The Indifference Point

[cowboyhat]

One of the assumptions behind putting money in a PP is that saving is currently rational.

Saving is rational if your excess productivity can be stored so that you are pretty sure you can use to buy similar amounts of stuff in the future. But if you are pretty sure that today's productivity will buy less in the future then saving makes less sense. If you are going to lose purchasing power by saving then is more rational to focus on buying stuff now.

10 year TIPS are currently selling for negative real returns in a best case scenario (ie the government does not deliberately use the CPI adjustment against investors). That means people who buy TIPS expect to have less purchasing power from their investment in 10 years.

That means that many well informed investors believe that when most risks are stripped out of assets they can expect a negative real return over the next ten years. And there is something worse than that if you believe that markets are efficient. Negative 10 years TIPS imply that that entire investment universe offers negative real returns when risk is accounted for over the next 10 years. Otherwise efficient investors would not be buying TIPS for a guaranteed real loss. They would be putting their money into things with better prospects for real return.

The super efficient US treasury bond market expects to take a real loss over the next ten years no matter where it invests money. The bond market is smarter than I am, therefore I should expect to lose by saving too. If saving is currently a mug's game, then I have reached the Indifference Point.

My house is the biggest consumption item in my budget, and I can pull consumption forward by making early payments on my mortgage. If I viewed my house as an investment this would not be rational since my house may lose value, but if, as HB argued, I view my house as a form of consumption, then it makes sense to buy as much of it as I can with today's perishable productivity, and use tomorrow's potentially more valuable productivity for other types of consumption that I can not pull forward.

The other thing is that rationally I should be as minimally productive as possible. Why work extra when the fruits of my labor are so perishable? Better to spend my free time in leisure and work later when I actually have a chance to safety store my productivity.

[BearBones]

The other thing is that rationally I should be as minimally productive as possible. Why work extra when the fruits of my labor are so perishable? Better to spend my free time in leisure and work later when I actually have a chance to safety store my productivity.

Because:
You can use some of your current earnings for the purchase of durable assets which retain value/utility (house, land, gold, many forms of education).
You are not guaranteed work later due to poor economy or poor health.
You cannot predict the high and low of any market cycle. It could be that the investing environment is better now than in the future.
The ant is usually better off in hard times than the grasshopper.

[clacy]

First, it's not as if the "bond market" is an all-knowing, perfect market that never gets it wrong.  It sounds like you are trying to over-think the market/economics and make too many predictions.

[shoestring]

Well...

1.  What if the bond market changes in a year maybe less?

2.  You seem to be looking at government rates.  Thing is the government pays the minimum possible rate investors will accept for that level of risk.  That doesn't mean no one will make any money.  Also the government isn't trying to leverage the money it is just financing its operations.

3.  Time for this vs. That has been an issue ever since oil became cheap enough people could stay up a few hours every night.  I accept my bounded rationality and try not let speculative external factors well beyond my control guide my decisions until they are knowable facts.

4.  The Bard of the PP, HB himself, made a budget for pleasure part of the plan.  I find extra spending and extra spare time have diminishing marginal rates of utility at some point so it is rational to both indulge the present and save for the future just in case there is a tomorrow.

[lazyboy]

Personally, as a retiree, I'm glad I saved for the future. During the time I  worked, I spent and enjoyed as well; remodeling my house, taking vacations, going to concerts, etc. I think one needs to do both, keeping a balance, because life is uncertain and, also, meant to be enjoyed. Now, I agree that the future for bonds do not look promising. I certainly don't know the answer to that one. Paying off your house earlier may (or not) make sense depending on borrowing rates, tax breaks and whether you like where you live. As far as being less productive, that's a more a matter of how you're feeling about yourself, your work and, again whether you are in balance. No one should be a slave to their job and working extra hours can be a burnout.

[akratic]

My hope for the PP is that it returns 3% after taxes and inflation over the next 50 years with relatively low volatility.  I wouldn't be shocked if it turns out to be more like 0-2% after taxes and inflation though.

If on the other hand, I could get a guaranteed 3.5% by paying off a 3.5% mortgage, I wouldn't have a PP at all.  I'd put every dollar I had into the mortgage, and start the PP only after the mortgage and all other debt was paid off.

I always kinda figured that the reason people had a mortgage AND investments is that they optimistically/irrationally/exuberantly assumed that stocks would return >8% forever, so what's the point of paying off a 4% mortgage?  I don't know why someone would have a PP and a mortgage though.  If the PP is going to do 3-4% real during its good decades and 0-3% real during bad decades, I'd personally take the guaranteed return you get from paying down the mortgage before I bothered with a PP.

As for minimizing productivity, consider two ways to get enough money to provide basic needs for the rest of one life (my ERE bias is going to come out here...):
A) 40hrs/week x 5 years
B) 5hrs/week x 40 years

In terms of inflation adjusted dollars, if real returns are 0%, A and B are equivalent.  If real returns are above 0%, A "wins".  If real returns are below 0% B "wins".  Given that real returns probably won't be much above or below 0%, I'd say A and B are about a wash though, and it should come down to which life you like better.

You might prefer B.  I prefer A because I like focusing a large percent of my efforts on a few things, and because with my skill set it's easier to find 40hr/wk jobs than 5hr/wk jobs.

[BearBones]

I find extra spending and extra spare time have diminishing marginal rates of utility at some point so it is rational to both indulge the present and save for the future just in case there is a tomorrow.

!!!

[Gosso]

This reminds me of the Ray Kurzweil thread where we discussed the exponential growth of technology and the likelihood that money may become irrelevant in the future or the technology will simply consume or destroy us.  This might seem on the extreme side of things, but remains a possibility.

I like how Tortoise described investing as an insurance policy that will payoff if we can hold the current system together.

Personally I think Harry's rule of enjoying your money was one of his most important rules, and yet it seems to be the most under appreciated.

[shoestring]

I find extra spending and extra spare time have diminishing marginal rates of utility at some point so it is rational to both indulge the present and save for the future just in case there is a tomorrow.

!!!

I don't see why this is so shocking.

I have determined that with spending, for instance, I don't get a lot more satisfaction blowing $300-$400 a month going out and doing stuff or buying watchadoozits than I do from only spending about $100 a month.  Sure it's more fun, but spending $100 is 80% as fun as blowing the entire wad.

Spending is a funny thing, until you get to the point you can sustainably spend a certain "quantum" of funds without really jeopardizing any of your other financial goals, you just don't get much more enjoyment out of it.  Now if I was so wealthy that I could spend $10 million in 1 month and it was naught but a drop in the bucket, sure I'd be doing things like people do in the movies, but the extra couple hundred bucks I save isn't going to afford me such opportunities.

I personally reach a point, somwhere, where I derive more satisfaction from saving the money than spending it.

Similarly, I've been in life situations with no "goof off" time in the past, and I've been in situations where I had nothing but "goof off" time.  Both are extremely unpleasant.  The former is terrible almost immediately, and the latter is fun for about two weeks, and then you get tired of it very quickly and in fact you wind up not doing the things you swear you'd do "if I only had time".

To be fair, I think the optimal rate of utilization for "work" would only be 4 hours a day.  If I were financially independent I'd make that happen somehow.

Similarly, I know if I truly pressed myself I could have a second job and be going to night school, and I know for a fact I could spend less than seventy five cents a day on food, etc.  I don't do these things because the marginal rewards of doing work tapers off past a certain point for me.  Being utterly exhausted and non stimulated isn't worth the extra $960 a month even though I know my opportunities would be much improved after doing this for 4 or 5 years.

[shoestring]

I like how Tortoise described investing as an insurance policy that will payoff if we can hold the current system together.

This is exactly the way I look at it.

Very few people have the resources to really be able to completely insulate themselves from a systemic collapse of society to any meaningful degree.  I figure the best I can do is figure the "system" isn't likely to just all go away at once, more like things will just start to decline.

I mean the 2008 recession happened, and we still have people who make a living blogging about movie stars.  We have a long way to fall yet.

And looking back through history, even though governments come and go, nations persist.  England, just to pick an example, as a nation has been around for quite some time, but it's my understanding their current government is actually younger than the American government.  It would have to be, how much power did the king have in the late 1700s versus now.  Several times since even then has the power changed hands, yet I'm not aware of the populace at large having their entire wealth confiscated or destroyed at any point.  Now in other nations that has happened, but the point is I have no idea which one it will be.