Go with TIPs or am I crazy?

[ESRBob]

OK, I am surprised someone has not proposed this as an alternative... so, let me know your thoughts on this..

Annuities make more sense for people who are a bit older than the average ER. If you price an annuity for a 45 or 50 year-old, you will find it pays less than the typical SWR of 4%, and you've given the money away, besides! (It is sometimes easy to forget that return on a CD is interest, and you still own the principal. Return on an annuity is all you get until you die or other terms are met.) Then there is the niggling problem of credit risk. Despite my earlier comments, I would still trust the U.S. Treasury more than any company over the 50 years + that I want them to be paying me monthly payments. In fact, AIG is the company behind many annuities, including the ones at Vanguard.

Mister Bill -- I am sure you could do your retirement just fine on 100% TIPS, though DCA'ing into them, in case real interest rates move up, might be worthwhile. But there we go again, trying to finesse things! If you are going the 100% TIPS route, you should have the personality that would just say, 'to heck with it, I'm locking this down for the rest of my life", and forget about what could happen or might change in their prices. If you can do that, you probably have the constitution for it.

But I'm with Nords. The future is long, and I want a diversified portfolio to deal with whatever may come along. (And I can't afford to live on an all-TIPS portfolio, either -- fair disclosure) And a part of me is hoping the future isn't bad and I'll be able to raise my sights a bit in the years ahead based on some good market returns.

Stocks may stumble, but they won't melt to zero. A single stock might, but an index won't. People stilll need to eat, furnish their homes, drive around, communicate with each other, stay healthy.... companies exist to provide these products and services and stocks just gives you an ownership in solving these evolving and renewing needs. Index investing isn't gambling. And if you diversify, the volatitlity isn't even that bad -- some things go up when others go down and the whole thing feels more like an ocean liner than a little fishing boat. Plus, you can always just not check your prices.

'Nuf said... if you hate all volatility and worry a lot at night, then TIPS may be the best thing for you.

 

[robert]

ESRBob/Nords,

Good posts. You have stated your case well and, frankly, given me some food for thought. I agree that, barring Armageddon, we will not likely see equities go to zero. However, most (but not all) commentators seem to believe that equities are trading a very high multiples right now, thus there is little hope for high returns going forward. And, historically, there have been long periods where equities have delivered virtually nothing. Given this backdrop, "locking in" a safe approach via TIPS becomes more attractive. But, I will reconsider how much I should allocate to TIPS. Perhaps it is wise to hold some equities in the event the future is a bit rosier than it now appears.

This is a very tough environment in which to make wise investment decisions. I sometimes feel like I am attempting to navigate a minefield. Discussions such as this one help.

ZamaGuy

 

[wildcat]

However, most (but not all) commentators seem to believe that equities are trading a very high multiples right now, thus there is little hope for high returns going forward. And, historically, there have been long periods where equities have delivered virtually nothing

I can't predict a damn thing but I can argue a different side. Corp balance sheets are nice and flush with cash. I think more boards will be willing to increase payouts (investors now favor dividends vs the late 90's retained earnings) as we have seen in a lot of big blue chips. Increase in payout rates could help produce moderate returns. You will never eliminate some of the bumps in the road and you just have to live with it.

 

[Nords]

I am not sure about budgeting for a kid's wedding.

Well, ideally the kid is related to you.  And if we want to invite a bunch of freeloading guests to watch our kids get married, then perhaps helping to pay for it is the polite thing to do.  I'll subsidize our kid's first car, too, but it sure won't be a Bentley.  And if the kid wants to use the wedding-party budget for bedroom furniture or money for a house down payment, then I can support that worthy goal.

The point is that many retirees fail to adequately capitalize their retirement portfolios because they don't consider the surprises.  No one can.  I could have brought up charitable contributions, replacing GE appliances every 11 months, or other scary capital expenses but very few retirees consider all the ways in which their retirement spending will change.  The only way to handle surprises is to keep an "overcapitalized" portfolio that has more than you think you'll need. 

Be it 100% TIPS or a simple couch potato portfolio or the slightly more complicated "four pillars", I just want to put my retirement into some sort of investment and forget about it.

We all want to do that-- especially the retirees in the steel & airline industries who want their old pensions back.  But being taken care of worries me far more than taking care of myself-- and if I'm gonna worry then I want to do it constructively.  (Preferably with the helpful suggestions of this board's members.)  Handling my own investments, or finding someone trustworthy to do it for me, controls that worry.  Probably the best compromise is to pick an asset allocation and only rebalance when it really gets out of whack.

I know that no projection of expenses is perfect, but I do feel I have a good handle on it since it is modeled on my expenses of the past 30 years factoring in additional costs due to aging.  If anything, my standard of living may improve.  My projected SWR will never exceed 2%.  I've been retired for several years now and my actual withdrawal rate is negative (i.e. I'm still putting money into savings each year).

Well, past isn't necessarily prologue but a negative SWR will certainly cover that issue. 

I have over 100,000 Quicken transactions covering a couple decades of spending, but it's worthless at predicting the future.  (All I'm asking for is one set of quotes from tomorrow's market in today's news!)  It sure can't forecast what new child-raising expenses we'll encounter or where our property taxes will go or whether one of us will need lifelong prescription medication & dialysis.

Will I go broke with 100% TIPs at 1.75% yield and a withdrawal rate below 2%?

Well, yeah, you know the answer to that one.  FIRECalc only guarantees withdrawals that exceed yields for a finite number of years.  Hopefully your lifespan doesn't exceed that either, but do you really want to risk being wrong?  Not invading principle principal will work just fine... but only if you have the opportunity to control your expenses.  Life would be great without all those surprises.

If there is a worry about inflation growing faster than the CPI, should I sit on cash til the yields on TIPs go back to 2.25% or 2.50% keeping the yield I receive higher than my portfolio withdrawal rate?  (Cash sounds good to me!)

Well, you could do that, but then you'd have to keep an eye on the TIPS yield and time your entry successfully.  Most of us don't care to do that, and I don't think you would either.

If I don't need stocks, I don't want stocks. 

We hear ya.  But we're not trying to get you to buy stocks-- we're trying to persuade you of the benefits of asset allocation & diversification.  That does not necessarily have to include stocks-- but it should include different types of bonds or bond funds of different maturities & qualities.  It should probably also include REITs or REIT mutual funds, CDs of different maturities/yields, and commodities (or their mutual-fund equivalent). 

Heck, it could even include krugerands-- I know a guy whose portfolio is 25% gold bullion, 50% commodities, and the rest in CDs.  (He sold his home three years ago because the market was overpriced.)  He probably buys shotgun shells, bottled water, & freeze-dried rations, too, but he doesn't have to agonize over the stock market.  And he's diversified enough to take pleasure in watching some portion of his portfolio rise in value no matter what kind of day the world has.

There's a portion of a Four Pillars chapter where Bernstein designs different portfolios for different investors.  You don't have to adopt one of those portfolios, but you can apply Bernstein's logic & methods to your own personal preferences to develop your own personal diversified portfolio.  And then you only have to mess with it when it no longer meets your personal preferences.

With a SWR of less than 2% and TIPS yielding 2%, will it work? 

Well, again yes, but only if your expenses don't invade the principle and you don't outlive the decline.  Rotsa ruck.

But, hey, I may not be the most credible source for this discussion.  After all, I'm only 44 and I'm hoping to be tracking my expenses for at least another 60 years.  But I do know a couple of credible sources-- go over to the Vanguard Diehards discussion board and wave your 100% TIPS portfolio in front of SamBro (age 92), Taylor Larimore (age 80+), Mel Lindauer (retired and a big fan of bonds), & "Ol' Meph" (an expert on annuities).  They may not be able to predict your future, either, but they can sure tell you what the roadmap looks like.

 

[Mr._johngalt]

Another excellent post! Re. diversification, I'm in total agreement.
There are many ways to make ER work and you can do it easily with no stocks (or no bonds, CDs, TIPs, etc). If it works, it works, end of story.......................

JG

 

[JWR1945]

For Mister Bill:

I don't understand why so many people want to talk you out of your original idea. It is not as if you were locking yourself into a single decision. In fact, most people in a situation such as yours would set up a 10-year (or possibly a 20-year) TIPS Ladder. This means that you would be getting 10% (or 5%) of your principal (plus inflation) back each year. You would be able to redeploy almost all of that money if you wanted to. You would be removing only a very small fraction of principal for living expenses.

Remember that the principal is adjusted to match inflation. Even if TIPS stopped paying interest, you could still withdraw 2% of your original balance (plus inflation) for 50 years. If you can get 1% interest from TIPS, you can withdraw 2% of your original balance (plus inflation) for 70 years.

If 50 years is long enough and if you get 1% interest, you could increase your withdrawals to 2.55% of your original balance (plus inflation).

Of course, you have to consider taxes and so on.

There is nothing difficult or limiting if you start out with a TIPS Ladder.

Have fun.

John Russell

 

[cute fuzzy bunny]

You're certainly not limiting yourself to the decision, but the value of tips on the secondary market is NOT fixed. If you had to or wanted to get out, you might find yourself giving up a lot of principal.

TIPS also DO NOT track inflation, they track CPI. Johnny...the reason why so many people dont listen to you is that you keep repeating the same inaccuracies. If CPI lags inflation by 1% (and its worse than that in my area of the world), you're losing 1% of purchasing power per year. So by year 50 of your super duper plan, you'll be eating cat food and living in a box.

Also, nice example given but I'm unaware of most retirees being able to live on 2% of their money; usually 4% is a push. In that case your money lasts 25 years. Super, I'll be out of cash when I'm 68. I guess if I use my last $250 on a used smith and wesson, thats a good plan...:

But this is the sort of advice I'd expect to get from a guy who is living off of a cola pension and plays with investment money he doesnt need to live on...how about some people who adhere to it that have to rely on their investment income? Oh yeah, Joe Dominguez did that...

 

[Arin38]

Perhaps you should review "Your Money or Your Life" and then follow up on Joe Dominguez' last few years of life as he struggled to survive on his 100% Treasury portfolio.

First post since being involved with one of the older Retire Early Homepage boards a few years ago....

I searched for a story on Joe and can not find it. Everything I'm finding is about the book and his great contributions. I'm a fan of his book ( in general concept, but I'm not a fan of living my life in a frugal manner) and would love read about his last few years. He seemed to be a caring man that deserved better.....

Thanks for all of the wisdom on this board. I'm about 5 years from FIRE, provided I don't mess up....

 

[cute fuzzy bunny]

"Frugal" doesnt quite measure up what Joe went through towards the end. Mind you, his fundamental idea of getting off the hampster wheel was a good one. His choice of investing through a single low-yielding investment asset class wasnt.

The stress of running out of money and having his entire life revolve around a desperate attempt to hold onto his last few dollars was far worse than what most people experience in dilbert-land.

 

[unclemick]

I believe from the get go - Mister Bill said he had a 'decent pension' plus 'some other money'. I also got the impression stocks gave him the willy's - so why not?

Me - I would never do it. But someone else?

My newly added financial advisor Bear Bryant says play defense in retirement like a linebacker -'agile, mobile and hostile.'

By 2006: as income streams -

29% interest/div form 60/40 balanced index IRA
29% early SS
21% dividend stocks
21% Pension - non cola - will fade in the stretch.

The first 10-12 years were easy - a lot of good breaks. I'm with those that feel - valuations are high - and the the next decade may need more defense.

Still overall a stock cat though - with dividends.

 

[Nords]

I searched for a story on Joe and can not find it. Everything I'm finding is about the book and his great contributions. I'm a fan of his book ( in general concept, but I'm not a fan of living my life in a frugal manner) and would love read about his last few years. He seemed to be a caring man that deserved better.....

Here's the text from John Greaney's "Retire Early" website:

"Two prominent early retirees have followed the 100% fixed income approach. Your Money Or Your Life author Joe Dominguez invested in only US Treasury securities when he retired in 1969 at age 31 and continued to champion that approach up until his death in 1997. Dominguez retired in 1969 with a $100,000 portfolio and $7,000 per year in living expenses. An August 1996 Kiplinger's Personal Finance Magazine article revealed that Dominguez was then living on about $13,000 per year. To keep pace with inflation, $7,000 in 1969 would need to grow to $30,360 by 1996 to maintain the same purchasing power. Dominguez managed this loss of spending power with unusual living arrangements (he lived in a group home with about 30 other people) and a lot of composting and the washing and reusing of tin foil and wax paper -- a strategy that few early retirees would tolerate.

Paul Terhorst, author of Cashing in on the American Dream: Retire at 35 limited his investments to a laddered portfolio of FDIC-insured Certificates of Deposit (CDs) when he retired in 1984. His web site ( http://www.geocities.com/TheTropics/Shores/5315/ ) reveals he holds "a more traditional portfolio heavily weighted with low-cost [equity] index funds" today."

 

[robert]

Good thread.  These are my takeaways --

Every retiree needs an adequate source of income to fund his or her retirement.  Those with fat pensions or other reliable income streams have little need to take unnecessary risks.  Thus, they can probably avoid equities without putting their retirement at risk.  Others, who enter retirement with more modest resources, must count on their nesteggs to generate a higher rate of return.  That generally means equities.  I would summarize this as follows:

1)  as your retirement resources increase, the need to accept risk decreases (and visa-versa), but never disappears (unless you are very, very rich).

2)  diversification is always a good thing -- parallels the old adage, "don't put all your eggs in one basket."  However, diversification does not necessarily mean that you need to to invest in some high risk investments, i.e., you can have a diversified portfolio of "low risk" investments and still be adequately diversified (assuming you have an adequate nestegg to generate sufficient income despite a lower rate of return).

As for myself, I believe I need to rethink my 100% TIPS strategy.  I anticipate retiring with a nestegg of roughly $1M, and have a small pension and SS to look forward to a few years after I retire.  My needs are modest, but perhaps it would be prudent to put a portion of my nestegg in equities (conservative ones).  The traditional wisdom seems to be that you should have 60-80 percent in equities.  I don't believe that's necessary, or even prudent for me.  But, perhaps I should consider something in order of 25 - 50%.

Anyway, good discussion.  At least it has nudged me into rethinking my gameplan.

ZamaGuy

 

[laurence]

pssst, Wellesley!

 

[Nords]

As for myself, I believe I need to rethink my 100% TIPS strategy.  

Anyway, good discussion.  At least it has nudged me into rethinking my gameplan.

ZamaGuy

Then our work here is done... this thread is a good reference for the archives.

 

[cute fuzzy bunny]

Well there are two ways to look at it...you can go very conservative because you dont need the money (and chances are you wont make much so making money wont be a big concern) or you can become very aggressive because since you dont need the money you can take the volatility.

In the former case, you'll sleep better...perhaps. In the latter case, you may end up with a lot more money before you know it. I dont know too many people who couldnt find a way to spend more money, or who wouldnt want to leave a nest egg for their kids, or some charity.

In either case, I havent seen a one asset class analysis that proved out best over the long haul. I dont think its a good idea to calculate a strategy based on a 'drop dead' date, even if you really dont want to leave any money behind. I dont think CPI indexed investments will keep pace with actual inflation over long periods of time unless you live in a very low cost of living area that stays that way. I dont think 'strategies' based on some myoptic view of valuations of certain asset classes that keeps you out of those asset classes is worth the time it just took me to write this sentence. And I dont think its a good idea to take investment advice from people who are just playing with the investment money and may not even be following their own advice.

 

[Donner]

Mister Bill and Nords—

           This is really a fine thread with a lot of good food for thought.  Just have to throw in my two cents-----

           Retirees need to approach this notion that common stocks are the way to go to get some inflation protection into their portfolios with a big grain of salt.  Take a look at the chart and comments below which I pulled together from the Shiller Data.  These periods represent broad swaths of investment history which I have characterized as High Inflation, Low Inflation or Deflation periods.  What is surprising is how few High Inflation periods we have had in the last 100 years.  Low inflation and actual deflation appears to have dominated  most of our investment history over the past century.  Deflation we know about.  What distinguishes High Inflation from Low Inflation?  Well, it looks like anytime inflation in the CPI exceeds 4% you have a problem. 

           Look at the three periods of  High Inflation highlighted below:  1913-1920; 1941-1948; and 1966-1982.  The 1941-1948 period is an anomaly.  War time conditions and shortages followed by a release of pent up demand after the War led to price increases.  But note the earnings record in those years.  Stocks did middlin to Ok but nothing to write home to mama about. Didn’t keep up with inflation. But this is the only instance I can see in the data that supports the notion that common stocks will provide you with any semblance of  real protection in a  High Inflation environment.  We are highly unlikely to replicate those conditions anytime soon. 

            The other two High Inflation periods tell a completely different story.  1913-1920 and 1966-1982  are both characterized with what can only be described as poor overall stock performance.  If given a choice between two general hypotheses -- A) Stocks are a good hedge against High Inflation; or,  B) High Inflation kills stock performance -- which would you lean towards?

            The evidence seems to indicate that stocks do best in periods of mild or Low Inflation, badly during periods of High Inflation, and horribly during periods of Deflation. 

            High Inflation may be the poison that kills retirements, but, ownership of common stocks is not the antidote.
Ownership of common stocks during periods of High Inflation is the modern day equivalent to the leeches theory of medicine.  It won't help and it just might kill you a lot quicker.

            If  High Inflation is on the horizon (some think it is here already) then we could be looking at a rough market patch ahead.  Volker has said that the psychology of inflation, once underway, is difficult to reverse.  May explain why Greenspan is trying to convince us that inflation is “well contained” while pursuing a classic anti-inflationary monetary policy. 

            A TIPs portfolio doesn’t seem such a bad idea in view of the Shiller data, Mister Bill.  If there is High Inflation your TIPS strategy will give you some protection while your stocks may languish or even decline.  If there is Low Inflation your TIPs will keep up with the cost of living  but you may fall behind the portfolio performance of your common stock brethren.  (Can you stand it?)  If there is Deflation, your TIPS will give you your principal back at maturity.  Could be a lot worse ways to go.

                                   Average Annual Rate of Change
          S&P
         Comp   CPI Earnings Dividends
1913-1920 -2.0% 8.9% 5.8% 1.7%
1921-1929 14.3% -1.1% 17.1% 7.7%
1930-1933 -10.1% -6.1% -24.8% -16.7%
1934-1937 7.1% 1.8% 25.6% 17.4%
1938-1940 -1.8% -0.2% 5.0% -1.9%
1941-1948 6.0% 7.0% 12.1% 4.8%
1949-1965 12.7% 1.8% 5.9% 7.1%
1966-1982 3.8% 6.9% 5.9% 5.7%
1983-1994 10.8% 3.7% 9.5% 5.6%
1995-1999 25.3% 2.4% 10.1% 4.7%
2000-2002 -14.0% 2.3% -12.9% -1.0%


1913-1920   High Inflation -  Poor Stock Performance
1921-1929   Deflation -  Excellent Stock Performance
                     Roaring 20’s ; Post War Decade;  Excellent Earnings and Dividend Growth
1930-1933   Deflation-  Very Poor Stock Performance
                     Earnings and Dividends tank
1934-1937    Low Inflation – Good Stock Performance
                     Earnings and Dividends rebound; hope springs eternal
1938-1940    Deflation -  Poor Stock Performance
1941-1948    High Inflation – Good Stock Performance
                      WWII and Post War Period;  Earnings Jump;  Pent Up Demand
1949-1965    Low Inflation -  Excellent Stock Performance
                     Solid Earnings and Dividend Growth
1966-1982    High Inflation -  Poor Stock Performance
                     The Bad Old Days; Vietnam; Guns and Butter
                      Paul Volker and Stagflation
1983-1994     Low Inflation – Excellent Stock Performance
                      Ronald Reagan and Supply Side Tax Cuts
                      Earnings growth not matched by Dividend Growth
1995-1999     Low Inflation -  Excellent Stock Performane
                      Earnings growth not matched by Dividend Growth
2000-2002     Low Inflation –Poor Stock Performance
                      Earnings and Dividends Tank
2003-2003     Low Inflation- Excellent Stock Performance
                      Earnings and Dividends rebound from a low base
                      See 1934-1937—hard to ignore improving earnings
                      From decimated base
2004-2005     Low Inflation-  Poor Stock Performance
                      Earnings and Dividends growth slows  year-to-year

Donner

 

[ESRBob]

Donner,
Good points about high inflation environment -- inflation also kills bonds, so TIPS would be one of the fiew bright spots in the US market.

One reason I am happy having 40% in stocks (half of them international) 40% bonds (half of them international) and 20% "other' -- stuff that doesn't correlate much with anything -- private equity, commodities, real estate etc. is to sidestep these systemic black holes inflation in one country can cause. Note that even if the U.S. has high inflation, it is not clear other currencies will be similarly affected, and should actually rise against the dollar if their relative inflation rate is lower. So foreign currency holdings can be one hedge against U.S. inflation.

One more reason this "Slicer" sleeps well at night. (Except when I worry about getting my boat in the water -- they smashed up the radar today on the travel liift...

 

[haha]

Good post Donner. As one who was inversting in the 70s, I can add that academics, pundits, etc. all had well worked out theories as to why inflation was bad for stocks. Understated depreciation and inventory profits leading to overpaying corporate income tax were only 2 of many. Warren Buffet wrote about this frequently in the Berkshire Annual Reports of the era.

Only recently have stock promoters dusted off the old pre-70s theories about stocks being inflation hedges, representing ownership of real things, etc.

The only halfway decent low risk invrestment class in the 70s was US and OECD short term debt.

Ha

 

[Nords]

Donner, you have a ton of data proving that stocks do badly during high inflation.  I get it.

Now let's focus on the data showing what does better during high inflation.  Commodities.  OK, I get that too.

Now let's just focus on the best-performing asset classes during ALL periods of inflation... because as you say, high inflation is (hopefully) not that common.  I think that's stocks.  Sometimes it's bonds, sometimes it's gold, sometimes it's other things-- but over the big picture of the last couple centuries of (admittedly imperfect) data, it's been stocks.

This whole thread has kept jumping back to "bad stocks".  No kidding, guys, stocks can be bad and I don't disagree with that.  Most of the "bad" is considered to be volatility, which personally I would only think is a problem if you actually need to sell on the downside.  (No one ever complains about upward volatility).  What causes problems is focusing on one asset class to the exclusion of all the other "bad" ones.

So don't buy stocks if you don't like them.  (More for me!)  But don't let a stock bias distract one from the compelling reasons to stay diversified, and the dangers of sticking with just one asset class.

So why is our portfolio 95-98% stocks?  Because we think my govt pension is the equivalent of TIPS, we're heavily invested in real estate, and I fear inflation more than any other risk.  We don't care about volatility because we keep enough cash stashed to ride out most of it.  (You won't find that stocks/cash analysis in Shiller OR Bernstein.)  And we feel that we've taken similar precautions to guard against the other types of investment risks.

One other point about TIPS.  Even today, with teraflops & terabytes of computing power, the smartest guys in the world (even Greenspan) can't tell when anything less than 1% turns from inflation to deflation or vice versa.  And the CPI itself has been massaged & hedonic-ed until it's unrecognizable (not necessarily the Fed's fault).  So while TIPS might promise to match inflation-- they don't have a very good handle on it, they'll understate it, and they'll lag it.

Finally, Donner, while you are able to regurgitate a huge pile of data in that post, it's hard to discern its quality.  The S&P today barely resembles the S&P of the '80s, let alone some reconstructed analog of the 1920s.  Compustat data just doesn't exist to show good records of enough dividend payments before 1950, and I'm not aware of any better data.  Several of those periods have those low inflation numbers again, and we all know how companies can manipulate earnings.  Imagine what they were getting away with 50-100 years ago.

Yeah, it's the best data we have and we have to use it to predict the future.  I get that too.  But I wouldn't confuse all that teraflop/terabyte power with the ability to do a better or more credible analysis than we could 20 years ago.  Crap is still crap, whether you're looking at it with bifocals or with a scanning electron microscope.  I'll stick with the big picture, the rolling long-term periods of FIRECalc, and perhaps even Monte Carlo.

 

[robert]

Great discussion . . . here's my thoughts at this juncture.

These are very difficult times for someone trying to fashion a successful retirement strategy. We have interest rates at historical lows, stocks trading at historically high multiples, twin deficits, a bubble (or at least "froth") in the housing market, and some would say a "demographic crisis" brewing in the background.  This is a lot to cope with, especially for someone such as myself who is admittedly risk-averse.  We do have historical references to guide us, but no one is really sure how accurately the past can be used to predict future performance, particularly in light of the unusual conditions that exist today.

Thus, it appears that we are faced with a Hobson's choice.  If we opt for safety, the real return on our investment is unlikely to exceed the rate of inflation.  If we seek a higher rate of return, we could find our nestegg ravaged by a market reverting to the mean, a bubble popping, a dollar plunging, or a host of other nightmares that seem to be lurking in the wings.

I'm 18 months shy of retiring and trying mightily to come up with an investment strategy that will allow me some peace of mind.  Perhaps the best strategy would be to simply not commit fully to either choice, i.e., put half of my assets in a safe investment vehicle (e.g., TIPS) and the other half diversifed among a handful of investments with the potential of yielding a higher rate of return (e.g., equities, reits, etc.).  Helleva choice.

If only there were a safe way to achieve a 2.5 real return on investment . . . that's all I ask . . . sigh!   

ZamaGuy

 

[laurence]

Plenty of good low cost blended funds out there, take all the work out of it for you. Didn't you say you have a fat pension? You should probably look at something dividend/value/short term security and then have a margarita.

 

[cute fuzzy bunny]

Nords hit the nail on the head. 20/20 hindsight tells you what was good or bad. But did you KNOW what to own before those periods hit?

For all seasons, a good balance of equities gives the best long term returns. Ballasted with bonds to smooth out the volatility a little bit. Spread among US, foreign, and across market caps. A little sector weighting to juice things up and let you spend some of unclemicks 'male hormones'.

Thats what I think "stocks offset inflation" really means...not that they do so during the exact periods of high inflation, but taken a class at a time, very few asset classes defeat inflation over a long holding stretch.

Not even TIPS do it in my opinion. Given the underestimation factors, hedonics and basket substitutions, I'm going to really go overboard and say that tips at best will keep your money even with inflation.

The day I'm shooting to stay even is a sad day indeed.

 

[Texas Proud]

This is a lot to cope with, especially for someone such as myself who is admittedly risk-averse. 
ZamaGuy

I am sure a lot of people have talked about this, but it seems that people only focus on market volatility risk when they say they are risk-averse. There are other risks that should be looked at that people ignore, such as inflation.

If you look at stock over a longer term, the voltility risk is muted and you are normally rewarded for this risk...

Maybe I need to go back to my portfolio analysis textbook to read up on the various risks

 

[laurence]

Money is emotional, people do crazy things. I had a coworker ask me for advice this morning, and I almost strangled him when I saw what he was doing.

Credit Card balance = $10,000 @ 18% interest

Savings account at 1.x% = $20,000

IRA = $12000 in CA TAX FREE MM! (I asked him if he wears a belt with his suspenders

He refused to pay off the balance, and couldn't understand why tax advantaged in a tax deffered might not be a good idea....he was just so afraid to have his balances go down. He couldn't grasp the idea that the invisible hand of inflation and the not so invisible CC company were robbing him blind.

 

[cute fuzzy bunny]

:

Good news Laurence is that if there werent dummies losing money in the market, we wouldnt be making any...