Has Investing to Live Become Harder?

[rjohnla]

Some ER members provided some good advice in another thread, I think it's about done now, see: Hi, New & wanting to retire early

Wanted to switch topics: Has Investing Become Harder?

My Background: BA, Finance, MBA, Int'l Fin. There's a catch though, I graduated in 1986. I've followed it finance, economics, etc., ever since. But don't work in the financial industry.

Question please: Can ER's get a decent return at low risk somewhere? Something more than 1% saving account. How about buy the markets with EFT's? Annuities while appealing have custodial risk which concerns me.

[David1961]

Not sure what you mean by "low risk" but there are many blue chip stocks that pay dividends of 4% or higher. But, of course, their share prices can go down in value. If you want lower risk, you could look into Savings Bonds. Not sure what they are paying now but is probably higher than what you'd get in a bank.

[rjohnla]

When I was young, ha, ha, I thought $500k would do it laddering bonds at around 10%. Well 10% was nowhere to be found. So $1M and 5%, you now how that worked out. So now it's mega-millions and 1% or buy the risk inherent in investing vs. savings. I would just like to go in my new Travel Trailer and have some fun and not return to find I need to live in a '20 Trailer for life.

We have stocks, bonds, options, futures, and other derivatives galore; the people who have created some of them do not even know how to value them. I think most people do not understand them (not ref. to members on this site). Fyi, in 1985 I wrote a paper in grad. school how the now $1.2 Quadrillion Derivatives Market which dwarfs World GDP would eventually implode global financial markets. Hopefully, I'm wrong. Thoughts?

Last, in 1984 tried to write a program that would: 1) let me enter macro economic data; 2) sector data; 3) company data, and then run it through the Markovitz efficient portfolio and have it select the most efficient portfolio. Well 5 1/4 floppies and IBM 8088 just did not have the horse power. But Pc's do today, and that is exactly what most financial advisors are doing for you.

[rjohnla]

David1961, hi, year born...

Low risk, start with the risk free rate - T-bills - that are always part Markovitz efficient portfolio theory. Got turned off when learned have to accept 10 major assumptions do not exist, yet readily exist in the real world. Then there is diversification theory, there's are times investors have been slaughtered with that. As another ER wrote "no crystal ball", so were all looking for the best theory that seems to be a moving target, e.g., stocks & houses in 2007. I really don't like to see anyone lose money and I've seen that happen to quite as few people I know in 2000-03, and 2007-09 mainly in 401k's where a lot (sorry) of people have no idea what their doing.

Fyi, any financial advisor will likely build an diversified efficient portfolio for you I think, there's not much else out there since the 40's.

[nun]

The days of getting all your income from investments that guarantee your principal are long gone, but CDs, Savings Bonds and stable value accounts should still be part of most people's portfolios. Most ERers are comfortable with the risk inherent in the stock market and have portfolios and income streams designed to survive market downturns.

[rjohnla]

Quote:

Originally Posted by nun The days of getting all your income from investments that guarantee your principal are long gone, but CDs, Savings Bonds and stable value accounts should still be part of most people's portfolios. Most ERers are comfortable with the risk inherent in the stock market and have portfolios and income streams designed to survive market downturns.

Hi Nun, thanks. Would you kindly elaborate on the area in bold. Seems to be what I'm looking for.

[robnplunder]

Diversification, having long term horizon for investment strategy are my way of getting decent return with low risk.

To OP's question, other than annuity, probably getting into house rental business in stable neighborhood may offer decent return with lower risk.

[nun]

Quote:

Originally Posted by WAVE3 Hi Nun, thanks. Would you kindly elaborate on the area in bold. Seems to be what I'm looking for.

Well it comes down to diversification and discipline. Read the wiki over at Bogleheads.org, many on this forum follow the portfolio and investing principles it explains.

[nun]

Quote:

Originally Posted by robnplunder To OP's question, other than annuity, probably getting into house rental business in stable neighborhood may offer decent return with lower risk.

I like the diversification and income a rental property can provide, but I'm not sure about it being low risk.

[robnplunder]

Quote:

Originally Posted by nun I like the diversification and income a rental property can provide, but I'm not sure about it being low risk.

"Decent," "low" are subjective terms. YMMV.

[Fishingmn]

Rental real estate has been a good decision for me.

While the underlying price of the homes could fluctuate the rents should stay somewhat steady and usually increase with inflation. Therefore, if they are purchase at the right price and cash flow that should continue into the future.

Right now I'm getting close to a 9.5% cash return on my units which doesn't count the depreciation benefits come tax time or the substantial appreciation over the past 3 years. It is much harder to find good rentals right now though as prices have increased and supply is way down.

[rjohnla]

Harry Dent who follows demographics trends and their impact on the economy, markets, industries, etc., agrees with IF you know what your doing (it's difficult). Harry says buy starter homes in good locations and live /rent and then mid-2020's sell the children of the millennium generation. Have to use lots of leverage or have lots of cash. But yes.

Add: Most the foreclosed property has been bought for rentals by investment firms paying cash. They want return. But they are not homeowners, they'll dump it in a second. Risk for the small guy.

[Zathras]

People can give you much better advice, or at least things to think about, if you can describe what "low risk" means to you.

Also, keep in mind inflation risks and length of retirement.
Inflation risk is not terribly worrisome for someone that is planning a 10-15 year retirement compared to someone with a 40-50 year retirement plan.

[rjohnla]

Hi, how about beta's? +1.25 to -1.25. I don't really care if investment up /down, what counts is right/wrong.

Helpful in defining risk?

Also, your point on time-frame. You can accept lower returns with shorter time frames. Me: est. 25 years = 85. But mortality charts I believe show 70 something for men.

[Major Tom]

Quote:

Originally Posted by Zathras People can give you much better advice, or at least things to think about, if you can describe what "low risk" means to you.

Agreed. Often, what people mean when they say "low risk" is actually "low perceived risk".

[rjohnla]

Most people can not define risk tolerance. Let advisors ferret that out.

[nun]

Quote:

Originally Posted by Fishingmn Rental real estate has been a good decision for me. While the underlying price of the homes could fluctuate the rents should stay somewhat steady and usually increase with inflation. Therefore, if they are purchase at the right price and cash flow that should continue into the future. Right now I'm getting close to a 9.5% cash return on my units which doesn't count the depreciation benefits come tax time or the substantial appreciation over the past 3 years. It is much harder to find good rentals right now though as prices have increased and supply is way down.

I bought a rental 17 years ago and it generates $1200/month.....it's doubled in value since then but ignoring that and just dividing the income after costs and expenses are removed by the initial purchase price I get about 7%. RE has been good for me.....but like all investments some types are more risky than others. I was conservative and so bought a very nice 2 family in a good neighborhood. It was expensive, but it survived the housing bubble well. I also live on the premises so it's easy to manage it myself.

[rjohnla]

Nun - nice! You must know what you are doing. A lot of people lose in real estate. They are not really real estate investors.

[nun]

Quote:

Originally Posted by WAVE3 Nun - nice! You must know what you are doing. A lot of people loose in real estate. They are not really real estate investors.

I avoid any investments that promise large or quick returns and like to keep things diversified. I also buy "quality", keep things simple and costs down. So I'm a Boglehead with a pretty simple index fund portfolio. I bought my 2 family in 1997 for $329k and paid it off 2 years ago. A similar house 2 doors down just sold for $675k

It all seems pretty simple and common sense to me. There's no mystery to investing as long as your expectations are sensible and you are not looking to beat the market. If you want alpha>0 things get complicated. If you are fine with alpha=0 it's easy to be successful and yo can sleep well at night. The most difficult thing about investing is having the excess income to invest regularly.

[Zathras]

Quote:

Originally Posted by WAVE3 Hi, how about beta's? +1.25 to -1.25. I don't really care if investment up /down, what counts is right/wrong. Helpful in defining risk? Also, your point on time-frame. You can accept lower returns with shorter time frames. Me: est. 25 years = 85. But mortality charts I believe show 70 something for men.

Beta of 1.25? Heck, TSLA is only at 1.32 and that is pretty darn risky.

It really is a personal idea of risk.
For example, I view a well diversified portfolio of individual blue chip stocks to be very low risk.
They pay me about 3.5% and the dividends grow faster than inflation.

In market downturns, the portfolio may drop by 40-50%, yet the dividends have been much less volatile (10% loss in the 2007-2009 recession).

Certain losses to be aware of are inflation and financial fees. I do my best to minimize the later ($20-$70 a year) and be aware of the former.