Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Answer to John Galt's Question - Why own Stocks ?
Old 04-04-2004, 09:55 AM   #1
 
Posts: n/a
Answer to John Galt's Question - Why own Stocks ?

nm
__________________
  Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Answer to John Galt's Question - Why own Stock
Old 04-04-2004, 10:47 AM   #2
Thinks s/he gets paid by the post
 
Join Date: Feb 2003
Location: Mesa
Posts: 3,588
Re: Answer to John Galt's Question - Why own Stock

While I believe the conclusion, I'll bet I don't agree completely with the definition of "risk" or the calculation used in the graph.

Risk comes in many forms. Some may be approximated by quantitative metrics while others may not. And any quantitative metric for risk must be based entireley on historical results. Then there's the problem of translating this standard deviation risk value into the feelings you get when your portfolio value drops. How is 10% standard deviation going to feel compared to 14% standard deviation over the next 10 years?
__________________

__________________
sgeeeee is offline   Reply With Quote
Re: Answer to John Galt's Question - Why own Stock
Old 04-04-2004, 11:45 AM   #3
Thinks s/he gets paid by the post
BigMoneyJim's Avatar
 
Join Date: Feb 2003
Location: DFW
Posts: 2,627
Re: Answer to John Galt's Question - Why own Stock

Before I start, I'll say I challenge numbers and methods to understand them better, not to attack them or to necessarily invalidate them. Additionally, until a week or two ago I was over 95% in stock index funds for long term investing. Now I'm about 80/20 stock index funds & bond "total market index" and slowly considering whether I want to go to 70/30 or 60/40 in the near future even with 15-30 years until expected withdrawals begin and up to 30-45 years span of withdrawals.

First, I agree with salaryguru's objection about presenting standard deviation as risk. At first glance it seemed the only reasonable measure for risk, but if historically annualized stock returns dropped 22% one year then bounced up 22% the next, for example, that doesn't necessairly indicate more long-term risk if you're withdrawing a single-digit portion of your portfolio. I'm way too lazy today to look up historical statistics right now, but I seem to recall any dramatic one-year drop in stocks was generally quickly followed by a bounce in the other direction.

Second, I am a bit tickled about the 8% 100% stock returns given that I've read many times here that Bernstein expects closer to 3% returns over the next 30 years. I don't see how you can say that stock returns will be much less in the future while confidently applying historical deviation or "risk". Intuitively stocks will still be more volatile than bonds, but if one believes that stock returns will be much lower for a 30-year span then how would he also apply anything but a similarly-performing subset of historical statistics to that span? (Disclaimer: He isn't claiming both at the same time as far as I know, but both bits of information come from the same guy, and I find that curious.)

Third, it's been over 10 years since my statistics class, but I still have the textbook. I recall the standard deviation being somewhat of an average of deviations from the mean, and if that's the case then 20-22% sounds incredibly high for 100% stocks. (I am assuming by "stocks" he's using the total market index index.) I am opening my textbook to the definition of standard deviation, and there are too many greek letters for me to choose verifying my suspicion over getting myself a glass of wine, so my rusty half-informed speculation stands until someone more recently acquainted with statistics corrects or verifies my objection.

Oops, something just slipped loose in my brain, and I haven't started drinking wine yet. With the squares and square roots and a recollection of somewhat parabolic population bell curves, I recall the standard deviation helps shape the curve with respect to the mean; 20-22% still sounds high to me.
__________________
BigMoneyJim is offline   Reply With Quote
Re: Answer to John Galt's Question - Why own Stock
Old 04-04-2004, 03:00 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Answer to John Galt's Question - Why own Stock

We've had a number of big drops that took a while to recover from. We just had one that stuck for 3 years before the bounce back.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Answer to John Galt's Question - Why own Stock
Old 04-04-2004, 03:42 PM   #5
 
Posts: n/a
Re: Answer to John Galt's Question - Why own Stock

Here's the deal! If you can average , oh say 6%
on your "forever" money without worry about default,
would you take that or gamble on stocks??
Is it really that simple or am I missing something?

John Galt
__________________
  Reply With Quote
Re: Answer to John Galt's Question - Why own Stock
Old 04-04-2004, 03:46 PM   #6
 
Posts: n/a
Re: Answer to John Galt's Question - Why own Stock

And another thing Cut-throat, I thought you were
fishing. What are you doing reading financial
books?? My day? Slept late, ran some errands and then fished
until cocktail hour. Life is good!

John Galt
__________________
  Reply With Quote
Re: Answer to John Galt's Question - Why own Stock
Old 04-04-2004, 04:20 PM   #7
 
Posts: n/a
Re: Answer to John Galt's Question - Why own Stock

John,

I was fishing.

But then there was the 4 hour plane ride each way and the 1/2 hour read before bedtime each night.

I may be unusual that I am enjoying financial reading lately. But since I don't have a job, it's more enjoyable now.

I read every fishing book I could get my hands on 15 years ago when I was working and not able to fish as much. Now the tables are turned a bit!


Quote:
Here's the deal! If you can average , oh say 6%
on your "forever" money without worry about default,
would you take that or gamble on stocks??
If you were talking about a 6% real return over inflation, with less risk than stocks - I'd be in. Of course we know that no such investment exists.

If you are talking about a 6% return before inflation of 8%, I would not be interested in losing 2% of my money.

And no, it's really not that simple.
__________________
  Reply With Quote
Re: Answer to John Galt's Question - Why own Stock
Old 04-04-2004, 04:30 PM   #8
 
Posts: n/a
Re: Answer to John Galt's Question - Why own Stock

Well, if we have 8% inflation, all bets are off.
I suppose I would have to hope my real estate bailed me out, or maybe I would get lucky and expire before my money was gone. On the other hand, maybe I am old enough now to survive with a minus 2% until my demise

John Galt
__________________
  Reply With Quote
Re: Answer to John Galt's Question - Why own Stock
Old 04-08-2004, 11:03 AM   #9
Recycles dryer sheets
 
Join Date: Oct 2003
Posts: 452
Re: Answer to John Galt's Question - Why own Stock

John Galt,
ok, where do you get 6% ? can you be a little bit specific ?
Ray
__________________
renferme is offline   Reply With Quote
Re: Answer to John Galt's Question - Why own Stock
Old 04-08-2004, 11:23 AM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Answer to John Galt's Question - Why own Stock

My dad's still carrying some old bonds that pay 6+%.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Answer to John Galt's Question - Why own Stock
Old 04-08-2004, 11:42 AM   #11
Thinks s/he gets paid by the post
charlie's Avatar
 
Join Date: Mar 2004
Location: Dallas
Posts: 1,211
Re: Answer to John Galt's Question - Why own Stock

bennevis,

A joint immediate life annuity, both 60 years old,
pays about 6% right now. Don't get me wrong,
I am not advocating this strategy for all your
portfolio, but some may find it attractive for part.

Of course inflation eats away and no estate is
left. It is possible to buy annuities with a fixed
percentage rise, but the return is less than 6%.
I believe Vanguard has such an immediate annuity,
but I have not checked into it yet.

As an academic exercise it might be fun to use
FIREcalc to determine the best annuity/stock
balance.

Cheers,

Charlie
__________________
charlie is offline   Reply With Quote
Re: Answer to John Galt's Question - Why own Stock
Old 04-08-2004, 02:51 PM   #12
Thinks s/he gets paid by the post
 
Join Date: Feb 2003
Location: Mesa
Posts: 3,588
Re: Answer to John Galt's Question - Why own Stock

A TIAA-CREF article that might address your question about annuity/stock allocation. Go to:

www.tiaa-crefinstitute.org

click on "Pensions and Retirement"

click on "Published Articles"

The article is titled:
Making Retirement Income Last a Lifetime
John Ameriks, TIAA-CREF Institute, Robert Veres, Inside Information and Mark J. Warshawsky
December 2001

The article is about annuities as a component of a retirement portfolio and how it affects portfolio longevity risk, the authors use a Monte Carlo simulator that they attempt to calibrate with a historical simulator. They publish a number of detailed tables with the results from both simulators.
__________________

__________________
sgeeeee is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
John Dorfman’s Robot Portfolio--again Ed_The_Gypsy FIRE and Money 3 03-05-2007 01:55 AM
Religion ... again JohnEyles Other topics 32 02-23-2007 06:32 PM
John Mauldin's column~Goldilocks?~906 days w/o a 10% correction mickeyd FIRE and Money 15 10-19-2006 08:08 PM
Jarhead's question on "Hunt for Red October" Nords Other topics 7 01-05-2006 09:50 AM
Another bad answer retire@40 Life after FIRE 8 09-09-2005 05:26 PM

 

 
All times are GMT -6. The time now is 03:19 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.