Just a note before I begin. My piece called “Where Money Goes to Die” was an abnormal piece for me, and it received abnormal attention.  The responses came in many languages aside from English, including Spanish, Turkish and Russian.  It was interesting to note the level of distortion of my positions among those writing articles.  That was less true of writing responses here.

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My main point is this: if something either has no value or can’t be valued, it can’t be an investment.  Speculations that have strong upward price momentum, like penny stocks during a promotion, are dangerous to speculate in.  Howard Marks, Jamie Dimon and Ray Dalio seem to agree with that.  That’s all.

Now for Q&A:

Greetings and salutations.  

Hope all is well with you and the family!

Just have what I believe is a quick question. I already know [my husband’s] answer to this (Vanguard index funds – it his default answer to all things investment), but this is for my Mom, so it is important that she get it right (no wiggle room for losing money in an unstable market), hence my asking you. My Mom inherited money and doesn’t know what to do with it. a quarter of it was already in index funds/mutual funds and she kept it there. The rest came from the sale of real estate in the form of a check. That is the part that she doesn’t know what she should do with. She wanted to stick it in a CD until she saw how low the interest rates are. She works intermittently (handyman kind of work – it is demand-dependent), but doesn’t have any money saved in a retirement account or anything like that, so she needs this money get her though the rest of her life (she is almost 60). What would you recommend? What would you tell [name of my wife] to do if she were in this position? BTW, it is approx $ZZZ, if that makes a difference. Any advice you can give would be very much appreciated!

Vanguard funds are almost always a good choice.  The question here is which Vanguard funds?  To answer that, we have to think about asset allocation.  My thoughts on asset allocation is that it is a marriage of two concepts:

• When will you need to spend the money? and
• Where is there the opportunity for good returns?

Your mom is the same age as my wife.  A major difference between the two of them is that your mom doesn’t have a lot of investable assets, and my wife does.  We have to be more careful with your mom.  If your mom is only going to draw on these assets in retirement, say at age 67, and will draw them down over the rest of her life, say until age 87, then the horizon she is investing over is long, and should have stocks and longer-term bonds for investments.

But there is a problem here.  Drawing on an earlier article of mine, investors today face a big problem:

The biggest problem for investors is low future returns.  Bonds have low rates of returns, and equities have high valuations.  You’ll see more about equity valuations in my next post.

This is a real problem for those wanting to fund retirements.  Stocks are priced to return around 4%/year over the next ten years, and investment-grade longer bonds are around 3%.  There are some pockets of better opportunity and so I suggest the following:

• Invest more in foreign and emerging market stocks.  The rest of the world is cheaper than the US.  Particularly in an era where the US is trying to decouple from the rest of the world, foreign stocks may provide better returns than US stocks for a while.
• Invest your US stocks in a traditional “value” style.  Admittedly, this is not popular now, as value has underperformed for a record eight years versus growth investing.  The value/growth cycle will turn, as it did back in 2000, and it will give your mom better returns over the next ten years.
• Split your bond allocation into two components: long US high-quality bonds (Treasuries and Investment Grade corporates), and very short bonds or a money market fund.  The long bonds are there as a deflation hedge, and the short bonds are there for liquidity.  If the market falls precipitously, the liquidity is there for future investments.

I would split the investments 25%, 35%, 20%, 20% in the order that I listed them, or something near that.  Try to sell your mom on the idea of setting the asset allocation, and not sweating the short-term results.  Revisit the strategy every three years or so, and rebalance annually.  If assets are needed prematurely, liquidate the assets that have done relatively well, and are above their target weights.

I know you love your mom, but the amount of assets isn’t that big.  It will be a help to her, but it ultimately will be a supplement to Social Security for her.  Her children, including you and your dear husband may ultimately prove to be a greater help for her than the assets, especially if the markets don’t do well.  The asset allocation I gave you is a balance of offense and defense in an otherwise poor environment.  The above advice also mirrors what I am doing for my own assets, and the assets of my clients, though I am not using Vanguard.

Article by The Aleph Blog