Too Much Faith?

This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.

The basis of my retirement plan involves having the majority of income coming from stocks that pay dividends or interest from bonds.  I have assumed that when I have enough money invested, the cash flow from my diversified portfolio will replace my household income and I won’t have to work anymore.

Over the weekend, Mark Cuban (billionaire owner of the Dallas Mavericks) wrote an interesting blog post about how the market is broken, titled “What Business is Wall Street In?”.  He suggests in his article that the market is no longer efficient and is being run by traders, who he likens to hackers – exploiting the operating system and application shortcomings of the system.  These traders are breaking the “Wall Street System”, which was created as a method of raising capital, and turning it into a place where robots are making percentages of pennies per trade.

The economy in general seems fairly fragile.  Look at what happened to the marketplace in 2008, whether it was stocks, bonds or real estate, the market tanked for a significant period of time and wiped out vast fortunes.  Given the fact that investors have minimal or no control over the marketplace, it seems a little risky to put a ton of money in there, but that’s what most people, including myself will do – hoping it’s still there when we need it.

When I look at my other options of what to do with my money, I’m okay with the risks associated with the market.  My feeling is that if the marketplace completely fails, there will be much bigger problems than money.  As much fun as having a treasure chest full of gold in the backyard, I don’t think I’m going to become a gold bug anytime soon.  I don’t assume that all my money will disappear once invested, but I realize there is a small chance that during a crash I may get wiped out, no matter how strong the companies I’ve invested in or diversified my portfolio was constructed.

I look at any marketplace as gambling at much lower odds than sports.  I realize I am really outclassed by the majority of investors out there, both in capital and knowledge (Editor’s Note: I highly doubt that on the second one…remember mutual funds).  My plan is based on cash flow returns, and hoping that I can stay ahead of any significant changes in the companies I have invested in.  I have to assume and have faith that the whole market will not be reduced to a rubble in the 50+ years I will be investing or living off of my investments.

So in the end, do I have too much faith? I’m wondering what other people’s opinions are?  How do you diversify your retirement savings?  Do you have some sort of “black swan” investment strategy?  Or are you like me and just hope for the best (while attempting to diversify as much as possible)?

7 thoughts on “Too Much Faith?”

  1. I think investing should be boring and should be certain and easy. What about term deposits? The bank usually guarantees the principle and guarantees the interest payments. True, these days, you do not get much interest but up here in Canada you might get on $500,000 say 2.50% which would go a long way to helping you with either Social Security or what we have here in Canada Old Age Security. Too many people make investing seem really hard and I think that it is fairly easy. When you are retired you can plan your expenses more easily and you life style is different and more under your own control. If you want more interest just come up with a larger amount of money! Have some really solid boring stocks like pipelines or train stocks, something that just pays, not perhaps all that big a dividend but is very regular and reliable. How about this answer to your problems???

  2. I’m with you, I think investing should be boring. I don’t reach for the stars, I have my assets allocated among various fund-types (large- mid- and small-cap US stocks, international emerging and developed markets, bonds, and a small allocation to real-estate and commodities). Whenever my allocation gets too out of whack from market activity, I rebalance to bring it back to my original allocation.

    I just posted the first in a series of posts on this at my blog. Looks like we’re on the same wavelength today!

  3. I agree after retirement, a good portion of the savings should be in GIC or Canadian govt bonds, but always spare a little to invest in stocks just for fun and occasionally bigger return!

  4. Pension or annuity goes a long ways towards enhancing income security. Shouldn’t be all of your income, but it’s a steady source. Along with term deposits, bonds, etc.

    You do need stocks and real estate to provide a strong inflation component. Many would suggest that gold fills that niche, but I personally dislike an investment that has no yield.

  5. Stocks and bonds are the ideal ways for living a relaxed life, if we survive post retirement age :). Be wise and grab the ones that would give the best return and is exciting, but that might be a difficult proposition in this uncertain market.

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