Reader Questions

A reader asks;

What advice do you have for retirees. I am out of mkt. now. Do I wait for lower entry, or tip toe in? What might happen next 2 months or so?

Well I don't have any great advice. Going to zero equity exposure is a huge bet. While I specifically think making big bets is a bad idea for most people due to the likelihood of being wrong either coming or going it is even tougher to make such a big bet with no plan of re-entry (this is how I read the question).

If the market races higher starting with last Friday's lift never to go down again then any of the benefit derived from selling out will be lost. If the market tanks and he then times his re-entry perfectly it will have been a brilliant (or lucky) trade. There is no way to know what will happen, I think reality will be somewhere in between the two scenarios I gave. Assuming he timed getting out very well he now has to be very right getting back in or it will have been for naught.

Being that right two times in a row is a tall order and not a position I would want to be in. I have no advice for this person but if you are going to make big bets I would urge you plan ahead of making your bet.

Another question;

What is your goal for an annual rate of return? 6%? 8%? While I know we are always looking for the highest returns, what point of return puts a smile on you face, at what point is it okay but not great, and at what point is it just disappointing?

The question is not framed in manner I think of this. The stock market averages 10% or so per year. If you look at a Stock Trader's Almanac you will see that the market very rarely goes up exactly 10%. if you look will see years the market is up a lot, years it is down a lot and everything in between. Average all of them together and you get 10% or whatever the exact number is.

If the market finishes the year where it is right now, up less than 2%, I think getting 8% would be tough to do. Maybe you could do it but a lot would have to go right. If in 2008 the market is up 26% (not a prediction just an example) getting only 8% would be an utter failure, getting 12% would be an utter failure.

I tend to believe you can only get what the market gives. Getting 6% in a 2% world is possible but getting 20% is not unless you take huge risks. Like the market, a diversified portfolio will have years of up a lot, down a little and smaller moves and all that will blend to give you an average that will be in the neighborhood (a little ahead or a little behind) of the market (assuming you want a diversified portfolio).

In that context if you add a few percentage points of extra return every few years you will be lucky and enhance your long term result greatly.

Another aspect of this not touched upon is getting a little less than the market return with much less volatility. This is a topic explored on this site several times in the past. If the market averages 10% and you get 8% with only half of the market's volatility you are having another type of success. This is an appropriate strategy for people with a lot of money, relative to their financial plan, or people who are not comfortable with normal stock market volatility.

I'll explore this again another time but it gives the second question an entirely different dimension.