Indexing vs fixed interest rates

[Luck_Club]

It is common to hear on this group and others that we should just buy the market or invest in index funds.

If a laddered fixed interest rate (CD's, Govt Bonds) investment portfolio could provide a 4-6% safe return would you still be investing in an index investment with the potential of a 10%-30% negative return risk?

 

[COcheesehead]

Safe and 4-6% today, not gonna happen. A bit in the future maybe, but not now.

 

[Luck_Club]

Safe and 4-6% today, not gonna happen. A bit in the future maybe, but not now.

I know it isn't available now. I'm asking if it was would it change your desire to take on the market risk.

 

[COcheesehead]

I know it isn't available now. I'm asking if it was would it change your desire to take on the market risk.

Well sure and that is what the bulls fear. That rates get high enough that the trade off begins to make some sense. The wild card is inflation. If that grows as well, then equities still rule.

 

[REWahoo]

The wild card is inflation. If that grows as well, then equities still rule.

+1

In this 4-6% "what if" scenario, what's the inflation rate?

 

[brewer12345]

+1

In this 4-6% "what if" scenario, what's the inflation rate?

Perzactly.

OTOH, if we ever see long term TIPS at 3-4% plus inflation I will be buying a LOT of them.

 

[Sunset]

Since we are living in fairyland.

Not when my index pays 2% dividend per year and on average returns a total of 8% per year.

 

[target2019]

If I could get 4-6% interest, inflation would be higher than it is now. I wouldn't go all in on CDs, though. Probably would gradually shift some equity fund into a guaranteed interest fund.

 

[nun]

This reminds me of when I asked at what IRR (assuming an average life span) would someone buy an annuity...even at 7% and above not many people said that they would.

If I could get a CD with a guaranteed 3% above inflation I'd be all over it. In fact TIAA-Traditional is basically that as it's paying 4.85% and we have just under 2% inflation

 

[pb4uski]

I suspect that the OP doesn't realize that the theoretical base for rates of return is the expected inflation rate.

 

[MichaelB]

It's easy to make investment decisions when we have the risk conditions of today but the reward opportunities of another time. Now all we need are time machines to go back and make different choices, because when we had the opportunity back then we didn't take it. Why not?

 

[Luck_Club]

I guess my question surrounds my own experience.

Over the years I've had a few bets pay off, while others have lagged and even gone to $0. The ones that went to zero really burned me up, because the investments were sound based on book value, but shareholders ended up getting wiped out. However, when I look at my overall portfolio performance, there has been negligible return vs the money put into the investments. Like 4% over 20 years. Most of that gain came from a few good bets and only investing into dividend stocks in the past 10 years.

On the other hand I have the temperament and knowledge in rental real estate. Though real estate isn't passive, it isn't a huge time suck either, averaging 2-10 hours per year on average per property. For which I'm rewarded with coupon rates in the teens or higher.

As I move to simplify my life in preparation for early retirement, I see more less return and more risk in marketable securities, and I'm looking for ideas on possible solutions.

Is there a low risk vehicle out there in marketable securities with a decent steady return, or am I chasing a unicorn.

 

[pb4uski]

Sounds like you have been buying individual stocks and choosing poorly if your return has only been 4%... 10-year average annual returns for Total Stock, Wellington and Wellesley have been 7.23%, 6.92%, 6.65%, respectively.

You'll be better off with an index or well-run managed fund.

 

[REWahoo]

Over the years I've had a few bets pay off,

This might be the heart of the issue. I don't equate investing with gambling and don't see successful returns as having my "bet pay off." In my younger days I learned looking for hot stocks was a great way to get burned.

Unicorn chasing...

 

[nun]

Sounds like you have been buying individual stocks and choosing poorly if your return has only been 4%... 10-year average annual returns for Total Stock, Wellington and Wellesley have been 7.23%, 6.92%, 6.65%, respectively.

You'll be better off with an index or well-run managed fund.

I agree, there are no unicorns or silver bullets and the reason so many people fail when investing is because they are convinced that those things do exist and lose money looking for them in vain.

 

[ERD50]

Agree with the others, but specifically - this:

It is common to hear on this group and others that we should just buy the market or invest in index funds. ...

is not this:

I guess my question surrounds my own experience.

Over the years I've had a few bets pay off, while others have lagged and even gone to $0. The ones that went to zero really burned me up, because the investments were sound based on book value, but shareholders ended up getting wiped out. However, when I look at my overall portfolio performance, there has been negligible return vs the money put into the investments. Like 4% over 20 years. Most of that gain came from a few good bets and only investing into dividend stocks in the past 10 years. ...

and that is why so many here recommend indexing. I could start a poll - "Anyone ever had a broad-based market index fund/ETF go to zero? Yes/No ", but we already know the answer.

Is there a low risk vehicle out there in marketable securities with a decent steady return, or am I chasing a unicorn.

Pick an AA, drop your money into low cost index funds. As close to a unicorn as you are likely to find.

-ERD50

 

[Chuckanut]

T In my younger days I learned looking for hot stocks was a great way to get burned.

Unicorn chasing...

Almost as risky as looking for hot women!

In the long run, like many stocks, the less spectacular looking gal in her 20's ends up being the ravishing beauty at 40.

 

[YVRRocketSurgery]

I'm working my forecasting with an overall 6% nominal growth in my investments and 2.5% increase in spend per year.

If I could get 4-6% in fixed income, I would likely have a chunk of my portfolio in it with consideration to inflation and taxes.

Right now for me, it's important to take the right amount of risk/reward to provide a realistic chance to support my financial goals. Supporting my financial goals doesn't just mean focusing returns but also managing inflation risk, etc.

 

[livinglilies]

This reminds me of when I asked at what IRR (assuming an average life span) would someone buy an annuity...even at 7% and above not many people said that they would.

If I could get a CD with a guaranteed 3% above inflation I'd be all over it. In fact TIAA-Traditional is basically that as it's paying 4.85% and we have just under 2% inflation

My TIAA-traditional is paying 3% a year. I guess you started it earlier?

 

[livinglilies]

Sounds like you have been buying individual stocks and choosing poorly if your return has only been 4%... 10-year average annual returns for Total Stock, Wellington and Wellesley have been 7.23%, 6.92%, 6.65%, respectively.

You'll be better off with an index or well-run managed fund.

are Total Stock, Wellington and Wellesley from which company? Vanguard? Thanks.

 

[pb4uski]

Yes, all Vanguard. Google is your friend.

 

[nun]

My TIAA-traditional is paying 3% a year. I guess you started it earlier?

Yes I have vintages as early as 1987 when rates were high.


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[Totoro]

I use an approach I picked up in The Intelligent Investor. If safe senior debt (bonds) is more than 2/3rds of what I would expect to earn in junior debt, I'd prefer going for the bond yield. yields in real terms.

Example: 2% inflation. 5% bond = 3% real. 25 P/E = 4% earnings yield + 2% expected growth - 2% inflation = 4%. In that case bonds are quite attractive, or phrased otherwise there is hardly a risk premium for the junior debt.

Currently these numbers are roughly 0% - 1% real for bonds and 3% - 4% for equity. So equities it is. But the gap is closing lately.

That said, I'm roughly 55%/45% equities/bonds. Eventually I want to move towards 75%/25% or so. Not in a rush, waiting for strong drop. It's partly emotional insurance (buy when stuff is low), partly regret avoidance: I know going in now and seeing a 15% drop shortly after would cause me some agony. If things go up another 50% on the other hand I won't feel that as strongly.

 

[haha]

It is common to hear on this group and others that we should just buy the market or invest in index funds.

If a laddered fixed interest rate (CD's, Govt Bonds) investment portfolio could provide a 4-6% safe return would you still be investing in an index investment with the potential of a 10%-30% negative return risk?

If you are referring to the potential loss in the index equity, or even certain bond indices, you are vastly underestimating the potential loss.

Ha

 

[haha]

I guess my question surrounds my own experience.

Over the years I've had a few bets pay off, while others have lagged and even gone to $0. The ones that went to zero really burned me up, because the investments were sound based on book value, but shareholders ended up getting wiped out. However, when I look at my overall portfolio performance, there has been negligible return vs the money put into the investments. Like 4% over 20 years. Most of that gain came from a few good bets and only investing into dividend stocks in the past 10 years.

On the other hand I have the temperament and knowledge in rental real estate. Though real estate isn't passive, it isn't a huge time suck either, averaging 2-10 hours per year on average per property. For which I'm rewarded with coupon rates in the teens or higher.

As I move to simplify my life in preparation for early retirement, I see more less return and more risk in marketable securities, and I'm looking for ideas on possible solutions.

Is there a low risk vehicle out there in marketable securities with a decent steady return, or am I chasing a unicorn.

Why do you care? If you can get the returns you quote, with the small time investment you say, stop looking and be happy. Any experienced investor would say keep doing what you are doing, if in fact it is working as well as you say.

Ha