Opportunity Cost for PP

[I Shrugged]

If you were to do a calculation for opportunity cost for money that could be in the PP but was not, for the next five years, what percentage would you use?  I'll give my thoughts after the answers so as not to anchor anyone else's guesstimate.  Plus maybe I'm way off in my thinking.

Edit to add:  I'm just looking for the annualized percent.

[mathjak107]

sorry , the crystal ball is not working that well. there is really no way to project out with so many variables and conditions.

we have high stock valuations and low interest rates which never happened before together . as well as lots of potential negatives for every asset in the pp as well as conventional portfolio's .

[barrett]

If you were to do a calculation for opportunity cost for money that could be in the PP but was not, for the next five years, what percentage would you use?  I'll give my thoughts after the answers so as not to anchor anyone else's guesstimate.  Plus maybe I'm way off in my thinking.

With real and nominative returns virtually identical at the moment, I would go with 3% to 4% a year. So for five year's your lost opportunity cost might be 20%. This is, of course, just my best guess and not an actual calculation.

I'm actually in this situation myself with a 2nd piece of real estate that I want to get rid of in about five years. As it happens, that piece of real estate is currently growing my money faster than the PP. I look at myself as being overweighted in the prosperity bucket. Sort of like a Mathjak Portfolio except that mine is not really by design. In other words I wouldn't have put myself in the position of owning two properties (neither generate income) if I had read HB earlier... or Craig or Tyler.

Interesting that you mentioned anchoring as, more than a year ago, Wild About Harry (at least I think it was he) wrote some of-the-cuff remark about having 200 Krugerrands, and for a long time I thought that was a nice target to shoot for. 

[I Shrugged]

Thanks Barrett. 

[I Shrugged]

sorry , the crystal ball is not working that well. there is really no way to project out with so many variables and conditions.

we have high stock valuations and low interest rates which never happened before together . as well as lots of potential negatives for every asset in the pp as well as conventional portfolio's .

People have to make such predictions all the time. At least people in financial positions do.  I have a decision to make that requires my best guess of the opportunity costs.  I can't just say my crystal ball is cloudy.

[rickb]

This might be based on annual data (Jan 1 to Jan 1 timeframes), but Tyler's Real CAGR over time chart from http://gyroscopicinvesting.com/forum/pe ... #msg123914 shows an historic range of about 2% to about 10% real CAGR over 5 years.  If you have to pick one number 4.5% real CAGR is probably your best guess, although per golden rule #4 "no one can predict the future".

[sophie]

I'd go with Barrett's #s, based on the PP's historic 4-6% real return, and the idea that cash investments are unlikely to do more than keep pace with inflation.  BTW by "money not in the PP" I assume you mean cash in a savings account or something like that?

Barrett's 2nd home situation is money invested in real estate, since he plans to sell it eventually.  That's quite different I should think, but the PP's advantage over that, if any, is a bit harder to figure with such a short time window.  If it helps...the NYC housing market is still raging on in frenzy mode, but peak season is almost over.

[I Shrugged]

I was using it for a rent versus buy scenario on a house.  In the end, I think I was mostly trying to convince myself that we should not buy a house.


Anyway, my number, based on recent performance, was going to be 3% nominal.

[sophie]

The PP is a real return portfolio, and that's what you care about anyway.  For your calculation I'd assume the house will keep pace with inflation, i.e. provide a 0% real return.  Slightly better than cash in other words.

There are other factors that go into a decision to buy a house though.  Like, are you going to stay put for at least 5-7 years, are you sick of crappy rental kitchens and bathrooms and transient neighborhoods, are you prepared to handle the occasional huge repair bill and put in the time required to do all the home maintenance, are you itching for a yard so you can garden and set up your own zip line and chicken coop, etc.