Is the successful salaried retail investor a myth?

[iwealth]

Is there a reason 1972-1974 is included in simulations of portfolios that hold a significant amount of gold? If I understand correctly, it was illegal to own gold before January 1, 1975. Doesn't that fudge the numbers significantly in favor of the PP those first few years?

The US came off the gold standard in 1971, but I agree that the resulting wild gold years after that may not ever be repeated and thus may be deceiving.  Likewise, I hate it when stock bugs start any investment examples in the 80's and 90's.  That's why when discussing things like this I prefer to look at scenarios where you retired in a variety of years and economic conditions.

Bond/cash bugs also see a significant advantage starting any sort of investment example in the 80s and 90s and those assets constitute a significant slice of the PP. These SWR exercises starting in 1972 (or any rolling periods thereafter) make me nervous when we discount the performance over the prior 50 years which weren't exactly good times for bonds/cash.

[Libertarian666]

PS,

-Buying an older annuity, ie. kicks in at 85, in case the money runs out.
-Being clear with our kids (and our own intentions) that the greatest gifts we can give our kids is our time now and avoiding being a financial burden when they are holder.  As someone who works in palliative care, I can say this last point with some experience...avoiding being financially dependent on your children is a much better gift than an inheritance.  Obviously. with the idea that we will spend down our portfolio, that allows for a higher withdrawal rate.  We'll probably annuitize part of it as well.
-Possibly move to a really cheap, retirement friendly country for a period of time to stretch the portfolio.

If you move to a retirement friendly country AND get citizenship there AND drop your US citizenship (assuming you are a US person at present), then you might be able to buy a Swiss fixed annuity. They have many advantages, but as far as I am aware are not currently being sold to US persons.

[Thomas Hoog]

http://investingforaliving.wordpress.com/
Some guy also busy with the 4 % SWR, although he uses the IVY model.
Nice blog

[Marc De Mesel]

This is going to be pretty heavily in the "devil's advocacy" department, and somewhat stream-of-consciousness, so take it with a grain of salt.

I've been wondering lately if the entire field of retail investing by small net worth individuals working hard at their jobs and saving in their 401(k)s and Roth IRAs is just a big scam.

Let's look at the common case of retirement. You need 25x your annual expenses for a 4% withdrawal rate, or 33x for 3% and so on. If you need $40k/yr to live, at 4% SWR, you need $1m in a portfolio that reliably produces at least 4% after inflation with as little yearly volatility as possible, for example.

Now around these parts we all think the portfolio to do this with is the PP, and the PP is very stable, but unfortunately the PP has had quite a few years in the past two decades where it did not produce even a 3% after-inflation return:

1994: -5.2%
1996: 1.8%
1999: 2.2%
2000: -0.6%
2001: -2.4%
2008: -4.5%

(results compiled by taking historical PP performance data from https://web.archive.org/web/20160324133 ... l-returns/ and subtracting yearly inflation data provided by http://www.bls.gov/cpi/home.htm)

And every year it doesn't produce a 3% or greater real return, that's a bigger real return you need next year to make up the lost principal you had to sell.

If even the PP can't be counted on to produce even a 3% real return every single year, you're sunk. What's the alternative?

Well, if you need reliable, stable year-after-year income, what you really need is bonds. But right now bond yields are in the toilet. And bonds don't adjust their yields with inflation. Unless you reinvest a portion of your bond income (read: reduce its effective yield), the purchasing power of your bonds is just going to get creamed over time. Of course TIPS adjust with inflation, but they yield even less. You would need to be able to live on 2% or even 1% of your portfolio. Which sort of brings me to my point:

If you want to live off your investments, you just need a shitload of money. That's it. You can't count on interest rates being high enough for bonds or cash alone to work, you can't count on any individual market such as gold or stocks doing well over any consistent timeframe, and you can't even count on a diversified portfolio like the PP to produce a minimum level of real returns on a consistent basis. The financial markets are just inherently too volatile, and any volatility reduction--no matter how clever--will increasingly cause you to bump up against inflation as you dial down the volatility.

My tentative conclusion: You simply need enough money that it doesn't matter. If the paper value of your portfolio declines 8%, then screw it; you're still rich and your crapton of bonds continues to throw off enough to live on regardless of the paper value. If your PP goes down 6% this year, then screw it; you have 100x your annual expenses so you can wait it out and hope for a better-than-average return next year.

But then… if you have 100x your yearly expenses, you don't really need to be choosy about your portfolio. Who cares if stocks fall 50% and now you only have 50x your yearly expenses; it's probably going to shoot up again at some point and then eventually you'll have 200x your yearly expenses. Even if that takes, say, 15 years for stocks to stop treading water and after that decade and a half you wind up with "only" 35x your yearly expenses, that's still super safe compared to everyone else. If you're more conservative, you can just put everything into Munis, TIPS, and never worry about your asset allocation. Those bonds are going to produce you a real return of 1 or 2% with their eyes closed. And with 100x your annual expenses, heck, you don't even need to participate in the markets at all! Put it all in cash and spend it down, because you're probably not going to live for another 100 years.

So what you really need is 100x your annual expenses. For sommeone/some family who spends 40k/yr, that's 4 million dollars. Over the course of a 35-year career, accumulating 4 million dollars requires saving $114,000 every year. That's ridiculous. No salaried employee is going to do that. Maybe a few bankers and debt-free doctors might be able to do that, or some workaholic childless couples in high-paying fields. And they can't use tax-sheltered vehicles due to income caps and contribution limits.

So you need to own a business. A very prosperous business. And you need to sell it, or take a truly humongous amount of income from it.

Basically, what I'm trying to say here is when I really look into it, the investment market looks like it's for rich people and the rest of us have no real hope of providing for our retirement securely using investment products; the only surefire method is to simply accumulate more money, which means investing in yourself and probably owning a business or some sort.

Am I wrong?

I'm sorry to say but I think you are wrong.

I see people (retail investors) building a fortune via investing every few years. Some start with little.

The past years some did that in bitcoin, the decade before that some did it with with real estate and mining stocks, the decade before that some did it with dotcom companies.

Not saying it's easy. It never is. Is equally true for entrepreneurship, many try, few succeed, but indeed few DO succeed.

What is required: taking a position in something that has a high chance to 100 fold/1000 fold, watch it closely and stick with it (meaning don't sell/balance out too soon but let it become a very concentrated position and only sell when it is clearly overvalued). If you don't have the money, borrow it. A lot of study, trial and error, calculated risk taking, independent/critical thinking and self control is required. Dogmatic and herd thinking a no go.

[Pointedstick]

I think I was wrong too!

Keep in mind I wasn't so much talking about getting rich investing. I was talking about the idea that you could retire on your investments in index funds and bonds and stuff--or even the PP--after accumulating it for 30 years. I was worried that inflation would eat up your gains, and you needed far more money than is typically planned for (25x or 33x yearly expenses, for example). But the discussion that the thread started led to a thorough investigation into the role of cash in a portfolio and managed to convince me that cash is actually the secret sauce that allows a portfolio to sustain you in retirement while not being something monstrous like 100x your living expenses.

[Marc De Mesel]

I think I was wrong too!

Keep in mind I wasn't so much talking about getting rich investing. I was talking about the idea that you could retire on your investments in index funds and bonds and stuff--or even the PP--after accumulating it for 30 years. I was worried that inflation would eat up your gains, and you needed far more money than is typically planned for (25x or 33x yearly expenses, for example).

In this case I fully agree.

It is my opinion that index funds are not going up after inflation in the long term (net of dividends), the same is true for gold, the same is true for gov. bonds, interest included. The PP, makes only 1%/2% after true inflation so you do need a lot of capital if you want to retire on this without eating in your capital. So indeed with the PP you need 50x to 100x living expenses!

But the discussion that the thread started led to a thorough investigation into the role of cash in a portfolio and managed to convince me that cash is actually the secret sauce that allows a portfolio to sustain you in retirement while not being something monstrous like 100x your living expenses.

It is impossible that cash solves this problem since it's returns are even lower than the PP in all economic climates.

So either you succeed in having a few million, in which case you can live from the PP, or you must increase your returns.

Increasing your investment returns can only be achieved by having a VP or changing the composition of your PP.

[Thomas Hoog]

Well, back on topic
I track my "wealth" grow since 2000. And I think I can retire if the portfolio growth exceeds my present income for 5 rolling years.
So I don't calculate inflation, however I will have less costs due to morgage paying off and the kids leaving the house.
According to the present figures, I will need a portfolio of 2 milj. $.
So the 1 mil is a myth, but 4 mil. is to much.

[Pointedstick]

I have not read this thread but how cash can solve this problem is beyond me!

The secret sauce cannot be an asset that performs even worse in the long term than broad index funds or gold, but an asset that greatly outperforms the PP. That can only be a speculation. No venture, no gain. Retirees do not escape this fact of life.

Actually, it can. Read the thread. But the basic point is this: cash provides a place to make withdrawals from so that you don't need to sell volatile assets until they have actually given you a capital gain you can harvest.

For example: if you have a cashless portfolio that loses 6% in some year, and you need to withdraw another 4% to live, your total portfolio has declined 10% in a single year! You have sold when your assets were down and reduced your portfolio's ability to support you in the future. And we're not even factoring in inflation yet. This will kill your retirement plans!

However, if you have cash in your portfolio, you instead make the withdrawal from cash and wait until that 5% loss turns into a 10 or 15% gain in the next year or two. Even if it takes years to recover, as long as you have enough cash, you'll never have to sell those volatile assets before they have recovered. Then you harvest those gains from the recovery and deposit some of them into cash according to the rebalancing bands you've set.

Without cash, you have to sell volatile assets on a schedule dictated by your expenses rather than when it would actually be the best time to sell. Having cash prevents this. In essence, you are not actually living off your portfolio; you are living off a big wad of cash that your portfolio maintains and deposits into.

I encourage you to read the thread, especially starting with WiseOne's response here: http://gyroscopicinvesting.com/forum/ot ... /#msg71587

[Pointedstick]

Of course a counterargument is that nobody would be stupid enough to sell assets equally in a cashless portfolio; you would harvest the gains from the current winning asset. I'll need to backtest this to see what would have happened.

[frugal]

Hello PP friends!


My biggest fear is to have several losing years on PP. How can we get out?

Is it possible 10 losing or flat years?

Regards.

[k9]

I just tried to see what happens with a bondless (hence, 33% cash) PP, results are even better. I ended up with 22 million $ (rather than 16) at the end of 2013. Even a 7,5% withdrawal rate would have survived 40 years without eating the initial capital (although it would seriously have been on the decline). That's pretty amazing with a portfolio holding 1/3 of cash !

[frugal]

I just tried to see what happens with a bondless (hence, 33% cash) PP, results are even better. I ended up with 22 million $ (rather than 16) at the end of 2013. Even a 7,5% withdrawal rate would have survived 40 years without eating the initial capital (although it would seriously have been on the decline). That's pretty amazing with a portfolio holding 1/3 of cash !

k9

22M ?

Can you post the chart?

Tks

[ns3]

I just tried to see what happens with a bondless (hence, 33% cash) PP, results are even better. I ended up with 22 million $ (rather than 16) at the end of 2013. Even a 7,5% withdrawal rate would have survived 40 years without eating the initial capital (although it would seriously have been on the decline). That's pretty amazing with a portfolio holding 1/3 of cash !

Very interesting but I wonder how far back your back-testing went. Must have included the periods when cash was actually earning decent returns. I'm starting to wonder if we're ever going to see that again.

Having said that, if I had 16 million in my PP I hope I would have better things to do than back-test to see how I could have had more. Unless I win the lottery I don't think I'll ever have to find out if that is true.

[WiseOne]

I re-read this thread with great enjoyment, and suggest others do the same.  It will help a lot of us deal with the angst of a losing year for the PP compared to traditional stock/bond portfolios.

The data and conclusions really need to be written up into an article and posted somewhere.  Perhaps on Craig's blog, or melvyr's?  It's an extremely important but rarely seen message for investors following any strategy that doesn't involve gambling.  If it's ok with all of you I don't at all mind coming up with a first draft (much easier to edit than write in my experience...)

[k9]

Frugal & ns3,

I used WiseOne's data provided in the early pages of that thread, I just removed the "bond" component. I took data from 1972 up to 2013, so, yes, it includes the 70s and 80s when cash was yielding a lot. Yes, that might be out of sight forever, but a 2200% gain after expenses offers quite a reasonable margin of safety.

[frommi]

The solution to this problem is pretty simple. You need assets that throw of an ever increasing amount of cash. I know only of two assets that can do that, businesses and real estates. Don`t overpay for the cashflows and you should be set for retirement when you match the 4% rule. This has worked in the past 150 years and will in the future, since there are lots of opportunities out there, you just have to find them.

Sorry that i revived this old threat, but i don`t visit this forum regularly anymore. 

[Sam Brazil]

Just found this thread linked to in another thread...

The thing I find wrong with the initial analysis is that it assumes your expenses during working years will be your expenses during retirement. You used the example of 100x expenses for a 40k/year family means you need 4M to retire.

But for most people housing is their biggest expense, and the idea is that you pay off your mortgage in 30 years. Same with car notes. You no longer have kids to feed, etc. So your "retiree cost of living" could realistically be 1/3 of what was required when you were at peak expensive lifestyle raising a family and paying a mortgage. In that case, your number needed to retire gets back to around 1M which is doable.

[mathjak107]

we were just talking last night about the fact that many times having a paid off mortgage adds little value to the retirement picture.

being we are are retiring now we were saying how we are staying in nyc because this is where our kids and grandkids are  .

we were saying how when we all bought houses back in the 1970's in long island a home was 35k and our mortgages were about 250 bucks a month .

that was a lot of money since we rented for 180 a month.

well today those homes are paid off and real estate taxes are 15-18k.

the fact you are saving 250 bucks a month is a moot point in the affordability of retiring here .

that 250 is a fraction of just a utility bill today .

in fact a renter with a 3 bedroom apartment who just goes to a one bedroom  after the family is out see's better cash flow than we would owning .

depending where you live not having a mortgage may cut your expenses a bit 30 years later but it still may not mean much in dollars saved.

it will be all about location as to how much help no mortgage will be .


we have been renting the last 15 years . we have a better deal renting than owning.

we owned lots of investment real estate in nyc which did very well as investments but for housing ourselves renting  and investing elsewhere was a better deal

in fact if we had not sold our home i never would have been able to have the money to invest in the real estate since there was no way we could have afforded to pay equity loans waiting for the investments to pay off and the money i needed would be tied up in the home .

but now that we are retiring we have been selling off all the real estate  and being i am not the aggressive investor i once was we are considering buying a co-op next year.

but even then we will be giving up about 12k in income on the money we will be spending on the co-op while it will reduce housing costs about 6k.

but we are hoping ten years from now we will come out cheaper buying a co-op .

[mathjak107]

Of course a counterargument is that nobody would be stupid enough to sell assets equally in a cashless portfolio; you would harvest the gains from the current winning asset. I'll need to backtest this to see what would have happened.

except studies show it may not matter and in fact don't . so yes lots of people may be stupid , including very very smart  researchers who realized cash buffers are more  mental masturbation than accomplishing much financially  michael kitces has looked  at cash buffers and buckets over and over  and the answer is systematic  withdrawals from all parts up or down  may actually work better than trying to maintain and restrict spending when markets are down to cash buffers

the weight of big cash buffers actually create their own drag in up trends that undo what they try to preserve in down trends ..

whether cash buffers help really will depend on how long you maintain them before you need the money and whether or not up cycles on any othe assets  have taken place prior .

protecting against things always will have a cost . whether the cost is higher than the protection it provides is the question..



https://www.kitces.com/blog/research-re ... ket-timer/


https://www.kitces.com/blog/are-retirem ... on-mirage/

https://www.kitces.com/blog/managing-se ... -approach/

[Pointedstick]

we were just talking last night about the fact that many times having a paid off mortgage adds little value to the retirement picture.

being we are are retiring now we were saying how we are staying in nyc because this is where our kids and grandkids are  .

we were saying how when we all bought houses back in the 1970's in long island a home was 35k and our mortgages were about 250 bucks a month .

that was a lot of money since we rented for 180 a month.

well today those homes are paid off and real estate taxes are 15-18k.

the fact you are saving 250 bucks a month is a moot point in the affordability of retiring here .

that 250 is a fraction of just a utility bill today .

I want to point out that these numbers are insane. My property taxes are a tad over $1,000 a year and my entire monthly utility cost (water, electricity, gas) runs between $60 and $90, depending on the season. $250 may be a fraction of a utility bill if you live in a mansion or air condition the place to 68 degrees year-round with half a dozen 20 year-old window units, but the largest ongoing home ownership for most people living in places with sane costs of living and a housing stock that isn't 200 years old is their mortgage, not their utility bills or property taxes.

[mathjak107]

insane or not that is what the tristate area is . nyc has lower property taxes then outside the  city but we have a nyc income tax  instead. our kids live in westchester county and they are even higher .

[Pointedstick]

insane or not that is what the tristate area is . nyc has lower property taxes then outside the  city but we have a nyc income tax  instead.

And the tristate area is not everywhere--an oversight frequently made by New Yorkers. You said, "we were just talking last night about the fact that many times having a paid off mortgage adds little value to the retirement picture." That might be accurate if you replaced "many times" with "for people who live in heavily urbanized parts of the tri-state area"

[mathjak107]

well it certainly is true  for millions of us  folks who live on the coasts . that is "many " in my book

new jersey , parts of california , ct , ny  have very high taxes.  it is for those i speak .

the same as someone commenting about how low their taxes are does not apply to us .

not every comment will apply to  everyone ever.

[Libertarian666]

No, the world stops at the Hudson river. What are you, a communist?

https://en.wikipedia.org/wiki/File:Stei ... _Cover.png

[moda0306]

PS,

Using your place in New Mexico as the "alternative" to some super expensive home out east, do you mind telling us what the FMV is?  The reason I ask is that I find this stuff is usually pretty scaleable, and I'd imagine your mortgage wasn't significantly higher as a portion of total housing expenses than someone living in a condo in Manhattan, but perhaps I'm way off here.

Either way, though, it seems to me that this is very individual by individual, with a LOT of people out there with net-worths & lifestyles & housing preferences that would make their mortgage a pretty tiny portion of their retirement expenses.  For others, it's perhaps a BIG piece.