As noted, they will but you only get a 1099 for a regular investment account - not for a Traditional or Roth IRA. If you are investing for retirement, the general advice is invest in this order, as long as you have the cash to do so :
first, take advantage of your corporate plan to maximize the employer match, if offered. IOW, if they match the first 3%, put in 3% - bingo you just got a return of 50%!
second, open a Roth IRA and put in the max of $6000 in 2019. (Before Apr 15 you can do $5500 for 2018)
third, go back to your corporate plan and put as much as you can there - up to the limit.
fourth, open a regular account for excess, if you are lucky enough to still have money to save. This is the account where you have to pay taxes but not the others. On the Roth, you never pay.
What I mainly popped in to say is: don’t invest all your money at once. Invest in 10-20% increments and keep your eye on things. It is always possible we are on the cusp of some big change, in which case not being “all in” can be advantageous.
If it were me, I would put $10k into the S&P500 index fund, in increments, and keep the other $10k on hand, maybe in a money market account. I feel like the bull market is going to wrap up and that there very well may be a recession looming. If that happens, having some cash on hand will put you in a good position. As they say, “The time to buy is when there is blood running in the streets.” You can’t do that without some cash on hand.
I also transferred about 3/4 of my 401k into bonds and other safe assets, just last month. I think there is going to be a crash (worse than what we’ve already seen) in the next couple of years, and want to retain that value to get back in after things go south. I could be wrong, but even if I am I have a nice chunk of low-yield dough safely set aside. I continue to buy into the S&P 500 with most of my 401k contributions, and don’t see that changing (I’ll increase contributions if there really is a crash).
Good post. I agree that it makes sense for some investors to hold multiple funds/ETFs for small cap value exposure. Here’s one comparison of the various funds that are available today for this particular asset class:
For foreign small cap value there does not appear to be many options for those of us who don’t have access to DFA. But I’d prefer to use a foreign large cap value ETF over a foreign small cap ETF, since historically the value premium has been both larger and more stable than the small cap premium, at least domestically we know this has been the case.
That having been said, for the 92.5 year period ending June 30, 2018, $1 invested in the largest decile of stocks in the CRSP database would be worth $4,169 (9.43% average annualized return), whereas $1 invested in the smallest decile of stocks would be worth $110,800 (13.38% average annualized return), or 26X as much.
What’s your data source for this? It hasn’t been the case for the last 2 decades in the U.S. based on the CRSP data I’m looking at. Large cap value has underperformed large caps overall, and been the worst performing of any size- or growth/value- based sector.
Since 2002:
7.2% - Mega
6.7% - Mega Value
9.1% - Mid
9.2% - Mid Value
9.9% - Small
10.4% - Small Value
I always thought the theory was that an algorithmic value-based strategy only works for small companies, since there’s just too much information in so many small companies for active investors to process, so price discovery is less efficient. Whereas if large well-researched companies are trading at (say) a superficially attractive P/E, it’s usually for a good reason.
I will happily admit that I miss out on the end of every bubble, and the beginning of every recovery. But… you’re wrong about the big jump, I’m sure we all remember 2008 and 2000 when people caught falling knives by the fistful just from pure optimism. Knife collecting has likewise become popular in recent months.
I don’t claim to time every small downturn, but if you couldn’t see 2000 and 2008 crashes coming, it’s because you tried very hard to ignore all the warnings that were out there.
The problem is not that it was hard to see the 2000 and 2008 crashes coming. It’s that the same people predicted the great crashes of 2002, 2005, 2006, 2007, 2010, 2011, 2013, 2014, 2015, the five crashes of 2016 and the seven in 2017.
Thanks. Fortunately for the U.S. part, there’s no need to be too concerned about whether anything has structurally changed, since we have good cheap small cap value funds. Small cap value has work in the very long run and also for more recent decades.
This is actually not true, it’s a thing people tell each other to feel OK about not monitoring their investments or economic conditions.
I am not knocking that decision… much is at stake, it seems overwhelming, a mechanistic approach is a totally valid way to maximize your comfort. But just because you’re uncomfortable with a more active approach doesn’t mean it’s impossible.
What is true is that markets sometimes crash, but sometimes also go up very quickly. And that often those times are points of greatest negative sentiment when it appears that a crash is about to happen. It’s not rational or objective to focus on how much money you could have saved in 2000 and 2008 by exiting the market, because of all the times you would have lost far more by exiting the market at the wrong time.
It’s not a question of comfort, it’s a question of taking the optimal and most rational approach to maximize your returns. Are you really suggesting that for a retail investor, the rational approach is to assume that you can beat a passive index? The great majority of professional managers do not. All empirical evidence, not to mention basic common sense, argues against your recommendation to manage your investments actively.
FWIW, here is a chart of my retirement account from ages 40-70.
The first 20 years represent 15-20% of pay as annual 401k savings (includes 6% company match). The last ten years had no contributions because I retired. I will start regular withdrawals this year.
My strategy though most of this was ‘buy and hold’, 90% or more low fee stock funds. I never sold in a down market. The last five years have been a shift to all index & stable value funds and a gradual decrease to only 60% stocks.
And to clarify exactly what’s necessary to prove that you can beat a passive buy-and-hold strategy. You need a consistent track record of picking entry points to sell the market short, and exit points to cover your short profitably.
You are describing an extremely active management strategy (including short selling). That’s not what I do or advocate. Actually I’m mostly in passive instruments and I trade very, very infrequently. I am only active to the extent that I believe it’s possible to make qualitative judgments about when major corrections are due, within a 1-2 year timeframe, and respond accordingly.
For example I started shifting to a more bond-heavy portfolio in April 2018, and stopped around August 2018. This was mostly from the obvious observation that 10-year bull markets don’t continue forever, and the US does not have the most steady hand at the wheel right now. I didn’t know the correction would begin in October, but the expert consensus seemed to be that it was due, and I agreed. Right now I have no sense at all what’s going to happen in 2019, so I’m not making any changes for the next 2-3 quarters at least.
Yes, I missed a few points of gain in the summer, yes, I’ll likely miss some on the rebound, but I missed the 20% haircut that the SP500 took in that timeframe. I don’t claim to be perfect or precise.
That’s just one data point, so it won’t satisfy the rigor you want, but I just wanted to be clear about my thinking.
You claim that you can see major declines coming, and that your strategy is to exit the market at those times and re-buy after the decline. So relative to a passive strategy that is always invested in stocks that’s obviously logically exactly equivalent to claiming that you can make money consistently over time by shorting the stock market when you anticipate a decline is imminent, and covering your short some time later.
I understand your thinking. The issue is whether you can consistently make money from this vague strategy of selling the market short when you think it looks like it will go down.
Do your stable value funds focus on returns? The ones I’ve moved into do, and they have been generating good income.
I’ve moved into them expecting a recession. They have gone up, not as much as a more aggressive portfolio, but that is what I expected. If they generate enough cash for me to live on, I don’t have to sell them even if their price decreases.
I invested for the first time ever this year at 40 years of age. Nobody in my family ever invested, or had anything to invest. I grew up in a cult that told me the world would end any day now and that basically preparing for the future was somewhat useless. Anyway, I left the cult and see the need to have something in retirement. I did a lot of research and so far I managed to turn $6,000 into under $5500 in my first year of investing in index funds (Vanguard SP 500 and Total Stock). I have to say that, coming from where I come from, the scarcity mindset is pinging my brain and telling me to just keep my money under a mattress, but I know that’s not a good long term strategy.
My wife and I can afford to put in about $6,000 annually (we’re self-employed) so I think I’m going to hold off on investing now for last year and just wait to see how 2019 goes. Seems many think it will go down more. If it does maybe I can spend the $6,000 I would have spent in 2018 plus the $6,000 I’ll spend in 2019 all in 2019 and get more bang for the buck by buying low. I know that timing the market is a fool’s bet, but I’ve already watched my money go the wrong way and it seems like most are predicting that it will continue so it just seems dumb to dump my $6,000 that I have saved in now. We can do up to $12k+ annually anyway so if we do two years in one I don’t see that it will hurt anything.
I am working this year on trying to squeeze more savings out of our budget and trying to get that working even better. If anyone sees a fatal flaw in what I wrote above please let me know. I’m trying to do my best to make the wisest decisions I can for my wife and I, save on fees, and make every dollar that I can stretch because I’m starting late and somewhat limited.
It’s good that you invested. And I understand that it may scare you that the $6,000 you already invested is down to $5,500. But you don’t need that money now. If you’re 40 now, you shouldn’t need the money for 25 years. During that time, there will be up years and down years (as this one was). And keep in mind that the lower market means that the next $6,000 you invest will buy more shares. So keep at it.