I would give it up for a fixed rate of..........

[haha]

I think Nords got it: so many outside factors can act on a fixed return over that long a period that flexible strategies seem less risky even at a slightly lower net return.

I might look hard at TIPs that paid 8% plus core inflation, though.

Now, that isn't asking much, is it?

Ha

 

[samclem]

Per Audrey's point: Something would have to motivate an issuer to offer 8+ % on fixed rate securities. Possible motivators:
-- Risk of default is high, and investors want to be highly compensated. Is this they type of investment in which those yearning for early retirement will likely want to invest a large portion of their nest egg?
-- Existence/risk of high inflation: If inflation is already at 10%, would many people invest in an 8% fixed security? No--better to buy material goods, commodities, etc. Sure, whatever caused the high inflation is likely to abate, but who can say when, and who can say the same root causes won't accelerate the inflation for years to come? Yes, if I saw 12% CDs or treasuries, I'd be tempted to invest a modest portion of my nest egg and hope for a reversion to the mean in inflation. But it wouldn't be a large chunk--history is full of economies that don't get healthy for decades.

 

[Nords]

Good answers but there must be some rate that would flip that switch. None at all?

Per Audrey's point: Something would have to motivate an issuer to offer 8+ % on fixed rate securities.

Nope. I'd rather trust in the stupidity of large groups of uninformed & emotional investors in a capitalistic society than depend on large groups of uninformed govt bureaucrats setting arbitrarily high rates just to clear the auction.

I already have my military pension and my putative SS benefits indexed to inflation. I don't think it'd be very smart to give the govt the responsibility for paying me the rest of my money. Sure, they can run the Treasury's presses at full speed... but as that would implode the dollar, wouldn't that cause international investments to be worth more than U.S. debt?

As for the "govt securities at xx% above inflation" crowd-- are you the same people who are arguing that the CPI does not reflect reality and is used to punish both consumers & SS recipients?

P.S. I believe it is Bernstein (among some others) who says the return one should reasonably expect from bonds is 6% and 6.5% in stocks over the next 10 years or so. How can that be reconciled with not being willing to take a 6% pretty sure thing?

Like I said, most of my income is already annuitized and there's no reason to "settle" for a "pretty sure thing". I can take risks with the remainder of the portfolio, knowing that if I'm horribly wrong then I can cut spending or (*clench*) get a job. If the govt annuities collapse, well, I'll have bigger problems than worrying about pension checks.

I'm a fan of Bernstein but I'm no apostle. Bernstein may also have been talking about total market returns, too, which leaves out niches like international & small-cap value assets. And let's not forget that while he does a great job of explaining asset allocation, a decade ago he was also substantially outperformed by a momentum investor and has yet to adequately address the debacle.

 

[Dawg52]

I would be hard pressed to pass on a 7% cd for 10+ years. I jumped all over Pen Fed's 6.25% rate a year ago, why not 7% for a few years longer? I wouldn't have all my money in it, but a good chunk.

 

[REWahoo]

I know a few folks who "pine" for the high CD rate days of the early 1980's. There were banks around here offering 13% CD's for 10 years, some even higher on shorter CD's

Of course, unemployment was around 9%, gas prices were high for the time, a 16-17% mortgage rate was normal, and car loans were 18-22%, but HEY, I'm getting DOUBLE digits on my CD's!!!

My dad loved to talk about his 3 year CD's paying 17% back in "the good old days"...

 

[FinanceDude]

My dad loved to talk about his 3 year CD's paying 17% back in "the good old days"...

My dad still talks about it...........and THAT'S funny from a guy that thought the world was coming to an end when gas was 45 cents a gallon.........

 

[Bigritchie]

I would take 7% the rest of my life with no problem.

i save a good chunk of my monthly income from CD's and reinvest already, so it would just be more cash.

I think it depends on ones assets and situation also, but for me that would provide a nice standard of living, while allowing me to save retirement income every month (my way of fighting inflation).

Frankly if Inflation ever really hits, or hyperinflation I should say, we are all screwed anyway.

 

[RockOn]

10%.

All my calculations are based on a "pessimistic" return of 8%, and an "optimistic" return of 10%. So if I could get a guarantee of my optimistic rate, I know I'd be on easy street, and I'd take it in a heartbeat.

10% is an answer I would have expected. Above that? I see there are some bulls on this board. Nothing wrong with that but I'm surprised at those looking for a higher return than 10%. I'd grab 8% for sure, probably 7%, maybe even 6.5%. I'd deal with inflation, I know it is rising now and could get out of control for a period, but locking in for a long time would smooth that out. Same for the weak dollar.

I read a few books and articles lately based upon recommendations from the forum, Bernstein, Swedroe, Clyatt, Ferri and Bogle. I don't remember exactly who said what but there was pretty much agreement that that returns on stocks and bonds will not be as high in the coming years for various reasons.

A theory I have is we'll not see 12-14% on Treauries again in our lifetimes, probably not even 8 or 9%. The boomer bubble is all looking for income and there is huge demand for fixed income if a good long term rate should appear.

 

[DblDoc]

Well the fed is stuck in a bind now. Lower rates and watch inflation and the dollar roar out of control.

Here is a good summary by Professor Roubini of the mess we are in:

That is a scary document to read. 1-2 trillion dollar loss just in mortgages...

DD

 

[free4now]

I think I'd take something around 9-10%. It'd have to be close to what the stock market returns, but I'd take a little less because a truly fixed rate eliminates most sources of risk other than inflation. But whether I would trust any entity (other than the Gov) to guarantee anything for that long is up for debate.

 

[2soon2tell]

Without knowing future inflation and tax rates locking in any fixed rate would be risky business. I might be tempted at 12% for half my portfolio. I always want a backup plan so half is all I would commit.

2soon

 

[unclemick]

Hmmm - after two yrs out - took a temp job for jobshopper $ at the old rocket plant. The guy who hired me made three mistakes:

1. By then I figured out that my balanced index funds and my reduced expenses had me set for ER - which I explained to him.

2. Turns out he had a very huge chunk of early 80's 30 yr Treasuries in the 12-14% range and enough years in for a nice pension.

3. After I finished my temp stint - within a few months - he took 55 and out. I went to his retirement dinner.

heh heh heh - I'm just a bad influence. Myself - I'll stick with ying and yang - balanced index. I didn't overload Treasuries in 1982 nor would I now at some X rate. Would I buy 'some extra' if yield got tempting yes - bet the farm? - er ah no.

 

[free4now]

For those who need more than the stock market's historical 10-11%, why? That return has historically been more than enough to cover inflation and still return 4% minimum. At 11% fixed you could still get 4% even if inflation were 7% for all 30 years. Periods of inflation higher than 7% have always historically been much shorter than 30 years, so you would have to be preparing for some much worse than historical inflation to require more than 11%.

 

[Marquette]

My spreadsheet calls for a long-term return of CPI-P + 3%.

No Art, sorry, I don't trust the solvency of any insurer to back a contract for my time horizon. Maybe my view is poisoned from being on the inside, but it'd feel too much like putting all of my eggs in one basket.

 

[Nords]

No Art, sorry, I don't trust the solvency of any insurer to back a contract for my time horizon. Maybe my view is poisoned from being on the inside, but it'd feel too much like putting all of my eggs in one basket.

They lose a little on each client, but they make it up on volume!

 

[CyclingInvestor]

For those who need more than the stock market's historical 10-11%, why? That return has historically been more than enough to cover inflation and still return 4% minimum. At 11% fixed you could still get 4% even if inflation were 7% for all 30 years. Periods of inflation higher than 7% have always historically been much shorter than 30 years, so you would have to be preparing for some much worse than historical inflation to require more than 11%.

I felt I needed more (15% to 18%) because I expect to earn that return in the market. I do not
need to - I live on my dividends, so all I need is for the dividends of my stocks to be raised as
fast as the inflation rate to maintain my standard of living, and I could live on half that easily enough.

But I enjoy analyzing and investing. I try to increase the 'intrinsic' value of my portfolio (based on my
opinion of the value of the future dividends of each company) by trading the stocks I own that become
relatively overvalued for stocks I track but do not own that are relatively undervalued. I have
gained a pretty steady 13 - 18% each year of intrinsic value for the last 14 years, which translates
into -7% to +47% of market value (average 17+ %).

I realize I could just be lucky, but this strategy allows me to sleep at night, while maintaining a 100%
equity position of top quality stocks with long histories of rising earnings and dividends, and keeping
me intellectually active to boot. If I fail, I doubt my 0.1% expense ratio will kill me.

 

[W2R]

For those who need more than the stock market's historical 10-11%, why? That return has historically been more than enough to cover inflation and still return 4% minimum. At 11% fixed you could still get 4% even if inflation were 7% for all 30 years. Periods of inflation higher than 7% have always historically been much shorter than 30 years, so you would have to be preparing for some much worse than historical inflation to require more than 11%.

Future inflation rates are not guaranteed to match historical inflation rates.

Similarly, housing was expected to always increase and never decrease, based on historical information. Remember just five years ago, when people would say that it was an impossibility for housing to ever decrease, short of total economic collapse? Their justification was that it couldn't because "they aren't making any more of it [land]", and because history had taught us as much.

It seems to me that there is a fair chance (if not a likelihood) that we will experience inflation exceeding historical levels during my lifetime. With half my money stuck at a fixed interest rate, it had better be high. It wouldn't have to be so high if it was a smaller portion of my nestegg, that I could more easily afford to lose, or if it was COLA'd.

It has been a very long time since we have had a period of high inflation and high interest rates, but I remember what it was like (pretty ugly! ).

 

[ziggy29]

I'd say a fixed 5% over inflation might do it for me.

 

[Shabber2]

Maybe the question should be: With your current investment portfolio and strategy, what is your expected return?

 

[calmloki]

Regarding fixed income, here's another option: http://www.early-retirement.org/forums/f28/funding-private-loans-30900.html

We are going in this morning to pick up a payoff check on one of the loans we funded, and will be hunting for another. I like that they are secured by property, have a 5 year payoff, and that we can go out and look at the physical investment. Last loan we did i put an early payoff penalty in to prevent it paying off in less than a year - we funded the loan that is paying off today back on 10-06.

 

[Hillbilly]

7.25% for me, I'm all in. And man that Vanguard high yield (junk) bond fund (yield ~8.5%) is starting to look good. Sorry, bit off topic.

 

[Texas Proud]

You guys all crack me up.........

I just started to read this thread.... and must agree with FD...

Wanting 16% guaranteed!!! Heck, you are probably not even close to that now with all the risks you are taking.....

Some of you need to take a reality pill or something...

 

[ziggy29]

7.25% for me, I'm all in. And man that Vanguard high yield (junk) bond fund (yield ~8.5%) is starting to look good. Sorry, bit off topic.

Junk bonds tend to suffer early in economic downturns. But man, junk bond funds can be a rocketship once the market perceives the recovery is beginning, as they are economically sensitive to economic conditions like stocks, not so much interest rate movements like bonds.

 

[RockOn]

Future inflation rates are not guaranteed to match historical inflation rates. It has been a very long time since we have had a period of high inflation and high interest rates, but I remember what it was like (pretty ugly! ).

Yes, I remember the late 70's too. The other side of it is that it created a once in a lifetime buy in fixed income. Rates have dropped for 28 years since and bonds have rallied. The inflation didn't really last that long. In '74 nixon panicked with wage price controls as inflation was running about 4%, in '80 inflation peaked. I'm not sure a inflation surge would be that ugly for some retirees, our costs go up but for those of us with assets, our fixed income goes up too. I'd like to lock in some 10% yields, selfish I suppose. These 3% fixed rates and low stock returns are pretty devasting to my spreadsheet. Sometimes it's not what it seems.

 

[ziggy29]

Yes, I remember the late 70's too. The other side of it is that it created a once in a lifetime buy in fixed income. Rates have dropped for 28 years since and bonds have rallied. The inflation didn't really last that long. In '74 nixon panicked with wage price controls as inflation was running about 4%, in '80 inflation peaked. I'm not sure a inflation surge would be that ugly for some retirees, our costs go up but for those of us with assets, our fixed income goes up too. I'd like to lock in some 10% yields, selfish I suppose. These 3% fixed rates and low stock returns are pretty devasting to my spreadsheet. Sometimes it's not what it seems.

True, that. The thing is, so many people felt inflation was uncontrollable, and doom and gloom was rampant. So even while we might consider a 30-year Treasury yielding 12% to 15% as the choicest "sure thing" ever, there was enough angst at the time that people weren't jumping all over them.

Can you imagine buying long-term zero coupon bonds in 1981? Wow.

The closest thing I ever got to a "safe" fat pitch was the I bonds I purchased when they were paying 3.4% over inflation in 2000. I just wish I had more money to max out on them at the time.