Gyroscopic Investing

Tyler wrote:

iwealth wrote: 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.

One day at a time wrote: 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.

Pointedstick wrote: 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?

Pointedstick wrote: 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).

Pointedstick wrote: 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 wrote: 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.

k9 wrote: 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 wrote: 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 !

Pointedstick wrote: 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.

mathjak107 wrote: 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 .

mathjak107 wrote: 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.