Maximizing portfolio return with very low risk

Hey Roger.........good post! Yep, that was my folks all right. However, no nursing home or home care bills YET.
That will be a real test (for me, not them).

John Galt
 
...of course there was my Great Uncle who financed his retirement with Folger's cans full of paper money tucked in hidey holes in his basement, and double eagels in a safety deposit box. This worked quite well for him.

I think some tend to forget that investment in stocks for the common person is a relatively recent thing. My portfolio does have some stocks, but as far as I'm concerned you can analyse past returns until you are blue in the face and still not have a real good predictor of future returns. Any stock investments I have are moneys I can loose completely and still survive somewhat well.
 
Hi Roger! Have to add your uncle to my list of heroes :)
Good point about people forgetting that widespread stock ownership is a recent development. This is
important. And, like you, I could lose all of my stock
investments and my ER wouldn't miss a beat :)

John Galt
 
My father is 87 (yesterday) and Mom is 85.
Dad retired at 67.  Mom worked off and on during'thier marriage.  Neither has ever owned any stocks of any kind.  Dad's only "investment" was real estate and CDs
(geez, sounds like me)  :).  Anyway, with a very
small net worth, a small pension, two SS checks and no
debt, they are in good shape.  Their net worth
has even gone up over the past 20 years with really
no planning at all (sounds like me again).  Anyway,
they are not eating cat food and from what I can gather
are doing quite well despite having little or no investment knowledge, nor any draconian economizing.
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Sounds like it's got a lot more to do with the "evil anti-Randian" Social Security payment you despise rather than any financial planning. If your expenses are less than your income (i.e. you spend less than your Social Security pays) then your nominal net worth will go up. They will be ok because they can and are willing to live on that amount and it's inflation adjusted. If you want to fund a nicer retirement then you'll need to do more than just keep up with inflation. I would surprised if the returns on their CDs have done more than keep up with inflation.
 
I think some tend to forget that investment in stocks for the common person is a relatively recent thing.
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Bank accounts for the common person are not all that more recent either. Perhaps we should keep our wealth stored up in the old fashioned way - a herd of goats?
 
"..I think some tend to forget that investment in stocks for the common person is a relatively recent thing..."



I disagree; ownership of common stock by "common"
people has quite the norm in the 1920's, I have been
told (I was not around then); possibly not the extent
as today, but it was still a major trend and many
brokerage houses prospered by catering to the
"common" man.

It was also the period in which consumer financing
made it's appearance.

The 1930's "cured" people of both habits, but I think
the trend returns from time to time when the market
is doing "good" and tapers-off when the market is
"bad."

I really don't see where we are living in a "new era:"
we are just re-visiting an old one.


Capricious
 
Hello Capricious. I doubt this very much and will stick with my original statement until proven wrong.
I am saying that as a % of the population, that there
is an enormous increase in common stock ownership
today vs. the 20s, and 30s and certainly back to the
inception of FIRECALC data. This is no reflection on the
value of FIRECALC, but unless you can back up your assertion, I refuse to accept it. I believe it is not even debatable. Convince me.

John Galt
 
Boy, there's some history going on here that I don't remember. Probably there was some exuberance around the stock market for common folk that was just starting to kindle in the early part of the 1900's, but the crash of 1929 and subsequent depression scared almost a whole generation of us ordinary people out of the stock market. Things started to heat up slightly again in late 1950's and early 1960's but were greatly fueled when corporate sponsored retirement plans ( as in 401K's) came into use a little later on, so corporations could get out of providing pensions.

Banks, on the other hand were often the first building to come into being in any new town after the saloon, general store, and church were built. Anyone who had any actual money or gold would probably use a bank to keep their money safe. This made it especially handy to make early westerns revolving around bank robberies. Where as, I don't remember any John Wayne movies where the Merrill Lynch office was robbed.

So I didn't look it up, but that's how I remember it.
 
"...unless you can back up your assertion, I refuse to accept it. I believe it is not even debatable. Convince me..."




Well, I supose that Icould quote some writings that
it was the entry of "common" people into the stock
market that caused the "run-up" in stock prices
throughout the '20s, but Idoubt that it would
convince you; I could cite stories of Charles Mitchell's
redirection of National City Bank' stock brokerage
efforts in the direction of the "common man" that lead to
it's rapid growth during that period, etc. etc.



But I don't think that it would "convince you," anymore
than you will ever convince me that George W. Bush
possess any of the qualifications to be president other
than being born into money and influence.

I will just stand by my opinion that there are no
"new eras" in finance; just fogotten old lessons.

But forgotten lessons are common in this country;
we have forgotten why our forefathers outlawed
gambling, so we again have gambling.

In just one generation we forgot the lessons of
Vietnam, and now we have Iraq.

So I am not surprised that ownership of common
stock by common people in the '20s comes as "news"
to many. The writings of the time herald it
as a "new era.'

Deja vu


Capricious
 
Banks, on the other hand were often the first building to come into being in any new town after the saloon, general store, and church were built.  Anyone who had any actual money or gold would probably use a bank to keep their money safe.  This made it especially handy to make early westerns revolving around bank robberies.  Where as, I don't remember any John Wayne movies where the Merrill Lynch office was robbed.
Click to expand...

Ok, let's give stocks for the "common people" only maybe 80 years of history.  Banks have probably only maybe double that or 160 years of use by "common people" (if we want to be exceedingly optimistic then maybe 300 years).  Goats (or other livestock) as a store of wealth have at least an order of magnitude longer and probably more like a factor of 30 so goats win.
 
MY Grandfather had a couple of stocks in the 20's but despite his being fairly poor for most of his life he was far from common. I had a fling with a few stocks in the 70's and I was considered by my peers to be nuts and a gambler. Few people I knew then had investments outside the bank. Now everyone I know that can afford it has a mutual fund.

My observations

Bruce
 
Here's some of the numbers. So when we use past performance as a predictor, basically the page turned about 1980. The whole ball game didn't change, but a lot of the players sure did.

stockownership.jpg
 
I'm giving general ownership of common stock 20 or 30 years and here's a nice article that suggests similar numbers.
Click to expand...

Ok, let's say that stocks have only been owned by "common people" for "20 or 30 years". That still leaves banks being used by "common people" for only about 160 years. That means that goats still win as having the longer (much longer - maybe thousands of years) history of being used as a store of value by "common people".

What's the SWR with a bank account or goats anyways?
 
Here's some of the numbers.  So when we use past performance as a predictor, basically the page turned about 1980.  The whole ball game didn't change, but a lot of the players sure did.
Click to expand...

I don't know if the players have changed as much as your chart purports. Many of the kinds of people who are now buying stock or mutual funds used to own it with just another layer of indirection that has been only recently (in the last 20-30 years) been removed for most - the pension. Many people owned stock or mutual funds through their pensions and now own such financial instruments through their 401k.
 
If I see we are getting a lot of posting in opposition
to my assertions vis-a-vis stock ownership, I think I can dig out some pretty exact numbers for y'all to settle
this. I'm still prepared to be proven wrong, even
though it is an event rarely seen in nature :)

John Galt
 
Back to the point I was hoping to convey, I would say that it's your money to invest and you can do your own research and have your own conclusions. However one over riding investment theory is that past returns with many years of data add confidence to future stock performance. I don't think this is totally bogus. But the fact is that past returns don't measure a continuous group of investing environments. But more a number of unique historical events that have seen especially profound recent changes. These are only loosing woven together with the fact that they occur in the continuous American market place.

For me this allows less confidence than many traditional "return to the mean" theorists purport because the relevent sample size is much smaller than the assumptions. It also includes discreet populations that are not especially homogeneous. So, as I said, you can calculate past return until you are blue, but if your original assumptions are wrong, it doesn't mean a hoot.

That is why I'm am conservative and apprehensive about stocks with my money. Since I also care about your well-being and investments, I only ask you to consider this. For many generations before us retirement and savings funds used less risky investments. I think many of us now are going out on a limb with increasing risk to squeeze a point or two more return out of things. This may work for some but the risk is higher than the common perception.
 
Back to the point I was hoping to convey, I would say that it's your money to invest and you can do your own research and have your own conclusions.  However one over riding investment theory is that past returns with many years of data add confidence to future stock performance.  I don't think this is totally bogus.  But the fact is that past returns don't measure a continuous group of investing environments.  But more a number of unique historical events that have seen especially profound recent changes.  These are only loosing woven together with the fact that they occur in the continuous American market place.

For me this allows less confidence than many traditional "return to the mean" theorists purport because the relevent sample size is much smaller than the assumptions.   It also includes discreet populations that are not especially homogeneous.  So, as I said, you can calculate past return until you are blue, but if your original assumptions are wrong, it doesn't mean a hoot.

That is why I'm am conservative and apprehensive about stocks with my money.  Since I also care about your well-being and investments, I only ask you to consider this.  For many generations before us retirement and savings funds used less risky investments.  I think many of us now are going out on a limb with increasing risk to squeeze a point or two more return out of things.  This may work for some but the risk is higher than the common perception.
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I guess I have a few problems with the thrust of your argument. Specifically:

- So if the past history of returns and volatility is not necessarily a good predictor of the future, what would you like us to use? I'm not suggesting that the historical data is the be-all and end-all, but I think it is the best indication of what the future may be. So long as stock investors are aware of the full breadth of data out there (return distributions, volatility, likelihood of both good and bad scenarios) and don't just depend on "average" performance, I fail to see anything bad about that.

- Not sure if I quite get what you are saying, but it sounds like you are maintaining that each year is a unique historical event. Umm, yes?

- Being conservative is fine, and I think that a healthy bit of conservatism is probably a must for most investors. However, I think you are failing to consider risks aside from volatility. Inflation is the silent killer of many a retirement portfolio. If you are investing heavily in bank products, you are trading volatility for inflation risk. Not a great trade, IMO. You also run the risk of simply not bering able to save enough to meet your goals. If you know that you can't meet your goals with a savings account postfolio, then it should be a non-starter.

- Finally, although individuals may have needed to stick with savings accounts in the past, the pension funds that many relied on for the bulk of retirement income have always been big equity investors.
 
Brewer, Probably past performance is useful predictor.  What I'm saying is that it should be weighted more towards the last 20 or 30 years and that the relative confidence I would have in it's ability to predict is not as high as many suppose.  In addition that are a number of other indexes that probably have more current value as predictors.

I don't think of one year as a unique events, but there are unique eras in history.  I've often read that since our investments survived events liker Pearl Harbor, you assume they will also survive terrorism or running out of cheap oil.  These do have a vague common thread, but are "false analogies".  Each is a unique event in history.

When you compare volitility of bank products to stocks, the risk is there, but the degree of risk is not the same.  How many years did it take for the market to recover from the depression.  How many stock crashes where the market declined 25 % or more have occured.   Has this happened with bonds?

Understanding history is important to understanding the future.  Books like "The Four Pillars", remain books by people with vested interests inspite of the convincing work.  There are equally as reputable investment advisors "ei Thau) who are not gung ho on stocks.  Consider the alternatives.
 
Brewer, Probably past performance is useful predictor.  What I'm saying is that it should be weighted more towards the last 20 or 30 years and that the relative confidence I would have in it's ability to predict is not as high as many suppose.  In addition that are a number of other indexes that probably have more current value as predictors.

I don't think of one year as a unique events, but there are unique eras in history.  I've often read that since our investments survived events liker Pearl Harbor, you assume they will also survive terrorism or running out of cheap oil.  These do have a vague common thread, but are "false analogies".  Each is a unique event in history.

When you compare volitility of bank products to stocks, the risk is there, but the degree of risk is not the same.  How many years did it take for the market to recover from the depression.  How many stock crashes where the market declined 25 % or more have occured.   Has this happened with bonds?  

Understanding history is important to understanding the future.  Books like "The Four Pillars", remain books by people with vested interests inspite of the convincing work.  There are equally as reputable investment advisors "ei Thau) who are not gung ho on stocks.  Consider the alternatives.
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I hate to even come close to putting words in your mouth, but you are pretty near the 4 most expensive words in the english language: "this time its different." I get very uncomfortable when I see anyone even heading in this direction and I have made an awful lot of money (and avoided losing a lot) by betting against those suggesting that things are different now. I don't think that I will ever convince you that it would be unwise to consider the history of the equity (or any) market as the main indicator of the future, so I am content to let the matter drop.

What I am saying re: bank products is that you are accepting a very significant risk in return for avoiding stock market volatility. Bank products typically struggle to keep up with inflation, especially after taxes. Inflation is just about certain death for a retirement portfolio, particularly if the retiree lives longer than they expect. As this is the case, it seems to me that you can't possibly expect to make it on a savings account portfolio unless you are willing to massively overfund your retirement. If you don't like the equity market, then you need to find something else that will help you beat inflation.

I think that everyone should think for themselves on these matters, but it is worth reading the opinions and research of those who have devoted a graet deal of time and effort into their works on the subject. I may not entirely buy the efficient market hypothesis, but I gain an awful lot by understanding it and getting what I can from the very high quality thought that went into it (on the part of people who are a lot smarter than I am).

As for just holding equities, I would regard that as follish for a retiree. One of the least controversial implications of the Markowitz theory (efficient frontier) is that you get better risk-adjusted returns by broadening the number of unique, uncoreelated asset classes that you have to choose from. IOW, throw in at least a dab of almost everything and you get more milk for less moo. To this end, I have been diversifying away from US equities into commodities and foreign equity. I will be adding foreign bonds as well. I also intentionally bought STON because I expect that its returns will be pretty uncorrelated with the US equity market. If I can figure out a cost efficient way to add dollops of other asset classes, I will do so. Anyone know of a way to add art and antiques without direct investment? Is there some sort of fund? What other asset classes can anyone think of (aside from RE)?
 
Brewer, thanks for the exchange.  There are indeed some things I'd have trouble convincing on.  I have what I consider a balanced portfolio that includes some equities.  I know it has it's spot.  I think the general assessment of equity risk is underestimated.  It doesn't sound like I've swayed you on this.   In the end, one of us, both of us, or niether of us will be right.  I hope it's both.
 
 I also intentionally bought STON because I expect that its returns will be pretty uncorrelated with the US equity market.  If I can figure out a cost efficient way to add dollops of other asset classes, I will do so.  Anyone know of a way to add art and antiques without direct investment?  Is there some sort of fund?  What other asset classes can anyone think of (aside from RE)?
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Brewer,
Can't seem to find what STON does -- is it giving you true access to another asset class? The only time I found a 'stock' (as opposed to a fund) which seemed worth owning for its pure diversification was Plum Creek Timber, (PCL) a REIT that owns, manages and harvests timberland, something that the Commodities funds don't seem to give exposure to.

ESRBob
 
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