walks out of the casino to another who bets $100 at blackjack and then goes to bet an additional $100 on craps. To rephrase my original point: if I told you I owned my $500 house free and clear and was planning to remortgage it and take the proceeds of the remortgage and invest it all in the market, would you recommend that I do it? This is called a leveraged investment, and I don't believe that anyone here would make the recommendation to do it with personal funds of this magnitude, and they'd be right. But how, exactly, is this any different than person B taking their windfall money and investing it instead of paying down existing debt?
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Sep 9, 2013 08:49
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Eyes Only posted:To rephrase my original point: if I told you I owned my $500 house free and clear and was planning to remortgage it and take the proceeds of the remortgage and invest it all in the market, would you recommend that I do it? This is called a leveraged investment, and I don't believe that anyone here would make the recommendation to do it with personal funds of this magnitude, and they'd be right. But how, exactly, is this any different than person B taking their windfall money and investing it instead of paying down existing debt? You already take a significant amount and same amount of risk on the house, no matter the circumstance. You've already made a deal on the loan, so that money you are forced to pay back. The question you should be asking yourself is: If you didn't have debt, do you think it's a good idea to take a long term loan at the percentage interest that you actually have and put that money into investment?* Edit: Almost. Remember that there are tax implications, and when you pay a mortgage, the interest is tax deductible. ntan1 fucked around with this message at 09:25 on Sep 9, 2013 |
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Sep 9, 2013 09:14
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Volatility is not a useful comparison between investment choices for the simple reason that volatility does not equal risk. Re-read that point 20 or 30 times until it sinks in. Volatility provides no meaningful point of comparison when taken alone, you must factor in liquidity and expected return on investment when comparing asset classes. The extremely simple formula you're using takes neither factor in to account and thus cannot be used in determining anything useful.
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Sep 9, 2013 09:15
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The extremely simple formula he is using is how the entire world calculates portfolio variance between 2 risky assets. The problem isn't the formula, the flaw is assuming that the variance of the house is less than the variance of the balanced portfolio. Even if the correlation is positive, if the variance of the balanced portfolio is lower than the variance of the home it could result in a lower portfolio variance, because the formula uses weighted averages.
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Sep 9, 2013 17:04
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ntan1 posted:Edit: Almost. Remember that there are tax implications, and when you pay a mortgage, the interest is tax deductible. And don't forget inflation (Random inflation chart found in a Google search. If we are talking about 30 year mortgages, the trend in the US (especially in the last 60ish years) tends to be a pretty consistent couple percent a year on average. If you have a mortgage, that means that is eating into the actual utility of money that you owe - This is a good thing because that 200k you owe today might only be worth 140k in todays dollars in 30 years. Assuming you invested that money, sure it is more volatile, but usually the market keeps up with inflation and then some when we are talking over a 30 year span - else nobody in this thread would be recommending you be in it.  If you paid off your mortgage, it isn't eating into what you owe the bank - nor do you have investments that (hopefully) are outperforming it. I've been struggling on this myself, but I've come to the conclusion that it is better for me to fully leverage my tax-advantaged retirement accounts than to go full bore on paying off my mortgage early. I'd imagine that most people with a sub 4-5% APR would be in the same boat after factoring in the tax deductions and inflation on the mortgage. If we are talking higher APRs, then it starts to skew towards it making sense to pay off the mortgage. Also this doesn't take stuff like PMI into consideration (if you are paying PMI, paying the mortgage down until you aren't is going to be the best choice). This is perhaps a different scenario than a sudden windfall because taxes are likely to either make or break you on that and I don't honestly have any idea how that works since I've never been through it.
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Sep 9, 2013 17:23
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mike- posted:The extremely simple formula he is using is how the entire world calculates portfolio variance between 2 risky assets. Portfolios aren't picked solely on variance or volatility. Or if they are you need to find a new advisor.
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Sep 9, 2013 18:28
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ntan1 posted:The question you should be asking yourself is: If you didn't have debt, do you think it's a good idea to take a long term loan at the percentage interest that you actually have and put that money into investment?* This is exactly the question I asked in the paragraph that you quoted. I am trying to point out the inconsistent logic at play here. Given the same circumstances, we cannot advocate someone opting not to pay down debt in leiu of making investments elsewhere while disparaging those with no debt who opt to take on debt and make investments with the proceeds. The two strategies are identical and should garner identical advice. grack posted:Volatility is not a useful comparison between investment choices for the simple reason that volatility does not equal risk. Volatility is risk. You are talking about the balance between risk, reward, and other considerations such as liquidity. I am well aware that one can expect better return from say, the S&P than a typical mortgage interest rate, and that difference in return may dictate decision making. I have intentionally neglected to mention risk/return because it was not mentioned as reasoning for the advice I've seen given in the housing thread. If we think the advice to not pay down debt is sound for risk/reward reasons, we should be actually providing the correct reasoning for our advice, quantifying where one should draw the line based on ones risk tolerance, and generally being critical of our own advice and asking if it makes sense and is consistent. I will use myself as an example. I have a pretty large risk appetite, and would opt to make extra payments into retirement instead of paying down mortgage debt. However, I would not be comfortable taking out debt and investing it. I came to realize that these two positions are logically inconsistent, which is where this discussion came from. I need to re-evaluate my position on my actual level of risk tolerance. I can then only ask what else should I re-evaluate? For example I have a small amount of bonds in my portfolio - would it be beneficial to take the fraction of my contribution that goes towards bonds and use it to pay down debt instead? After all, bonds generally have a lower return and higher volatility (as in, > 0) than debt. I lose the benefits of the negative correlation with my stock assets, but does that outweigh the lower volatility of debt payments? Good response. Including inflation into the mix complicates things because you then have to pick a correlation between investment return and inflation. If inflation rises 2% next year, how likely is it that my portfolio will generate 2% more return to compensate? Its best to look at things like mortgage interest tax deductions and PMI as just changing the effective interest rate on debt, not as special considerations. They should already be baked in to your assumptions if they apply to you. As an aside, do remember that itemized deductions like mortgage interest need to to be evaluated in terms of their benefit in excess of the standard deduction. Eyes Only fucked around with this message at 19:30 on Sep 9, 2013 |
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Sep 9, 2013 19:27
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Eyes Only posted:Volatility is risk. No, it's not. Volatility in return is only one small part of risk tolerance. Risk tolerance is a function of multiple factors, including (but not limited to): Time horizon, liquidity, current assets, investor knowledge, current income and debt load. Volatility isn't even the biggest part - time horizon for investment is by far the most important consideration when choosing assets for a portfolio.
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Sep 9, 2013 19:43
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grack posted:Portfolios aren't picked solely on variance or volatility. Or if they are you need to find a new advisor. Having worked in portfolio design for ultra high net worth clients at a massive multi-national investment firm, yes they are. They are often picked on less than that. Volatility is one of the few standard measures of risk between assets, and the axiom is that if you have to choose between two investments with equal average returns, you pick the one with lower variance, and you combine assets in such a way to maximize the ratio of returns to variance. Anything else would be inefficient. edit: grack posted:No, it's not. Volatility in return is only one small part of risk tolerance. I never saw anyone incorporate those factors in anything but a superficial sense. And time horizon is just a proxy for tolerable volatility in a given year. bam thwok fucked around with this message at 19:48 on Sep 9, 2013 |
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Sep 9, 2013 19:45
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bam thwok posted:I never saw anyone incorporate those factors in anything but a superficial sense. And time horizon is just a proxy for tolerable volatility in a given year. Yeah, and I've developed portfolios for low and moderate net worth clients for the best part of a decade. Every one of those factors are used every time I put a portfolio together because if your investments are the difference between retiring at 65 or having to work at Wal-Mart until you drop dead you must account for *everything*
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Sep 9, 2013 19:53
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Eyes Only posted:I don't believe that anyone here would make the recommendation to do it with personal funds of this magnitude, and they'd be right. But how, exactly, is this any different than person B taking their windfall money and investing it instead of paying down existing debt? It needs to be looked at in the context of an overall financial picture, it can't just be binary as in paying down the loan is always good or bad. To stereotpye a big portion of people is bad with money, has too much debt, and lives beyond their means so for them paying down the home loan is a good thing as it will reduce their debt and take a big risk off the table. If I have my act together financially I actually want some mortgage debt. If I am in the top tax bracket, was lucky enough to lock in a 30 yr loan around 3.5% my after tax cost of debt is right around 2% Given that stocks (and even bonds have) historically (I know past performance is no guarantee... ) perform well above this level it would make sense to consider the option to max out that refi and hold the cash for investment. Of course your own financial situation and risk tolerance would be the deciding factor, you need to realize you are taking on significant risk (vs owning your home outright), but in general you would expect a good outcome in the long term, and you would need to be able to pay that loan without the investment income if things turns bad. J4Gently fucked around with this message at 20:14 on Sep 9, 2013 |
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Sep 9, 2013 19:57
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grack posted:No, it's not. Volatility in return is only one small part of risk tolerance. I think you are confusing the terms Risk and Risk Tolerance. I am talking about Risk, the measurable property that makes up uncertainty, as in volatility.
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Sep 9, 2013 20:11
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Volatility is the likelihood and degree of variance from the expected rate of return in a given amount of time. Do you understand now? You must include time frame and expected returns to make any sort of logical comparison. It's why you can't simply say paying off a mortgage is less risky than investing the money, as over the time frame required to pay off the mortgage the returns will smooth out on a portfolio of market instruments. The risk then becomes the difference between your savings on the mortgage interest and gains you didn't make from investing the money.
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Sep 9, 2013 20:45
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So my wife and I currently have a managed account via Ameriprise. There is roughly 37k in the account total. We're both nearly 30 years old. (GOD, yes I know we are way behind). Currently we pay an Ameriprise advisor 600$ a year + 1% a year to manage our portfolio. Neither of us has a job with 401k matching, and as such have all this money in Roth IRA's managed by this advisor. This year, YTD, he has gotten us a roughly 6% return on our investment.... (by that I mean, we had 28k to start, have invested another 6k through paycheck deductions and such, and have had a ~2000 change in value. 25% of our investment is in cash equivalents 52% is in equities 23% is in fixed income Other then OMG INVEST MORE....should I keep this guy? If not, where/what should I roll these investments over to?
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Sep 9, 2013 21:17
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So, like 2.5-3% in fees to the advisor? That is terrible. Has he invested you in loaded funds? It wouldn't surprise me. I think you would be almost certainly better off in the long term just firing the guy, rolling everything to Vanguard, and dumping everything into a target retirement fund. By comparison, vanguard target retirement 2045 is up about 12.5% on the year.
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Sep 9, 2013 21:24
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Holy poo poo, don't give that guy another cent! I don't know what fees/catches are attached to transferring funds out of Ameriprise but you don't need to be paying someone huge commissions to dramatically under-perform the market...
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Sep 9, 2013 21:33
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lord1234 posted:So my wife and I currently have a managed account via Ameriprise. There is roughly 37k in the account total. We're both nearly 30 years old. (GOD, yes I know we are way behind). And I'm guessing there are fees in the funds as well OUCH!.... My advice would be to run away fast. The $600 is 1.6%(of $37k) + 1% = 2.6% right out of the gate. add fund fees onto that and you probably need to make 3% just to break even each year!!! To put it another way if you had 50k which made 7.5%/yr for 30 yrs and this guy took 3.07%/yr you would end up with $153k. If you just went straight to the index fund .07% fee on the same return you would end up with $360k !!!! Way more than double. And to top it off the guys is giving horrible advice 25% in cash for a retirement account for a 30yr old. Not a very suitable investment in my book. Your post above is what makes me despise most financial advisers but that is another topic. So to fix things up: Read a book or two to get some base knowledge. If you are very basic go with something like http://www.amazon.com/Learn-Earn-Beginners-Investing-Business/dp/0684811634 There are a bunch of other good suggestions in this, and the finance topic What I would do to improve this situation is to roll over into a self directed IRA and get a low cost US and Intl equity index fund or etf. Vanguard is a great place to start or you can pick any number of other options, and there are a number of etfs (Ishares, Fidelity etc...) Something with a fee <.15% You worked hard for that money so do a little reading and research and make the most out of what you have. J4Gently fucked around with this message at 21:44 on Sep 9, 2013 |
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Sep 9, 2013 21:37
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lord1234 posted:Other then OMG INVEST MORE....should I keep this guy? If not, where/what should I roll these investments over to? Just to stress, what gvibes said.
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Sep 9, 2013 21:39
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I'm young, I'm aggressive, and I want to open a Roth IRA. Obviously just going to walk over to Vanguard, but does anyone have a specific recommendation for a mix of funds? I could just shove it into Target Retirement 2060 and sit on an actual decision until later, but wondering if there's any particular reason to micromanage myself.
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Sep 10, 2013 04:51
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DACK FAYDEN posted:I'm young, I'm aggressive, and I want to open a Roth IRA. Obviously just going to walk over to Vanguard, but does anyone have a specific recommendation for a mix of funds? I could just shove it into Target Retirement 2060 and sit on an actual decision until later, but wondering if there's any particular reason to micromanage myself. To select your exact portfolio asset allocation. But no, the Target 2060 fund is entirely legitimate and a good choice.
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Sep 10, 2013 05:21
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DACK FAYDEN posted:I'm young, I'm aggressive, and I want to open a Roth IRA. Obviously just going to walk over to Vanguard, but does anyone have a specific recommendation for a mix of funds? I could just shove it into Target Retirement 2060 and sit on an actual decision until later, but wondering if there's any particular reason to micromanage myself. Target retirement is an easy set it and forget it thing, but if you have a large amount of money, you can get lower fees with Vanguard's admiral-class shares (with minimum investments starting at $10k and up). You can mimic the Target Retirement fund mix with overall lower fees if you have enough money, and are willing to rebalance every year or two yourself. Here's a few links for other ideas: http://www.bogleheads.org/wiki/Three-fund_portfolio http://www.bogleheads.org/wiki/Lazy_portfolios http://www.bogleheads.org/wiki/Asset_allocation
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Sep 10, 2013 05:24
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Eyes Only posted:Thoughts? I don't think you did this correctly because you haven't weighted any of the volatility values. I spent way too much time doing a derivation of the cases in which you should invest in a house versus a diversified stock portfolio. The answer appears to be "when you already have lots of stock and not much house value" among a few other things. Maybe I did something dumb in there, but I had fun and it is late, so I'm going to bed! http://www.filedropper.com/hvs_1
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Sep 10, 2013 06:23
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What are peoples' current thoughts on TIPS funds, specifically how they would be expected to react to announcements about the Fed tapering their bond-buying program next week? VIPIX is an option in my 403b and I've been considering putting some of my bond position (currently all FXSTX) into it. I know timing the market is taboo but if VIPIX is a good long term buy-and-hold option, I'd rather do the exchange before it rallies or after it crashes.
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Sep 10, 2013 07:53
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Kilty Monroe posted:What are peoples' current thoughts on TIPS funds, specifically how they would be expected to react to announcements about the Fed tapering their bond-buying program next week? VIPIX is an option in my 403b and I've been considering putting some of my bond position (currently all FXSTX) into it. I know timing the market is taboo but if VIPIX is a good long term buy-and-hold option, I'd rather do the exchange before it rallies or after it crashes. how many years for retirement? those Inflation index bonds aren't providing much yield and if you have a long time horizon equities should outperform... I would see TIPS and the like more suitable to those very near retirement.
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Sep 10, 2013 13:13
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J4Gently posted:how many years for retirement? Far from retirement, but I'm specifically considering exchanging a portion of what bonds I have into a TIPS fund, and not increasing my position in securities overall. I'm already 90% in equities and don't plan on changing that for another 20 years probably. The bond fund is just for diversity.
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Sep 10, 2013 14:31
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MickeyFinn posted:I don't think you did this correctly because you haven't weighted any of the volatility values. I spent way too much time doing a derivation of the cases in which you should invest in a house versus a diversified stock portfolio. The answer appears to be "when you already have lots of stock and not much house value" among a few other things. Maybe I did something dumb in there, but I had fun and it is late, so I'm going to bed! I like this. A couple of questions: (1) It doesn't seem that weighting come into play here, can you expand on this? When I say "volatility of the house" I mean the volatility of that particular house, which is already a function of the house's value and thus is already "weighted". The same goes for the volatility of the stock portfolio. It looks like you are using the house value times the volatility of the underlying random variable, which is the same thing. I think this is a potato/potahto situation. (2) Why do you assume that paying the debt lowers the (weighted) volatility of the house? Fluctuations in the house's value are not based on the amount of debt outstanding or the equity that the homeowner has accumulated. If housing prices go down 10%, a home with a market price of 200k will incur a loss of 20k regardless of the mortgage situation. Payments on the debt do not reduce the value (weighting) of the house, they reduce the value of the debt. Since the volatility of the debt is zero to begin with, nothing changes and there is no increase in the portfolio's overall volatility. It follows that paying down debt keeps total portfolio volatility constant, while buying stock always increases total volatility as long as the correlation is assumed not to be heavily negative. The assumption about house volatility being higher is not needed as this relationship remains true regardless of their relative values.
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Sep 10, 2013 15:39
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This entire conversation about volatility is irrelevant because no one on earth builds a portfolio with the singular goal of minimizing standard deviation - the natural outcome of that would be a 100% cash portfolio at all times. As someone said earlier, mathematical standard deviation is not what any rational investor should consider to be the one and only "risk". It completely ignores the risks of not meeting your retirement goals, currency valuations over time, inflation eating away your real purchasing power, etc. Even if you decide to try and minimize standard deviation while making a projected 8% a year, you will still end up with wonky portfolios because unless you know the future returns of the universe of assets you are picking from, all you have to use in your formula are past returns, which obviously A. don't predict future returns and B. will still end up with you owning like 80% emerging markets and 20% US treasuries or something goofy.
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Sep 10, 2013 16:19
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Eyes Only posted:(1) It doesn't seem that weighting come into play here, can you expand on this? When I say "volatility of the house" I mean the volatility of that particular house, which is already a function of the house's value and thus is already "weighted". The same goes for the volatility of the stock portfolio. It looks like you are using the house value times the volatility of the underlying random variable, which is the same thing. I think this is a potato/potahto situation. It isn't potato/potahto, you want to know the volatility of the person's net worth so you have to weight the volatility of the asset by the fraction of the portfolio it takes up. quote:(2) Why do you assume that paying the debt lowers the (weighted) volatility of the house? Fluctuations in the house's value are not based on the amount of debt outstanding or the equity that the homeowner has accumulated. If housing prices go down 10%, a home with a market price of 200k will incur a loss of 20k regardless of the mortgage situation. Payments on the debt do not reduce the value (weighting) of the house, they reduce the value of the debt. Since the volatility of the debt is zero to begin with, nothing changes and there is no increase in the portfolio's overall volatility. It follows that paying down debt keeps total portfolio volatility constant, while buying stock always increases total volatility as long as the correlation is assumed not to be heavily negative. The assumption about house volatility being higher is not needed as this relationship remains true regardless of their relative values. I assumed no such thing. I assumed that the weight of the house value on the portfolio increased when someone pays into the mortgage. The net value of the asset is the current value of that asset minus the debt tied to that asset. The volatility of the debt being zero has nothing to do with it, I could have claimed that sigma_H was the volatility of the house and the debt with net value H and the math still works out the same. The bold sentence is generally untrue, both because of what I just said and because: Wikipedia posted:MPT is a mathematical formulation of the concept of diversification in investing, with the aim of selecting a collection of investment assets that has collectively lower risk than any individual asset. This is possible, intuitively speaking, because different types of assets often change in value in opposite ways.[2] For example, to the extent prices in the stock market move differently from prices in the bond market, a collection of both types of assets can in theory face lower overall risk than either individually. But diversification lowers risk even if assets' returns are not negatively correlated—indeed, even if they are positively correlated.[3] Edit: I also just found out if you do the the problem by assuming no net change in portfolio value and that Delta_H = - Delta_S (i.e. taking money out of the house to invest in stock), you get the same thing as equation (6) but with the inequality flipped, therefore you are usually increasing volatility by taking money out of the house and putting it into stocks (with the same list of parameters as outlined in the pdf I posted). MickeyFinn fucked around with this message at 16:58 on Sep 10, 2013 |
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Sep 10, 2013 16:42
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For the past year, I've been able to save / invest a substantial amount of money. Unfortunately, I won't earn nearly as much next year, so this is going to be my retirement investment money for the next year or two. I'm 26 years old, so I have a long way until retirement. I invested about 3k in my employer's retirement fund (no match, unfortunately) and have been tooling around for the past three or four months with some online trading. Using what I've learned in the finance courses I've taken, I grew my original ~$9,000 investment into ~10,500. I'm nearing my sell target on several of the stocks I'm invested into, and am looking to pull out the money from those stocks and put them into a long-term retirement account. Obviously I should max out my Roth contributions for the year, but should I wait until next year to put the rest into the Roth? Or should I put the balance into a traditional 401(k)? My thought is that if I reach my sell target before I can contribute more to my Roth I should just roll the rest into a 401(k). Does this sound right, or is it worth waiting for my Roth to open up again to avoid the taxation when I draw it out at retirement?
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Sep 10, 2013 19:18
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ryan_woody posted:For the past year, I've been able to save / invest a substantial amount of money. Unfortunately, I won't earn nearly as much next year, so this is going to be my retirement investment money for the next year or two. I'm 26 years old, so I have a long way until retirement. You can't dump your gains from selling stock directly into your 401k, but you can set your contribution percentage from your paychecks up to the maximum your plan allows for the rest of the year and use your stock gains in place of your income. If you're going to be making so much less next year that it drops you well into a lower tax bracket, then actually what would be better than maxing your Roth contributions this year is making Traditional contributions instead and rolling them over to your Roth IRA next year, when they'll be taxed at a lower rate. If the reason you'll be making less is because you're switching employers, then put as much as you can into the 401k and roll that over next year. Otherwise, you'll have to open a Traditional IRA and contribute the max to that you can for this year ($5,500 minus what you've already contributed to your Roth) and roll that over next year. If you won't be changing tax brackets, or you won't be able to roll over the whole amount, then it comes down to how good your 401k funds are, your expectations of what your tax liability in the future will be compared to what it is now, and the cost of not accumulating growth on that money for four months if you wait.
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Sep 10, 2013 21:30
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ryan_woody posted:I invested about 3k in my employer's retirement fund (no match, unfortunately) and have been tooling around for the past three or four months with some online trading. Using what I've learned in the finance courses I've taken, I grew my original ~$9,000 investment into ~10,500. I'm nearing my sell target on several of the stocks I'm invested into, and am looking to pull out the money from those stocks and put them into a long-term retirement account. I think you might already know, but just to make sure, note that a majority of the long-timers for this thread will strongly recommend that you do not trade stocks in the short term, unless it's your job to do so and you have the ability to watch the market 24/7. Z 9000 -> 10500 gain over the last year would be about equal to the S&P 500. There's nothing wrong, however, with keeping a 5% discretionary gambling pool to play around with individual stocks, but the majority of the money should go to long term funds This is contrary to the BFC Stock Market thread, which some of us probably don't have positive opinions of.
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Sep 10, 2013 21:53
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ntan1 posted:I think you might already know, but just to make sure, note that a majority of the long-timers for this thread will strongly recommend that you do not trade stocks in the short term, unless it's your job to do so and you have the ability to watch the market 24/7. Z 9000 -> 10500 gain over the last year would be about equal to the S&P 500. I would 100% agree with this ^^^ view. In general professionals with all the knowledge and training and time possible just don't beat the market. Keep some silly money to play around with individual stocks for fun but for serious investing a sound approach has the vast majority in low cost index funds with the vast majority of that in equities tapering off as retirement approaches. Also you happened to invest in a very good market, rising tide lifts all boats and such.
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Sep 10, 2013 22:00
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