moda0306 wrote: ↑
Fri Jun 08, 2018 9:25 am
I find it kind of odd the haranguing about "having to take risk to be successful." I guess I'd ask for their definition of success. And perhaps their definition of "taking risk." To me, when discussing finance, reaching a point of financial independence at 60 is pretty "successful," but I'd include the person that can retire early and keep their expenses below their Social Security income and live a happy life. I would probably not
include someone who saved $1 Million by retirement but somehow can't figure out how to live on anything under $80k without being stressed. Also, to me, spending a high percentage of your income and then leaning on RoR of your investments to reach FI is extremely risky. I'd rather take "risks" that have the highest expected value. And saving a ton of your income to reach FI is actually very low-risk and doable.
For instance, my GF and I combined make about $100k. We save about 50% of our after-tax income and live what I consider to be a rich life... mostly because we know how to cook well and have cheap hobbies, drive economy cars to our jobs close to our home, and have a roommate to help with housing costs. Those alone seem to save us a ton of money compared to our friends.
After doing some quick math, if all we did was "invest" in a CD ladder that ends up earning us a -1% Real RoR for 40 years, using a 3% draw-down, could generate enough wealth to "fund" the rest of our life, even with no Social Security.
Add-back even the "75% promised benefits (from tax collections once the trust fund runs out)" from Social Security that one could arguably "plan" on, and our savings would be barely tapped based on lifestyle expenses. We could probably justify retiring a decade earlier.
Obviously, this example is a bit ridiculous but it is to prove a point... and that is you don't have to "take risks" in your investments to be successful. What you have to do is harvest a lot of your income into savings, even if its only going to grow at a rate lower than that of inflation.
The point is, you if you're NOT saving a very high percentage of your income, and then are having discussions about why you "have to" take investment risks to reach your goals (said another way, you rely on a higher expected RoR to not run out of money), then you're leaning on your investments for what is essentially a lifestyle expense problem. I'd assert that if you can't reach your "goals" with a 0% real rate of return in the analysis, then your problem is fundamentally one of savings rate (or if at/near retirement, mostly the spending rate portion of the savings equation)
I don't have a problem with investing in stocks... I do... but if your "monte carlo" needs you to to have a reasonable expected success rate, then you're probably simply leaning too hard on your wealth. The "better" route would be to figure out ways to live cheaper, either now or in retirement, or earn more in your career, or a combination of both.
Now from that position, if you find "high-expected-value " investments, either in the stock market or in more closely-held investments, I'd definitely often advocate "taking risk" to collect that RoR if you can keep it as a small-to-modest portion of your net worth and doesn't distract you from your main career. But nobody owe's you a Real RoR, so it isn't something one should naturally expect without having to work for it, but once you have to struggle for something it essentially becomes a "side gig" and is an opportunity cost to your main career. It isn't something that was ever found in nature (most things deteriorate... most things that don't are mostly useless or simply hold their value). The luxury of simply having the ability to harvest a healthy chunk of your earnings into a pot that doesn't need to be managed to not deteriorate is a modern miracle... one that we all take for granted because we are bombarded with stories of "8%-12% RoR" stock markets and 7% interest rates from years-past. Those latter investments are great... but if you're leaning on them, studying them, managing them and whining about them to reach financial independence you're probably foregoing better opportunities in your savings rate. Harry Browne said something to this affect... and it took me years of what was essentially an only semi-useful hobby of understanding financial markets and the PP to realize this. I'd have been far-better off learning how to use a price-book, learning how to cook, rent vs. buy analysis (or just a financial calculator in general), some tax planning fundamentals, career management fundamentals, and finding cheap healthy hobbies to get my savings rate up to 35%+ and save my "PP Learning Experience" and other related investing learning for my 30's.
I hope that doesn't come off as too lectury... it's just that the conversations I see most people having about money/investments appear to be entirely the wrong ones for the stage of financial independence/dependence that they are at. Even at that magic "25x expenses in net worth," being able to find tricks to reduce some expenses can help you enrich your life in other areas, or vice versa (finding ways to enrich your life in cheap ways reduce pressure on your money to "fund" a rich lifestyle).