Responses to “How to invest for 3-7 years out”

Personal finance

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I only received a couple of participants in my group writing project, but I’m not disappointed: they both had great advice, and in the end, it’s the quality that counts! Without further ado, here are some thoughts other personal finance bloggers shared, and a link to my response as well. The original question appears below.

Many thanks to the two who participated, and I’ll be sure to try this again when I have more to offer :)

  1. Mid-term Savings Methods by Shane Ede at A Penny Saved suggests high-yield savings accounts, some CDs, and perhaps some stock exposure. A comment from a reader recommended lumping long-term savings together and just separating them out “virtually” using an Excel spreadsheet
  2. Larry Stay from Grow Your Funds chose to leave his insights about choosing bonds in a comment on my response to the reader. He’s a professional bond portfolio manager with some nice credentials, and willing to take questions from readers about investing at his site, making it interactive. What a great resource! I’ve already learned about investment vehicles I didn’t even know existed.
  3. You can read my original response to the reader’s question as well.

The great thing about a group writing project (even one as small as this) is the dialogue it creates. Like a true brainstorming session. If it were more generic a question and had more participants, you’d have had the added benefit of finding responses from people and sites you didn’t even know existed. Even just considering my response forced me to check what options, vehicles, and rates are currently out there and available that might fit both my reader’s and my own investment needs. What can I say? I wish this sort of participatory writing project happened more often!

For completion, here’s the reader’s original question:

I like to setup my finances on a “purpose” basis. I create a separate account for each specific saving target. I have 401ks or IRAs devoted to long-term savings. A checking account (and a small savings account at the same bank) to handle day-to-day expenses. Some CDs as a safety net in case I lose my job. A separate savings account for spur-of-the-moment spending.

This keeps things tidy and reduces the tempation for my spur-of-the-moment spending to hamper something important (like next weeks [sic] groceries).

This works great for short-term or long-term savings. But not so well for mid-term savings. Things that are maybe 3-7 years out. (Like buying a new car or saving for home remodelling.) I can’t figure out what the best vehicle is for carrying this out. I can take more risk (and want better return) than savings accounts and CDs, but it’s not so long that I want too much stock exposure.

It just doesn’t seem like there’s a good way to create a single account to handle this sort of time-horizon.

Maybe the answer is on your site somwhere and I haven’t been able to find it. Any suggestions?

If you’d still like to respond and participate, don’t hesitate to let me know!

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2 Feedbacks on "Responses to “How to invest for 3-7 years out”"

Marc Mayor

Why not neutral investing?

I have found that a well-chosen portfolio, with half long good stocks and the other half short awful stocks, is even less volatile than most bonds.

The average annual performance is 15-20% per year (for me since ’99).

What’s better, the performance comes whatever the stock market does. Whether it crashes, goes sideways or up is no concern.

Why do so few people take a similar approach?



Ricemutt

Hi Mark,

Thanks very much for your comments. I can’t speak for others, but I suppose the most prevalent reasons people avoid a neutral (or hedge fund, if you will) approach is the perception that it’s much riskier, and/or they don’t know what one is or how to set one up. Perhaps this perception is wrong, and we’ve been somewhat brainwashed by conventional wisdom sold to us by mainstream money managers, but that’s the general consensus.

I visited your site, and the service your selling is very unusual in that, assuming it works as you say, your target audience would appear to be fairly wealthy individuals who are interested in actively managing their porftolio.

My guess is that if personal finance blogs out there are any good indication, most average Americans don’t have the kind of money, discipline, or understanding to invest the way you recommend. I’ve known many people who’ve shorted or have used margin to buy stocks only to find themselves in deep trouble because they had no idea what they were doing. And the ones who do have money tend to either want something passive that “costs” nothing, or they’re willing to pay someone to take care of it for them rather than take an active approach (or even learn about investing), like what you’re offering.

Although I admit I’m still very much a student when it comes to investing, I’ll give you my experience, for what it’s worth. The key words in your question are “a well-chosen portfolio”. Such a thing is tough to find. It takes me forever to find any stocks in which to take simple, long positions, and I’ve never shorted a stock with real money. In my experience, even theoretical neutral portfolios don’t always perform well. For example, in April 2003, I took a class in which our group chose KKD at a price of ~34 as a candidate that was ripe for a fall: it was obviously overvalued, had questionable accounting, unsustainable implied growth that sell-side analysts were rah-rahhing expectantly to the market, etc.

Yet KKD continued to surge to 50 before finally, a year later, desending back to 34 and continuing its fall. Maybe this is a reasonable time to wait for a market correction, but as an average individual investor, my understanding (perhaps incorrect) is that there are both time and financial limitations and difficulties to shorting a stock.

Had I really shorted the stock with my own cash, wouldn’t I have had to cover my short once KKD surged to 50? And that would have been quite costly to do. Finally, it’s easy to look back now and see that KKD ended up being a decent short play, but at the time, and with real money, I’m sure it would have been nervewracking, to say the least. To be sure, the toughest thing about developing a good portfolio (neutral or otherwise) is successfully analyzing and choosing the right stocks on a consistent basis.

I admit I was very skeptical of your method because I’m always wary of anyone who claims that a strategy will work well regardless of how the market moves. On the other hand, I have no doubt you’re much better at picking stocks than I am. I also read through your newsletter and appreciate that you highlight that your methodology isn’t guaranteed to be successful all the time, and that you have had a 3rd party, isfa, confirm your performance. I also agree with many of your statements and am a fan of techniques in general that eschew conventional thinking. As such, I’m willing to give you the benefit of the doubt that your strategy has worked for you. Still, I have a bit of a hard time swallowing a $1495 per year fee for the advice. At the recommended $50K investment amount, that’s nearly 3% in fees. I’m not saying your advice isn’t worth it, but I’m just not yet convinced, having only read about your methods on a website.

(By the way, may I ask why do you choose to benchmark your portfolio’s performance against the S&P 500? If your case studies are a good indication, most of your picks are small-cap stocks. Why not benchmark against the Russell 2000, which you still outperformed?)

Thanks again for sharing your thoughts and questions!



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