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percent above inflation
Old 01-10-2005, 02:05 AM   #1
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percent above inflation

What is a good rule of thumb as to how much a portfolio can return above inflation ? For example , if I compute a portfolio assuming getting an average return of 2% or 2 1/2% above inflation then ER looks good, otherwise it is shaky.

What conservative options would produce the 2%.or more ?
(Too much in stocks seems a little risky. )

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Re: percent above inflation
Old 01-10-2005, 04:42 AM   #2
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Re: percent above inflation

As far as ROI goes, I would want to get AT LEAST 4% where the first 3% goes to inflation and the next 1% goes to taxes. Anything I can get above 4% is profit. Of course, if it's realized, I would have to factor additional tax expenses, but at least I would net 80% of that profit.
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Re: percent above inflation
Old 01-10-2005, 05:00 AM   #3
 
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Re: percent above inflation

Quote:
What conservative options would produce the 2%.or more ?
(Too much in stocks seems a little risky. )
Of course no one knows the answer to your question, becuase no can predict the future.

But, most experts agree that a 50/50 Stock/bond portfoilo, should provide about a 3-4% 'real return'. I think Vanguard has some tools on their website that will allow you construct a portfolio and they will predict a return.

If we ever see TIPS at 2.5% return, that would be a good way.
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percent above inflation
Old 01-10-2005, 08:18 AM   #4
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percent above inflation

I have been following fisn.com

In the CD section they usually have a Fixed Rate Callable CD paying about 6% for 20 years. The CD is paying $100.000 at maturity. This week the rate is 6.19%. The cost is $30,042 for $100,000 at maturity. The CD's are FDIC insured.

I am thinking about rolling over my 401k into a IRA & using a portion to form a ladder. The maturities would be about 10, 15 & 20 years. The goal would be $100.000 each at maturity.

In the Bond section they have GMAC SmartNotes. A five year note is paying 5.75. A 20 year callable note is paying 7.25. A 12 year callable Step-Up Bonus Rate Note is paying an average of 6.712% if held to maturity.

I have not dealt with FISN & do not know how reliable they are.
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Re: percent above inflation
Old 01-10-2005, 08:39 AM   #5
 
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Re: percent above inflation

I am pretty well loaded up with GMAC Smartnotes, although many here question if it's all that smart

JG
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percent above inflation
Old 01-10-2005, 10:01 AM   #6
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percent above inflation

The 12 year note is not callable for 3 years & is paying 5.85% for the first 3 years. The remainder of the term it is paying 7%.

JG what is your experience with SmartNotes? Have you ever redeemed or had any called?
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Re: percent above inflation
Old 01-10-2005, 10:11 AM   #7
 
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Re: percent above inflation

My experience with Smartnotes has been good.
I have not had to sell any and do not intend to
(forever money). I have had them called, but was able
to buy more with the same interest rate by going out a bit further on the maturity.

JG
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Re: percent above inflation
Old 01-10-2005, 10:16 AM   #8
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Re: percent above inflation

I purchased GMAC and GE notes for my mother's account. The survivor option is nice. The problem for a younger person is liquidity, you really need to hold them to maturity.
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Re: percent above inflation
Old 01-10-2005, 10:21 AM   #9
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Re: percent above inflation

Searcher,
Not sure if you are in ER, or your comment meant that you could get to ER with inflation plus 2%, but if the former, then I would have some issues with your plan.

For a definition, my feeling is that a conservative investment generally means one that doesn't have a lot of upside or downside. Thus, you can pretty much count on the return you are going to get.

In that case, you need to 'lock in' something that will either be explicitly inflation adjusted (TIPS) or else you need to assume an inflation rate (3% is the historical average) and subtract it from your 'locked in' return to get your real return.

Then, if you are in ER, you will need to subtract the amount you intend to 'bleed' off your portfolio each year for living expenses. Most people are somewhere between 2 and 5%, (remember that a 1% SWR means you're stashing a million for every 10k a year you take -- not exactly in the province of most people.)

Then I feel pretty strongly that you'd want to have 1% left over if you can for some forward momentum or growth over time in your portfolio. Over 50 years, a lot can happen, and if you have built in an assumed bit of positive growth, you may be able to cover something unexpected.

Finally, don't forget your investment management fees -- something between .2% for traditional index funds at Vanguard and 1% for the lower-cost actively managed funds. Maybe .5% covers average cases with room for fund trading expenses. (These expenses only apply to funds or things you might buy and sell without waiting to maturity (bonds you sell early, or stocks).

Long way of saying I think you need at least 8% from your 'super safe' investments: 3% for inflation, 4% to withdraw for expenses and 1% to grow on.

Anything less and you'll be eating into principal/ not keeping up with inflation. Subtract from this 8% any amount less than 4% on your SWR, ie. if you only take a 3% swr, you can lock down a 7% interest rate and be ok long term.

Risky investments need to have an expected value of at least 8%, for the same reasons, but because they are risky, you can come out ahead or behind at the end of the day. But locking down an overall portfolio return lower than your SWR plus Inflation guarantees you'll be trashing your portfolio, so I don't see how that can be a part of a plan. (the 1% extra is gravy -- you may not feel the need for it.)
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Re: percent above inflation
Old 01-10-2005, 12:42 PM   #10
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Re: percent above inflation

Thanks JG & Brat for the comments on SmartNotes.
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Re: percent above inflation
Old 01-10-2005, 01:11 PM   #11
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Re: percent above inflation

Quote:
I have been following fisn.com

In the Bond section they have GMAC SmartNotes. A five year note is paying 5.75. A 20 year callable note is paying 7.25. A 12 year callable Step-Up Bonus Rate Note is paying an average of 6.712% if held to maturity.

I have not dealt with FISN & do not know how reliable they are.
A 5 year note issued by a marginally investment grade company that yields only 50BP over what PenFed is paying on a CD of similar term? You'd have to be crazy to take that deal!
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Re: percent above inflation
Old 01-10-2005, 02:32 PM   #12
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Re: percent above inflation

I will have a pension + Social Security (using 75%)+ investments.

4 categories of investments.

1. Very safe/consistently 2% or more above inflation.
(450K) (Glad I bought I bonds years ago)
2. Need one more investment that produces the above for 40k to finish the annual income portion.
3. Stocks - 80K
4. Surplus - 40K for emergencies or unplanned.

1 & 2 just equals a detailed budget that I created, covering everything I could think of, future cars, appliances, etc.

That leaves #3 to provide get ahead money. This one makes me a little nervous. I am planning on using 3 balanced funds. Oakmark, Dodge & Cox and TRowes Capital Appreciation.

Now where can I get inflation plus 2% or more for the 40-80K.
How does this plan sound ?
What would be a reasonable expectation on the mutual funds ? (using the last 10 years is misleading, great years except for 2)






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Re: percent above inflation
Old 01-10-2005, 03:59 PM   #13
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Re: percent above inflation

Quote:

A 5 year note issued by a marginally investment grade company that yields only 50BP over what PenFed is paying on a CD of similar term? *You'd have to be crazy to take that deal!
Relax
Crazy is a little strong
Those are examples listed
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Re: percent above inflation
Old 01-10-2005, 04:07 PM   #14
 
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Re: percent above inflation

Hi brewer! While I basically agree with you, and I have
no 5 year investments at 50 BP over Penfed's 5 year CD, "crazy"
is a bit strong IMHO.

JG
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Re: percent above inflation
Old 01-10-2005, 05:59 PM   #15
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Re: percent above inflation

Quote:
Hi brewer! *While I basically agree with you, and I have
no 5 year investments at 50 BP over Penfed's 5 year CD, "crazy"
is a bit strong IMHO.

JG
I calls 'em as I sees 'em. My business is credit risk, and 50BP over what is effectively a collateralized treasury is not even close to enough premium for the credit risk posed by a shaky Baa borrower. You wanna buy the GMAC bonds instead of the high rate CD? How about a bridge? I can get you a great deal on some landmark property in Brooklyn...
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Re: percent above inflation
Old 01-10-2005, 06:15 PM   #16
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Re: percent above inflation

Quote:
1. Very safe/consistently 2% or more above inflation.
(450K) (Glad I bought I bonds years ago)
Just curious -- I thought you can only by $30K per year or $60K for a couple prior to 2004. Has I-bond been around for a long time?
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