Mike Kueber's Blog

July 28, 2012

My new investing strategy

Filed under: Investing,Retirement — Mike Kueber @ 6:05 pm
Tags: ,

As someone who is fascinated by investment strategies, I have read about a variety of techniques to minimize risk and maximize returns – e.g., dollar-cost averaging, ladder purchases, re-balancing of assets, and numerous diversifying techniques, including indexed mutual funds.  Because I believe the ups and downs of the stock market can’t be timed, I generally don’t focus on trying to buy low and sell high.  Instead, I’m a confirmed buy-and-hold guy.  And, as a young guy, I’m 100% in the market.

Last week, however, with the stock market returning to a relatively high level (and with me not being as young as I used to be), I decided to implement a strategy for moving some of my nest egg out of the market.  This strategy, which I invented, takes advantage of market swings, akin to the dollar-cost averaging strategy.  (Although I am claiming to be the inventor, I’m sure thousands or millions of other people have thought the same thing).   

My plan is to take 5% out of my stock-market nest egg and move it to cash.  Then whenever the market recoups that 5% withdrawal (on average, twice a year), I will take out 5% more.  Thus, I will be forever selling stock on an upswing, and my stock-market nest egg will stay at the same level, less inflation.  A $100k nest egg would periodically generate $5k into cash, and a $1 million nest egg (which seems to be the target for many white-collar workers) would periodically generate $50k into cash.     

The only weakness with this strategy that I can detect is if the market drops and doesn’t return to the earlier level for several years.  If such an event occurs, I hope that I will have pocketed enough earlier withdrawals to avoid selling during a downturn.  But if I have to sell during a downturn, I will be especially motivated to keep the withdrawal to the smallest amount necessary (less than 5%).

A lot of investment advice must be tailored to an investor’s comfort level with risk.  In the past, I was comfortable with all of my savings in the stock market.  Whether the market went up or down, I knew that it had almost no effect on my lifestyle.  My co-workers and I called it paper loss (or paper gain).  Now that I have retired and am spending my savings, the ups and downs of the market are real, not abstract. 

When I sell 5% of my stock on Monday and move it to cash, I am going to feel a lot better knowing that I have cash to live on for a long time and won’t have to sell any additional stocks unless the market continues its upward march (in which case, I will have another 5% cash to live on for a long time times two).  The ups-and-downs of the market will once again be relatively abstract.

Because of my skin in the game, I have been rooting for President Obama’s success for the past three and a half years.  That is also one of several reasons why I am rooting for Mitt Romney to win in November.

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