Author Topic: sequence of returns investing  (Read 2139 times)

DK

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sequence of returns investing
« on: December 14, 2015, 02:31:29 PM »
So the SWR has been talked about, and mad fientist expanded on it in his recent article. Basically instead of a flat inflation adjusted 4%, it's "predicting" the market returns to adjust the amount that can be pulled out in retirement.

So a lower amount when the market should be steady or declining, a higher amount when it should be increasing.

Reversing that logic, does it seem viable that a person could use that to determine whether it will be better to pay off debt as opposed to investing it in the market?

In my personal scenario, I am maxing out 401k, Roth, only debt MTG and student loans. So it's between throwing more at the MTG at 4.375%, or investing in after tax account. Now if I had something 3% or so, I'd do the investing. Considering the interest rate I have, and the current market P/E (MF's SWR gauge) I think it's a close call on what I should do...

Thoughts on my situation. Thoughts in general?

economist

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Re: sequence of returns investing
« Reply #1 on: December 14, 2015, 07:59:17 PM »
I'm in a situation like that. I graduated a couple years ago with a ton of student loan debt. For the first year and a half or so I was only contributing 10% to my 401k and throwing almost everything at my student loans. Now that I've eliminated all the loans above 6% I have upped my 401k to 35% and started maxing out a ROTH and HSA. I still have a few thousand around 4 and 5%, and about 11k at 3.25%. I'm not super stressed about that debt.

I think the tax benefits of the 401k, ROTH, and HSA are significant enough that it's almost always worth it to invest through that, once you have that maxed out it gets trickier. I'd probably use interest rates as more of a guide than PE ratios. If the "risk free rate" is 3% and my student loans are at 3.25%, that means I'm basically borrowing at the same rate as the US government, which is a pretty sweet deal.

DK

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Re: sequence of returns investing
« Reply #2 on: December 15, 2015, 05:54:33 AM »
Yeah my student loans got consolidated and are at about 1.875%, or something ridiculous like that. Keeping that as long as I can.

MTG at 4.375%, and you can say market average return is 8%, so it seems like a no-brainer. But since 8% is the average, years are higher or lower. So with that 'sequence of returns predictor', maybe it's more likely the next few years it will average out to about 4%, so better to put extra money into MTG, until the 'predictor' says it might go back to the average 8% or higher. Then go to investing in the market. If I only would have refi'd at that 2.55% I saw at one time...

aj_yooper

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Re: sequence of returns investing
« Reply #3 on: December 15, 2015, 06:25:57 AM »
I'm in a situation like that. I graduated a couple years ago with a ton of student loan debt. For the first year and a half or so I was only contributing 10% to my 401k and throwing almost everything at my student loans. Now that I've eliminated all the loans above 6% I have upped my 401k to 35% and started maxing out a ROTH and HSA. I still have a few thousand around 4 and 5%, and about 11k at 3.25%. I'm not super stressed about that debt.

I think the tax benefits of the 401k, ROTH, and HSA are significant enough that it's almost always worth it to invest through that, once you have that maxed out it gets trickier. I'd probably use interest rates as more of a guide than PE ratios. If the "risk free rate" is 3% and my student loans are at 3.25%, that means I'm basically borrowing at the same rate as the US government, which is a pretty sweet deal.

I like how you are looking at the risk free rate in your analysis, but risk free rate is a technical term  as follows:  "Thus, the interest rate on a three-month U.S. Treasury bill is often used as the risk-free rate."  The current 3 month Treasury is at 0.26%

Read more: Risk-Free Rate Of Return Definition | Investopedia http://www.investopedia.com/terms/r/risk-freerate.asp#ixzz3uOZx6AFc
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PizzaSteve

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Re: sequence of returns investing
« Reply #4 on: December 15, 2015, 08:14:45 AM »
Yeah my student loans got consolidated and are at about 1.875%, or something ridiculous like that. Keeping that as long as I can.

MTG at 4.375%, and you can say market average return is 8%, so it seems like a no-brainer. But since 8% is the average, years are higher or lower. So with that 'sequence of returns predictor', maybe it's more likely the next few years it will average out to about 4%, so better to put extra money into MTG, until the 'predictor' says it might go back to the average 8% or higher. Then go to investing in the market. If I only would have refi'd at that 2.55% I saw at one time...

8% or higher is too high (as an assumption for equity returns) in today's low interest rate environment, in my opinion.  Most economists are looking at 1-3% for bond like products and something like 3-6% for equity like products.  We could do better with unexpected technology breakthroughs, but a lot of innovation driven growth is captured by entrepreneurs and private equity.


Scandium

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Re: sequence of returns investing
« Reply #5 on: December 15, 2015, 11:11:40 AM »
Yeah my student loans got consolidated and are at about 1.875%, or something ridiculous like that. Keeping that as long as I can.

MTG at 4.375%, and you can say market average return is 8%, so it seems like a no-brainer. But since 8% is the average, years are higher or lower. So with that 'sequence of returns predictor', maybe it's more likely the next few years it will average out to about 4%, so better to put extra money into MTG, until the 'predictor' says it might go back to the average 8% or higher. Then go to investing in the market. If I only would have refi'd at that 2.55% I saw at one time...

Also remember that paying a mortgage tie your money up in an illiquid asset, and you're reducing your tax deduction. I'd rather have that money available should I need it (even to pay off the house in one lump sum too should I wish to), rather than locking up $400k that's now really hard to get to.