4 1/2% return

[almost there]

What would you recommend if you wanted a low risk 4 1/2% return in your IRA? Starting today.......

Bonds seem shaky as interest rates will climb over the next several yrs.

And looking at the 25 yr S&P 500 chart does not instill confidence.


S&P 500 Index Chart - Yahoo! Finance;



Just thought it would be interesting to see what folks think.

[enjoyinglife102]

A time machine.

[timwalsh300]

You don't get to choose your rate-of-return. All you can do is choose assets that historically demonstrate a level of risk with which you are comfortable, and then take whatever the market gives you. I try to be as agnostic as possible about future returns.

That said, for financial planning purposes (e.g. how much do I need to save?), I think one must ultimately pin down a reasonable number to use for long-term projected returns. So with a 60/40 stock/bond index fund portfolio, I use 3% real. With inflation in the US running around 1.5% today, that works out to 4.5% nominal.

The key point, though, is that I chose a 60/40 portfolio because I think I can handle a 30% crash, not because I think it will return 3% real.

Tim

[REWahoo]

Quote:

Originally Posted by almost there What would you recommend if you wanted a low risk 4 1/2% return in your IRA? Starting today.......

I understand Bernie Madoff has started a new work from home online investment business. He can probably beat your 4.5% target.

[almost there]

I kwew this would be a good one.........
LOL LOL

"I think I can handle a 30% crash"

I have handled it twice. Well over 30% both times....

[ERD50]

Quote:

Originally Posted by enjoyinglife102 A time machine.

Or an attitude adjustment. I liked this comment:

Quote:

Originally Posted by timwalsh300 You don't get to choose your rate-of-return. Tim

-ERD50

[GrayHare]

utility stocks, telecoms or electric

[padlin00]

What's an annuity paying these days, might get you close.

[nun]

Quote:

Originally Posted by padlin00 What's an annuity paying these days, might get you close.

Over 4.5%.......BUT most of that will be return of capital. The annuity people invest in the same stuff we do so have to deal with today's low returns. If you buy an annuity today you just lock in those returns, but at least you avoid 30% losses, as long as your insurance company doesn't go broke.

[timwalsh300]

A while back I had a conversation with someone who scoffed at mutual funds (and diversification in general) because they generally tracked the broad market, and thus sometimes go down or stay flat for long periods of time. He insisted that he didn't care what the market indices were doing; he just wanted to get a steady X% return on his money (where X was significantly higher than the yield on any fixed-income asset).

My reaction: "Yeah, buddy, me too."

His idea was simply to buy a few utilities or consumer staples, and happily give up the possibility of 30+% annual gains during boom-times in order to take his steady X% without any risk.

That sounds good until you realize how hard it is to pick companies whose valuation won't tank along with everything else, even if they do continue earning a steady X% profit, during the next recession. But I wasn't able to convince him.

Tim

[Independent]

Do you want 4.5% real or nominal?

If nominal is good enough, 30 year TIPS are priced to yield about 1.4% + CPI. Buy one of them and hope for inflation of 3.1% or better.

[Ed_The_Gypsy]

There are several individual securities that return over 4.5%--today, but maybe not indefinitely. I have a few in oil and gas that I bought on weakness. I would not bet the farm on them, though (as my only assets). I suspect that their distributions could fall off with increases in interest rates as could their prices as well, so I am watching them. There ain't no free lunch.

I won't say what they are because I don't want someone to buy them on my recommendation. They have risks that I am willing to deal with but could be a nasty surprise for someone else.

[Lakewood90712]

Quote:

Originally Posted by padlin00 What's an annuity paying these days, might get you close.

Fixed anuity would get you about 2.5% taxable for a 10 year when I checked with vangard back in march. Not even close.

[Lakewood90712]

The 2.5% I quoted was the yeild not including the capitol returned. When I did a quick calc, it was about 25% in addition to the capitol , spread out in 120 payments. So 4.5 % payout quoted by another poster is correct.

[Surewhitey]

Dividend stocks like T, TOT, CTL, VZ, INTC...

[Ed_The_Gypsy]

Quote:

Originally Posted by almost there What would you recommend if you wanted a low risk 4 1/2% return in your IRA? Starting today....... Bonds seem shaky as interest rates will climb over the next several yrs. And looking at the 25 yr S&P 500 chart does not instill confidence. S&P 500 Index Chart - Yahoo! Finance; Just thought it would be interesting to see what folks think.

That chart does not show dividends, only NAV. Beware of drawing an invalid conclusion. (I made the same mistake until not long ago.)

Also consider the value of rebalancing with another, relatively uncorrelated, asset. I will see if I can generate an example.

[Ed_The_Gypsy]

For example, the same chart with Vanguard's Total Bond Market Index Fund, VBMFX (only NAVs, remember; does not show dividends). VBMFX has 6.66% annualized returns since inception in 1986.
S&P 500 Index Chart - Yahoo! Finance

[Ed_The_Gypsy]

This is what they look like together. This is total return including dividends.
VFINX and VBMFX.JPG
Looks a lot better, yes?

Clearly an opportunity to rebalance from time to time.

[Ed_The_Gypsy]

And this is what it looks like rebalanced annually (normalized to 1.00 at the first data point).
VFINX & VBMFX REBAL.JPG
This gave a compounded 8.1% per annum over 23 years. Not bad for a no-brainer.

Of course, the Apocalypse is coming any day now, so you will be better off buying gold and bullets (silver bullets, of course).

DOOM! DOOM! Prepare to meet thy Configurator! (Inside Boeing joke.)

(I am getting better with graphs. Thanks to all for the help.)

[LeavingOhio]

Quote:

Originally Posted by almost there What would you recommend if you wanted a low risk 4 1/2% return in your IRA? Starting today....... Bonds seem shaky as interest rates will climb over the next several yrs. And looking at the 25 yr S&P 500 chart does not instill confidence. S&P 500 Index Chart - Yahoo! Finance; Just thought it would be interesting to see what folks think.

I think the 60/40 stocks to bonds split is reasonable...enough bonds in there to help protect against a huge downturn in the stock market, and enough stocks in there to give good gains when stocks are doing well.

I've always done WAY better than 4.5% annual return (over 10% annual return), even with now having 14% bonds in there, so it is hard for me to imagine that 4.5% on average would be hard to get.

Of the 60% stocks, I would make sure that half were of the dividend-giving kind, and then be more aggressive with the other half.

I've said this before, but I am still toying with the idea of having ZERO bonds in my investment money when retired...all stocks. If I did that, I think I would want 2 years of expenses available to me in CASH or some other SUPER safe vehicle like CDs (which are so bad now I'm not sure I'd call them an investment) so that I could use that money if there were a bad stock downturn...when the stocks recovered, I could then slowly replenish the cash fund. Haven't decided which way to go just yet.