Investments and Retirement
DJIA - Absolute & Inflation Adjusted
As the financial markets crumble people are beginning to take a close look at their investment strategies … I am no exception.
My retirement portfolio (all of which is in a Roth IRA) is down 30% (as of 3/23/09). Most people are probably in a similar boat. Most people would tell me, “well, you have a long time to retire so don’t worry because the stock market always goes up in the long run.” Does it? I suppose over any 30-year period (adjusted for inflation), the stock market has gone up. However, how many 30-year periods have there been in the history of the stock market… four? That’s not a statistically encouraging sample size. So, while you may be able to extrapolate positive returns into the future, the standard deviations get larger the further out you get.
What does this mean? Basically, I can expect to get 8% per year on average for the next 20 years. However, the standard deviation of that “8% average” also increases. In 20 years, if I keep my money in stocks, the most likely outcome is that I make money, but another possible outcome is that I lose everything. To reduce this risk I can move more of my investments into “safe” assets as I get older.
I tend to be more on the risk-averse side compared to others my age. As such, I haven’t
gotten too much heartburn from the financial calamity engulfing the world. My rough
investments percentages are as follows:
48%: Cash in a high interest savings account. The account used to pay over 3%, but now pays slightly under. This is all my non-retirement money. When the markets starting palpitating last summer I got nervous and cashed out all my non-IRA investments and stuck them in a savings account. I lost money on the transaction, but not very much relative to where those investments are priced today.
23.4%: Vanguard Mid Capitalization Index (VIMSX). Basically this fund tracks the S&P500. It’s down 36%.
12.9%: Amana Trust Income (AMANX). This is an unusual fund in that it invests in accordance with Islamic principles. Basically, these principles require that investors avoid interest (riba) and investments in businesses such as liquor, pornography, gambling, and banks. That last word is the most important one. This is my best performing mutual fund – down only 29%.
10%: ProShares UltraShort 7-10 Year Treasury (PST). This is my foray into Exchange Traded Funds (ETF’s) and acts as my hedge against the impending poopstorm our government’s fiscal irresponsibility is about to get us into (my opinion only). The ETF seeks twice the inverse daily performance of the Barclays Capital 7-10 Year U.S.Treasury Index. Here’s what is all means (using my thought process). Foreign demand for US Treasuries will dry up as they no longer see it as the safe investment and/or not providing a sufficient return. China has already hinted in this direction. The supply of Treasuries will increase because it’s the only way we can fund our growing deficit. To continue paying our obligations we’ll have to print money, causing demand to contract in relation to our declining dollar. Basically, as US Treasuries go down the toilet, PST shares will be sitting pretty. I’ve only owned this fund for about a week (so no meaningful percentages), but I’m considering increasing my stake in PST as it also hedges my TSP fund (discussed below).
5%: Columbia Energy and Natural Resources (UMESX): This fund invests 80% in energy in energy and natural resource industries with 50% in crude oil, petroleum and natural gas. Last summer when oil was $150/barrel this fund was taking names and kicking ass. Today … not so much. However, I think this is still a good long term fund as it’s investing in a commodity with limited supply and increasing demand. This fund is down 42%.
0.7%: CitiGroup (C): A while back the stock dropped to $4.00 and I thought, “Wow, what a great buy!” Hey, we all make mistakes. Luckily I didn’t invest much. $4 is pretty low so it still may turn out to make money.
Not included in the above percentages is my Thrift Savings Plan (TSP) – basically a 401k for government workers. There aren’t many options in the plan – 10 to be exact. When you sign up for the program it automatically puts all your contributions into the “G” fund (Government Securities). To change my contributions I have to go onto the website. Due to a series of bureaucratic irregularities, it took several months for me to obtain a TSP login so my funds were slowly building up in the “paltry” G fund. By the time I logged in, I turned out the G fund was the best performer (clocking in at a red-hot +3%) so I figured I’d leave it alone for the time being. Because it’s new and I’m not maxing out my contribution, there isn’t too much in this fund at the moment.
Katie has similarly poor investments. In fact, she has about 40% less than she originally invested. It’s not comforting to know that you would have been better off stuffing your money in a mattress!
