PP or stocks only for wealthy?

[simata]

Let's say you have 5 million and live very simple life spending 50000 per year (1%). Let's say you are not lucky and you buy TSM at the peak (worst possible moment). You don't care where stock market is going. You can live on dividends only (even less). And you know (never looking at stock market again) your wealth is growing in the best way as stocks are best investment for very long run. So your kids can inherit the stocks and live on dividends only (and so on till eternity).

Why you (wealthy person) would prefer PP over TSM which has lower CAGR or any other investment/portfolio?

Dividends where never lower than 1% of inicial buying price whenever you bought in the past: http://pages.stern.nyu.edu/~adamodar/Ne ... spearn.htm

[Storm]

In this contrived scenario, which none of us are likely to be lucky enough to participate in, the "all stock" investor is still at a disadvantage over the PP investor:

1.  He is not liquid - in this scenario he can never sell any of his stock, or never sell it if it's the wrong time and the market is down.

2.  Dividends might fall, stocks might not have the growth in the next century that they have had in the last.

I think just being liquid is a huge advantage that the PP has.

[MediumTex]

If the investor only needs 1% to live on, why not just buy 30 year treasuries and give the other 2.5-3% in annual income to charity?

I think that the assumptions in the example are too unrealistic to provide any useful conclusions.

Among other things, people with that level of assets can rarely be that indifferent to large market declines.

[Ad Orientem]

Let's say you have 5 million and live very simple life spending 50000 per year (1%). Let's say you are not lucky and you buy TSM at the peak (worst possible moment). You don't care where stock market is going. You can live on dividends only (even less). And you know (never looking at stock market again) your wealth is growing in the best way as stocks are best investment for very long run. So your kids can inherit the stocks and live on dividends only (and so on till eternity).

Why you (wealthy person) would prefer PP over TSM which has lower CAGR or any other investment/portfolio?

Dividends where never lower than 1% of inicial buying price whenever you bought in the past: http://pages.stern.nyu.edu/~adamodar/Ne ... spearn.htm

Putting all of your money in a single asset class is nuts.  You can make an argument for those who are wealthy having a higher risk tolerance.  But 100% anything is reckless.

Case in point: October 1929 - July 1932 the US Stock Mkt lost 90% of its value. Many stocks lost even more (or were just wiped out).  Your $5 Million just became $500K.  Granted you probably can still live on that, for a while.  But your margin of safety is now utterly destroyed along with your capital base.  And the stock market did not recover to its pre-crash levels until 1954.  Can your hypothetical investor wait a quarter century to break even?

If I had $5 million I would almost certainly have the bulk of that invested in a PP.  But I will concede that the super wealthy (add another zero on that '5') and who are so inclined, can afford to take some added risks for potential extra gain.  If I had $50 million I might overweight stocks and underweight bonds and cash a bit.  I would probably also consider muni bonds for tax reasons though I am bearish on bonds long term.  Maybe something like...
50% VTI
30% NYF
20% Gold

But that's about as high risk as I could see myself getting, and again only if I was extremely wealthy and could afford to take a big hit for a number of years.

[smurff]

Let's say you have 5 million and live very simple life spending 50000 per year (1%). Let's say you are not lucky and you buy TSM at the peak (worst possible moment). You don't care where stock market is going. You can live on dividends only (even less). And you know (never looking at stock market again) your wealth is growing in the best way as stocks are best investment for very long run. So your kids can inherit the stocks and live on dividends only (and so on till eternity).

I was reading this and thinking, why does this sound so familiar?  Then it hit me--Madoff.  A friend had a couple of family friends who were Madoff clients, and her father, who managed his own portfolio, had been invited to invest with Madoff (but did not do so).  She would relay to me their stories.

Lots of Madoff's clients did what you described.  They invested all their assets (except for their homes, its contents, and personal belongings) in the stock market through Madoff, annually withdrew and lived on 1% to 4% of the account statement total.  Then the market tide went out, and Madoff was revealed as one of those swimming naked.  Such clients were wiped out.  Because their withdrawals equaled or exceeded the SIPC $500K limit, they were not entitled to any SIPC insurance proceeds, and might still be subject to clawback--meaning they would have lost even more than what the evaporated account balances showed.  (BTW, next to the massive fraud itself, the way the trustees interpreted and implemented the SIPC rules were the most shocking to me.)

Not that this is what you were describing, Simata, it's just what your example reminded me of.

Therefore:  Do not put all your eggs in one basket, whether that one basket be the TSM (a basket which constitutes one asset category), gold, one mutual fund or ETF family of companies, a specific brokerage firm no matter how well-known, etc. 

[Odysseusa]

Often times people with $5,000 or $50,000 lose more money in term of percentage of their income compared to the wealthy people with $5 million or $50 million, etc. Therefore, it is more important for non-wealthy people to consider HBPP.

[Pkg Man]

I agree with some of the previous posts -- the HB PP is, IMHO, safer than any single investment no matter what that investment is.

[craigr]

I know two kinds of wealthy investors:

1) Those that invested conservatively and still have their money.

2) Those that didn't because they got cocky and lost most of it.

The more money you have, the less risk you should be taking. You can only cause problems by taking on risk.