Wednesday, August 28, 2013

I Don't Know

Hopefully, soon, I will have one of those good kind of problems. When my house in Maryland sells, I will need to invest the proceeds. I believe the market is over valued, although it is starting to drop as the current administration beats the war drums. Bonds are paying historically low interest rates. If the interest rates continue to increase their short term values will continue to decline. Precious metal stocks have been choppy for several years. I am just not a rental property kind of guy.

So let me invoke the three most powerful words in investing, “I don’t know.” The beginning of wisdom always starts with an admission of your limitations.

Pride goeth before destruction, and an haughty spirit before a fall.

In the twelve years I have invested in a serious and conscientious manner, I have followed a course that could be described as a modified form of dollar cost averaging. I invested 14% of my pretax income in a mix of funds offered by my employer. I seldom adjusted my contribution percentages to different types of investments. I probably rebalanced my holding in this account once a year or less. The theory (and it works) is that over many years, buying more shares when the price is low, fewer shares when the price is high is safer than attempting to time the market. Rebalancing on a periodic basis forces the investor to buy stocks when the market tanks and sell when the market is high. Outside of my Government equivalent of a 401K, I would invest relatively small amounts of money in different kinds of investments as opportunities present themselves or I needed a little more of this or that to stay in balance.

I believe one of the keys to safety in investment is never invest too much in any one holding (diversification) or too much money at any one time. Now, while I doubt that I will invest all the proceeds from the sale of my house at one time, realistically I will need to invest more at one time than is my habit. Of course I have some ideas, but at this time I have no idea what I will actually do when the time comes.

Here are some of my thoughts:

1)Add to my holdings in Vanguard Wellington and Wellesley Income funds. Together these funds give me a 50%/50% holding in a diversified group of conservative dividend paying stocks and investment grade bonds. This position is the basis for my attempt to self fund my need for long term care insurance. Also if I die and my wife does not desire to maintain our self managed account, she could sell shares in companies she didn’t understand and move the money to these two funds.

2)The recent bankruptcy of the city of Detroit has caused some problems in the municipal bond market. A tax exempt interest rate of 3.12% sounds interesting. I could add to my holdings of Vanguard Intermediate Term Tax Exempt (VWITX).

3)I am reasonably certain that I want to buy some more utilities, particularly water companies. They pay a good dividend with a reasonable degree of safety.

4)Add some platinum to my gold and silver holdings (just a little).

5)Peruse the lists of dividend aristocrats. My basic investment style can be summed up in three words, dividends, dividends, and dividends. I really am not very interested in a company that does not want to share its profits with the owners (me). Also, now that I am retired income is more important than ever before. Maybe I can find a bargain.

6)Start a bond ladder. The classic way to generate retirement income is the bond ladder. This is probably worth an entire post, but basically here is how it works. Buy a bond for income that expires at some certain future date. Then buy another bond that expires before or after the first bond-and another with a different term-and another with a different term etc, etc. As the bonds mature reinvest the proceeds in another bond. This provides a steady stream of income with a minimum of risk caused by interest rate fluctuations. This method is out of favor because bonds are currently paying just about nothing.

Let me end with a warning, “I don’t know.” I look into my crystal ball, but I just don’t know.

Please! Let’s be careful out there today.

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