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More On Why I Sold My Vanguard Target Retirement 2050

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My post on why I sold off our Target Retirement 2050 fund received quite a few comments and I wanted to address those individually and in a way that simply can’t be done in chronological comments.

On the topic of not having a plan: There actually was a plan but the plan was bad or wrong or just not well thought out, so there :) . Usually people recommend that you shouldn’t in stocks unless your plan’s horizon stretches somewhere past 5 years, my plan doesn’t necessarily stretch past five years and I merely wasn’t sure about it. Since I wasn’t sure, that’s basically not much a plan now is it?

One thing I’m grappling with, when it comes to getting the most return for my money, is where should I put funds that I don’t know when I’ll need it? It won’t be this year but what if I want to put it towards real estate in over a year? Should I put it in laddered certificates of deposit (though honestly their returns are not much better than the 5%+ available through Emigrant Direct) or is there another mechanism? Since I didn’t know of any, I simply put it into the TR2050 because that’s where I thought it should’ve been.

On the topic of panic selling or market timing: I didn’t consider it panic selling because I looked at the situation, recognized the short term nature of my “plan” and thought the nature of the environment said it wouldn’t be a bad idea to sell. I only sold the TR2050, I didn’t adjust my 401k (it’s already at max or I would’ve increased it), SEP-IRA or my Roth IRA (where I am also in TR2050). Am I market timing? Sure, you can call it that and I’m okay with it.

On the topic of how subprime was too small to really affect anything: It’s already affected the employees of those companies considering how companies have either folded (American Home Mortgage is the biggest name to go under) or just folded their mortgage departments all together (if you’re curious for names, there are plenty in the news). Bernake and the Fed added additional liquidity to the market and dropped the funds rate half a percent. If Bernanke didn’t reverse course, bend to the market as easily as he did, it would be a totally different story right now (I call bullshit on his whole “you can’t watch the markets, you have to understand the undercurrents and the fundamentals” because he was watching the markets).

Hope that’s enough fodder for now. :)

The biggest question is what should someone who has a horizon of less than five years be in?

{ 10 comments, please add your thoughts now! }

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10 Responses to “More On Why I Sold My Vanguard Target Retirement 2050”

  1. Brian says:

    I’m glad you followed up on your previous post to give more insight into your decision. This clears a lot of it up.

    As for the question about what investments should you be in if your time horizon is less than 5 years, just throw it in something liquid that will give you 5-6% with little risk and I think you are fine. Your idea of laddered CDs is ok if you don’t have the discipline to have all the money available to you, but I know you do have good financial discipline from your previous posts. So, if it were me, I would throw the money in a high-yield online savings account like ING or HSBC Direct.

    I’ll update the post I wrote on your previous thread to reflect these updated thoughts.

  2. pcooper says:

    If the only thing you’re sure of is that you won’t need it for a year, I would invest as though you needed it in a year, putting it in your short-term instruments of choice (like CDs or a high-yield checking or savings account).

  3. Kurt says:

    “Should I put it in laddered certificates of deposit (though honestly their returns are not much better than the 5%+ available through Emigrant Direct) or is there another mechanism?”
    Laddered CDs will provide higher returns in a falling rate environment (if we’re headed into a demand driven recession, for instance).

    “On the topic of panic selling or market timing”
    If the market had been going up recently, you wouldn’t have sold. You panic sold and are trying to market time. Nothing wrong with that — we’re all human.

    “On the topic of how subprime was too small to really affect anything”
    Subprime is a media generated buzz word. True, it was part of (and indicative of) a general loosening of credit terms. But it was that general loosening, not the specific issue of sub prime, that should be the story (just ask Henry Kravis and his bankers).

  4. Lazy Man says:

    I’m weird (and crazy), but I’d probably do a 30-30-30-10 split. 30% in US equities, something like Vanguard Total Index. 30% in non-US equities, like the Vanguard ex-US fund or ETF. 30% in something safe like CDs or high-interest banks, and 10% in Prosper. Okay scratch the Prosper, and maybe up the high-interest account. With this kind of mix, you should be able to net a 7% gain, which isn’t bad, and you have access to money if you need it. Your downside risk should not be too high as I can’t imagine the US and the whole world’s equity markets go to nothing.

  5. You should look into laddering treasuries, since they’re state income tax free. Of course, the extent of this advantage depends on your marginal state tax rate.

  6. Eric says:

    Don’t worry about being called a market timer – what do you think 90% of the individual investors do?

  7. I tend to be on the conservative side due to my age but I have the funds I need in the next five years purely in tax free money market funds and bonds (short term, intermediate term and GNMA). Everything else I don’t need in that timeframe goes right in the stock market in REITs.

  8. Kurt says:

    “Everything else I don’t need in that timeframe goes right in the stock market in REITs.”
    Interesting. Do you own a house? That appears to be all the real estate exposure anyone really needs.

  9. Keith says:

    Something relatively new that you might consider trying is called “Structured Notes” I’m not too familiar with them yet (just heard about them).

    I’ll see if I can give a simple explanation. Basically, you buy a CD from a bank and set up a structured note. The interest you earn from the CD is reinvested in derivatives. The potential upside is unlimited, and the downside risk is 0. If it makes money, you get more money than you normally would with a CD, if it loses money, you still get back your principal in the CD. So, the only loss would be the opportunity cost of putting it into something else. Check out this PDF from the Chicago Fed I found that gives a little more detail. I’m not sure how this whole credit crunch will affect it however as it is somewhat exotic.

    http://www.chicagofed.org/publications/capitalmarketnews/structn.pdf

  10. Keith says:

    Sorry, one more link that may be easier to understand from JPMorgan. Click on “How they work” then click on “Launch Product Simulation” then Principal Protected Note. It has a nice animation on possible outcomes.

    http://www.jpmorgan.com/pages/jpmorgan/investbk/institutionalequities/structuredinvestments/structurednotes


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