Author Topic: Is a 7% return unlikely without a complex approach?  (Read 13894 times)

boarder42

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Re: Is a 7% return unlikely without a complex approach?
« Reply #150 on: December 14, 2021, 11:26:01 AM »
What does the group say?  In this hypothetical scenario, would a rebalance be a Mustachian move or a market-timer move?

While I disagree with the premise that Mustachian and market-timer is a valid dichotomy, I rebalance whenever I see that my bond position is more than 25% out of whack in either direction.  I rebalance as I feel like it within those ranges.  Since I have such a low allocation to bonds, I'm typically not forced to rebalance very often.

In that hypothetical, I'd be rebalancing all the way down to maintain my AA, which would mean selling bonds and buying stocks.  Which is pretty much what I did in the COVD semi-flash correction last spring.  I went from bonds to stocks on 2/26,  2/28, 3/10, 3/11, 3/12, 3/13, and 3/17/20.  I also did half of my 2020 Roth conversion on 3/17/20.

so long term it likely pays off but this is something i've often thought about maximizing that down turn but at the same time you need to maintain a reasonable traditional balance to continue making conversions til you can withdraw tax and penalty free.  so 50% seems reasonable.  I have to control my mind alot b/c sometimes i'm like why not all the way to the top of the 22% bracket b/c i've got alot of trad and the 22% bracket may die off here in a few years.

secondcor521

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Re: Is a 7% return unlikely without a complex approach?
« Reply #151 on: December 14, 2021, 12:03:46 PM »
What does the group say?  In this hypothetical scenario, would a rebalance be a Mustachian move or a market-timer move?

While I disagree with the premise that Mustachian and market-timer is a valid dichotomy, I rebalance whenever I see that my bond position is more than 25% out of whack in either direction.  I rebalance as I feel like it within those ranges.  Since I have such a low allocation to bonds, I'm typically not forced to rebalance very often.

In that hypothetical, I'd be rebalancing all the way down to maintain my AA, which would mean selling bonds and buying stocks.  Which is pretty much what I did in the COVD semi-flash correction last spring.  I went from bonds to stocks on 2/26,  2/28, 3/10, 3/11, 3/12, 3/13, and 3/17/20.  I also did half of my 2020 Roth conversion on 3/17/20.

so long term it likely pays off but this is something i've often thought about maximizing that down turn but at the same time you need to maintain a reasonable traditional balance to continue making conversions til you can withdraw tax and penalty free.  so 50% seems reasonable.  I have to control my mind alot b/c sometimes i'm like why not all the way to the top of the 22% bracket b/c i've got alot of trad and the 22% bracket may die off here in a few years.

When I said "half", I meant "half of my annual target Roth conversion for 2020", not "half of my traditional IRA balance".

There are a lot of tradeoffs to consider in how much to Roth convert, and certainly the 2026 sunset of the TCJA rates and brackets is on a lot of people's minds, including mine.  In fact, I may do a "pulse" up to top of 22% or top of 24% in two or three years when my kids are out of their FAFSA years, partly for that reason.

Like you, I have a lot (well, as in percentage of my FIRE stash) in my traditional IRA, so I'll probably be Roth converting some each year for the rest of my life.  I basically balance my tax rate now vs. my projected tax rate at age 75 and try to convert up to  that age 75 rate but not higher.

boarder42

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Re: Is a 7% return unlikely without a complex approach?
« Reply #152 on: December 14, 2021, 12:07:35 PM »
What does the group say?  In this hypothetical scenario, would a rebalance be a Mustachian move or a market-timer move?

While I disagree with the premise that Mustachian and market-timer is a valid dichotomy, I rebalance whenever I see that my bond position is more than 25% out of whack in either direction.  I rebalance as I feel like it within those ranges.  Since I have such a low allocation to bonds, I'm typically not forced to rebalance very often.

In that hypothetical, I'd be rebalancing all the way down to maintain my AA, which would mean selling bonds and buying stocks.  Which is pretty much what I did in the COVD semi-flash correction last spring.  I went from bonds to stocks on 2/26,  2/28, 3/10, 3/11, 3/12, 3/13, and 3/17/20.  I also did half of my 2020 Roth conversion on 3/17/20.

so long term it likely pays off but this is something i've often thought about maximizing that down turn but at the same time you need to maintain a reasonable traditional balance to continue making conversions til you can withdraw tax and penalty free.  so 50% seems reasonable.  I have to control my mind alot b/c sometimes i'm like why not all the way to the top of the 22% bracket b/c i've got alot of trad and the 22% bracket may die off here in a few years.

When I said "half", I meant "half of my annual target Roth conversion for 2020", not "half of my traditional IRA balance".

There are a lot of tradeoffs to consider in how much to Roth convert, and certainly the 2026 sunset of the TCJA rates and brackets is on a lot of people's minds, including mine.  In fact, I may do a "pulse" up to top of 22% or top of 24% in two or three years when my kids are out of their FAFSA years, partly for that reason.

Like you, I have a lot (well, as in percentage of my FIRE stash) in my traditional IRA, so I'll probably be Roth converting some each year for the rest of my life.  I basically balance my tax rate now vs. my projected tax rate at age 75 and try to convert up to  that age 75 rate but not higher.

i'm more balancing SORR today since we're just stepping into FIRE i'm more concerned the next few years with controlling spending thats easy to control like taxes and ACA costs to lower our cash out flows and therefore SORR. Long term i'll have to pivot my focus to RMDs but at that point we'll have a much larger stash hopefully.

i was well aware you meant half you stash conversion for the year but it just sparked the thought in my brain i'd been contemplating

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Re: Is a 7% return unlikely without a complex approach?
« Reply #153 on: December 14, 2021, 06:10:02 PM »
Yes, I would rebalance per my IPS at the 5/25 bands. My spreadsheet calculates this and tells me when and how much to rebalanced. So in the 90% down case I’d probably be catching the falling knife a bit.

I am currently sitting at 10% bonds / 10% cash / 80% stocks. Stocks are split between 60%US / 20%Dev ex US / 20%EM. US is split 40% TSM / 25% Growth / 25% SCV / 10% REIT.

Probably more complex than is warranted, but it has some entertainment value also.

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Re: Is a 7% return unlikely without a complex approach?
« Reply #154 on: December 15, 2021, 09:05:10 AM »
What does the group say?  In this hypothetical scenario, would a rebalance be a Mustachian move or a market-timer move?

While I disagree with the premise that Mustachian and market-timer is a valid dichotomy, I rebalance whenever I see that my bond position is more than 25% out of whack in either direction.

I think you are misunderstanding the term market timer.  Rebalancing due to allocations having changed is not an example of market timing.  Market timing is making a move based on what you think will happen next.  It's effectively gambling based on fortune telling.  So I do stick to my assertion that market-timing is never the Mustachian approach.


In that hypothetical, I'd be rebalancing all the way down to maintain my AA, which would mean selling bonds and buying stocks.  Which is pretty much what I did in the COVD semi-flash correction last spring.  I went from bonds to stocks on 2/26,  2/28, 3/10, 3/11, 3/12, 3/13, and 3/17/20.  I also did half of my 2020 Roth conversion on 3/17/20.

So your bond position was changing by 25% on a daily basis during that time?  Was it a very small percentage of your AA overall?

wenchsenior

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Re: Is a 7% return unlikely without a complex approach?
« Reply #155 on: December 15, 2021, 09:42:24 AM »
You do have a high bond allocation.   Most bonds right now have a negative real rate of return.   Keep that in mind.

Interesting.  I thought this was a fairly standard % for being less than 10 years from retirement.  What seems like a good number to you?

I was 100% stocks right up until I pulled the trigger on FIRE. At that point I decided on setting aside a few years of spending in cash/bonds.

I have no idea what the future holds. I have a simple stock heavy globally diversified portfolio. No plans to change that.

FWIW - I didn't read the link in your OP. I don't care what JPM says. I don't read any other financial analysis articles either. I think a low information diet is the best use of my time when it comes to the financial media.



Yeah, we are 4-6 years out from retirement and 90% stocks (diversified global, as we've been for quite a while). I would not necessarily expect 7% returns without a stock allocation this high (although I expect it's more likely we'll end up with tons of money than under-perform expectations).  But we have a small pension in retirement that will function like a 'bond/cash' allocation, so we expect to stay in very heavy stock allocations well into retirement or until our situation/needs drastically change.  And we anticipate budgeting to be able to live on a 3% withdrawal rate, if that becomes necessary.

ETA: as others have noted in this thread, our high stock allocation is based on the nerves of steel that I (the money manager) have in terms of tolerance to wild market swings.  If my husband were running things, we'd probably have a lower stock allocation.  That's the part of your personal equation you have to determine, I think.
« Last Edit: December 15, 2021, 09:46:06 AM by wenchsenior »

firelyve

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Re: Is a 7% return unlikely without a complex approach?
« Reply #156 on: December 15, 2021, 10:08:51 AM »
I don't post often, being a noobie to all this FIRE stuff, I've been eaten a live a couple of times, so I know how the OP feels LOL!

I just learned about the whole FIRE concept 2 years ago, but luckily I had the basics down for many years.  Be as productive as possible (earn money), spend WAY less than you earn (be frugal), invest the rest (mostly stocks).  My goal was to FIRE last May, with wife to follow in December (who was about as anti-FIRE as possible before we got married 4 years ago).  COVID tweaked that a bit, we both got let go in August last year, but got to collect unemployment.  In the meantime, we both ourselves up as Independent Contractors from home with minimal travel, and work 2-4 hours per day.  Not 100% FIRE, but enough to get us out of the traditional rat race. 

I can tell you that my first year of FIRE did not go as planned.  Stock market up a lot, and I had a lot in cash as my plan was to glide path to handle SORR.  Poor strategy, considering we were still partially working and had income to cover budget.  Now, if the market tanked last year, I would have looked like a genius, but it still would have been luck.  My take away is if you're still generating income, especially enough to cover costs, stay invested.  I'm targeting 3 years of cash (majority I Bonds) to weather any stock market storm.

We also spent a TON more money than we thought on 2 major categories.  We traveled a bunch (I know, weird in COVID, right?) and house remodel; $40k we didn't need to do.  Got a second bathroom, so no real regrets there.  A few things we didn't account for were small things like presents for kids/family, and activities for our 10 year old.  That in itself ran us another $3600.  Now, here's where everyone will jump in and say 'you spent how much on what'?  We didn't HAVE to, but we could.  Maybe it's not as Mustachian as others.  But I learned another valuable lesson.

I dabbled in rental real estate, stock picking, having lots of cash, etc..  For the OP, here is what I think is 90% of the battle:

1.  The only real controllable is your spending.  Spending will dictate both the amount you can save while working and how long your capital will last once you stop working.  I feel a little stubble growing on my upper lip...

2.  Have a crazy safe withdrawal rate.  My goal is to hover between 2-3% once we completely quit working PT.  When working PT, goal is 0%.  I'm counting on Social Security at 75%.  I may have to withdraw a little more than 3% for a few years before I start collecting (I'm 48 now, like OP), but then once start collecting, I think I can reduce that withdrawal rate to like 1.5%. 

That should get me 90%+ there, with things that I can't screw up and are controllable (how much I work, how much I spend, how much is left to invest).  What I invest in exactly as long as it's diversified low cost mutual funds or ETFs, with 15-20% in cash/I-bonds, should do the trick.  IF I could find a method to allow me to withdraw another 1-2% from my portfolio per year (currently at $1.7MM), that would be awesome.  HOWEVER, it's that marginal return on time to try to figure that out AND a good chance I would DO NO BETTER OR WORSE than if I just kept it simple. 

So I feel pretty bullet proof, even though I've made a ton of mistakes and continue to.  I'm not completely FIRE, but I feel I could stop working any time if I got fed up with the couple hours a day of work.  Now, if the economy tanks in a zombie apocalypse, then it really doesn't matter, so I don't try to plan for that.

Find a cash-stache that you think will get you through a major market poop.  Is that 2 years, 3 years, 5 years?  I picked 3 years.  I have resources to do things like take out a mortgage, use credit cards, etc., to float another 1-2 years easily. 

Bonds pretty much stink here.  I-bonds seem much better, and I am working to park my cash there.  I'll be 80-85% stocks.  Probably put a few % of that into REITs.  Real estate is great for some, but I've been there and not where I want to be.  I'd rather work 2 hours per day PT from my home than deal with tenants. That's just me.  I'm lucky I can do what I do and make decent money with such little effort, the result of building 25 years of a career in the same industry. 

That's my own 2-cents, good luck OP! I've learned quite a bit from this thread and I hope you did/do too!

secondcor521

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Re: Is a 7% return unlikely without a complex approach?
« Reply #157 on: December 15, 2021, 10:21:45 AM »
What does the group say?  In this hypothetical scenario, would a rebalance be a Mustachian move or a market-timer move?

While I disagree with the premise that Mustachian and market-timer is a valid dichotomy, I rebalance whenever I see that my bond position is more than 25% out of whack in either direction.

I think you are misunderstanding the term market timer.  Rebalancing due to allocations having changed is not an example of market timing.  Market timing is making a move based on what you think will happen next.  It's effectively gambling based on fortune telling.  So I do stick to my assertion that market-timing is never the Mustachian approach.

I think you misunderstand me completely.  I know and understand the terms perfectly well.  What you are (probably) misinterpreting is either "Mustachian" or "dichotomy".  But I'm not going to bother trying to nail it down further after seeing how you tried and mostly failed to understand @Malcat, who is notorious for her (*) clarity and communication skills.

In that hypothetical, I'd be rebalancing all the way down to maintain my AA, which would mean selling bonds and buying stocks.  Which is pretty much what I did in the COVD semi-flash correction last spring.  I went from bonds to stocks on 2/26,  2/28, 3/10, 3/11, 3/12, 3/13, and 3/17/20.  I also did half of my 2020 Roth conversion on 3/17/20.

So your bond position was changing by 25% on a daily basis during that time?  Was it a very small percentage of your AA overall?

I don't recall offhand, but I don't think so.  The market was dropping rather rapidly, and I was also in the process of getting my AA adjusted closer to my target.  Some point previous to last spring I had a realization that, because I wasn't going to spend all of what I had, I could put the portion I wasn't going to spend in 100% stocks.  This meant my AA would be a blend of my AA of 90/10 and my kids' AA of 100/0.  This meant that my target AA had shifted from 90/10 to about 97/3.  To amuse myself, I chose to lazily and opportunistically move towards this goal rather than move all at once (although I would have been fine intellectually, emotionally, financially, and practically to move immediately to the new AA).

You are right, though, in that I have historically had a low, and recently a very low, allocation to bonds.  I was essentially 100% stocks from at least 1987 through 2016 when I FIREd.  I went to 90/10 for a bit, and currently have an AA target of approximately 98/2.

Overall, of course, the difference between 90/10, 97/3, 98/2, and 100/0 isn't really all that big IMHO.

(*) I *think* Malcat is female, but I'm not 100% sure.
« Last Edit: December 15, 2021, 10:26:13 AM by secondcor521 »

CrankAddict

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Re: Is a 7% return unlikely without a complex approach?
« Reply #158 on: December 15, 2021, 10:49:03 AM »
I think you misunderstand me completely.  I know and understand the terms perfectly well.  What you are (probably) misinterpreting is either "Mustachian" or "dichotomy".  But I'm not going to bother trying to nail it down further after seeing how you tried and mostly failed to understand @Malcat, who is notorious for her (*) clarity and communication skills.

Wow, that got cranky in a hurry.  If we're being snarky now I'd love to play :)  Since you are a wizard with definitions you should realize that "notorious" has a negative connotation: "famous, typically for some bad quality".  Probably not the best way to underscore somebody being good at something.  Note I'm not making that claim against her, I'm just jabbing you.  That said, a review of the conversation would show Malcat was having difficulty understanding what I was saying, which would not hinge on her ability to relay thoughts and concepts:

"Honestly, I feel like I just can't understand what you are getting at"

"I give up. I still have absolutely no idea what you are proposing to do."

"I'm now totally confused by what you are referring to as "bonds""

In any case, I'm not sure why you are unwilling to explain what you mean that a mustachian ("someone following the principles espoused on the MMM blogs/forums") and a market-timer ("a person or organization that makes decisions to buy or sell investments based on economic and other factors that might affect the direction of the market") do not represent a dichotomy ("a division or contrast between two things that are or are represented as being opposed or entirely different") and are instead trying to hold her up as a shield.

Could a mustachian market time?  I suppose you could be a frugal spender and big saver but still try to time the market.  That might get you a beginner stache.  But if you want the full waxed handlebars, I have not seen anyone around here propose market timing as a recommended strategy.  Your original juxtaposition of the dichotomy comment and the mention of having rebalanced your bonds would lead any reasonable reader to conclude as I have.
« Last Edit: December 15, 2021, 10:51:43 AM by CrankAddict »

firelyve

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Re: Is a 7% return unlikely without a complex approach?
« Reply #159 on: December 15, 2021, 11:16:30 AM »
I don't post often, being a noobie to all this FIRE stuff, I've been eaten a live a couple of times, so I know how the OP feels LOL!

I just learned about the whole FIRE concept 2 years ago, but luckily I had the basics down for many years.  Be as productive as possible (earn money), spend WAY less than you earn (be frugal), invest the rest (mostly stocks).  My goal was to FIRE last May, with wife to follow in December (who was about as anti-FIRE as possible before we got married 4 years ago).  COVID tweaked that a bit, we both got let go in August last year, but got to collect unemployment.  In the meantime, we both ourselves up as Independent Contractors from home with minimal travel, and work 2-4 hours per day.  Not 100% FIRE, but enough to get us out of the traditional rat race. 

I can tell you that my first year of FIRE did not go as planned.  Stock market up a lot, and I had a lot in cash as my plan was to glide path to handle SORR.  Poor strategy, considering we were still partially working and had income to cover budget.  Now, if the market tanked last year, I would have looked like a genius, but it still would have been luck.  My take away is if you're still generating income, especially enough to cover costs, stay invested.  I'm targeting 3 years of cash (majority I Bonds) to weather any stock market storm.

We also spent a TON more money than we thought on 2 major categories.  We traveled a bunch (I know, weird in COVID, right?) and house remodel; $40k we didn't need to do.  Got a second bathroom, so no real regrets there.  A few things we didn't account for were small things like presents for kids/family, and activities for our 10 year old.  That in itself ran us another $3600.  Now, here's where everyone will jump in and say 'you spent how much on what'?  We didn't HAVE to, but we could.  Maybe it's not as Mustachian as others.  But I learned another valuable lesson.

I dabbled in rental real estate, stock picking, having lots of cash, etc..  For the OP, here is what I think is 90% of the battle:

1.  The only real controllable is your spending.  Spending will dictate both the amount you can save while working and how long your capital will last once you stop working.  I feel a little stubble growing on my upper lip...

2.  Have a crazy safe withdrawal rate.  My goal is to hover between 2-3% once we completely quit working PT.  When working PT, goal is 0%.  I'm counting on Social Security at 75%.  I may have to withdraw a little more than 3% for a few years before I start collecting (I'm 48 now, like OP), but then once start collecting, I think I can reduce that withdrawal rate to like 1.5%. 

That should get me 90%+ there, with things that I can't screw up and are controllable (how much I work, how much I spend, how much is left to invest).  What I invest in exactly as long as it's diversified low cost mutual funds or ETFs, with 15-20% in cash/I-bonds, should do the trick.  IF I could find a method to allow me to withdraw another 1-2% from my portfolio per year (currently at $1.7MM), that would be awesome.  HOWEVER, it's that marginal return on time to try to figure that out AND a good chance I would DO NO BETTER OR WORSE than if I just kept it simple. 

So I feel pretty bullet proof, even though I've made a ton of mistakes and continue to.  I'm not completely FIRE, but I feel I could stop working any time if I got fed up with the couple hours a day of work.  Now, if the economy tanks in a zombie apocalypse, then it really doesn't matter, so I don't try to plan for that.

Find a cash-stache that you think will get you through a major market poop.  Is that 2 years, 3 years, 5 years?  I picked 3 years.  I have resources to do things like take out a mortgage, use credit cards, etc., to float another 1-2 years easily. 

Bonds pretty much stink here.  I-bonds seem much better, and I am working to park my cash there.  I'll be 80-85% stocks.  Probably put a few % of that into REITs.  Real estate is great for some, but I've been there and not where I want to be.  I'd rather work 2 hours per day PT from my home than deal with tenants. That's just me.  I'm lucky I can do what I do and make decent money with such little effort, the result of building 25 years of a career in the same industry. 

That's my own 2-cents, good luck OP! I've learned quite a bit from this thread and I hope you did/do too!

Radagast

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Re: Is a 7% return unlikely without a complex approach?
« Reply #160 on: December 15, 2021, 07:51:25 PM »
The world's stock markets have a history of occasionally losing 90% or more.

I assume that this is in reference to the 89.2% loss in the Dow during the great depression.

But that's a little bit "wrong" in the sense that there was also massive deflation at the time.

https://www.thebalance.com/stock-market-crash-of-1929-causes-effects-and-facts-3305891
Pretty much every market that's been around a while has lost 90% or more. Japan after 1990 and Iceland after 2007 I think are recent examples, maybe some others like Greece or Portugal and Russia. Go back farther and they all have. The US is actually unusual in that it never quite did. Sorry data is hard to find without time which I don't have and I can't remember where I read that.

Radagast

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Re: Is a 7% return unlikely without a complex approach?
« Reply #161 on: December 15, 2021, 07:57:27 PM »
I'd want to keep working a few more years.  In other words, whether I had $280k or $100k, I'd still feel like it was way too risky to just quit my job and start living the good life.  So if having 20% bonds during the building phase doesn't really give me a safety net in that sense, is it still worth doing?
Strictly by the spreadsheet, there is no reason for bonds while still employed. But there also may be expenses beyond your control, or lost employment. A bond situation for the employed really depends on your own situation: employment stability, one or two earner household, quality of insurance or health, and more. If you don't have much money then 10% to bonds isn't much anyhow: $90,000 in stocks and $10,000 in a checking account.

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Re: Is a 7% return unlikely without a complex approach?
« Reply #162 on: December 16, 2021, 05:04:38 PM »
1) Bonds are a boat anchor, cut them loose
I'd like to register a categorical disagreement for this one. The world's stock markets have a history of occasionally losing 90% or more. If you count on 4% annually, and can trim to 3%, would you be happy with a 100% stock portfolio if the Great Depression repeats? No. Definitely no. A 90% crash could start at any time, and even after ten good years a 90+% crash could still sink you depending on how the sequence played out. I'd recommend something instead like 10% series I savings bonds plus 10% long term treasury bonds in addition to 80% stocks or whatever because you really don't know what will happen. But 10% bonds/cash at a bare minimum. With that said, yes bonds are boat anchors, so don't keep too many, but at least if a big storm pops up you won't get blown away if you have them. All ships actually have anchors, because they are useful.

I'd like to register a philosophical disagreement.  Bonds aren't an anchor, they are ballast.   Ballast keeps you on course and steadies the ship.  For  example, at the start of the Great Depression and market crash, interest rates were at about 6% and then fell as the country slid into recession.   Falling rates meant that bonds were becoming more valuable, even as stocks became less valuable.   So having some ballast provided protection. 

Now let's say there is some big market crash tomorrow.   Currently the 10-year is 1.4%.   Inflation is what?  9%?   Falling rates won't protect you because they can't fall far enough to avoid taking a permanent loss on the bond portion of your portfolio.  Best case is you won't lose as much with bonds.  But in order to get that protected you need to sign up for virtually guaranteed loss at the beginning.  Expensive insurance, for sure. 

CrankAddict

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Re: Is a 7% return unlikely without a complex approach?
« Reply #163 on: December 16, 2021, 05:16:42 PM »
1) Bonds are a boat anchor, cut them loose
I'd like to register a categorical disagreement for this one.

I'd like to register a philosophical disagreement.  Bonds aren't an anchor, they are ballast.   Ballast keeps you on course and steadies the ship.  For  example, at the start of the Great Depression and market crash, interest rates were at about 6% and then fell as the country slid into recession.   Falling rates meant that bonds were becoming more valuable, even as stocks became less valuable.   So having some ballast provided protection. 

Now let's say there is some big market crash tomorrow.   Currently the 10-year is 1.4%.   Inflation is what?  9%?   Falling rates won't protect you because they can't fall far enough to avoid taking a permanent loss on the bond portion of your portfolio.  Best case is you won't lose as much with bonds.  But in order to get that protected you need to sign up for virtually guaranteed loss at the beginning.  Expensive insurance, for sure.

Not counting defaults, is there a viable scenario where bonds are worse than cash?  It seems holding an actual bond you get all your money back plus some amount of interest so you'd be guaranteed to be better off than cash under the mattress.  But with a bond index fund, couldn't a share price drop along with a minimal return put you worse off than cash at 0%?

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Re: Is a 7% return unlikely without a complex approach?
« Reply #164 on: December 16, 2021, 06:09:03 PM »
1) Bonds are a boat anchor, cut them loose
I'd like to register a categorical disagreement for this one. The world's stock markets have a history of occasionally losing 90% or more. If you count on 4% annually, and can trim to 3%, would you be happy with a 100% stock portfolio if the Great Depression repeats? No. Definitely no. A 90% crash could start at any time, and even after ten good years a 90+% crash could still sink you depending on how the sequence played out. I'd recommend something instead like 10% series I savings bonds plus 10% long term treasury bonds in addition to 80% stocks or whatever because you really don't know what will happen. But 10% bonds/cash at a bare minimum. With that said, yes bonds are boat anchors, so don't keep too many, but at least if a big storm pops up you won't get blown away if you have them. All ships actually have anchors, because they are useful.

I'd like to register a philosophical disagreement.  Bonds aren't an anchor, they are ballast.   Ballast keeps you on course and steadies the ship.  For  example, at the start of the Great Depression and market crash, interest rates were at about 6% and then fell as the country slid into recession.   Falling rates meant that bonds were becoming more valuable, even as stocks became less valuable.   So having some ballast provided protection. 

Now let's say there is some big market crash tomorrow.   Currently the 10-year is 1.4%.   Inflation is what?  9%?   Falling rates won't protect you because they can't fall far enough to avoid taking a permanent loss on the bond portion of your portfolio.  Best case is you won't lose as much with bonds.  But in order to get that protected you need to sign up for virtually guaranteed loss at the beginning.  Expensive insurance, for sure.

I have the same outlook here. Let's say that there is a parallel with health. Rather than having to pay the expensive health insurance all my life (even if i'm healthy in general), i rather pay a small charge per doctor visit e.g. $20. And this how having open credit line would work: paying smallish interest rate when actually using it. Sorry for keeping repeating myself, i'm often guilty of it.

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Re: Is a 7% return unlikely without a complex approach?
« Reply #165 on: December 16, 2021, 07:33:17 PM »
Not counting defaults, is there a viable scenario where bonds are worse than cash?  It seems holding an actual bond you get all your money back plus some amount of interest so you'd be guaranteed to be better off than cash under the mattress.  But with a bond index fund, couldn't a share price drop along with a minimal return put you worse off than cash at 0%?

Cash is two different things. Cash in the bank and cash under a mattress.

Cash in the bank can be better than owning a specific long term interest rate bond if interest rates increase substantially because you'll earn more interest on your bank account balance than you do on the fixed rate bond.

Cash under the mattress or cash in the bank can be better than owning a specific long term bond if interest rates increase substantially, depressing the resale value of your bond, and you need or want to spend your money now rather than when the bond matures in 10 or 30 years*.

*Or 40 years for some of the new corporate bonds Amazon has issued.

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Re: Is a 7% return unlikely without a complex approach?
« Reply #166 on: December 16, 2021, 09:03:17 PM »
Didn't this post start with some reason to think 7% returns may not be likely and now we're comparing cash positions. What's next trading nfts?

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Re: Is a 7% return unlikely without a complex approach?
« Reply #167 on: December 16, 2021, 09:32:33 PM »
Not counting defaults, is there a viable scenario where bonds are worse than cash?  It seems holding an actual bond you get all your money back plus some amount of interest so you'd be guaranteed to be better off than cash under the mattress.  But with a bond index fund, couldn't a share price drop along with a minimal return put you worse off than cash at 0%?

Yes, exactly.  If you hold a bond to maturity, then your return will be the interest rate of the bond.  With a bond fund, you could lose money than by simply holding cash in your scenario.  The converse is also true. 

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Re: Is a 7% return unlikely without a complex approach?
« Reply #168 on: December 16, 2021, 09:33:36 PM »
Didn't this post start with some reason to think 7% returns may not be likely and now we're comparing cash positions. What's next trading nfts?

I think we're discussing the purpose of cash. 

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Re: Is a 7% return unlikely without a complex approach?
« Reply #169 on: December 16, 2021, 09:37:10 PM »
Didn't this post start with some reason to think 7% returns may not be likely and now we're comparing cash positions. What's next trading nfts?
I'm only 200 pages into The Simple Path To Wealth but I'm sure hoping he gets to NFTs at some point soon.  Will report back asap.

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Re: Is a 7% return unlikely without a complex approach?
« Reply #170 on: December 19, 2021, 04:31:48 PM »
It is "standard" but those standards were set when bonds had positive real yields. If I'm lucky I'm ~8 years away from retirement and I'm 100% equities. I strongly suggest reading The Simple Path to Wealth by J L Collins for a more in-depth analysis of why perhaps the "standard" recommendation is wrong, especially if you plan to retire early.

I enjoyed the book and probably read it faster than I've read any other book, thanks again for the recommendation.  Overall I feel like this site prepared me for the concepts he laid out.  There was really only one surprise but it was a big one (to me).  At the very end, when giving the bullet list of advice for his daughter, he gets to the section "Once you've reached financial independence and are able to live on 5% of your holdings, now is the time to consider buying a house if you are so inclined.  Houses are not investments, they are expensive indulgences."

We can split hairs on whether or not a house is an investment, but in most US markets it should at least keep pace with inflation.  The part that really trips me up is how adamant he is about avoiding interest, saying a few pages earlier "nothing is worth paying interest to own".  But if you don't own a house, you must be renting, and is that not the housing equivalent of making interest-only payments for 10-20 years?  Actually, it's even worse since interest only mortgages typically leave you with some principal gained through increased valuations.  I'm completely missing how this wouldn't be a huge hit to your net worth as compared to having bought a modest house - even if you had to have a mortgage to do so.

What are your thoughts on that?

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Is a 7% return unlikely without a complex approach?
« Reply #171 on: December 19, 2021, 04:42:53 PM »
If rent were equivalent to a mortgage for housing costs what you say may make sense. But remember that rent is the ceiling of what you pay for housing and a mortgage is the floor. You have taxes and insurance and maintenance and repairs and renovations. And in HCOL areas rents are often quite a bit less than mortgages for the same place not factoring in the other costs of ownership.

And then there is the opportunity cost of your down payment tied up in an asset appreciating at the rate of inflation.

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Re: Is a 7% return unlikely without a complex approach?
« Reply #172 on: December 19, 2021, 04:46:34 PM »
You're assuming apples to apples.

The vast majority of renters will spend as little as possible for their needs at that moment, while most buyers will extend themselves as far as possible for a "forever home". Plus there are the taxes, maintenance, and the compulsive renos that most people feel are necessary to make their very expensive possession prettier.

Also, in many markets, rents are substantially lower than mortgages for buying an equivalent place. Rents are not dictated by the cost of houses, they are determined by the demand for rentals, so in many locations it is literally cheaper to rent.

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Re: Is a 7% return unlikely without a complex approach?
« Reply #173 on: December 19, 2021, 06:02:38 PM »
1) Bonds are a boat anchor, cut them loose
I'd like to register a categorical disagreement for this one. The world's stock markets have a history of occasionally losing 90% or more. If you count on 4% annually, and can trim to 3%, would you be happy with a 100% stock portfolio if the Great Depression repeats? No. Definitely no. A 90% crash could start at any time, and even after ten good years a 90+% crash could still sink you depending on how the sequence played out. I'd recommend something instead like 10% series I savings bonds plus 10% long term treasury bonds in addition to 80% stocks or whatever because you really don't know what will happen. But 10% bonds/cash at a bare minimum. With that said, yes bonds are boat anchors, so don't keep too many, but at least if a big storm pops up you won't get blown away if you have them. All ships actually have anchors, because they are useful.

I'd like to register a philosophical disagreement.  Bonds aren't an anchor, they are ballast.   Ballast keeps you on course and steadies the ship.  For  example, at the start of the Great Depression and market crash, interest rates were at about 6% and then fell as the country slid into recession.   Falling rates meant that bonds were becoming more valuable, even as stocks became less valuable.   So having some ballast provided protection. 

Now let's say there is some big market crash tomorrow.   Currently the 10-year is 1.4%.   Inflation is what?  9%?   Falling rates won't protect you because they can't fall far enough to avoid taking a permanent loss on the bond portion of your portfolio.  Best case is you won't lose as much with bonds.  But in order to get that protected you need to sign up for virtually guaranteed loss at the beginning.  Expensive insurance, for sure.
That is closer to my old analogy, you are the ship, stocks are the sails, bonds are for ballast, long term treasury bonds and gold are outriggers.

We don't know what future inflation will be. There is no reason to think 9% or even 2%.

I think that long term treasury bonds would double in price from their current in a huge crash. I think the 30 year could go to zero if that happens. Such a crash would be deflationary if that happened. The other half of my recommendation is I-bonds, which are indexed to inflation and cannot have a negative yield.

So, not that expensive, really. If you don't have bonds you are vulnerable to a deflationary crisis, and we truly cannot know if or when one will happen.

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Re: Is a 7% return unlikely without a complex approach?
« Reply #174 on: December 19, 2021, 06:04:04 PM »
Regarding previous posts:
Another issue with buying a house is that you will become reluctant to move for better economic situations. Not only reluctant to move to a new city, but even reluctant to move to the other side of town and avoid a commute if you get a new job locally.

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Re: Is a 7% return unlikely without a complex approach?
« Reply #175 on: December 19, 2021, 06:13:06 PM »
Regarding previous posts:
Another issue with buying a house is that you will become reluctant to move for better economic situations. Not only reluctant to move to a new city, but even reluctant to move to the other side of town and avoid a commute if you get a new job locally.

Economists like Alex Tabarrok say this all the time:

Another problem with houses is that home ownership locks people to location making it harder to move for jobs. The problem is especially severe because no one likes to sell at a “loss” even when it is rational to do so. So when jobs disappear and home prices fall instead of moving, people hold on for too long just hoping that things will get better. It’s troubling that both across states in the United States and across countries higher home ownership predicts higher unemployment rates.

That arguably changes after you retire.
« Last Edit: December 19, 2021, 06:33:38 PM by PDXTabs »

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Re: Is a 7% return unlikely without a complex approach?
« Reply #176 on: December 19, 2021, 06:40:28 PM »
Those are some thought provoking responses on the housing topic.  Definitely feels unfamiliar to me after a lifetime in reasonable Midwestern smaller cities.  My brother pays $1200/month for a studio apt in the same metro area where you can buy a perfectly fine house in a safe neighborhood for $175k.  Yes,  there are property taxes, but there is also the deduction of mortgage interest.  Yes there is maintenance but there is also equity.  That said, I can certainly see how the calculations would change if the minimum viable house were $1M+. 

Being stuck in a job because you don't want to sell your house is another one I would have never considered.  But maybe that's because I've been self employed working from home for my entire career.  Interesting perspectives,  thanks for responding.

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Re: Is a 7% return unlikely without a complex approach?
« Reply #177 on: December 19, 2021, 06:55:17 PM »
My brother pays $1200/month for a studio apt in the same metro area where you can buy a perfectly fine house in a safe neighborhood for $175k.  Yes,  there are property taxes, but there is also the deduction of mortgage interest.  Yes there is maintenance but there is also equity.  That said, I can certainly see how the calculations would change if the minimum viable house were $1M+. 

Yup. In my local market there have been times in my life where it was obviously better to buy or to rent based on prices if you thought that you would be staying for a little bit.

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Re: Is a 7% return unlikely without a complex approach?
« Reply #178 on: December 19, 2021, 07:02:53 PM »
In addition to all the other things mentioned, transaction costs can be 10% round trip on buying then selling a home.  We're often (OK, well I am) astonished at how bad it is for people to pay a 5.75% front end load to buy a mutual fund, but many people don't blink when paying a realtor a 6% commission on a house purchase.

ETA:  Agreed, the above is not apples to apples for a few different reasons, but the financial impacts are similar.

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Re: Is a 7% return unlikely without a complex approach?
« Reply #179 on: December 19, 2021, 07:06:32 PM »
Those are some thought provoking responses on the housing topic.  Definitely feels unfamiliar to me after a lifetime in reasonable Midwestern smaller cities.  My brother pays $1200/month for a studio apt in the same metro area where you can buy a perfectly fine house in a safe neighborhood for $175k.  Yes,  there are property taxes, but there is also the deduction of mortgage interest.  Yes there is maintenance but there is also equity.  That said, I can certainly see how the calculations would change if the minimum viable house were $1M+. 

Being stuck in a job because you don't want to sell your house is another one I would have never considered.  But maybe that's because I've been self employed working from home for my entire career.  Interesting perspectives,  thanks for responding.

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Meanwhile, a friend of mine rents a luxury 2 bedroom apartment for $2400/mo. The building next door sells a similar unit for over 900K, plus $850/mo in condo fees, plus $1000/mo in property taxes.

So yeah, it depends on your market.

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Re: Is a 7% return unlikely without a complex approach?
« Reply #180 on: December 19, 2021, 07:12:59 PM »
Those are some thought provoking responses on the housing topic.  Definitely feels unfamiliar to me after a lifetime in reasonable Midwestern smaller cities.  My brother pays $1200/month for a studio apt in the same metro area where you can buy a perfectly fine house in a safe neighborhood for $175k.  Yes,  there are property taxes, but there is also the deduction of mortgage interest.  Yes there is maintenance but there is also equity.  That said, I can certainly see how the calculations would change if the minimum viable house were $1M+. 

Since you brought up the tax deductibility of mortgage interest:

It can be very easy to fall into the trap of chasing tax deductions even when they don't make financial sense. With the SALT cap in place, the deduction for mortgage interest applies to a much smaller subset of people. Even if your brother pays enough in property+state taxes to achieve the maximum $10k, only about half of the interest he'd be paying on a mortgage would be tax deductible. And tax deductible doesn't mean free, just modestly subsidized. If he's in the 24% federal income tax bracket his total savings from deductible mortgage interest would be on the order of $20/month* to start with and declining each year afterwards.

It may be the numbers still work out in buying where your brother lives (I'd be curious if there are big differences in commute time or quality of life between the part of the metro where he rents his studio vs the areas where houses are selling for $175k) but the deductibility of mortgage interest is clearly not something that should be a deciding factor.

*Assumptions: 30 year mortgage on a house worth $175,000 with a 20% downpayment and a 2.75% interest rate, with the maximum of $10k in SALT taxes meaning almost $3k of home loan interest that is used up before he can exceed the standard deduction for a single person of $12,950.

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Re: Is a 7% return unlikely without a complex approach?
« Reply #181 on: December 19, 2021, 08:21:17 PM »


Those are some thought provoking responses on the housing topic.  Definitely feels unfamiliar to me after a lifetime in reasonable Midwestern smaller cities.  My brother pays $1200/month for a studio apt in the same metro area where you can buy a perfectly fine house in a safe neighborhood for $175k.  Yes,  there are property taxes, but there is also the deduction of mortgage interest.  Yes there is maintenance but there is also equity.  That said, I can certainly see how the calculations would change if the minimum viable house were $1M+. 

Since you brought up the tax deductibility of mortgage interest:

It can be very easy to fall into the trap of chasing tax deductions even when they don't make financial sense. With the SALT cap in place, the deduction for mortgage interest applies to a much smaller subset of people. Even if your brother pays enough in property+state taxes to achieve the maximum $10k, only about half of the interest he'd be paying on a mortgage would be tax deductible. And tax deductible doesn't mean free, just modestly subsidized. If he's in the 24% federal income tax bracket his total savings from deductible mortgage interest would be on the order of $20/month* to start with and declining each year afterwards.

It may be the numbers still work out in buying where your brother lives (I'd be curious if there are big differences in commute time or quality of life between the part of the metro where he rents his studio vs the areas where houses are selling for $175k) but the deductibility of mortgage interest is clearly not something that should be a deciding factor.

*Assumptions: 30 year mortgage on a house worth $175,000 with a 20% downpayment and a 2.75% interest rate, with the maximum of $10k in SALT taxes meaning almost $3k of home loan interest that is used up before he can exceed the standard deduction for a single person of $12,950.

He lives in the heart of downtown in a modern complex within walking distance to bars, restaurants and concerts.   But there are no grocery stores.  No home improvement stores.   No neighborhood schools.  The $175k house is not walkable to anything,  typical suburbs, but it's adjacent to schools,  grocery stores, Lowes, Home depot, Target, etc.  So it's really about your family makeup and lifestyle to pick the best fit.   Ironically,  his office is out in the suburbs,  so living downtown is not ideal in terms of commute, but it's where he wants to be socially.  The most expensive properties I've found in the cities around here are the big acreage mansions built outside the city.  Definitely a reversal from the HCOL coastal places.

Another consideration is ROI.  My business partner lives in a very expensive city and has had significantly more overhead than I have (we live in different states) over the last 15 years.  I've often felt almost guilty over his expenses being so much more than mine.  That said, he just sold his house for 3x its purchase price in 2006 netting him literal millions.  Where I live homes cost far less but also don't increase in value nearly as much.

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Re: Is a 7% return unlikely without a complex approach?
« Reply #182 on: December 20, 2021, 08:56:29 AM »
Those are some thought provoking responses on the housing topic.  Definitely feels unfamiliar to me after a lifetime in reasonable Midwestern smaller cities.  My brother pays $1200/month for a studio apt in the same metro area where you can buy a perfectly fine house in a safe neighborhood for $175k.  Yes,  there are property taxes, but there is also the deduction of mortgage interest.  Yes there is maintenance but there is also equity.  That said, I can certainly see how the calculations would change if the minimum viable house were $1M+. 

Being stuck in a job because you don't want to sell your house is another one I would have never considered.  But maybe that's because I've been self employed working from home for my entire career.  Interesting perspectives,  thanks for responding.

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I must agree with J L Collins in regards to purchasing and owning a home. A complete indulgence.

The difference is I believe this indulgence in worth the cost (as long as you purchase a home that meets your needs). I purchased a reasonable home in a great school district that will meet my family's needs. It also made my wife happy. It also makes my children happy to know they have a permanent "home", and I feel that long term stability will reap long term dividends. I think it's psychologically very important to know that you "belong" somewhere. I think this is more important than simple $$$ transactions. Most people, IMHO, know this somewhere deep inside and this is why people are hesitant to move (regardless if they live in a double wide or a mansion).

I plan on keeping and living in the home at least until my kids have finished their education and are launched. I believe its vital for them to have a place to head home to and feel safe and nurtured and cared for until they can develop a "home" of their own.

Sorry for the rambling...

JGS

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Re: Is a 7% return unlikely without a complex approach?
« Reply #183 on: December 20, 2021, 09:55:53 AM »
I must agree with J L Collins in regards to purchasing and owning a home. A complete indulgence.

JGS

Yeah I'm still trying to wrap my head around the perspective.  I definitely understand the argument in an extremely high cost of living area.  But his comment made no reference to that detail, it was just a blanket statement.  I'm trying to work through the alternatives in my case, maybe you guys can help make that argument.  Here are the details:

I bought the house outright (no mortgage) in 2018 for $275k.  Real estate tax is $2800/year and homeowner's insurance is $1200/year.  You'd still need renters insurance in an apartment, but it would probably save you $50/month.   Either way, the house + tax + insurance is costing me $333/month.  If I had instead put that $275k into something making 7% that would give me about $1600/month to go towards renting.  Based on other listings I know I couldn't rent my current house for that price.  As well, my 2 friends who are realtors indicate my house would currently sell "immediately" for over $300k.  It's hard for me to see that in a way which makes the house purchase feel indulgent, even though in this city I could have found "a house" for half this price.  I was able to buy the exact house I wanted, but it still feels like the fiscally conservative move.  What am I missing?

The comparison that keeps popping in my head is that renting a house feels like leasing a car.  To that point, I bought a 2003 Chevy Tahoe in 2013 for $10k and still drive it to this day.  It costs $42/year in personal property tax and $48/month in insurance.  If I would have put that $10k into the market, its 7% would give me a $58/month car allowance which feels a bit limiting :)  Now if I were trying to race Formula 1 (the car equivalent of buying a house in NYC or LA) then I get that I would have to rent the car.  Buying would be completely off the table due to the ridiculous prices.  But here in the flyover states I'm having trouble seeing the perspective.

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Re: Is a 7% return unlikely without a complex approach?
« Reply #184 on: December 20, 2021, 10:16:12 AM »
I must agree with J L Collins in regards to purchasing and owning a home. A complete indulgence.

JGS

Yeah I'm still trying to wrap my head around the perspective.  I definitely understand the argument in an extremely high cost of living area.  But his comment made no reference to that detail, it was just a blanket statement.  I'm trying to work through the alternatives in my case, maybe you guys can help make that argument.  Here are the details:

I bought the house outright (no mortgage) in 2018 for $275k.  Real estate tax is $2800/year and homeowner's insurance is $1200/year.  You'd still need renters insurance in an apartment, but it would probably save you $50/month.   Either way, the house + tax + insurance is costing me $333/month.  If I had instead put that $275k into something making 7% that would give me about $1600/month to go towards renting.  Based on other listings I know I couldn't rent my current house for that price.  As well, my 2 friends who are realtors indicate my house would currently sell "immediately" for over $300k.  It's hard for me to see that in a way which makes the house purchase feel indulgent, even though in this city I could have found "a house" for half this price.  I was able to buy the exact house I wanted, but it still feels like the fiscally conservative move.  What am I missing?

The comparison that keeps popping in my head is that renting a house feels like leasing a car.  To that point, I bought a 2003 Chevy Tahoe in 2013 for $10k and still drive it to this day.  It costs $42/year in personal property tax and $48/month in insurance.  If I would have put that $10k into the market, its 7% would give me a $58/month car allowance which feels a bit limiting :)  Now if I were trying to race Formula 1 (the car equivalent of buying a house in NYC or LA) then I get that I would have to rent the car.  Buying would be completely off the table due to the ridiculous prices.  But here in the flyover states I'm having trouble seeing the perspective.

You're not missing anything. In some cases owning a home, when compared to renting *the exact same home* will come out ahead in certain markets.

I already replied to you earlier though that almost no one rents the exact same home that they would buy. Also, renters don't dump piles of money into renos and updates that owners typically do. Not only that, but owners tend to spend much more on furniture than renters do, because renter know that a piece of furniture might not work in their next rental, so are less inclined to spend thousands on very expensive "investment pieces."

It's not so much that the numbers of owning never make sense, it's that the typical behaviour of owners is very different and much spendier than the typical behaviour of renters.

If you are legitimately an exception to the spendy rule AND you live in a market where owning is superior, then absolutely, you will come out ahead owning. That's why I personally own, because for my particular housing preference, owning was much cheaper than renting, especially long term with rents rising in my area rapidly.

The example of my friend renting though is a 5 minute drive from me, where the numbers don't make sense for buying.

The "rule" is not that owning never makes sense, it's that buyers generally don't come out ahead when looking at the big picture. That doesn't mean that there are never exceptions to the rule. Just that you should look very, very critically before assuming that you *are* an exception to the rule, but if you are, then great.

Most rules are founded in averages, not absolutes.

ETA: I'm in Canada, where over 90% of our residents live in urban centers, and almost all of our urban centers have crazy expensive house prices, so here it is more of a rule
« Last Edit: December 20, 2021, 10:18:27 AM by Malcat »

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Re: Is a 7% return unlikely without a complex approach?
« Reply #185 on: December 20, 2021, 11:10:01 AM »
You're not missing anything. In some cases owning a home, when compared to renting *the exact same home* will come out ahead in certain markets.

I already replied to you earlier though that almost no one rents the exact same home that they would buy. Also, renters don't dump piles of money into renos and updates that owners typically do. Not only that, but owners tend to spend much more on furniture than renters do, because renter know that a piece of furniture might not work in their next rental, so are less inclined to spend thousands on very expensive "investment pieces."

It's not so much that the numbers of owning never make sense, it's that the typical behaviour of owners is very different and much spendier than the typical behaviour of renters.

If you are legitimately an exception to the spendy rule AND you live in a market where owning is superior, then absolutely, you will come out ahead owning. That's why I personally own, because for my particular housing preference, owning was much cheaper than renting, especially long term with rents rising in my area rapidly.

The example of my friend renting though is a 5 minute drive from me, where the numbers don't make sense for buying.

The "rule" is not that owning never makes sense, it's that buyers generally don't come out ahead when looking at the big picture. That doesn't mean that there are never exceptions to the rule. Just that you should look very, very critically before assuming that you *are* an exception to the rule, but if you are, then great.

Most rules are founded in averages, not absolutes.

ETA: I'm in Canada, where over 90% of our residents live in urban centers, and almost all of our urban centers have crazy expensive house prices, so here it is more of a rule

I'm not following you.  Kidding!! :)   That all makes sense, thanks for responding.  It was definitely a blind spot in my perspective.  I always think of the NYCs and LAs of the country to be the exception, but I guess in terms of population that's wrong.  If you take the populations of just the 3 biggest cities in the US, that represents more people than half a dozen entire midwestern states.  No wonder our senate is a marvel of governance :O

 

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