Author Topic: Basic question - European market  (Read 724 times)

dk_mmm

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Basic question - European market
« on: September 20, 2023, 05:35:37 AM »
Hi experts!

I only have a rudimentary understanding of mutual funds, stocks, bonds, etc. and I am unable to answer the below for myself.

I have a very specific case/question for Europeans.

My yearly expenses are €5000 (I am very frugal).

And suppose I have  €270K  (I don’t have them yet), and I plan on investing it… my goal is to never touch the capital. I need an instrument that gives me 1,85% in return and I could be FI.

If I want to invest those  €270K  today, and I want to get my 1,85% return a year from now… and do the same every year. (without touching the capital). What’s the best instrument that can guarantee at least 1,85%? Is there some flaw in the analysis?

I know there are always risks associated, I am looking for the safest option within known risks.

Thanks for reading!

Ps: lets remove the inflation out of the equation too 😊
Ps2: rereading my analysis, I realize those €5000 have to pay tax… So if I have to pay 25% tax… I would only get €3750







daverobev

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Re: Basic question - European market
« Reply #1 on: September 20, 2023, 12:16:00 PM »
1.85% *plus inflation*, or flat? There is nothing guaranteed for the former, but you'd be fine with a standard stock + bond split.

'Return' by the way includes both dividends and capital gains. So. Do you want to never sell a unit, or never fall  below 270k EUR? Again, not the same.

In your position I would probably go for a 50/50 global stock/bond mix (this is quite conservative, 'normally' people go for 60-70% stocks, but you have quite a lot of money for that 5k spend - so why go for riskier assets), and then split the bonds - perhaps 30% (of the 50%) a standard long bond fund, and the remainder in short term - either bonds, savings accounts, using whatever tax advantages there are.

In the UK you could put some in 6.2% 1 year bonds, for example. In France, you could put some money into a Livret A at 3% with no tax (and better, for low income people, a LEP at 6% on up to soon to be 10k EUR).

reeshau

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Re: Basic question - European market
« Reply #2 on: September 20, 2023, 12:29:31 PM »
Is there some flaw in the analysis?

...


Ps: lets remove the inflation out of the equation too 😊


In my opinion, it is the second statement above that is the flaw in your analysis.  Inflation isn't a side issue, but the core issue when facing the rest of your life.

We often say we want "safe" investments, meaning we don't want them to be volatile.  But a safe investment that lags inflation by 1-2% is not good--it's a guaranteed loser.

That is in contrast to some government pensions, which include a cost of living adjustment.  To guarantee a return, through inflation over time, might really be a safe investment--at least, to the extent you can count on the guarantor existing to the end of your contract.

Stock and mutual funds can be unsettling because they are volatile.  But over time, the volatility cancels out, and their outperformance becomes clearer.

You can obtain the first version of safety through private contract, of course.  It's called an annuity.  But they are relatively costly; their high fee structure means you need a significant lump sum to buy rather modest monthly payout.

So, it's understandable that stocks are popular; they are the cheapest way to security, even given their imperfections.  What many do is to divide their money into buckets: a short-term bucket of cash for liquidity and spending; a medium-term bucket of safer investments (bonds, fixed interest accounts, reliable dividend payers) for good assurance of refilling the first bucket; and a third, long-term bucket of risk assets (stocks and funds) to keep your assets growing, and help you offset surprises and catastrophes in the future.

Maybe that's a more general description than you were looking for.  But fundamentally understanding the difference between short-term fear of market volatility and long-term risks to your wealth is an important thing to settle in your mind in order to be at peace with whatever financial plan you make.

vand

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Re: Basic question - European market
« Reply #3 on: September 20, 2023, 02:03:42 PM »
Sovereign bonds are considered risk-free. Not sure what the rate is on the 1yr but probably around 4%. If you want to lock in the payments further out you need to go further out on the duration of the note -3yr, 5yr, 10yr, whatever.

Why is it specifically a question for Europeans?


Financial.Velociraptor

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Re: Basic question - European market
« Reply #4 on: September 21, 2023, 07:40:25 AM »

If I want to invest those  €270K  today, and I want to get my 1,85% return a year from now… and do the same every year. (without touching the capital). What’s the best instrument that can guarantee at least 1,85%? Is there some flaw in the analysis?

If you plan on a sub 2% withdrawal rate, you golden no matter what country you are in except maybe Somolia.  In the US you'd ordinarily load up on bonds.  But European stocks generally pay higher yields.  You should be able to find plenty of safe European equities that yield 3% or more.  I'd still have at least some bonds and a cash buffer.

Your flaw is ignoring inflation but it shouldn't be a problem at any plausible long term Euro rate of inflation if you are withdrawing under 2%.

Add a summer weather side hustle and you have even more buffer.

Must_ache

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Re: Basic question - European market
« Reply #5 on: September 21, 2023, 09:53:29 AM »
Hi experts!

I only have a rudimentary understanding of mutual funds, stocks, bonds, etc. and I am unable to answer the below for myself.

I have a very specific case/question for Europeans.

My yearly expenses are €5000 (I am very frugal).

And suppose I have  €270K  (I don’t have them yet), and I plan on investing it… my goal is to never touch the capital. I need an instrument that gives me 1,85% in return and I could be FI.

If I want to invest those  €270K  today, and I want to get my 1,85% return a year from now… and do the same every year. (without touching the capital). What’s the best instrument that can guarantee at least 1,85%? Is there some flaw in the analysis?

I know there are always risks associated, I am looking for the safest option within known risks.

Thanks for reading!

Ps: lets remove the inflation out of the equation too 😊
Ps2: rereading my analysis, I realize those €5000 have to pay tax… So if I have to pay 25% tax… I would only get €3750

So many red flags here.

1) If you need €5000 post-tax to cover expenses and your taxes are 25% then you need 5000/0.75 = €6,667 pre-tax.
2) If you think you need €270K to generate this income and you haven't adjusted for this, now you need 270K/0.75=€360K.
3) You also need to adjust your spending for inflation.  You say you don't have the 270K yet, how long will it take?  Let's assume you are 10 years out and inflation is 4.5% (the average inflation rate in Denmark between 1960-2022).  You will need 1.045^10-1 = 55.3% more then to have the same purchasing power.  10 years from now you will need €10,354 pre-tax to generate €7,765 post-tax.  To do that you will need 360K x 1.553 = €559K.


« Last Edit: September 21, 2023, 10:01:43 AM by Must_ache »

RWD

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Re: Basic question - European market
« Reply #6 on: September 22, 2023, 03:08:19 PM »
I only have a rudimentary understanding of mutual funds, stocks, bonds, etc. and I am unable to answer the below for myself.
You should gain a better understanding. Start here:
https://jlcollinsnh.com/stock-series/

[...] my goal is to never touch the capital.
Why not? Traditionally with investing you have to expect some years where the market will go down. You can withdraw your capital then and when the market goes up it will make up for the down periods.

I know there are always risks associated, I am looking for the safest option within known risks.
[...]
Ps: lets remove the inflation out of the equation too 😊
Inflation is your biggest risk. Also there's the possibility your expenses increase outside of your control later in life. €5000 annually forever, even inflation adjusted, is probably not realistic. At the very least it does not give you much wiggle room.