Concerns regarding the ability to retire comfortably after age 65

[NTL2009]

Taken at face value, your analysis implies there is essentially no risk investing in stocks. I'm highly sceptical. The moral that stocks can go down as well as up would appear, in the long term, to be false. They must, in your analysis, double every 20 years?
...

With all due respect, I am at a loss as to how you can make that statement based on what I posted. I've said, and implied, no such thing. I hope my communications skills are not this poor!

... My guess is that an element of hindsight bias has crept in. With hindsight the prudent investor would have done X, Y and Z over the years. And A, B and C are considered mistakes.

In other words, the strategy you propose has been tailored to the specific stock market conditions of the last 100 years. A strategy that would have looked equally viable at the time but would have lost money has subsequently, with hindsight, been deselected. ...

This sounds to me that you are thinking I may have cherry-picked the data to fit my view? Just the opposite, I chose those dates based on input from others that they would be the very worst time to invest.

I did choose a source with 20 year rolling returns for the market, as I do believe that if someone is trying to make a mortgage pay-off decision, they should consider the long run. I'd say that is appropriate and meaningful to the discussion.

... I'm also sceptical about how one tracks the indexes and to what extent these are a true reflection of long term stock market growth. Amazon was not a company in 1919, so at some point stocks need to be swapped in and out. This costs money and not everyone can buy stocks at exactly the same time etc.

The third point is how charges and fund management fees are accounted for. ...

You can find the data sources on the internet. A search on "shiller stock data 1871" will get you one commonly used data set.

Management fees are accounted for in the cfiresim source I linked. Now it's true, low cost, broadly diversified mutual funds/ETFs were not available in 1929, trading costs were higher, so this isn't meant so much as a literal analysis of what a person in 1929 could do, but more useful (since none of us are going back to 1929), as to what we might expect if the market took a similar plunge today (as they say, history doesn't repeat so much as it rhymes).

... Fourth, I suspect there is an element of averaging here. The average investor may get 3.1%, but that does not mean that everyone gets exactly 3.1%. Some investors do very well, some okay, some break even and some lose money. That is the nature of "risk". Unlike fixed returns where everyone gets the same.

The first research I would do is to determine how the raw stock market growth equates to the returns that an individual investor can expect. ...

But I don't care what the 'average person' did or will do. I'm trying to plan for myself and my family, arming myself with knowledge. I could make parallels, if (for illustration), we say the average person who attends college does not get a good paying/satisfying job in their field, do we use that to tell someone they should not pursue an advanced degree in Physics? I think not. Many people have made very good use of their degrees, or by learning an in-demand trade. Who cares about the 'average people', I don't want to be average, I want to excel (at least in some things).

... I can well imagine that if I invested a sum in the stock market and came back 20 years later I would have doubled my money or better. But, I can also imagine (perhaps wrongly) that I might not and that I might even have lost money.

The chart I presented showed no loss in the market for any 20 year period (there are some 10 year periods with losses). That doesn't mean, and I certainly did not intend to imply, that such a loss is impossible, or beyond consideration. But I do think it is worth considering that it hasn't happened in this reported time frame. I'm not going to ignore it, and I'm not going to say anything outside of that is impossible either. But w/o a crystal ball, I can only look backwards, apply some reasoning, and be willing to place a bet, if/when I think conditions warrant it.

Turning this around, does the fear of a chance of losing money in the market over a 20 year period keep you 100% out of stocks? And if so, what is the alternative? You are almost guaranteed of losing significant buying power if you keep your money in cash/bonds. You might try TIPS, but I think there are limits to those, and will they be around in the future if you need to roll them over?

 

[NTL2009]

I don’t believe those numbers, the stock market lost 90% of its value between 1929 and 1933

Also your inflation-adjusted fixed withdrawal will wipe you out in the 70s where the stock return for the decade was actually worse than the 30s if you adjust for inflation (aggregate prices declined during the Depression)

If you present your data, I think you will find (as I mentioned upstream), that stock prices may have dropped 90% from their peak. However (relevant to your next statement), that does not take into account the deflationary environment of the times. And it does not take into account dividends, which make up a significant % of the value of those stocks (I think more so then than today).

And my chart includes some bonds (75/25), I'm not sure how bonds reacted at the time, but I assume that was a smoothing effect. I have not advocated for a 100% stock portfolio in any of my posts.

And you are correct that the 80's inflation was actually harder on the retiree than the Great Depression. But the Great Depression is what people like to point out, so that is what often gets the response. My research indicates that 1966 was the worst 30 year scenario for someone drawing down an inflation adjusted amount from their 'nest egg'.

 

[BWV]

Taken at face value, your analysis implies there is essentially no risk investing in stocks. I'm highly sceptical. The moral that stocks can go down as well as up would appear, in the long term, to be false. They must, in your analysis, double every 20 years?

My guess is that an element of hindsight bias has crept in. With hindsight the prudent investor would have done X, Y and Z over the years. And A, B and C are considered mistakes.

So the seemingly over-generous excess return of stocks over bonds is a much studied phenomenon in the finance literature. In the Dimson Marsh data set (you can google it and get the Credit Suisse annual report with that data) in every single country that had a stock and bond market in 1900 the return from stocks equaled or exceeded bonds on an inflation-adjusted basis (albeit in some cases like Russia they were both -100%). That said there are bad 10 and 20 year stretches where leverage or a too-aggressive withdrawal strategy would have wiped you out. The economic answer to the equity risk premium is the timing of the losses - the stock market drops during bad market economic periods - I.e at the same time you are likely to get laid off and need to draw on your savings. This is why stocks have a risk premium.

I'm also sceptical about how one tracks the indexes and to what extent these are a true reflection of long term stock market growth. Amazon was not a company in 1919, so at some point stocks need to be swapped in and out. This costs money and not everyone can buy stocks at exactly the same time etc.

The index returns are legit and reflect all the companies that went bankrupt and new entries like Amazon. The key point is the average stock has a lower return than t-bills with the stock market return driven by the skew of a relatively small number of winners like Amazon. The Dimson Marsh date has a world index the includes every stock market that existed in 1900. With some markets going to zero, like Russia in 1917, the real return is still something like 5% annualized

The third point is how charges and fund management fees are accounted for.

Fair, open end mutual funds began in the 20s and the first index fund in the 70s, fees and transaction costs were much higher.

Fourth, I suspect there is an element of averaging here. The average investor may get 3.1%, but that does not mean that everyone gets exactly 3.1%. Some investors do very well, some okay, some break even and some lose money. That is the nature of "risk". Unlike fixed returns where everyone gets the same.

The return of a cap-weighted index like the S&P 500 reflects the return of the average dollar invested - it is the return everyone in theory can get. Every dollar that outperforms the market must be offset by a dollar that underperforms

 

[PeroK]

So the seemingly over-generous excess return of stocks over bonds is a much studied phenomenon in the finance literature. In the Dimson Marsh data set (you can google it and get the Credit Suisse annual report with that data) in every single country that had a stock and bond market in 1900 the return from stocks equaled or exceeded bonds on an inflation-adjusted basis (albeit in some cases like Russia they were both -100%). That said there are bad 10 and 20 year stretches where leverage or a too-aggressive withdrawal strategy would have wiped you out. The economic answer to the equity risk premium is the timing of the losses - the stock market drops during bad market economic periods - I.e at the same time you are likely to get laid off and need to draw on your savings. This is why stocks have a risk premium.The index returns are legit and reflect all the companies that went bankrupt and new entries like Amazon. The key point is the average stock has a lower return than t-bills with the stock market return driven by the skew of a relatively small number of winners like Amazon. The Dimson Marsh date has a world index the includes every stock market that existed in 1900. With some markets going to zero, like Russia in 1917, the real return is still something like 5% annualized
Fair, open end mutual funds began in the 20s and the first index fund in the 70s, fees and transaction costs were much higher.
The return of a cap-weighted index like the S&P 500 reflects the return of the average dollar invested - it is the return everyone in theory can get. Every dollar that outperforms the market must be offset by a dollar that underperforms

Whether we accept your more knowledgeable analysis or my more naive scepticism, it all adds up to genuine risk. And risk, by definition, means you can lose some or all of your money. In contradiction to the blithe analysis of the raw data.

 

[NTL2009]

This was directed at BWV, but I'll respond from my point of view:

Whether we accept your more knowledgeable analysis or my more naive scepticism, it all adds up to genuine risk. ...

Where has anyone stated that the stock market is w/o risk? Why do you keep repeating this?

I'll try to make myself crystal clear. Investing in the stock market has risks. Your portfolio can be expected to drop from time to time, maybe for a long time. Maybe longer and deeper than we have ever experienced in modern history. Records are made to be broken.

But context is required. As I stated above, other investments, including 'investing' in cash, have risks too. Inflation will almost certainly reduce their buying power (the only meaningful measure of 'value') over time.

As my son, the Pharmacist says, "All medicines are also poisons". Everything in life involves a risk/reward scenario. So you pick your medicine/poison, and you pick your investment vehicle. But there is no place to hide.

... And risk, by definition, means you can lose some or all of your money. In contradiction to the blithe analysis of the raw data.

I see no contradiction. If you want to say the data is incomplete, fine, I agree. It is pretty rare that we approach anything in life with complete data. And when we do, there is probably little discussion, the answer may be obvious and trivial, so we decide and get on with our day. Ho-Hum.

A scenario where a prudent person would lose all their money due to prudent stock market exposure, would be an extreme one. Not impossible at all, but again, we must have context - if that scenario raises it's head, what are the alternatives? If he would have been better off 100% in bonds, would that have been predictable? Maybe an alternate scenario (more likely, based on history), would have occurred, making stocks far more valuable than bonds. But our investor has no crystal ball.

You make it sound as if stocks could go to zero? I suppose that's a mathematical possibility, but I can't see it happening in real life. And if it did, we'd probably have bigger worries (like food, shelter and water), than a number on our brokerage statement. But yes, if I'm drawing on my portfolio, and stocks dive, I risk depleting my portfolio. But historically, this is more likely with conservative investments, as historically, they have not provided enough protection against inflation. So I don't see avoiding stocks as any sort of solution, the data we have says that would be a worse problem. I can't ignore that data, in favor of unknown future data.

What do you propose?

 

[PeroK]

This was directed at BWV, but I'll respond from my point of view:Where has anyone stated that the stock market is w/o risk? Why do you keep repeating this?

I'll try to make myself crystal clear. Investing in the stock market has risks. Your portfolio can be expected to drop from time to time, maybe for a long time. Maybe longer and deeper than we have ever experienced in modern history. Records are made to be broken.

But context is required. As I stated above, other investments, including 'investing' in cash, have risks too. Inflation will almost certainly reduce their buying power (the only meaningful measure of 'value') over time.

As my son, the Pharmacist says, "All medicines are also poisons". Everything in life involves a risk/reward scenario. So you pick your medicine/poison, and you pick your investment vehicle. But there is no place to hide.
I see no contradiction. If you want to say the data is incomplete, fine, I agree. It is pretty rare that we approach anything in life with complete data. And when we do, there is probably little discussion, the answer may be obvious and trivial, so we decide and get on with our day. Ho-Hum.

A scenario where a prudent person would lose all their money due to prudent stock market exposure, would be an extreme one. Not impossible at all, but again, we must have context - if that scenario raises it's head, what are the alternatives? If he would have been better off 100% in bonds, would that have been predictable? Maybe an alternate scenario (more likely, based on history), would have occurred, making stocks far more valuable than bonds. But our investor has no crystal ball.

You make it sound as if stocks could go to zero? I suppose that's a mathematical possibility, but I can't see it happening in real life. And if it did, we'd probably have bigger worries (like food, shelter and water), than a number on our brokerage statement. But yes, if I'm drawing on my portfolio, and stocks dive, I risk depleting my portfolio. But historically, this is more likely with conservative investments, as historically, they have not provided enough protection against inflation. So I don't see avoiding stocks as any sort of solution, the data we have says that would be a worse problem. I can't ignore that data, in favor of unknown future data.

What do you propose?

I don't propose anything. In my lifetime by far and away the best investment has been property. But I can't say that property will continue this trend into the future. In any case, property prices in the UK have risen to levels that exclude most new potential house buyers.

In terms of retiring at 65, I think the biggest factors are earnings and expenses. If you are lucky or clever perhaps you can conjure significant returns out of the stock market or other shrewd investments. But, maybe that's all just down to luck at the end of the day. Simply put, you need to earn enough. If you earn £30K and have four children you can forget about it. If you earn £100K and are single then the only risks are spending too much or losing money on foolish investments!

 

[Klystron]

Do not overlook unanticipated illness / disability in the primary income provider and family. Perhaps healthcare in the UK and EU minimize this risk but not in the USA.

 

[Vanadium 50]

The data you referenced is from 1919 until 2018, which includes the stock market crash of 1929 and the subsequent great depression...I do not know how this is reconciled with the data

It might be instructive to look at the differences between 2019 and 1929.

One is that investors were more highly leveraged then, and since then regulations have been put in place limiting margin. Indeed, the idea of slow-paying one's mortgage has been premised on the idea that it's better to do it this way and avoid these very same rules.

Another is that dividends were larger then. The 3% gain over 20 years was entirely in dividends, since it took until 1954 for the DJIA to reach 1929 levels (and most of that was at the end). In 1932, the dividend rate was 14%. Today it's closer to 2%.

A third is that people invested in fewer stocks then: you couldn't buy an index fund, and mutual funds were barely a "thing". They also looked rather different than today's funds. This means they took on more risk then is typical today. Similarly, the modern"institutional investor" didn't really exist in 1929. CREF, for example, didn't even exist until the 50's.

Banking is very different today. 11,000 banks closed during the Great Depression. Today there are about 6000 banks in the US.

 

[NTL2009]

... I don't propose anything. In my lifetime by far and away the best investment has been property. ...

This explains a lot. I've seen numerous exchanges on forums, where the real estate investors just can't seem to grasp stock/bond investments. Many people do well with real estate, maybe it is just lack of familiarity with stocks/bonds that breeds distrust, but as you say...

... But I can't say that property will continue this trend into the future. In any case, property prices in the UK have risen to levels that exclude most new potential house buyers. ...

So where does that leave someone like the OP? Of course, they need to get their earning and budgeting in line first, but if they are successful with that, they will have money to invest, in something.

... If you are lucky or clever perhaps you can conjure significant returns out of the stock market or other shrewd investments. ...

It is not about luck, or cleverness, and certainly no 'conjuring' - investing in a Total Stock fund and a Total Bond Market fund, and forgetting about it, involves none of that. In the long run, the stock market grows, because it is driven by people trying hard to create value. And if that fails, people won't be able to pay rent, property values will go down, etc. No man is an island.

What concerns me about property is that the individual investor can't get anywhere near the diversification of the stock/bond fund investor (unless they invest in REITs - not sure those have done better than the general market). Maybe a dozen properties? Versus lterally thousands of companies in so many diferent markets, many/most of them with international exposure.

I'm not trying to change anyone's mind. If real estate has been good for, that's good for you. I just think others should look at everything as objectively as they can.

... If you earn £100K and are single then the only risks are spending too much or losing money on foolish investments!

Avoid foolish investments!

 

[Michael Price]

This explains a lot. I've seen numerous exchanges on forums, where the real estate investors just can't seem to grasp stock/bond investments. Many people do well with real estate, maybe it is just lack of familiarity with stocks/bonds that breeds distrust, but as you say...

So where does that leave someone like the OP? Of course, they need to get their earning and budgeting in line first, but if they are successful with that, they will have money to invest, in something.
It is not about luck, or cleverness, and certainly no 'conjuring' - investing in a Total Stock fund and a Total Bond Market fund, and forgetting about it, involves none of that. In the long run, the stock market grows, because it is driven by people trying hard to create value. And if that fails, people won't be able to pay rent, property values will go down, etc. No man is an island.

What concerns me about property is that the individual investor can't get anywhere near the diversification of the stock/bond fund investor (unless they invest in REITs - not sure those have done better than the general market). Maybe a dozen properties? Versus lterally thousands of companies in so many diferent markets, many/most of them with international exposure.

I'm not trying to change anyone's mind. If real estate has been good for, that's good for you. I just think others should look at everything as objectively as they can.
Avoid foolish investments!

Agreed. Equities/stocks will beat property, over the long run. Where I live.(London, UK) return on property (rent + capital appreciation) has been about the 10% p.a. over the last 30 years. You can comfortably beat that with some technology stock trackers. Likewise, the property investment funds, available in my pension plan, are very mediocre compared to the technology investment funds.

Some people say, "as safe as houses", but property goes down in a recession, just like stocks.

 

[PeroK]

Agreed. Equities/stocks will beat property, over the long run.

You don't know that. No one knows that. You quote that as though it's a law of nature.

It's madness to think that you know the future relative growth of property, stocks and technology stocks in particular.

Also, if that were a law of nature, then the future growth would already be built into the current price.

 

[PeroK]

So where does that leave someone like the OP?

Facing an uncertain future. Like the rest of us.

 

[BWV]

The problem with real estate is diversification - hard to do (outside of buying REITs, but those are stocks) for most individuals. London real estate may have been a good investment but when the UK becomes a post apocalyptic wasteland on Nov 1, who knows?

 

[Michael Price]

The problem with real estate is diversification - hard to do (outside of buying REITs, but those are stocks) for most individuals. London real estate may have been a good investment but when the UK becomes a post apocalyptic wasteland on Nov 1, who knows?

Brexit is another topic, which I won't go into - except to say the EU is protectionist, anti-free trade, anti-free market scheme. The UK should do just fine outside the EU.
https://qph.fs.quoracdn.net/main-qimg-fdf8c398523d58282b7c607058fd9665

 

[PeroK]

London real estate may have been a good investment but when the UK becomes a post apocalyptic wasteland on Nov 1, who knows?

Brexit is another topic, which I won't go into - except to say the EU is protectionist, anti-free trade, anti-free market scheme. The UK should do just fine outside the EU.
https://qph.fs.quoracdn.net/main-qimg-fdf8c398523d58282b7c607058fd9665

At least one of you must be wrong.

 

[Michael Price]

At least one of you must be wrong.

And we shall find out who in a couple of months.

 

[Klystron]

What would investment advice be without a few hoary truisms?

"People can live in houses."

Although maligned in literature, the landlord invests capital in buildings that provide shelter and living space for many people beginning with their own family. Modern city law also demands a certain level of maintenance investment in livable properties. Bond and bond fund investment also provide funds for civic improvements, transportation projects, and many endeavors that benefit others, particularly real estate investors.

 

[Vanadium 50]

Where I live.(London, UK) return on property (rent + capital appreciation) has been about the 10% p.a. over the last 30 years. You can comfortably beat that with some technology stock trackers.

You're focusing on the future again, and had you said "I would have been better investing in X than Y in the past" I would again have let it slide. But

• You cannot predict the future
• You are predicting that technology will continue to be undervalued for thirty years
• Previously the claim was 20% for 20 years. If you have 10% for 30, and 20% for 20, that means there can be a period of a decade with -7.6% growth. Because math. Pretending that this income is guaranteed does nobody a service, and is belied by your very own numbers.

 

[Michael Price]

You're focusing on the future again, and had you said "I would have been better investing in X than Y in the past" I would again have let it slide. But

• You cannot predict the future
• You are predicting that technology will continue to be undervalued for thirty years
• Previously the claim was 20% for 20 years. If you have 10% for 30, and 20% for 20, that means there can be a period of a decade with -7.6% growth. Because math. Pretending that this income is guaranteed does nobody a service, and is belied by your very own numbers.

The past is the best guide to the future. And people here are smart enough to add the usual caveats. Technology is always undervalued because most punters live in the present.

 

[Vanadium 50]

What concerns me about property is that the individual investor can't get anywhere near the diversification of the stock/bond fund investor (unless they invest in REITs - not sure those have done better than the general market)

There are ways. TIAA Real Estate is technically an annuity, but it's set up to behave like a mutual fund. The 10-year annualized return is 6.91% vs 7.25% for the S&P 500, including dividends.

I own some of this. There are things to like, and things not to. On the plus side, it's relatively uncorrelated with stocks and bonds, and it's value is fairly stable. So it's a sensible element of a diverse portfolio. On the minus side it's expensive compared to index funds (0.8%) for obvious reasons and is relatively illiquid (restrictions on how quickly one can withdraw money), again for obvious reasons.

I don't own more for several reasons, not least of which is that I own my house, so my total real estate holdings are about 16% of my net worth. My target is 15-20%. I'm on the low end of where I want to be, but still in the window, and I may pick up a little more at my next rebalancing.

 

[Vanadium 50]

The past is the best guide to the future

So Eastman Kodak would have been a good buy in 1999? After all, look at that growth! On a log chart no less. For 35 years (and long before it), it was growing at ~8% per year, returning a bit more than half as dividends. And then it wasn't.

 

[Michael Price]

So Eastman Kodak would have been a good buy in 1999? After all, look at that growth! On a log chart no less. For 35 years (and long before it), it was growing at ~8% per year, returning a bit more than half as dividends. And then it wasn't.

View attachment 248796

Except that they got caught out by technology!

 

[HankDorsett]

I realize there is another issue to think about, standard of living during retirement. It's not how much do I need to just survive during retirement but rather how much do I need to enjoy retirement.

 

[Klystron]

I realize there is another issue to think about, standard of living during retirement. It's not how much do I need to just survive during retirement but rather how much do I need to enjoy retirement.

Maintaining standards can be important, but I value happiness and contentment more; not that they are exclusive. For instance, participation in these forums (fora) requires a certain investment in technology, time and connectivity. Membership costs a little more. The contentment and satisfaction of participation, perhaps helping a member of a younger generation, far outweigh the cost, as a matter of opinion.

True hustlers never seem to retire or, at least, manage to derive income from old age activities. Old O.J. hustles golfers eager to lose money to a notorious celebrity. Old Bob Ross could not even draw his pet squirrel but lived comfortably hawking questionable oil paints while donating the majority of his paintings. O.J. sells access. Bob sold Happiness.

 

[bhobba]

You can see a professional if you like, but the only professional I personally trust is an Actuary. There are a few personal financial actuaries around, but even now they are rare. Still if you can find one and they charge a reasonable price they will help you figure out the approach best suited to your retirement goals. They have a specific specialisation that only does that - long gone are the days they just do insurance:
https://www.actuaries.asn.au/education-program/fellowship/subjects-and-syllabus
One way to meet the first module is to have a PhD - talk about rigorous standards.

I have read a lot of books on investing, and even traded for a while. For building a portfolio the best book I have read is:
https://www.amazon.com/dp/1260026647/?tag=pfamazon01-20

Out here in Australia THE guru on share investing, also president of the investors club and well known debunker of scam's is Austin Donnerly. Unfortunately he is dead now, but his book, unfortunately also out of print, described exactly how and when to buy and sell. Fortunately, his method, called the Zone system, is explained here:
https://p8s8a2t3.stackpathcdn.com/wp-content/uploads/2015/04/The-Zone-System-research-paper.pdf

What I did, was have 50% of my money in a safe bonds (like bank debentures. Banks are government guaranteed here in Aus), and 50% in the zone system using a geared share fund. When it comes time to use your money in retirement have a look at what zone the market is in and sell your fund when its in zone one - not that you would have that much invested under the zone system. Live on the Bond fund until then. If the market is down do not worry, eventually it will rise

Thanks
Bill

 

[bhobba]

So Eastman Kodak would have been a good buy in 1999? After all, look at that growth!

For funds one study showed a parcel of the worst performing funds performed better than a parcel of the best performing funds the following year. It's called regression to the mean, and is almost (but not quite) a universal law of investing - there are a few superstars like Simons that defy it. That's how the Zone System I mentioned above works.

Thanks
Bill

 

[Vanadium 50]

For funds one study showed a parcel of the worst performing funds performed better than a parcel of the best performing funds the following year. It's called regression to the mean

There is a similar plan in the US called "Dogs of the Dow", where every year one invests in the DJ30 stocks with the highest dividends. The rationale is that DJ30 companies are at low risk for a total implosion (caveat: see Eastman Kodak above) so that high yield implies undervaluation, so regression to the mean will bring the price up.

Does it work? On average yes, in every year, no.

My view on this is that the argument is sound, but the risk in going to 10 stocks is not compensated for by the increased yield. Value stock index funds do almost as well (after fees) but with less variability.

Your Zone System is trying to, at some level, time the market. There are times when it is going up, times when it is going down, times when a value strategy works better, and times when a growth strategy works better. Experience says that these are very difficult to predict, and the shorter the period one wants to make a prediction, the more difficult it becomes.

My own strategy has been to determine the level of risk I am willing to accept, design a portfolio that attempts to maximize yield for this risk, rebalance every 6 months or so to a) keep the risk level constant and b) capture the diversification return, and every few years reassess whether my goals have changed and whether my tolerance for risk has changed.

Much of the advice here is a good example of why you should not get financial advice on an internet forum. The implicit goal is "make as much money as you can". That's not my goal. Mine is to be able to retire comfortably. An investment option that gave me a 10% chance to live like Scrooge McDuck but also a 10% chance that I'd be living under a bridge eating dog food has no appeal to me. Goals are absolutely critical and much of the advice is directed towards goals other than StatGuy's.

 

[bhobba]

There is a similar plan in the US called "Dogs of the Dow", where every year one invests in the DJ30 stocks with the highest dividends. The rationale is that DJ30 companies are at low risk for a total implosion (caveat: see Eastman Kodak above) so that high yield implies undervaluation, so regression to the mean will bring the price up.

Does it work? On average yes, in every year, no.

There is a similar well known one that has the same characteristic:
https://www.amazon.com/dp/0470624159/?tag=pfamazon01-20

The author details the strategy and shows it does work like Dogs of the Dow. But believe it or not - he does not use it and many people start using it but stop even though they are making money. Why? It involved work and after a while you get sick of it. Most just want something to set and forget which is a quite interesting human foible. I will tell you when I traded and actively managed my retirement account using the Zone strategy it was exactly the same - you got sick and tired of it after a while. When I reached retirement age nearly 10 years ago now I had stopped the trading and zone system (I was lucky it was about 2008 or so and in Zone 1) and simply had some safe high yielding shares. Now I am even simpler, I just leave it in a high yielding bank account a couple of which exist here in AUS eg ING direct - you get a few percent more if you get your pay put directly in the account - they counted my pension as pay. Also I figured with all my health problems why not spend it - I doubt I will live into my 90's etc.

My own strategy has been to determine the level of risk I am willing to accept, design a portfolio that attempts to maximize yield for this risk, rebalance every 6 months or so to a) keep the risk level constant and b) capture the diversification return, and every few years reassess whether my goals have changed and whether my tolerance for risk has changed.

Much of the advice here is a good example of why you should not get financial advice on an internet forum. The implicit goal is "make as much money as you can". That's not my goal. Mine is to be able to retire comfortably. An investment option that gave me a 10% chance to live like Scrooge McDuck but also a 10% chance that I'd be living under a bridge eating dog food has no appeal to me. Goals are absolutely critical and much of the advice is directed towards goals other than StatGuy's.

I could not have said it better. Some years ago now it was predicted the rise of a new professional - The Personal Actuary:
https://www.soa.org/library/newslet...ew-star-in-the-universe-of-financial-advisors
They are the experts at managing financial risk which for retirement should of course be your aim. But it never eventuated. Instead we had the rise of the Financial Planner. They had a recent royal commission into the financial sector here in Aus and the stories of the disgusting things some financial planners did was unbelievable - and the consequences for their clients - just so sad. They were of course crooks.

Experienced Financial planners here in Aus make about $140k, experienced Actuaries about $180k. So they are somewhat, but not greatly so, more expensive that financial planners, but the rigor of their training puts them in an entirely different class IMHO. The outcome of the Royal Commission was certain minimum qualifications to be a financial planner, but nothing close to an Actuary. Just my view, but I would like to see the minimum qualification as passing part 2 of the actuarial exams - you can then legally call yourself an Actuary. An amusing story related to this is during the Royal Commission it was pointed out with derision some financial planners didn't even have degrees in business, but rather all sorts of stuff including science which made the commentators chuckle. It seems they never heard of the degree Actuarial Science often in the math department - sad really.

I do hope personal Actuaries take off, but I doubt it - you would need both a financial planning qualification and an actuarial one with the new changes in rules here in Aus.

As an aside its interesting what an experienced Actuary gets paid - I thought it would be more - even as an experienced programmer in the government, which generally has pay lower than private enterprise, at the level I was gets about $130k. The training to be an Actuary is far more rigorous. One of my math professors said it was well above a Masters, but not quite at Doctorate level to be a fellow, (called part 3 here in Aus - but you just need part 2 to be legally an Actuary - part 2 is about Masters level), although if you have a doctorate it meets some of the fellowship requirements.

Thanks
Bill

 

[OCR]

Thanks Bill, and here's some more about what Actuaries do, and are. . .

Actuary - Wikipedia If anyone wonders about the citation style, read the Talk Page.

Talk:Actuary - Wikipedia

.

 

[Vanadium 50]

A scenario where a prudent person would lose all their money due to prudent stock market exposure, would be an extreme one.

Well, if they would have lost all their money, it's hard to describe it as prudent. It's hard to do this on a cash basis anyway (but with margin and leverage it gets easier). But that's not the risk.

The risk is not waking up one morning to find the stock market is at zero. The risk is overspending your savings.

Suppose you need $50,000/year for 15 years, and stocks went up 10% per year. Then you need $370,000 in savings. This number is low, because $37K of the needed $50K comes from growth, so you only need to spend $13K of principal.

Instead, suppose in the first year stocks are down 30%, then down 10%, then up 10%, then eight years at up 20% before returning to 10% per year. Over 15 years, this is more favorable than the straight 10%. So what happens?

You go broke in Year 7.

In that first year you lose almost half your money - the one-two punch of falling valuations plus having to spend a (proportionately) large chunk of principal. You never recover from this. If you want to make it through this scenario, you need to start with $540,000, not $370,000.

Suppose instead we had half our money in stocks and half in cash (0% change every year), and every year adjust so that this remains true. At $370,000, our nest egg lasts until Year 11 in both scenarios. This is more predictable - e.g. lower risk. If you want to make it to Year 15, you need to start with $490,000 in the flat 10% scenario and $450,000 in the market crash scenario. (Yes, they have reversed positions) This is why diversification reduces risk.

You could also have a pure cash solution, which would of course have zero stock market risk. That would take $750,000; at $370,000 you go broke in Year 9.

A final argument for diversification. A $450,000 portfolio would not make it through the market crash scenario if it were invested either in all stocks or all cash. But it does make it through on a 50-50 mix.

 

[StatGuy2000]

Well, this thread certainly has expanded far beyond my original question about investment strategies!

For the moment, my focus is on building my savings. Thank you all for the advice.

 

[Vanadium 50]

For the moment, my focus is on building my savings.

That's the important thing anyway. There's no point in discussing what to do with what you didn't save.

 

[bhobba]

That's the important thing anyway. There's no point in discussing what to do with what you didn't save.

Very true. Here in Australia we have compulsory superannuation of at least 8% (there is a push for it to be 12% which I think would be better) of your wage must go into it - of course you can put more in, and some employers are kind enough to match the extra dollar for dollar. If you work for the government its a whopping 16% - that's one reason government jobs pay less. We have discussed getting financial advice in this thread. The ASX (the Australian Stock Exchange) and other bodies not associated with the Financial Planning Association, who obviously will say get it from the start, have looked at it and its not really a paying proposition until you have at least $200,000 - some say as high as $500,000. Before that just leave it in a low fee fund according to your risk profile - they usually come in 3 types - conservative, balanced and growth. To start out (ie in your 20's so you will not retire for years) its only logical to go for growth. Then as you head to for the bigger amounts get the advice which can include things like setting up your own super fund. It's wise to remember starting work in your early 20's by the time you retire at 65 you will likely be a multimillionaire - although I would be looking to like me retire at more like 50-55 - so putting 16% like government workers do is a good idea. Reaching that figure where seeking professional advice will probably occur sometime in your 30's.

Thanks
Bill

 

[bhobba]

Just out of curiosity I did manage to locate a firm here in Australia that has actuaries who are also qualified financial planners. They produced a paper describing there process:
https://www.berryplan.com.au/images/stories/file/markiaa2009.pdf

Yikes - this is more detailed than other financial planning books/papers I have read. I always take more seriously papers like this that have been peer reviewed. Also like me the author believes: 'Consideration could be given to the development of a specialized financial planning course for actuaries which would be recognized by both ASIC and the Australian Taxation Office.'. At the moment you have to get something like Certified Financial Planner Qualification which takes 5 years experience and pass 5 subjects.

Thanks
Bill

 

[bhobba]

The following interesting discussion about T-Bill's is also of relevance:
https://www.physicsforums.com/threads/most-stocks-under-perform-t-bills.969802/
Thanks
Bill