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Old 07-08-2009, 10:51 PM   #61
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Question...have you actually met anyone who actually built up enough money through the market so that they could retire on it?
Yes.

And I also know people who have CD ladders that make up the bulk of their retirement income--my FIL was one of those.

As REWahoo said, isn't it great we can each choose the path that we believe will work for us.
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Old 07-08-2009, 11:52 PM   #62
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I have met a handful of real estate millionaires, business owners, dot com cash outs, and CD saving maniacs, just never ran across a stock market millionaire in my limited travels, but I am in a government town.
.

One of the problems is that some do not invest all in stock... but my mom has beat your 5% and is a buy and hold investor... heck, it is hard for me to get her to re-balance her portfolio.... I think the last time we did it was 3 or 4 years ago...

Except for a small account she allows me to trade for her... she has every individual stock she has bought.. Exxon and Texaco in the early 80s... she held on even when Texaco lost their $3B verdict... she mostly holds onto her mutual funds and we are able to withdrawal her yearly amount from different funds to get the balance more right...

Me... I can not say what I have, but I would be that over the 20 years you have given, I am up a 'compound' 5%... I am flat the last 5, but did very well the 15 before... and the last 5 were a big run up and a big crash...
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Old 07-09-2009, 04:31 AM   #63
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Yes.

And I also know people who have CD ladders that make up the bulk of their retirement income--my FIL was one of those.

As REWahoo said, isn't it great we can each choose the path that we believe will work for us.
I guess one's approach to market exposure should take into account the time horizon for needing the money and the proportion of required spending coming from market investments.

In the pure case of a retired person 100% dependent on this income, AND who has a very thin discretionary income above spending on essentials, a 100% position in the markets would be ill-advised.

I think if a person builds in the assumption of 50% variability and 7% rate of return over the long run, they are closer to reality than assuming a 12% straight line up. The spouse has to be fully onside regarding hanging on during prolonged downturns. Personally, not sure why anyone would choose to live that way.

Well, maybe I do understand. Looking at your portfolio balance is fun and addictive, and this is a factor to consider. For myself, I manage this need by playing poker. Its cheaper to spend a couple of hours losing $20 at the table than gambling with my investments.
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Old 07-09-2009, 04:52 AM   #64
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One of the problems is that some do not invest all in stock... but my mom has beat your 5% and is a buy and hold investor... heck, it is hard for me to get her to re-balance her portfolio.... I think the last time we did it was 3 or 4 years ago...

Except for a small account she allows me to trade for her... she has every individual stock she has bought.. Exxon and Texaco in the early 80s... she held on even when Texaco lost their $3B verdict... she mostly holds onto her mutual funds and we are able to withdrawal her yearly amount from different funds to get the balance more right...

Me... I can not say what I have, but I would be that over the 20 years you have given, I am up a 'compound' 5%... I am flat the last 5, but did very well the 15 before... and the last 5 were a big run up and a big crash...
I guess a family gets on a certain track and the spouse generally continues the formula set by the husband...at least for the previous "sexist" generation.

there is no question in my mind that the classic female disposition is more suited to buy and hold and not over fiddling...

I assume Mom has enough financial elbow room to not have to cut back on her premium cable when the markets are down.

looking back on your experience with the market, would you have done anything differently as overall approach...what advice do you give younger crowd in your clan.
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Old 07-09-2009, 08:45 AM   #65
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Is there anyone out there that can tell me with a straight face that they are up more than 5% yield compounded on the last 20 years?
DOW

7/8/09 8178.41

7/8/89 2,660.66 (cost basis adjusted for divs)

Gain: 3.0738

1.0575 ^ 20 years = 3.06; so ~> 5.75% annual gain.

What's so hard to believe? What would a CD ladder return be for the past 20 years?

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Old 07-09-2009, 09:03 AM   #66
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I guess one's approach to market exposure should take into account the time horizon for needing the money and the proportion of required spending coming from market investments.
Do you think people on this board approach their asset allocation willy nilly with no regard to their personal situation?

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In the pure case of a retired person 100% dependent on this income, AND who has a very thin discretionary income above spending on essentials, a 100% position in the markets would be ill-advised.
If the only way this person can survive long term is hoping a 100% equities portfolio will go up a lot, then I would say this is not an asset allocation mistake, it is merely an undercapitalized portfolio. They don't have enough money to retire.
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Old 07-09-2009, 09:19 AM   #67
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wow!

lets say you want to be free at 50...does this mean you will shift 10% of your stake to fixed income each year?

will you be 100% dependent on your investment income at that point?

why do you want to retire early? what would you do with your retirement?

are there kids in the pipeline?

are you confident you will not face divorce?
I'm hoping to be free closer to 40. I haven't really figured out when I'll get into fixed income investments. And I probably will remain 70-80% invested in stocks when I do FIRE.

At that point I would be 100% dependent on investment income. Unless my portfolio value dropped substantially, then I would get a job. A couple decades after I FIRE, I may get some social security $$, but that doesn't factor significantly into the plan since it is not certain.

We already have 2 kids that will not quite be college age by the time I plan to ER. Divorce? No plans for that, but who really plans for that?? That could adversely impact my plans, but it would adversely impact anyone's plans I suppose. Luckily I have a good wife.

Why ER? What would I do all day? It would not involve punching a clock, sitting in a cubicle all day and working on TPF reports (my current task here). Trust me when I say I would have no problem filling up my weeks with an additional 50 hours of leisure time if work was not a requirement. I have hobbies, other interests, desire to travel, and intellectual pursuits that would easily fill up my time. If they don't I can always go get a job if I get reaaaaaally bored. Heck I may even do a little part time consulting on the side if conditions are right.

Kroeran, I'm not sure why you are skeptical of us who invest in the stock market and plan on the long term returns funding a sufficient stream of income to allow early retirement. The standard assumption is one can withdraw 4% of a portfolio each year in retirement and have a high degree of safety and minimal portfolio failures. Would a 3% annual withdrawal make you more comfortable? How about a 2% withdrawal? At some point in the 2-3% range the dividends from the portfolio will more than cover the withdrawal rate, and there is a reasonable assumption that the stocks held in the portfolio would grow at least at the rate of inflation, hence funding withdrawals in perpetuity. What particular point of this logic do you disagree with? Do you agree that a sufficiently large portfolio invested mainly in equities would provide a wide enough margin of safety to allow one to feel reasonably confident taking an early retirement?
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Old 07-09-2009, 10:17 AM   #68
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1.0575 ^ 20 years = 3.06; so ~> 5.75% annual gain.

What's so hard to believe? What would a CD ladder return be for the past 20 years?
seems like a lot of worry and risk for a small yield gain
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Old 07-09-2009, 10:36 AM   #69
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Do you think people on this board approach their asset allocation willy nilly with no regard to their personal situation?
I don't mean to insult the intelligence of persons on the board

partly, I am trying to calibrate the level of sophistication on the board and then see if something unexpected comes back that makes sense, checks out, and tweeks my philosophy

partly, I am trying to refresh my awareness of market issues, questioning myself. Its been a while since I considered this stuff. I don't think I have ever been in a situation where I could discuss it with informed, intelligent, and experienced company, such as exists here.

My mom's portfolio, because of mandatory withdrawals from a registered plan, is going to start building an unsheltered pool that will need to find a home.

Based on my discussions here, I was able to recognize the value of the VG Wellington fund article in todays WSJ...and I was startled by their 30 yr average yield, which was 11.5%.

When I start to consider after-tax CD return, given a 10 year planning horizon and not relying on it for income, maybe putting the money in such a fund may make sense for this situation.

At 80, Wellington Still Going Strong - WSJ.com

I would also have the entertainment of looking up the value every couple of hours. ; - )
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Old 07-09-2009, 10:59 AM   #70
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Kroeran, I'm not sure why you are skeptical of us who invest in the stock market and plan on the long term returns funding a sufficient stream of income to allow early retirement. The standard assumption is one can withdraw 4% of a portfolio each year in retirement and have a high degree of safety and minimal portfolio failures. Would a 3% annual withdrawal make you more comfortable? How about a 2% withdrawal? At some point in the 2-3% range the dividends from the portfolio will more than cover the withdrawal rate, and there is a reasonable assumption that the stocks held in the portfolio would grow at least at the rate of inflation, hence funding withdrawals in perpetuity. What particular point of this logic do you disagree with? Do you agree that a sufficiently large portfolio invested mainly in equities would provide a wide enough margin of safety to allow one to feel reasonably confident taking an early retirement?
Well, for me personally, the uncertainty would drive me crazy, given at any point the market might tank, and then spending a few years wondering if it will go back up. One day, it might not...or not in time. I realise this is counter to the prevailing faith.

There was another fellow who mentioned that a good strategy was to convert to annities just the amount you need for essentials, then leave the rest with the markets or CDs. That makes sense to me. Of course, its a bad time for annuities just at the moment I guess - but if there was a short term freakish interest rate spike in the next five years...that would be the time to strike.

If I move back into the markets, it would be with non-essential money. As we are all up to our ears and way over water with indexed pensions with my team, I think the market makes more sense for me than many, actually.

The main downside for me would be DW looking at me like I am an idiot when the market goes down...well, I guess she does that anyway
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Old 07-09-2009, 11:57 AM   #71
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Originally Posted by ERD50
1.0575 ^ 20 years = 3.06; so ~> 5.75% annual gain.

What's so hard to believe? What would a CD ladder return be for the past 20 years?
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seems like a lot of worry and risk for a small yield gain
Maybe, but to compare I would still need to know what a CD ladder would do over the same time. And you are mentioning this at a time when the index is 30% or more down from its peak, other 20-year periods may look better (or not, I'd have to look).

If I look at the 5 or 10-year T-Notes (^FVX ^TNX) I see that yields are down to about half of what they were in 1989. So, if you are living off the yield versus the gains/divs of a stock index fund is there really such a difference between the stock index being down 40%, and the yield on the bonds/CDs being down 40%?

I'm not trying to convince you one way or the other - people should do what they are comfortable with. I would just suggest that you don't ignore the risk that is in fixed investments - the risk of losing out to inflation. Hmmm, a firecalc run with:

$35K spend, $1M portfolio, 40 year time frame says:

75% Eq = 97% success
100% 5 year Treas = 28% success.

All the fixed income options gave about the same result. And, if I'm following the squiggly lines correctly, it looks like the odds of hitting zero earlier with the fixed income is also higher. Trading away that stock market volatility comes with a price (as one should expect).


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Old 07-09-2009, 12:32 PM   #72
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The main downside for me would be DW looking at me like I am an idiot when the market goes down...well, I guess she does that anyway
But if she looks at you like you are an idiot when the market goes down and you are invested, wouldn't she look at you like an idiot if it went up a lot and you were not invested in it at all? How long would it take for her to hear about everyone else who doubled the value in their RRSP's/IRA's/401k in five years before she asks you why you are wasting away your joint assets in fixed investments that are barely beating inflation? Maybe your DW has unrealistic expectations about money management. At the least, it certainly sounds like she is risk averse if she could not stomach a 30% drop in investment values in your long term investments. Investing in equities is probably not for her.

When I told the DW we lost 36% last year and that equates to over one year's gross income for us, she just said, "that's horrible but one of the risks we take by owning a lot of equities investments, and the market will come back some day". She doesn't really pay attention to our investments, but understands that what we are doing has significant volatility but typically pays nice rewards in the end (with patience).
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Old 07-09-2009, 01:15 PM   #73
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I guess a family gets on a certain track and the spouse generally continues the formula set by the husband...at least for the previous "sexist" generation.

there is no question in my mind that the classic female disposition is more suited to buy and hold and not over fiddling...

I assume Mom has enough financial elbow room to not have to cut back on her premium cable when the markets are down.

looking back on your experience with the market, would you have done anything differently as overall approach...what advice do you give younger crowd in your clan.

Well, that was not my dads way.... before he had a big family, he traded and lost... so he only went into CDs when they had money (most of my life, we had NO savings... zip, zero... it was only after all the kids left and my mom started to work did they start to save)....

My mom grew up during the depression... that is where she got formula....

There was a time she wanted to change... when my brother was making money like crazy during the dot com days... but I told her it is better to be diversified.... so she stuck with it and it has worked...

Also, she is a LBYM person that would make most people on this board look like spendthrifts... I try to get her to spend more, but she just does not care to do it.... no premium cable, heck, she just got cable because it comes with the condo she bought... she lives on her SS and a small pension... and a small amount from her investments...


My recommendation.... save at minimum 10% of your salary... preferrably 15% to 20%... starting from your first job... if you get into that habit, you can keep it... Invest in what you feel comfortable.... but do take some risks if you want to get a decent return over the long haul....

If someone young was planning on making it with CDs and private lending.... they would be sorry when it came time to retire... if they were doing that to fund their retirement, then it sounds like a good source of current income with not as big of downside as the stock market...
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Old 07-09-2009, 01:30 PM   #74
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But if she looks at you like you are an idiot when the market goes down and you are invested, wouldn't she look at you like an idiot if it went up a lot and you were not invested in it at all? How long would it take for her to hear about everyone else who doubled the value in their RRSP's/IRA's/401k in five years before she asks you why you are wasting away your joint assets in fixed investments that are barely beating inflation? Maybe your DW has unrealistic expectations about money management. At the least, it certainly sounds like she is risk averse if she could not stomach a 30% drop in investment values in your long term investments. Investing in equities is probably not for her.

When I told the DW we lost 36% last year and that equates to over one year's gross income for us, she just said, "that's horrible but one of the risks we take by owning a lot of equities investments, and the market will come back some day". She doesn't really pay attention to our investments, but understands that what we are doing has significant volatility but typically pays nice rewards in the end (with patience).
Count me and my gal in the risk adverse camp. Not really counting on CDs or savings rate interest to provide for us in our dotage either. Not when we can loan out money in the 10-12% range on properties that WE value at somewhere around double the amount we loan. Down side? when it comes time for the loan balloon to be paid off the borrower can't find other financing. In that case we can either keep taking payments (maybe upping the interest rate?) or foreclose. We're trying to back out of real estate, so getting another chunk of property may not be as attractive as getting our cash back, but it beats buying a market giant like GM or Enron or Rath Packing at the wrong moment.

A big advantage of stock is the ability to sell it for some price at almost any time. Loans or land are much more difficult to divest. Maybe that forces a certain deliberate nature to the transactions, which could be a good thing.

BTW, someone said something like "trust everyone or no-one, it all works out the same". Not real sure what that means, but unlike Kroeran i trust everyone means to do what they say and is not trying to cheat me. While i trust they mean what they say i don't count on them accomplishing what they say. Stuff happens.
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Old 07-09-2009, 01:42 PM   #75
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All the fixed income options gave about the same result. And, if I'm following the squiggly lines correctly, it looks like the odds of hitting zero earlier with the fixed income is also higher. Trading away that stock market volatility comes with a price (as one should expect).
I don't really understand why one would purchase a note or bond when you can a get 4-5% CD FDIC/CDIC insured, unless you are playing with a lot of zeros. I think going rate (best at CD brokers) up here is still 4%.

The thing about fixed income is that you can have a plan and know where you will be, with a very high degree of certainty.

Stock market returns are a play on probabilities and past performance. To have a comfortable margin for error, I would think you would want to target 2* projected living expenses, which means you may have to be overcapitalized compared to what you would need under a fixed income plan.

To correctly project your plan, you would have to walk your strategy forward through history, and see where you would end up using different windows of time, consider the worst case scenarios (which are predicted by the data) and adjust strategy/expectations.

I guess one of the messages is to build in buffers...like maybe doing some contract or self employed work during a transitionary period or some sort of reverse mortgage on the house in a worst case scenario.

One of my neighbours in Florida is a retired teacher from the North. He got his real estate liscense and made more money doing that in a few years of the boom than his entire teaching career. It is not a burden to him. It gets him out of the house meeting people.

Another self employment story - A struggling screen writer fellow I know picked up his real estate liscense and started operating in Santa Barbara. Not your typical agent - very mellow self actualized guy and popular with the rich divorcees. Within a couple of years he was doing multimillion dollar deals and hiring assistants.

I have this idea I am going to be a yacht broker when I finally pull the plug. It will give me a card to hand out at parties and an identity...rather than being a "retired guy". Don't care if I actually sell any damn yachts.
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Old 07-09-2009, 01:53 PM   #76
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How long would it take for her to hear about everyone else who doubled the value in their RRSP's/IRA's/401k in five years before she asks you why you are wasting away your joint assets in fixed investments that are barely beating inflation?

she just said, "that's horrible but one of the risks we take by owning a lot of equities investments, and the market will come back some day". She doesn't really pay attention to our investments, but understands that what we are doing has significant volatility but typically pays nice rewards in the end (with patience).
we have spent the last 30 years listening to the stories as collegues, neighbours and relatives rode the markets up, and then listened to them crying in their beer as they rode them back down (after running up their credit cards on expensive trips etc).

I got a nice ski trip to Switzerland out of dad in the 70s (I was in highschool) when gold made its crazy run up and he was feeling flush - he didnt ask me to pay back the money when he rode it all the way back down the year after.

So, the lesson here is make sure you manage expectations of all the stakeholders (usually, DW) when choosing the stock market roller coaster, which you have done.
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Old 07-09-2009, 02:02 PM   #77
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Well, that was not my dads way.... before he had a big family, he traded and lost... so he only went into CDs when they had money (most of my life, we had NO savings... zip, zero... it was only after all the kids left and my mom started to work did they start to save)....

My mom grew up during the depression... that is where she got formula....

There was a time she wanted to change... when my brother was making money like crazy during the dot com days... but I told her it is better to be diversified.... so she stuck with it and it has worked...

Also, she is a LBYM person that would make most people on this board look like spendthrifts... I try to get her to spend more, but she just does not care to do it.... no premium cable, heck, she just got cable because it comes with the condo she bought... she lives on her SS and a small pension... and a small amount from her investments...


My recommendation.... save at minimum 10% of your salary... preferrably 15% to 20%... starting from your first job... if you get into that habit, you can keep it... Invest in what you feel comfortable.... but do take some risks if you want to get a decent return over the long haul....

If someone young was planning on making it with CDs and private lending.... they would be sorry when it came time to retire... if they were doing that to fund their retirement, then it sounds like a good source of current income with not as big of downside as the stock market...
yes...I always carry around in the back of my mind my Dads story of him and granddad driving into Saskatoon to sell 20 jars of cream on the street to raise mortgage money in the 30s.

you really saved your mom (and your inheritance) with that dotcom redirection.

It seems with comcast converting to digital, the premium HD channels seem to be accessible even with basic condo cable, if you have a newer flatscreen - they just appear as mid channel channels (if you put the cable direct into the TV.)
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Old 07-09-2009, 02:10 PM   #78
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Count me and my gal in the risk adverse camp. Not really counting on CDs or savings rate interest to provide for us in our dotage either. Not when we can loan out money in the 10-12% range on properties that WE value at somewhere around double the amount we loan. Down side? when it comes time for the loan balloon to be paid off the borrower can't find other financing. In that case we can either keep taking payments (maybe upping the interest rate?) or foreclose. We're trying to back out of real estate, so getting another chunk of property may not be as attractive as getting our cash back, but it beats buying a market giant like GM or Enron or Rath Packing at the wrong moment.

A big advantage of stock is the ability to sell it for some price at almost any time. Loans or land are much more difficult to divest. Maybe that forces a certain deliberate nature to the transactions, which could be a good thing.

BTW, someone said something like "trust everyone or no-one, it all works out the same". Not real sure what that means, but unlike Kroeran i trust everyone means to do what they say and is not trying to cheat me. While i trust they mean what they say i don't count on them accomplishing what they say. Stuff happens.
yeah, my borrowers can't find new money even though i have asked them to pay out, and I am too much of a soft touch to foreclose or up the interest rate, which is why I am not good for pedal to the metal for that game.

and a couple very troubling lines of scripture regarding the eternal fate of unmerciful merchants - for those that are superstitious about such things

and there is the fact that my granddads lender let it ride for a couple of years when he couldnt make the payments on the farm mortgage in the 30s - so how can I lean on someone who is up to date on their payments?

There are worse things than 10% with 50% LTV.

I assume then that you take the borrowers word for it regarding the appraisal value of the property, taxable income, personal balance sheet, insurance, taxes paid up, liens ...; - )
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Old 07-09-2009, 02:29 PM   #79
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Stock market returns are a play on probabilities and past performance. To have a comfortable margin for error, I would think you would want to target 2* projected living expenses, which means you may have to be overcapitalized compared to what you would need under a fixed income plan.
I guess we have different views on how stocks create wealth.

I am buying an ownership interest in companies that provides me with a claim to all future dividends plus any liquidation value forever into the future. Over time, I expect my long term returns to roughly equal out to the amount by which the companies I own increase their earnings plus the dividend payments each year.

You are correct that in the short term, stock returns are largely matters of probability and probably driven more by large scale emotions rather than fundamentals. But over the long term (speaking in decades, not years or months), the fundamentals ultimately hold sway over stock valuations. I don't base my estimates of future performance on past performance, I base them on the expectation that companies will grow earnings over time and pay dividends over time. As earnings increase, the companies I own get more valuable.

Although backtesting based on the last hundred or so years of data does show that portfolios heavily invested in equities did tend to survive with much higher levels of success versus portfolios comprised primarily of fixed income investments. Historically (and probably today as well) fixed income investments with short-ish maturities and cash-like in nature have only produced returns around the level of inflation, plus maybe one percent. Before taxes that isn't great. If I were to earn inflation plus one percent for the next 40-50 years and try to withdraw 3.5-4% each year adjusted for inflation, I know I'll be broke before the end of the 40-50 years. Stocks, which have a reasonable expectation of producing returns in excess of inflation plus one percent, would at least provide a decent shot at sustaining portfolio withdrawals for 40-50 years. Stocks are not without risk, but at least it isn't guaranteed failure.

Those viewing fixed income investments as risk-free are really ignoring the risk of inflation eating the real value of their investments alive. You may not lose money in nominal terms, but in real terms you might lose real value every year as you consume your portfolio. Even risk-free investments have risk as paradoxical as that sounds.

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To correctly project your plan, you would have to walk your strategy forward through history, and see where you would end up using different windows of time, consider the worst case scenarios (which are predicted by the data) and adjust strategy/expectations.
This is exactly what FIREcalc does. Basically says more equities = better survival up to a certian point.
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Old 07-09-2009, 02:29 PM   #80
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Originally Posted by Kroeran View Post
I don't really understand why one would purchase a note or bond when you can a get 4-5% CD FDIC/CDIC insured, unless you are playing with a lot of zeros. I think going rate (best at CD brokers) up here is still 4%.
Well, FIRECALC does not have a CD option that I see, so I went with the fixed they had. If you have something that relates historic CD returns with those other options, there are ways to "game" FIRECALC to simulate other things.

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The thing about fixed income is that you can have a plan and know where you will be, with a very high degree of certainty.
Maybe with TIPS. Else, how do you know that your CD returns will beat inflation by a wide enough margin to provide real income? I was not aware that inflation could be predicted with a high degree of certainty.


Quote:
To correctly project your plan, you would have to walk your strategy forward through history, and see where you would end up using different windows of time, consider the worst case scenarios (which are predicted by the data) and adjust strategy/expectations.
That is exactly what FIRECALC does. So I have done that, and I have built in buffers (working isn't one of them - if I do that I'm not retired). One reason that I plan on keeping some % of assets in equities is so that I don't need such a big buffer, equities should be better at keeping up with inflation than fixed income options.

So tell me, how you have done this back-test with your investments?

-ERD50
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