Long Term Real Returns Favor Stocks

[aim-high]

Jeremy Siegel, author of “Stocks for the Long Run“, had an article in the latest issue of the “AAII Journal” (American Association of Individual Investors) entitled “Real Returns Favor Holding Stocks.” The full article is a benefit available for members only, but perhaps the best part of the article was a chart showing the risk/return trade-offs (efficient frontiers) for stocks and bonds over various holding periods (1980-2012):

Marotta highlights important points from two of the graphs from in the article.

http://www.marottaonmoney.com/real-returns-favor-holding-stocks/

 

[2B]

Long term real returns may favor stocks but imagine retiring in 1929 with 100% equities. How comfortable would you feel in 1932 when almost 90% of your assets have disappeared. Go back just to 2008 and we had a 50% drop. Yes, the market recovered but it took several years while deminished assets were being spent to live on. The purpose of fixed income is to let you sleep at night and not let a severe market downturn destroy your retirement plan.

I just got my Vanguard financial plan that is my last validation step before pulling the plug. I'm currently 40% in equities and their recommendation is to increase this to 60%. Doing this would increase my calculated spending by about 10-15% (on paper anyway) but at 40% equities I can spend (again on paper) more than my current taxable income is now. I'm not spending all of that now. Despite the current poor fixed income interest rates I have created a stronger safety net in the event of another 1929.

 

[eta2020]

The larger portfolio you have easier it is to be 100% stocks. IMO at cutoff 3 million you can be 100% stocks and sleep without big worries.

Such portfolio should generate 60k-70k of dividend yield which if qualified is taxed at 0% by Uncle Sam. Lot of research indicates that happiness does not grow after income of 75k (As far as income goes).

If you can live on 60k-70k you can care less where market goes next year. That includes 2008-2009 scenario.

But even in above case having 2-3 years of cash is advisable thing to do.


It is hard to be 100% with lets say 700k portfolio since one has to be selling positions.......

 

[RonBoyd]

Go back just to 2008 and we had a 50% drop. Yes, the market recovered but it took several years while deminished assets were being spent to live on.

However, a 50% loss would only occur if one sold the entire portfolio at the very bottom in 2008. The funds extracted to "live on" would, of course, lose 50% or less -- on a sliding scale -- over that 2-year period. Therefore, a million dollar portfolio (as example) with a 4% withdrawal rate would have lost perhaps $40k... a long way from your implied $500,000.

So the question is: Which would recover the $40,000 faster, stocks or bonds?

 

[aim-high]

However, a 50% loss would only occur if one sold the entire portfolio at the very bottom in 2008. The funds extracted to "live on" would, of course, lose 50% or less -- on a sliding scale -- over that 2-year period. Therefore, a million dollar portfolio (as example) with a 4% withdrawal rate would have lost perhaps $40k... a long way from your implied $500,000.

So the question is: Which would recover the $40,000 faster, stocks or bonds?

Add to that, that the article isn't advocating for 100% stocks. What would a 68% allocation rebalanced annually have done form 1928 with a 4% WR done?

 

[jerome len]

The real question is how well you sleep and night and how can you almost guarantee enough income without worrying without the purchase of an annuity. For that reason, and my net worth is substantial, I have over half of my money in muni bonds, laddered, and far less than half of my money in stocks. I sleep good since I can live off of SS, muni bond interest and dividends. Dividend stocks will increase dividends most years, SS will go up with inflation and the only question is how much I leave the next generation.....and, there will be money left. So, my opinion is that if you have over 3 million, you can choose to invest conservitely....yes, the financial planners will tell me I'm leaving money on the table.....my answer is "so what" ......all it means is less inheritance for others.

 

[Totoro]

Nice chart! The conclusion however isn't necessarily that you should go stocks in the long run. We don't get to play averages, we just play once.

And of course, statistics means you can still drown in a pool with average depth of 5 cm.

Not that I don't plan for stocks in the long run, I do. I'd also sign immediately if someone could garantuee me >5% real returns as the chart is implying for 100% stock.

Somehow doubt anyone credible will offer me that deal

 

[yakers]

Good idea to have a balance of stocks & bonds I like the quote that the market can remain irrational longer than you can stay solvent and.... in the long run we're dead.

 

[Car-Guy]

my net worth is substantial, So, my opinion is that if you have over 3 million, you can choose to invest conservitely....yes, the financial planners will tell me I'm leaving money on the table.....my answer is "so what" ......all it means is less inheritance for others.

Trust me, you are not the only one on this board that feels that way!