ugh almost ready to give in to panic

[samclem]

Talk of SPIAs, dumping it all into CDs--dang, everyone is running for the doors. Anyone remember when inflation was 10% in the US? And, that's mild by worldwide standards--rates much higher than that can happen here, and a lengthy stretch if inflation is a likely occurrance if you've got a 30-40 year investment horizon. I would not like to have all my $$ tied up at a fixed rate in such an environment.

Pick you asset mix, rebalance when needed, take deep breaths. Repeat the mantra: "I will not sell at the bottom, I will stay true to my allocation"

 

[RockOn]

Talk of SPIAs, dumping it all into CDs--dang, everyone is running for the doors. Anyone remember when inflation was 10% in the US? And, that's mild by worldwide standards--rates much higher than that can happen here, and a lengthy stretch if inflation is a likely occurrance if you've got a 30-40 year investment horizon. I would not like to have all my $$ tied up at a fixed rate in such an environment.

Pick you asset mix, rebalance when needed, take deep breaths. Repeat the mantra: "I will not sell at the bottom, I will stay true to my allocation"

Inflation wasn't really 10% in the 70's, at least that's what I hear most saying. The BLS didn't know what they were doing back then. That seems to be consensus thinking. I have yet to read a serious article disputing the numbers John Williams is reporting on that fact.

I'm not against your mantra, it's just not my risk tolerance.

 

[Dawg52]

I hate to do this to you, but we think very similar.

I hate to do this to you, but most on here probably think I'm a nut.

 

[DblDoc]

I hate to do this to you, but we think very similar. I'd like to see more discussions about how to get a pretty safe and fairly steady 5 or 6 or 7%. Investing in overpriced (as I see it) risky assets doesn't do it for me. I suspect there are more than the two of us out here.

I don't really like the whole concept of an insurance annuity but it is one of the only ways I currently see to get close to meeting the goal of a pretty safe and steady 5 or 6%. I'm not really ready to pull the plug on one, but I might in a few years.

Given that risk and reward are tighly bound to one another where do you anticipate finding such an investment?

DD

 

[samclem]

Here are some data from almost a half century of inflation figures from a few other industrialized countries. Maybe their respective inflation stats are off, too.

Inflation happens periodically. I wouldn't want to have a 5% SPIA when we have a bout like the UK had from 1972 - 1982. Locked in at annual real losses of 5-15% for a decade. Nope, I wouldn't be sleeping well.

In which one of those countries would a 5% CD or SPIA have been a good deal?

Uncertainty and volatility comes from many more places than the stock market.

 

[Dawg52]

Here are some data from almost a half century of inflation figures from a few other industrialized countries. Maybe their respective inflation stats are off, too.

Inflation happens periodically. I wouldn't want to have a 5% SPIA when we have a bout like the UK had from 1972 - 1982. Locked in at annual real losses of 5-15% for a decade. Nope, I wouldn't be sleeping well.

In which one of those countries would a 5% CD or SPIA have been a good deal?

Uncertainty and volatility comes from many more places than the stock market.

Well during the late 70's and early 80's CD rates were double digits. Can't say what they were in the 50's and 60's. Also wasn't the stock market basically flat from the late 60's to the early 80's? Doesn't look like stocks were that good of a hedge against inflation during that time frame.

 

[RockOn]

Given that risk and reward are tighly bound to one another where do you anticipate finding such an investment?

DD

I gave you one idea, a SPIA, that is pretty simple. 2B has mentioned preferred stocks. There are many more places to look for 5, 6, or 7% with less risk and less potential upside than a 60/40 portfolio.

Maybe covered call options funds, some lower risk hedge funds, valuation based timing funds like the the Hussman Funds, high yield bond funds (if bought when undervalued), REITS, MLP's .......

Not to say they all are good ideas, but some of these ideas work for people looking for less risk.

 

[RockOn]

Here are some data from almost a half century of inflation figures from a few other industrialized countries. Maybe their respective inflation stats are off, too.

Inflation happens periodically. I wouldn't want to have a 5% SPIA when we have a bout like the UK had from 1972 - 1982. Locked in at annual real losses of 5-15% for a decade. Nope, I wouldn't be sleeping well.

In which one of those countries would a 5% CD or SPIA have been a good deal?

Uncertainty and volatility comes from many more places than the stock market.

There are plenty of discussions about the validity of inflation numbers. I think we should just accept that the average inflation number of around 3% a year for the last 100 years is valid, just like many want to accept that a 10.2% average return is expected from stocks based on the last 100 years. At 3% inflation a SPIA still looks pretty good.

IMHO at least when betting on inflation staying at 3% one is not taking on as much risk as betting that (overvalued) stocks selling at PE's of 23 will not lose possibly 40% and revert to the mean sometime in the next 10 years.

 

[haha]

IMHO at least when betting on inflation staying at 3% one is not taking on as much risk as betting that stocks selling at PE's of 23 will not lose around 40% and revert to the mean sometime in the next 10 years.

You don't have to take either risk, since inflation adjusted SPIAs do exist.

Ha

 

[huskerblue]

SPIA's spook me due to having so much money tied up in one insurance company basket. My perspective is skewed by my entering the financial business world right after Executive Life imploded and it was A+ rated right up to the day it closed it's doors.A diversified portfolio remains your best bet to solid returns. That said, this market feels a little different from other squishy markets I have experienced.

 

[RockOn]

You don't have to take either risk, since inflation adjusted SPIAs do exist.

Ha

Good point, many seem to forget that. I would buy some inflation protection or hold some money back to buy another to increase my income as I age, if I made the leap to a SPIA.

 

[unclemick]

Whowser! No wonder the Brit engineers I worked with in the 70's and 80's were talking annuities - SWISS of course.

heh heh heh - provincial American me - that's about the time I started DCA via 401k into the then new 500 Index.

Ya gotta have faith baby. I don't think I even noticed the 'Stocks Are Dead' article back then.

heh heh heh - So far my non cola pension, SS and dividends on my small amount of Norwegian widow stocks are sufficient for a 'hard times' cash flow. With time and inflation never say never on annuities - but not now or yet even.

 

[RockOn]

SPIA's spook me due to having so much money tied up in one insurance company basket. My perspective is skewed by my entering the financial business world right after Executive Life imploded and it was A+ rated right up to the day it closed it's doors.A diversified portfolio remains your best bet to solid returns. That said, this market feels a little different from other squishy markets I have experienced.

I don't really want to be sounding like I am pushing annuities, because it is only one of many options and I could care less about insurance companies or their products..... but even in the drastic Executive Life case, every annuity was made whole from what others have said, unlike Enron stock holders.

 

[samclem]

Well during the late 70's and early 80's CD rates were double digits. Can't say what they were in the 50's and 60's. Also wasn't the stock market basically flat from the late 60's to the early 80's? Doesn't look like stocks were that good of a hedge against inflation during that time frame.

True-though if you'd locked into a fixed annuity in 1965 there would have been no opportunity to get those higher rates. At least as far as I can tell, there's no single vehicle (including giving all of one's money to an insurance company) that protects against all eventualities. I've got a long time horizon, and I feel a lot safer with a mix of assets and no dependency on one industry, one national economy, and especially not a single company.

 

[DblDoc]

I gave you one idea, a SPIA, that is pretty simple. 2B has mentioned preferred stocks. There are many more places to look for 5, 6, or 7% with less risk and less potential upside than a 60/40 portfolio.

Maybe covered call options funds, some lower risk hedge funds, valuation based timing funds like the the Hussman Funds, high yield bond funds (if bought when undervalued), REITS, MLP's .......

Not to say they all are good ideas, but some of these ideas work for people looking for less risk.

If any of these were to provide "value" in terms of risk:reward why wouldn't all the smart money flow into them? I would grant you that some will provide a hedge against certain risks but over the long haul I will place my faith in a diversified portfolio of index MF's and gov't bonds (including TIPS) as the most likely path to a successful retirement.

DD

 

[RockOn]

If any of these were to provide "value" in terms of risk:reward why wouldn't all the smart money flow into them? I would grant you that some will provide a hedge against certain risks but over the long haul I will place my faith in a diversified portfolio of index MF's and gov't bonds (including TIPS) as the most likely path to a successful retirement.

DD

You might be right, we just do not know for sure. If you are wrong, would you be ok?

In a diversified portfolio the expected 10year returns might have a range of 14% to -4% (just using the numbers as an illustration). In a lower risk idea the returns might be from 8% to 2%. I would be ok with a 2% return. Would you be ok with a 0% or -4% return for 10 years? IMHO that is how we see this differently.

 

[innova]

If any of these were to provide "value" in terms of risk:reward why wouldn't all the smart money flow into them?

Good point. The fact that the smart money does not is an indication that the risk:reward is tilted in favor of the insurer, not the holder of the annuity.

In a diversified portfolio the expected 10year returns might have a range of 14% to -4% (just using the numbers as an illustration). In a lower risk idea the returns might be from 8% to 2%. I would be ok with a 2% return. Would you be ok with a 0% or -4% return for 10 years?

Your argument falls down in the context of investing for retirement.

I am ok with 10 year returns being flat or negative, because I am not retiring in 10 years. Without volatility and losses, equities would not return more than bonds, and bonds over cash, and so on. In other words, down years or even decades are necessary - or else markets would not reward for risk and people would not invest in stocks at all.

If I were retired, I might have a 50:50 asset allocation between stocks and bonds, and the odds of suffering negative years would be much less. So much less that offering me a guaranteed 2% is laughable. How do you think the insurance companies can guarantee 2%?? It is because they are all but certain to outearn that in the market. Why not cut out the fee-sucking middleman who is prone to possible (eventual?) catastrophic failure and trust instead in capitalism?

 

[RockOn]

Good point. The fact that the smart money does not is an indication that the risk:reward is tilted in favor of the insurer, not the holder of the annuity.

Your argument falls down in the context of investing for retirement.

I am ok with 10 year returns being flat or negative, because I am not retiring in 10 years. Without volatility and losses, equities would not return more than bonds, and bonds over cash, and so on. In other words, down years or even decades are necessary - or else markets would not reward for risk and people would not invest in stocks at all.

If I were retired, I might have a 50:50 asset allocation between stocks and bonds, and the odds of suffering negative years would be much less. So much less that offering me a guaranteed 2% is laughable. How do you think the insurance companies can guarantee 2%?? It is because they are all but certain to outearn that in the market. Why not cut out the fee-sucking middleman who is prone to possible (eventual?) catastrophic failure and trust instead in capitalism?

To each their own. I wish you could accept other points of view. I believe investing for the long term in overvalued markets (as I see it) is very risky, you do not have to agree. We could discuss that. As I calculate it the insurance companies are offering guaranteed internal rates of return on investments of 5 or 6% for life, I do not think that is incorrect and several have confirmed those calcs. I do not think that is an unfair return. I would not want to make that guarantee to anyone myself.

 

[DblDoc]

I'll be selfish here and say that if we had a flat or (-) market for the next 10 years I'll be overjoyed because at some point in the ensuing decade(s) all those cheap equities I'll have accumulated will pay off handsomely . Will I have to work a little longer, possibly.

If I'm wrong then there will be a large portion of the baby boom eating beans and rice (or worse) with me and we will have much bigger issues then worrying about when or if to buy a SPIA, portfolio tilting and gov't fudging of inflation numbers.

Remember: "This time it's different" are the 4 most expensive words in the English language - for bubbles and bears...

DD

 

[RockOn]

I'll be selfish here and say that if we had a flat or (-) market for the next 10 years I'll be overjoyed because at some point in the ensuing decade(s) all those cheap equities I'll have accumulated will pay off handsomely . Will I have to work a little longer, possibly.

If I'm wrong then there will be a large portion of the baby boom eating beans and rice (or worse) with me and we will have much bigger issues then worrying about when or if to buy a SPIA, portfolio tilting and gov't fudging of inflation numbers.

Remember: "This time it's different" are the 4 most expensive words in the English language - for bubbles and bears...

DD

Good points! In your case and if you could really stick with buying in and losing money (or not making any) for that long, you'll likely do fine. If newly retired I think you might be in trouble though.

 

[Dawg52]

True-though if you'd locked into a fixed annuity in 1965 there would have been no opportunity to get those higher rates. At least as far as I can tell, there's no single vehicle (including giving all of one's money to an insurance company) that protects against all eventualities. I've got a long time horizon, and I feel a lot safer with a mix of assets and no dependency on one industry, one national economy, and especially not a single company.

If I ever buy one, it will only be a small part of the equation. No more than 10% of my investments. Just enough to add to my SS to meet my monthly cash flow requirements. So we agree for the most part. Only difference, I have included an annuity as part of my mix.

 

[ERD50]

People that live below their means survive inflation better than those that don't. They adapt, cut back, substitute and make due.

I've seen this comment posted before - seems backwards to me.

If one is LBYM - how does one cut back? Unless your means is very high, you already *have* cut the 'frills' from your budget.

-ERD50

 

[Dawg52]

Whowser! No wonder the Brit engineers I worked with in the 70's and 80's were talking annuities - SWISS of course.

heh heh heh - provincial American me - that's about the time I started DCA via 401k into the then new 500 Index.

Ya gotta have faith baby. I don't think I even noticed the 'Stocks Are Dead' article back then.

heh heh heh - So far my non cola pension, SS and dividends on my small amount of Norwegian widow stocks are sufficient for a 'hard times' cash flow. With time and inflation never say never on annuities - but not now or yet even.

Unclemick, full of wisdom. BTW, your pension is basically an annuity, correct? You may not have had a choice to opt for anything else when you were working, but that is what you have and it is part of your income mix. That is all I'm advocating. Just a piece of the puzzle to possibly make me sleep a little easier.

BTW folks, I'm not a die hard annuity advocate. I just think for some, it can help be helpful product at some point in one's retirement. Now, time to head to the golf course.

 

[ziggy29]

I've seen this comment posted before - seems backwards to me.

If one is LBYM - how does one cut back? Unless your means is very high, you already *have* cut the 'frills' from your budget.

I think a better way to put it is "those who LBYM can fare better because they have room in their income stream to absorb some inflation without going into debt."

 

[CitricAcid]

I've seen this comment posted before - seems backwards to me.

If one is LBYM - how does one cut back? Unless your means is very high, you already *have* cut the 'frills' from your budget.

-ERD50

Thought the same thing when I read it, but the point remains valid. They survive better because they actually have a little breathing room and haven't spread themselves so thin. So maybe they can't "cut back" more, but they are still in a much better position than those who are living tooth to nail, paycheck to paycheck, leveraging themselves with 40 credit cards. Just saying...

As I am far, far off from ever needing to retire, I looooove the bear market. Puts me at odds with many of the older folks shaking their heads at the stock market at work but I just keep my mouth shut and continue to save. Working into a bear market is very good when you are young, and as P/E multiples come back to reasonable ranges you are able to buy more stocks as the prices become cheaper. Someday, the faith goes, the decreased value will certainly pay off when you have a lot more money invested in the market. Then again, if you are less than 3 years from retiring or already have, it is a much different animal... but then again, that is why you shift your AA