Investing at all-time highs, and the purpose of the Future Needs Fund

Ben Carlson over at Ritholtz just published a great post on how to invest in today’s market, when all-time highs can freak out many valuation-minded investors.

With everything seemingly overpriced, what do you buy?

It’s the perfect setup to remind investors to stick with what they know, and keep things simple whenever possible.

Some of my favorite points from his piece reminded me of the reasons why I’ve been working to build a Future Needs Fund, a vehicle for hedging the rest of my investments against a variety of investment risks — and a model for what would work for a lot of other small investors.

Below are a few of Ben’s fundamentally sound points about business-as-usual investing, in the context of the Future Needs Fund project, which aims to hedge against risks with a diverse group of investments that will be needed in a few decades time.

Avoid complexity. Someone is going to be a hero coming out of the next market downturn, but figuring out who that will be is like playing the lottery. There are plenty of complex hedging techniques, bear market funds, leveraged ETFs and VIX products you can invest in, but most require incredible foresight to work. You can be “right” in the markets and still not make any money, as mistimed trades, volatility and costs can often eat up good investment ideas….

This is the first hurdle for me, and certainly for anyone else interested in my project. Why bother to come up with a new system for hedging risk?

Yes, it’s true that I’m working to build a “future needs” basket portfolio, but mechanically the goal is to do it the simplest way possible: buying sector ETFs where possible, buying pure-play, sound equities where necessary, and doing it all in a Motif fund that is easy to buy, sell, and rebalance.

None of my diverse set of allocations is meant to be a “hero coming out of the next market”: I’m picking sector-level themes to invest in based on long-term needs, not commodities cycles or relative pricing.

As for mistimed trades and being right at the wrong time, see the time horizon point below.

Have enough cash to make it through a rainy year or three. One of the worst positions to be in as an investor is being a forced seller of your shares at an inopportune time. You give yourself a margin of safety by having enough cash on hand in safe holdings to see you through a disruption in the markets or economy. Low interest rates mean you won’t earn much on your cash holdings, but the peace of mind in knowing you can meet your expenses in a downturn is worth more than a few percentage points in returns. This money can also be used as dry powder when the next downturn comes around.

Agreed 100% on this one. The Future Needs Fund isn’t meant as a tool to duck in and out of markets, moving investments from a risk-on class to a risk-off class. Cash in safe holdings is the dry powder. The FNF goal is to provide a long-term investment hedge that sits in seclusion in the back of the investment closet while other strategies — passive index funds, active day-trading, you name it — coexist with cash balances and dry powder however the individual investor chooses.

DCA and diversify. From a psychological standpoint, there are few strategies that work better than dollar cost averaging into a diversified portfolio of assets. This isn’t a strategy you can brag about to your friends, but making investment contributions at periodic intervals regardless of price is one of the simplest ways to avoid making mistakes or over-thinking investment decisions.

With today’s valuations, Ben suggests that people who aren’t comfortable buying growth stocks should switch to value, and those not feeling U.S. valuations should buy international. Likewise, my goal is to make the Future Needs Fund sure bet in my own mind. It’s something I’m building without regard to current valuations, but to tomorrow’s needs. Success for me means I will dollar cost average into this basket without concern, no matter what valuations look like for major benchmarks.

Buy and hold. To paraphrase Winston Churchill, buy and hold is the worst investment strategy, except for all the others. Being a long-term investor is easy when things are going up. But to be a true buy-and-hold devotee, you have to both buy and hold when things are going down, as well. This is not for everyone because it’s emotionally challenging, but it is a great way to decrease transaction costs, taxes and market timing errors.

Buy and hold is a key part of the plan for the Future Needs Fund. It’s meant to be a hedge against all other strategies, whether active or relying on the seemingly timeless wisdom that decades-long time horizons and U.S. stocks add up to a sure thing.

If you didn’t read Ben’s post, it’s worth it, check it out here.

Thanks for reading. For more on how to invest in commodity-like essentials for future society, check out the example Future Needs Fund, which you can buy on Motif and rebalance or modify as desired.


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