Aggressive Funds for early retirement plan growth

[MERICA]

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During residency, our employer matches up to 5% toward our 403b account. I have maxed it out for the first two years. Originally I had it in a Vanguard mutual fund and got about 8%- aka barely beating my oppressive student loan interest rate. I have around 10k after about 21 months. I'm looking to move some of it to a more aggressive fund. One attending said that biotech funds have been very hot over the last few years. Any thoughts on whether this will slow down soon? I found a fidelity biotech sector fund, ticker FBIOX. Please advise...

 

[dubfarmer]

I think you would be well served to stick with low cost, well diversified, index fund investing with vanguard.

Have you checked out whitecoatinvestor.com?

 

[Wolverines83]

yes it will slow down. if stocks are "hot" that means lots of people know about them and are buying them.

popular stocks = lots of buyers = drives up price (lots of demand) = overpriced stock

if you're young you could shoot for more small cap index funds which, while more volatile, tend to perform better. Back it down in your later years towards large cap funds.

 

[Mman]

During residency, our employer matches up to 5% toward our 403b account. I have maxed it out for the first two years. Originally I had it in a Vanguard mutual fund and got about 8%- aka barely beating my oppressive student loan interest rate. I have around 10k after about 21 months. I'm looking to move some of it to a more aggressive fund. One attending said that biotech funds have been very hot over the last few years. Any thoughts on whether this will slow down soon? I found a fidelity biotech sector fund, ticker FBIOX. Please advise...

Your 8% return is not "barely beating" your oppressive student loan rate because you aren't including the doubling of your initial 5%. You can't use that money on your loan instead of the investment. So you are saving 5% of your salary which is then doubled and growing at 8% or in other words a fantastic long term return rate. In actual math if you get paid $40K per year, you are saving $2000 a year which is doubled to $4000 and then growing by $320. So your $2000 savings became $4320 after 1 year. That's quite a bit more than 8% growth of your initial $2000.

You can try to get into whatever you want, it's just unlikely that your "hot fund" will return more than 8% long term. It might return 20% for the next 2 years and then be down 30% the 3rd year. In your situation I wouldn't get cute with retirement money. Save as you are and then pay down your student loan debt as soon as you can after completing residency.


One not small point I would double check, though, is finding out how long till you are vested in that 5% employer match. One common thing residency programs used to do (I have no idea if they still do) is give residents a nice match to their retirement savings but make it 5 or 7 years til vested. So it sounded nice in theory but you actually had to stay on as an attending for a few years to get the money.

 

[aneftp]

Let me tell u about "aggressive funds". You can make a lot in a short amount of time. You can lose a lot over a short amount of time. If you aren't savvy and don't pay attention to the market you can get burned.

I've give u my example

Vanguard emerging markets fund (highly aggressive).
Invested roughly $10k in 2005. Think it shot up to 14k in 2007. Than ranked in 2008-2009.

Guess how much that initial $10k emerging markets is worth in 2015........drums roll.......$10k.

So in 10 years my vanguard emerging market funds has gone no where. I would have had to cash out in 2007 to get the big return.

Now let's look at the "boring" large cap value and mi cap index funds

Those same $10k I invested in 2005 are now worthy $16k in 2015. Of course it tanked to around $7000 in 2008/2009. But it's fullly recovered an more.

Moral of the story. Be diversified. It's ok to take some risk. But slow and steady often wins.

 

[BLADEMDA]

FFONX (Fidelity 4 in 1 Fund) 80%


http://seekingalpha.com/instablog/9...ds-spotlight-fidelity-four-in-one-index-ffnox
Aggressive Allocation

Then add an Emerging Market Fund 20%

VWO
EEMV
EEM

That's a very aggressive, low cost way to play the market. I would advise a more tame fund/ETF until the market corrects 10% or more from the high.

 

[BLADEMDA]

https://personal.vanguard.com/us/funds/snapshot?FundId=0122&FundIntExt=INT

VASGX is another excellent choice along with an Emerging Market Fund.

 

[BLADEMDA]

 

[BLADEMDA]

EEMV:

 

[kazuma]

Vanguard Health Care Fund
Class Inv (VGHCX)

What are your thoughts on this fund? One of my attendings has been encouraging us to invest in it.

 

[BLADEMDA]

Vanguard Health Care Fund
Class Inv (VGHCX)

What are your thoughts on this fund? One of my attendings has been encouraging us to invest in it.

Sure. Good Fund but remember to use ETFs instead of Mutual Funds in Taxable accounts. Also, sector funds are not diversified so should represent just a small portion of your overall portfolio; most young Attendings don't have a very large portfolio to begin with.

 

[BLADEMDA]

I like PRHSX as well.

 

[BLADEMDA]

 

[BLADEMDA]

I own sector ETFs including a health care ETF which is 50% Biotech; but, this ETF represents just a small portion of my portfolio at around 0.8%.

 

[dhb]

I have around 10k after about 21 months.

Which is good but you can save as much in one month as an attending. My view: don't sweat it, no reason to get fancy with that amount. Take what they give you (the 2k) and get on with your life, don't try to fund your retirement while in residency.

 

[pgg]

Originally I had it in a Vanguard mutual fund and got about 8%- aka barely beating my oppressive student loan interest rate.

If you're dissatisfied with 8% growth, two things are going to happen.

1) You're setting yourself up for a lifetime of dissatisfaction.

2) You're going to end up chasing higher returns, accepting much higher risk ... and when the day comes (and it will) when that risk shows up, you're going to get burnt, badly.

Please advise...

Diversify. Market returns are there for the taking. Take them.

Your post suggests you didn't really understand the risks you were taking with the Vanguard fund that only got 8%, and that you don't really understand the risks you're proposing to take with this hot biotech fund. For starters, you don't own any bonds. Even for young people with many years of high earning ahead, being 100% in equity is probably the wrong thing to do.

You have 100% control over how much you save, and how much you spend. That's where wealth accumulation comes from. Not embracing extraordinary risk chasing extraordinary returns. It's not as sexy as being able to tell people you made $100K or 26% with your "buy low sell high" technique, but they won't believe you anyway.



All that said, it's only 10K. That's a small amount in the grand scheme of things. It might be good for you to lose half of it by picking stocks or hot funds. It'll sting, but you'll learn, and later when you have 100K or 1M in your portfolio, you'll remember that risk is real and it appears at inconvenient times.

 

[MERICA]

Thanks for the input everyone. I'll give you a little more insight into my thought process (and naivety). I was thinking that this 10k, in the grand scheme of things, a very small portion. Since we have to switch our retirement accounts to Fidelity, I was thinking of continuing to max out my contribution into a more diversified portfolio, but take the initial 10k and put it into a more aggressive leaning strategy. I don't plan on banking my future retirement on this one thing, just the original 10k. When the high risk fund starts heading south, I could move it over to another fund, all the while continuing my steady contribution to the more diversified account. Some might consider this legal gambling, but it would only be in a small portion of my plan going forward.

 

[Mman]

Thanks for the input everyone. I'll give you a little more insight into my thought process (and naivety). I was thinking that this 10k, in the grand scheme of things, a very small portion. Since we have to switch our retirement accounts to Fidelity, I was thinking of continuing to max out my contribution into a more diversified portfolio, but take the initial 10k and put it into a more aggressive leaning strategy. I don't plan on banking my future retirement on this one thing, just the original 10k. When the high risk fund starts heading south, I could move it over to another fund, all the while continuing my steady contribution to the more diversified account. Some might consider this legal gambling, but it would only be in a small portion of my plan going forward.

There is no evidence that you can time out when to move in and out of funds in a reliable manner. When it "starts heading south" is a difficult thing to define and doesn't predict future price movements. So it may go up for 6 months and then drop 10% and you sell out but then it keeps gaining for another 3 years that you missed out on. Timing mutual fund sectors is unlikely to be profitable.

 

[pgg]

Gambling is legal, sure, but gambling is for suckers because the house always wins in the end. At least in Vegas you know the odds.

 

[urge]

FFONX (Fidelity 4 in 1 Fund) 80%


http://seekingalpha.com/instablog/9...ds-spotlight-fidelity-four-in-one-index-ffnox
Aggressive Allocation

Then add an Emerging Market Fund 20%

VWO
EEMV
EEM

Funny you mention EEM. I sold it last year, after holding it for over 8 yrs, due to below average performance.

I like PRHSX as well.

Pretty much all household name stocks have that same pattern in the last 2-3 yrs. Makes me wonder what is going on. Another bubble? Stock Inflation from the bailout? Real estate has the same curve also, at least where I live. Whatever it is, that pattern cannot be sustained forever.

I agree with Blade that ETFs are a great way to be invested in the market.

 

[BLADEMDA]

The Market is overvalued at this point but the artificially low Fed Funds rates are keeping it that way. If/When rates start to rise this year we will see if the markets can maintain a positive return . Only a few sectors are undervalued at this time with one of them being commodities/precious metals. But, that sector may under perform for several more years.

 

[deleted126335]

.

The Market is overvalued at this point but the artificially low Fed Funds rates are keeping it that way. If/When rates start to rise this year we will see if the markets can maintain a positive return . Only a few sectors are undervalued at this time with one of them being commodities/precious metals. But, that sector may under perform for several more years.

or decades. I do agree that precious metals equity and emerging markets are about the least expensive risk assets.

 

[pie944]

The Market is overvalued at this point but the artificially low Fed Funds rates are keeping it that way. If/When rates start to rise this year we will see if the markets can maintain a positive return . Only a few sectors are undervalued at this time with one of them being commodities/precious metals. But, that sector may under perform for several more years.

By what metrics do you believe the market is overvalued? I can find multiple metrics that say it is not.

 

[Mman]

By what metrics do you believe the market is overvalued? I can find multiple metrics that say it is not.

We certainly aren't at a 2000 level high, but the Shiller PE ratio of the market (aka cyclically adjusted PE ratio) is getting up there. Tends to not bode well for the next few years returns in the market.

 

[BLADEMDA]

 

[BLADEMDA]

http://www.advisorperspectives.com/dshort/updates/PE-Ratios-and-Market-Valuation.php


The P/E10 Ratio

Legendary economist and value investor Benjamin Graham noticed the same bizarre P/E behavior during the Roaring Twenties and subsequent market crash. Graham collaborated with David Dodd to devise a more accurate way to calculate the market's value, which they discussed in their 1934 classic book,Security Analysis. They attributed the illogical P/E ratios to temporary and sometimes extreme fluctuations in the business cycle. Their solution was to divide the price by a multi-year average of earnings and suggested 5, 7 or 10-years. In recent years, Yale professor and Nobel laureate Robert Shiller, the author of Irrational Exuberance, has popularized the concept to a wider audience of investors and has selected the 10-year average of "real" (inflation-adjusted) earnings as the denominator. Shiller refers to this ratio as the Cyclically Adjusted Price Earnings Ratio, abbreviated as CAPE, or the more precise P/E10, which is my preferred abbreviation.

 

[BLADEMDA]

“Anyone can point to a single metric that shows stocks as either cheap or expensive.

Those who are bearish usually go for Trailing Price to Earnings ratio (17.1 P/E), which shows stocks as pricey, or the even more expensive Shiller’s Cyclically Adjusted PE, which show stocks as very pricey (26.8 CAPE).

Conversely, those who are bullish choose other metrics: They select price to free cash flow or price to normalized earnings to show markets as cheap. The Standard & Poor’s 500-stock index is valued at 22.3 times free cash flow — about 22 percent below its average reading from 1986 to 2014. Price to normalized earnings is at 18.6 times, or 2 percent less than its post-September 1987 average.”

 

[BLADEMDA]

Stock prices have enjoyed a breathtaking jump. Profit has risen, too, just not as rapidly. The result is a market sporting a valuation that’s pushing the baseline. Companies in the S&P 500 are expected to earn an adjusted profit of $102.89 a share in the twelve months ended December 2014, according to statistics from S&P Dow Jones Indices, which might vary from other providers of earnings estimates. That means the market is trading for 20.3 times historical earnings. That’s not cheap by any stretch of the imagination. The market’s trailing P-E has been 18.7 on average since 1988, S&P Dow Jones Indices says.

That’s not to say the market can’t go higher. The 18.7 valuation on the market is an average and there have been periods investors have paid even more. Investors were paying 28 times historical earnings amid the market peak in 2000 – as enthusiasm for stocks hit historic highs. We all know how that turned out. Stocks aren’t hitting those kinds of valuations yet. Bulls hope earnings growth could pick up and make the valuation more typical.

 

[pie944]

“Anyone can point to a single metric that shows stocks as either cheap or expensive.

Those who are bearish usually go for Trailing Price to Earnings ratio (17.1 P/E), which shows stocks as pricey, or the even more expensive Shiller’s Cyclically Adjusted PE, which show stocks as very pricey (26.8 CAPE).

Conversely, those who are bullish choose other metrics: They select price to free cash flow or price to normalized earnings to show markets as cheap. The Standard & Poor’s 500-stock index is valued at 22.3 times free cash flow — about 22 percent below its average reading from 1986 to 2014. Price to normalized earnings is at 18.6 times, or 2 percent less than its post-September 1987 average.”

Excellent article. Read it this past weekend too. Here is the entire link for which you quote.

The article also states that "EV/EBITDA" is probably the single best metric based on evidence. This one shows the market is not over valued.

It also ends with "Those who have been using valuation as an excuse to stay away from equities are likely to be disappointed in their own market-timing skills."


http://www.washingtonpost.com/busin...c2b8a6-c1bc-11e4-9271-610273846239_story.html

 

[Mman]

The article also states that "EV/EBITDA" is probably the single best metric based on evidence. This one shows the market is not over valued.

Buffett’s longtime business partner, Charlie Munger, expressed Berkshire Hathaway’s position on this particular formula best: “I think that, every time you see the word EBITDA, you should substitute the word ‘bull****’ earnings.”


Basing anything on EBITDA is not wise. EV/Bull**** is certainly not a formula I would use to value the market.

As for market timing, I agree it shouldn't be tried. But I also agree with others that this market isn't undervalued right now and is possibly overvalued. Corporate profits look good right now, but that is somewhat buoyed by the fed's financial policies and easy money. When those tighten, corporate profits will drop.

 

[pie944]

Buffett’s longtime business partner, Charlie Munger, expressed Berkshire Hathaway’s position on this particular formula best: “I think that, every time you see the word EBITDA, you should substitute the word ‘bull****’ earnings.”


Basing anything on EBITDA is not wise. EV/Bull**** is certainly not a formula I would use to value the market.

As for market timing, I agree it shouldn't be tried. But I also agree with others that this market isn't undervalued right now and is possibly overvalued. Corporate profits look good right now, but that is somewhat buoyed by the fed's financial policies and easy money. When those tighten, corporate profits will drop.

I agree it isn't the all single great metric, just a single one. It has some good and some bad like all the others, I wouldn't dismiss it from a group of metrics attempting to determine valuation of the market. I just think timing is pointless and a lot of people have missed out on potential earnings from investing in equities. I think people claiming an overvalued market can argue it, but people can argue that the market value is a fair too.

The summer will be interesting. Or is it fall? I think the term "patience" has to change first? 🙂

 

[BLADEMDA]

The upside from here is riskier than the downside. This means be careful about deploying new money in an aggressive manner unless it is quick trade.
Where will Mr. Market top out? I'd say upside potential is another 5-10% from here but downside risk is greater.