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Old 08-16-2011, 09:18 AM   #61
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Originally Posted by clifp View Post
Of course this begs the question of where do you put the money now, since the bond market isn't favorable, and cash pays absolutely nothing. I guess CD's despite the pathetic rates unless you are willing to up your AA.
I earn 1% on cash and can still get 2.25% in CDs. Nothing great, but risk to my principal is zero with these. The 30-yr TIPS I sold promise 0.86% real and carry considerable risk to my principal. In fact, held to maturity, I'm guaranteed a 29% depreciation in price.

Let's say I'm targeting 2% real (just for laughs) on my original $1,000 investment, and let's assume that inflation comes in at current market expectations. For simplicity we'll assume that I'll be able to reinvest at 2.25% nominal forever. Lots of assumptions, I know, but my downside risk to each of these assumptions is pretty small. If rates rise, I can break my CD at minimal cost. If my reinvestment rate is lower, inflation is probably lower too, which makes my primary goal of not outliving my money easier to achieve.

With these assumptions in palce, I can sell the $1,410 TIPS I own, plunk that money in CDs, and basically draw 2% real for 21 years before my principal drops below the inflation adjusted value of my original investment ($1,000). Said another way, I can hit my target rate, with minimal risk, for 21 years while I wait for interest rates to rise again. (If rates fall to zero after my CD matures, I still have another 6 years - 11 in total - before I start consuming my original investment. If inflation spikes, interest rates will too, and I'll be out of my CDs.)

Considering my view that negative real rates are not something that can be sustained in the long-term, I'm pretty confident that I'll have far better reinvestment opportunitites at some point over the next decade or two. That's my 'gamble' anyway.

Edit to Add: The above, of course, assumes only one investment alternative: CDs. Currently I'm earning >4% real on a professionally manged rental property. There are larger, and different, risks to investing here. But the spread is large, it's a currently unloved asset class, and is one possible alternative that more than meets my return objectives.
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Old 08-16-2011, 10:47 AM   #62
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Here is a 3 minute audio interview with Jack Bogle. He discusses the stock/bond ideas some of us have talked about here: Bogle: Stocks Poised to Outperform

Seems to prefer stocks.
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Old 08-16-2011, 10:50 AM   #63
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We continue to make loans on property. Banks are all sticky and risk averse about making loans, which makes for a bunch of people with the desire for cash, the tangible assets - land, buildings - to put on the line as security, and the willingness to pay 10%+. When you get an investor who makes his best deal on a short sale or at an auction, borrows 80% of the auction price from us, keeping 20% skin in the game, and pays 10%+ on our short term loan it is an attractive investment.

Stocks and bonds and rentals are not the only way to get a little money coming in. There is the risk that you end up with a piece of property at a bargain price instead of your money back - on the other hand, GM. Enron. What did the stockholders end up with when those big boys went kerblooey? Not selling, just saying...
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Old 08-16-2011, 10:57 AM   #64
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Just listened to the interview with John Bogle. More sense in 3 minutes of Bogle's comments than hours of reading the financial press. Like many of us, I owe a successful retirement to Mr. Bogle and his low-cost ideas.
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Old 08-16-2011, 11:04 AM   #65
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Calmloki, this sounds like you have a good deal going. Of course, an 80% loan on a property that has lost 30+% of its value (like many in my area have) is not something anybody wants to be stuck with. Still, if one picks the properties correctly.....

I lost very little on GM and Enron because I don't buy individual stocks. Index funds protect me from individual stock risk.
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Old 08-16-2011, 02:43 PM   #66
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There are several interviews with Bogle at this site: Bogle: Stocks Poised to Outperform

They are well worth listening to, assuming one is not looking for a quick fix, instant answer, and thinks the market is easy to figure out.
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