Investment Concerns

[yalgaar 40]

I am considering long term passive investments Options and had a few concerns about the same. I was wondering if any of the members here had the following same/similar challenges:

1) If I want to just invest some amount of my capital in an Index fund. Lets say "SPY" what is the best way to do so? The only way I know of is to have an account with broker like TD Ameritrade and just but whatever quantity of SPY I want to invest and that is it. Are there any other better ways to do this?

2) Besides SPY there are many other funds that I am interested in. e.g. UPRO, TMF, TYD, SSO, UBT, UST. I want to know if you would be concerned about anything investing in any of these funds?

3) Do I ever need to worry about my money with TD Ameritrade while buying any of the above funds?

 

[DubMcDub 122]

19 minutes ago, yalgaar said:

I am considering long term passive investments Options and had a few concerns about the same. I was wondering if any of the members here had the following same/similar challenges:

1) If I want to just invest some amount of my capital in an Index fund. Lets say "SPY" what is the best way to do so? The only way I know of is to have an account with broker like TD Ameritrade and just but whatever quantity of SPY I want to invest and that is it. Are there any other better ways to do this?

Do you have a 401(k) with work or an Individual Retirement Account (IRA)? Those can be good places for long term investments, before using an individual brokerage account, but it depends on your specific situation.

 

Otherwise, yes, a brokerage account with your preferred broker (TD Ameritrade, or whoever else) is a perfectly fine way to buy and hold long term investments like SPY.

19 minutes ago, yalgaar said:

2) Besides SPY there are many other funds that I am interested in. e.g. UPRO, TMF, TYD, SSO, UBT, UST. I want to know if you would be concerned about anything investing in any of these funds?

I'm not familiar with any of these funds except UPRO. But I took a quick look, and it looks like several of them (including UPRO) are 3x leveraged funds. Doing passive long-term investing with leveraged funds is generally speaking a really bad idea. These types of fund are meant to be short-term trading vehicles, not long-term investment vehicles. 

19 minutes ago, yalgaar said:

3) Do I ever need to worry about my money with TD Ameritrade while buying any of the above funds?

 

I'm not sure I understand the question, here. Do you need to worry about losing money? All of these funds can definitely lose a lot of money, if that's what you mean. That's true of any investment, but it's extremely true of leveraged funds like some of the ones you've listed. 

[yalgaar 40]

@DubMcDub Thanks for your replies. Helped me a lot.

 

2 minutes ago, DubMcDub said:

Do you have a 401(k) with work or an Individual Retirement Account (IRA)? Those can be good places for long term investments, before using an individual brokerage account, but it depends on your specific situation.

I do have several 401K accounts with my previous employed that I intend to transfer the funds into 1 or more IRA accounts with TD Ameritrade. Would you be concerns about anything doing this?

 

4 minutes ago, DubMcDub said:

I'm not familiar with any of these funds except UPRO. But I took a quick look, and it looks like several of them (including UPRO) are 3x leveraged funds. Doing passive long-term investing with leveraged funds is generally speaking a really bad idea. These types of fund are meant to be short-term trading vehicles, not long-term investment vehicles. 

You are right UPRO and SSO are 3x and 2x leveraged ETFs. I understand the risk in it...but I would be having hedges accordingly. I am still working on things. But what I wanted to know is if those ETFs were overall secured. I mean if it was possible to lose all my money because of the fund manager institution going bankrupt. These are retirement funds we are talking about so just trying to ensure everything.

 

 

7 minutes ago, DubMcDub said:

I'm not sure I understand the question, here. Do you need to worry about losing money? All of these funds can definitely lose a lot of money, if that's what you mean. That's true of any investment, but it's extremely true of leveraged funds like some of the ones you've listed. 

I meant TD Ameritrade as a company. What is my safety/security for my funds with them? I know very little understanding of these things so doing my diligence before commitment of substantial (for me at least) retirement funds.

[DubMcDub 122]

27 minutes ago, yalgaar said:

@DubMcDub Thanks for your replies. Helped me a lot.

 

I do have several 401K accounts with my previous employed that I intend to transfer the funds into 1 or more IRA accounts with TD Ameritrade. Would you be concerns about anything doing this?

 

You are right UPRO and SSO are 3x and 2x leveraged ETFs. I understand the risk in it...but I would be having hedges accordingly. I am still working on things. But what I wanted to know is if those ETFs were overall secured. I mean if it was possible to lose all my money because of the fund manager institution going bankrupt. These are retirement funds we are talking about so just trying to ensure everything.

 

 

I meant TD Ameritrade as a company. What is my safety/security for my funds with them? I know very little understanding of these things so doing my diligence before commitment of substantial (for me at least) retirement funds.

Ah, I see. Well, I don't know enough about the solvency of various brokerages to really comment on that. Generally speaking, I do try to keep my long-term funds spread across a few different brokerages, just to diversify whatever institutional risk may exist. So maybe that's an option for you.

 

With the caveat that I'm not an investment advisor, so I say this to you just as an SO "friend," I really do not think taking your retirement funds and then investing them in levered ETFs--even with "hedges"--is a wise idea. Of course, it's your money and you will do with it what you think is best. But I will tell you that I'm a pretty experienced and very profitable options trader, and even with my experience and history of profitability, I would never in a million years do something like that with my retirement funds. And I know other experienced traders who would tell you the same. 

[yalgaar 40]

8 minutes ago, DubMcDub said:

Ah, I see. Well, I don't know enough about the solvency of various brokerages to really comment on that. Generally speaking, I do try to keep my long-term funds spread across a few different brokerages, just to diversify whatever institutional risk may exist. So maybe that's an option for you.

 

With the caveat that I'm not an investment advisor, so I say this to you just as an SO "friend," I really do not think taking your retirement funds and then investing them in levered ETFs--even with "hedges"--is a wise idea. Of course, it's your money and you will do with it what you think is best. But I will tell you that I'm a pretty experienced and very profitable options trader, and even with my experience and history of profitability, I would never in a million years do something like that with my retirement funds. And I know other experienced traders who would tell you the same. 

Thanks for your concerns. I appreciate it. Where would you invest your retirement funds?

[CJ912 133]

The leveraged ETFs are menat as a short term trading instrument. You really should read up on beta decay and drift in these, before deciding going in  long term. I don't think it's a good idea, there are some unhedgable risks in these instruments. Besides, even in a very classic 60/40 mix, somewhere around 85% of the portfolio risk is equity risk, do you really feel you need to increase that? 

I would rather think the opposite and try to diversify over more asset classes with different, lowly correlated return profiles. 

[DubMcDub 122]

6 minutes ago, yalgaar said:

Thanks for your concerns. I appreciate it. Where would you invest your retirement funds?

Again, I'm not an investment advisor, but I am happy to tell you what I personally do with my retirement funds. I invest them across a range of highly diversified, low-cost ETFs, with a slight tilt toward small cap and value stocks (small cap and value have historically shown a higher return, though no guarantees). The exact mix depends on how much you want to allocate where (e.g., how much stocks vs bonds, how much US vs international, etc.).

 

Here are some ETFs I currently own, all of which are very low cost and diversified. Maybe you can look into some of these and see how they suit your needs:

 

US Stocks

• SPY
• IWM
• MGV
• VBR
• VGSLX (technically this is a Real Estate investment trust, not a stock)

 

Int'l Stocks

• EFV
• IEMG
• DLS

US Bonds

• AGG
• TLT

(I don't invest in non-US bonds for various reasons, one of which is that in a lot of countries, bonds correlate much more highly with stocks than they do in the US.)

Edited September 4, 2020 by DubMcDub

[yalgaar 40]

@DubMcDub Thanks for sharing. I totally understand you not being an investment advisor but I value the information you share. Now if you don't mind to share how you allocate to these various funds and your reasoning for the same. Bottom line, what are your expectations from this on annual basis? What kind of drawdowns do you expect to see on this and are comfortable to accept it?

[Kim 7,451]

From SSO description:

This leveraged ProShares ETF seeks a return that is 2x the return of its underlying benchmark (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, holding periods of greater than one day can result in returns that are significantly different than the target return and ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks. Investors should monitor their holdings as frequently as daily. Investors should consult the prospectus for further details on the calculation of the returns and the risks associated with investing in this product.

I would be very careful with those leveraged instruments. Not only will they have much higher drawdowns, but in the long term they might not deliver what you expect from them.

Here is a good site that explains the benefits of passive investing. it is about Canadian implementation, but the principles are the same. It also gives some idea about long term returns and drawdowns using different asset allocations.



So with 60/40 allocation, you can expect around 7% annual return with 21% largest drawdown. 

[gf58 766]

To add to the discussion, you might also want to look into Harry Brown's permanent portfolio. I implement a variation of it for my retirement funds (default funds in Australia tend to jam very high percentages of you money into the chronically underperforming Australian market). The nuts and bolts of a good portfolio are investment in uncorrelated assets, the selection of which at least one should perform well during each economic state, and rebalancing every quarter or so to lock in gains.

There is a good write up of the implementation at https://investresolve.com/permanent-portfolio-shakedown-part-1/ and https://investresolve.com/permanent-portfolio-shakedown-part-2/ and I found getting to grips with it gives you a good basis for understanding the desirable elements of any long term investment portfolio such as diversification and rebalancing. It also gives some perspective as to why most retirement portfolios are things like 60/40 or 70/30 and what the difference is.

[Ringandpinion 1,621]

I'd like to chime in as well.  I've been reallocating funds from my recent retirement and for my wife's pending retirement.  The amount of money in just the US that is in retirement savings is astronomical, thus a huge variety of carpetbaggers come out of the woodwork with numerous stories about whatever they are selling is going to make you secure into the 24th century.  I want to amplify @Kim and @gf58, educate yourself, and be circumspect about where you get the information.  Nothing is really 100% secure.  It sounds like you are on your initial search to learn, it's okay to let your funds sit and earn nothing while you educate yourself, that's a lot better than losing them altogether.

[DubMcDub 122]

4 hours ago, yalgaar said:

@DubMcDub Thanks for sharing. I totally understand you not being an investment advisor but I value the information you share. Now if you don't mind to share how you allocate to these various funds and your reasoning for the same. Bottom line, what are your expectations from this on annual basis? What kind of drawdowns do you expect to see on this and are comfortable to accept it?

I think Kim's numbers from the "Canadian Couch Potato" model are very realistic in terms of what to expect from a 60/40 stock/bond portfolio. Of course, no one is saying your portfolio has to be 60/40, but that's a pretty common breakdown.

 

In my personal portfolio--again, not investment advice, I am just telling you what I personally do since you asked--I allocate about 65% to stocks and 35% to bonds (and other fixed income). Then within stocks, I allocate about 65% to US stocks and 35% to international stocks. I try to get worldwide exposure to as many different countries' stocks as possible. For the US component, I do roughly 50% allocated to large cap blend (SPY), 25% to small cap blend (IWM), and 25% to value stocks (MGV and VBR). 

 

My bond/fixed income holdings these days are mostly in 10-20 year US treasuries. The yield is crap, but it's at least higher than 0% and does provide some protection in the cash of stock market crashes, deflation, or both. 

 

You can get a very good, diversified portfolio using only 3-4 ETFs, by the way. My portfolio is probably more like 10 or so ETFs, which I think is still a reasonable number, but this depends on the person.

Edited September 4, 2020 by DubMcDub

[betaboy3000 64]

A great free resource detailing the risks involved in different asset allocation strategies (based on backtesting) is this site:

https://portfoliocharts.com/portfolios/

The "ulcer index" concept is particularly useful.

https://portfoliocharts.com/2017/11/01/the-ulcer-index-is-a-helpful-way-to-quantify-portfolio-pain/