Which Would You Prefer?

[wabmester]

Quote:

Originally Posted by Sam Still better than the 4% CD.

Fine. If you're going to make the market go up 20% in year 5, then I bought a 7% 5-year CD.

[audreyh1]

Quote:

Originally Posted by Sam Still better than the 4% CD.

Yep!

[Nords]

Quote:

Originally Posted by HaHa but even a middling bad year hurts.

If -20% is "middling bad" then I'd hate to see your definition of "painful".

Even in 2002 when one of our mutual funds was whomped -17% and two others were down 12%-14% (annualized, of course!), we still managed to limit the total damage to -2%.

So the example demonstrates that undiversified volatility can reduce overall returns...

[Toejam]

Quote:

Originally Posted by Nords If -20% is "middling bad" then I'd hate to see your definition of "painful". Even in 2002 when one of our mutual funds was whomped -17% and two others were down 12%-14% (annualized, of course!), we still managed to limit the total damage to -2%. So the example demonstrates that undiversified volatility can reduce overall returns...

This is exactly what I was thinking, Nords. I prefer Plan A with the equities and plan to hold for the very long term as Rich_in_Tampa mentioned. I got clobbered really bad in 2000 because I had too much stuff in tech. After that experience, I made sure to diversify across sectors, size (small vs. large cap), and countries (international). I may be crying into my handkerchief 1, 3 or 5 years from now. But hopefully, it will pay off 15 or 20 years down the road. I'm willing to take the risk. In the meantime, I can happily live off my pension and rental income while the equity portion hopefully grows through individual stock appreciation (tax free until sold), through stock dividends, and through mutual fund/ETF dividends & cap. gains that are reinvested. I realize some may not have a pension or other sources of income to rely on after retirement, so it is understandable that the more steady and less volatile Plan B might be preferable.

[Cut-Throat]

Quote:

Originally Posted by Toejam But hopefully, it will pay off 15 or 20 years down the road. I'm willing to take the risk. In the meantime, I can happily live off my pension and rental income while the equity portion hopefully grows through individual stock appreciation (tax free until sold), through stock dividends, and through mutual fund/ETF dividends & cap. gains that are reinvested.

Your heirs will Love you!

[teejayevans]

Quote:

Originally Posted by Cut-Throat Your heirs will Love you!

Which brings up a serious question, how many people today are counting on their
parents dying to provide them with their retirement income.
Tom

[Empty Pockets]

My plan takes into accout $0 from any outside sources, including potential inheritance and social security.

[cute fuzzy bunny]

Pretty much the same here. Although there are pensions, social security, and a probable inheritance from my dad. I figure the unexpected bad stuff readily available from other places will offset those if they even materialize.

[perinova]

Not accounting for taxes Plan C 40%-stock rebalance-yearly provides 17.94%

[Nords]

Quote:

Originally Posted by teejayevans Which brings up a serious question, how many people today are counting on their parents dying to provide them with their retirement income. Tom

I'm counting on our parents dying before we have to provide them with our retirement income...

That inheritance plan may not always work out in time. When the previous world's oldest woman died at the age of 114, her daughter was reportedly 80 years old.

[audreyh1]

Quote:

Originally Posted by Nords I'm counting on our parents dying before we have to provide them with our retirement income... That inheritance plan may not always work out in time. When the previous world's oldest woman died at the age of 114, her daughter was reportedly 80 years old.

We're already using our retirement income to help parents out!

I have a feeling quite a few folks on this board are much better off financially than their parents. So perhaps fewer are "counting" on that inheritance than Tom might think.

Audrey

[youbet]

Quote:

Originally Posted by teejayevans Which brings up a serious question, how many people today are counting on their parents dying to provide them with their retirement income. Tom

Unless you are in an extreme circumstance which almost guarantees a significant inheritance, "counting" on mom and dad's estate to bail out your retirement is a tad risky!

We received a small inheritance when my dad died, a relatively inconsequential amount. But now we're spending money helping DW's mom survive on her $12K annual SS income.

I agree with Audrey. I doubt many on this board "count" on inheritance dollars for retirement funding. But most on this board would manage an inheritance wisely should they receive one.

[TromboneAl]

If you held 60% in the equity portion, and 40% in a guaranteed 4% investment, and rebalanced, your return would be better than either of the above options: 17.75%

Perhaps someone can check my calculations:

[haha]

My purpose was not so much to find the best back-tested method of getting rich- only to illustrate the difference between arithmetic averages and geometric.

Ha

[wabmester]

I love how many people reinforced their belief in rebalancing with this one. For them, I'll provide an alternative to rebalancing annually.

If you start with 100% stocks, and then switch to 100% CDs after three years, your return would have been 50.6%!

So, CFB's market timing algorithm is superior to rebalancing. (At least with a priori knowledge.)

[Nords]

Quote:

Originally Posted by wab (At least with a priori knowledge.)

What time today do they publish tomorrow's edition?

[cute fuzzy bunny]

Well lets see...the last time (and one of the few times) we've had a run-up of the S&P500 like the three year period Ha is proposing, it was the last 3 years of the 90's. Even the 3 last good years comes nowhere near those figures.

I bailed out then, I'd do it again. I'm getting itchy right now in fact.

I'm not much of a market timer, but I think there are times when you have to respond to market stupidity at both ends. 40% in three years is market stupidity.

[wabmester]

Quote:

Originally Posted by Cute Fuzzy Bunny 40% in three years is market stupidity.

Dude, 40% over 3 years is 12%/year. Is there a stock class that hasn't done that over the last 3 years?

FWIW, I do agree that it's a bad sign. Whenever stocks grow faster than the economy, they eventually come back down. Same with real estate growing faster than wages. Commodity prices growing faster than demand. Etc. It's been an interesting few years, eh?

[cute fuzzy bunny]

Quote:

Originally Posted by wab Dude, 40% over 3 years is 12%/year. Is there a stock class that hasn't done that over the last 3 years?

Hmmm...the s&p 500's last three years are: 15.64% 4.77% and 10.74%.

So yes!

2003 before THAT was a whopper, but it WAS coming from a fairly deep low at the bottom of a mini-bear.

Granted stuff like reits, emerging markets and energy have done a lot better than that, but I dumped those already. Stuff with price charts that look like launch trails make me invoke the "stupid!" rule. While I might be 'selling too soon', I do get to keep the upside and not have to ride the other side of the stupid coaster.

[chinaco]

The CD vs Equity comparison sems to be on opposite ends of the investment spectrum (excluding short sells, options, derivatives, things that are hedges).

It seems to me that type of choice would depend on whether or not I was in a wealth accumulation stage or retired plus the time horizon.

If I need to grow my wealth and have 25 years to do so, equity investments are only realistic option. On the other hand, if I am retired and in my mid 70s and have a small to medium nest egg, I might choose CDs.