Lately I’ve been pondering the best way to “manage” my money long term. Specifically I’ve been mulling over different options for my company 401(k) and my other retirement accounts.
These accounts are of course longer term accounts that are earmarked for living expenses later in life. As such, my goals with them are to have some stability in the fact there there will be money there, while earning as much as possible so that my family is well taken care of later in life. Ideally, these accounts would grow to a size that enables my wife and I to retire comfortably while also providing future income for my children and down the generational tree.
So… The question becomes, what is the best way to manage this cash?
The bulk of the money is in a 401(k) account that has specific rules and regulations regarding deposits, withdrawals, transactions and investment vehicles. Quite frankly, it is fairly limited in what can be done. Hedging is out of the question, shorting is a no-no, individual issues are out of play, and there are only a dozen or so funds that can be used.
I don’t really plan on coming to an answer or recommendation on this post, I’m really just thinking out loud. If you have some thoughts on the topic, I’d love to hear them!
Here are my thoughts and current concerns
I am not a money manager. When I trade, I am a speculator. Plain and simple. I look for short to medium term (a few days) setups and I trade them. This is not how you manage money longer term.
My overall market directional calls have been pretty solid for longer term plays. Currently, I’m very concerned about the strong possibility of a long bear market, or at best, years and years of chop. Given this, I don’t think there is much appreciation to be had from the stock market in terms of raw percentage gains. I’m also a bit concerned about the possibility of a strong inflationary enviornment in the next three-seven years, if that happens, nominal prices will rise quickly and I’d like to protect my money from this increase.
If I am right directionally on the market and we move down, then having strong exposure to equities is not really the best place to be! Given that I cannot hedge properly in these accounts, it is very difficult to insure my gains from possible collapse. Without the ability to hedge, the only option that I can think of is to simply reduce my exposure.
With that line of thought, I took a look at my options. Cash or bonds. That is about it. Cash is definatley out of the question for a large part of the portfolio – over the next 30 years I’m pretty sure about one thing, cash will lose value – period. So, let’s talk about bonds. Well, there are two options that are avaiable to me here, the best one is a fund that has returned about 7.25% over its life, and recently has returned about 5% a year.
Consistent returns, or playing the market…
Well, 5-7% a year isn’t horrible, but it isn’t going to rock my retirement world either! Let’s get one thing clear, I do not micromanage this account. Nor do I want to. I will make about 4 adjustments a year. Primarily these will be total portfolio re -balance adjustments to line things up with future expectations. If I don’t need to make any changes to my fund selection, I’ll just re-balance things to get back in line with my investment allocation.
So.. Given that I’m not going to try and time the market, and I am definatley not going to be trading this account; what is the best allocation method for the investments?
I could do something simple like a 50/50 split. 50% locked up in a reasonably stable vehicle like that bond fund, the other 50% spread out across an array of other vehicles matched against macro economic conditions, fund performance, management etc… This provides a nice way to protect gains when I rebalance, and it also protects capital if the market collapses.
There are hundreds of other options, each of which have plusses and minuses. This post is getting wordy, so I’m going to call it quits for the moment, and I’ll revisit shortly. If you have any thoughts, I’d love to hear them.
