The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: shinn497 on May 14, 2018, 10:34:01 PM
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MMM's post on the long term gains of the stock market have made me pretty comfortable with its volativity. So here is what I'm wondering. Why not just dump everything into a 100% stock porfolio, draw 4% when you need to retire, and just yolo it along the way?
Would it be mathematically better to go with less volatility on retirement? If there are dips early on could these destroy your nest egg if you withdraw? Part of me just underscores the need to remain flexible?
Personally I see it this way. I'm 31, I don't actually hate working, and plan on earning a lot of money in life. I am a data scientist now, but I think when I am older I might pursue something else but still make money doing it. I plan on living in a paid off house ASAP, like dave ramsey suggests. And want 200k for health purposes or something by the time I'm 60. So I don't see the need to not be risky.
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100% equities now might be perfectly appropriate for you now. In retirement, well its good you don’t have to commit to that now.
It’s easy to say you’re comfortable with volatility when youre 31 and the markets been on a tear for damn near a decade.
Come back and update when your 100% equity portfolio drops 45%. Imagine how that would feel if that’s your first year of retirement.
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If there are dips early on could these destroy your nest egg if you withdraw?
Yes.
Note that 4% is not a law of nature. It is "what would have worked in the past" and in the past, some amount of bonds had better success than 100% stocks in retirement.
See
http://www.retailinvestor.org/pdf/Bengen1.pdf
http://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf
https://www.bogleheads.org/wiki/Trinity_study_update
https://www.bogleheads.org/wiki/Safe_withdrawal_rates
for some reading.
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100% is fine for 31, but not for a 50 year old who is about to FIRE. SORR is a factor, especially in this market. Not everyone's situation is the same as yours.
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I think I get it. But I still want to take the chance. Hmmm I guess I would rather not feel the FOMO of missing out on those gains.
Here is my question. I can understand changing allocation at like 50 - 65 or so, but should this be done gradually?
Oh I should say. All of my money is in betterment, which has fractional shares. So I can do that more easily.
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I would stick with MMM and ERN and plough everything into equity. My own path before I learned better was real estate, which sort of worked as a savings account. I think I may have lucked out on one of my properties because it did very well on AirBnB, but if I had to do it again I would definitely go 100% equities. In fact, I am trying to sell them so that I can put the proceeds into equities now.
The concerns expressed in the thread are about the sequence of returns, and they are real. However, since you are not on the cusp of FIRE, they are nothing to worry about.
Here is a good article about that risk, but the idea is intuitive. If you retire and the market tanks shortly thereafter, you could have to backpedal into work again:
https://earlyretirementnow.com/2017/05/17/the-ultimate-guide-to-safe-withdrawal-rates-part-14-sequence-of-return-risk/
As you near retirement, you would want to build an equity glidepath. The simplest form of that idea is to keep a couple of years of expenses in a bond portfolio. That way if your equity savings tank, you do not need to touch them. Here is a better explanation:
https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/
I think ERN actually has an article explaining how the traditional 60/40 or 70/30 equity/bond portfolio underperforms, but I could not find it. The idea is intuitive enough, though: if you keep part of your money yielding 2-3% (if that) for years, you are giving up the 7% cumulative gain of that money if it was in an equity portfolio for that time.
100% equities until very close to retirement, then a couple of years of expenses in bonds as you near your retirement date. Keep that at hand for the first 5-10 years of retirement until your SWR gets to about 3% and the likelihood of failure is nearly 0. It is not quite what you propose to do, but it is damn close to it.
Actually, re-reading your post, a 50-65% equities allocation does not seem sensible at all at any point - you'd be paying for too much insurance in the name of foregone returns.
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Yeah the whole giving up that 7% is what kills me.
And yeah. I see things this way. I'd like to retire at 50 but I also see it as I have 19 years to figure out how to increase my income and also decrease expenses. My base expenses are already like ~1100$ rn so I think I'm already pretty good! I'm also flexible with home choice, so I think I could move into a cheap city that has cheap real estate if I ever even want a house.
I thinking carving out a base and then moving up there, buying everything in cash, means I'll have enough freedom to be riskier with investments. Ionno just a thought. The biggest thing is as I get older, I'll need to start saving more for health insurance and eventually perhaps even self insurance.
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https://forum.mrmoneymustache.com/investor-alley/why-would-i-be-in-anything-other-than-100-stocks/
https://forum.mrmoneymustache.com/investor-alley/asset-allocation-100-stocks-for-how-long/
https://forum.mrmoneymustache.com/investor-alley/100-stocks-in-the-accumulation-phase/
https://forum.mrmoneymustache.com/investor-alley/revisiting-the-asset-allocation-question-the-case-for-100-stocks/
https://forum.mrmoneymustache.com/investor-alley/how-do-you-quantify-the-risk-differential-between-8515-and-7030/
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Personally I see it this way. I'm 31, I don't actually hate working, and plan on earning a lot of money in life. I am a data scientist now, but I think when I am older I might pursue something else but still make money doing it. I plan on living in a paid off house ASAP, like dave ramsey suggests. And want 200k for health purposes or something by the time I'm 60. So I don't see the need to not be risky.
So you're not 100% stocks then? Paying off your mortgage is comparable to a bond (except it's not liquid).
You were also too young to drink beer the last time the stock market dropped more than 10%, so it's pretty easy to say you're "comfortable" with volatility when you haven't seen $250,000 of your net worth wiped out in a week.
It also sounds like you're single. It's one thing saying you're flexible with spending and can move wherever now, but if you ever have a partner, kids and aging parents to care for that might not be so easy.
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YOLO doesn't cover going broke in retirement. But you'll have an 80-90% chance to make it according to Vanguard's nest egg calculator when you go 100% stocks for 25-50 years.
In general 100% stocks allocations get very popular during bull markets (like this one) and after it's been a decade since a massive crash (like 2008). Watch what happens in the next crash so you know how that feels before you decide to retire on 100% stocks.
Note you can also adjust your withdrawal rate to 3% (ignoring social security) and increase the chance of portfolio survival to 88-96% (between 25-50 years of retirement).
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On average you should be fine.
The problem is that the downside (portfolio failure substantially reducing your retirement standard-of-living) is catastrophic, while the upside (if you're a mustachian, extra money in retirement shouldn't make you happier) is not that much better. So you're risking a catastrophe in exchange for a premium that is basically not worth much.
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It sounds to me like you have enthusiasm and are off to a good start. I’d recommend hanging around here more and slowly learning the details and subtleties of things like how robust the 4% “rule” is, what asset allocations are recommended for the long haul, and where to invest.
Personally we have been in mostly equities during this amazing run-up accumulation phase. We are seriously discussing increasing bonds quite a bit in a “bond tent” strategy. https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/ (https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/). The details of when to start the tent aren’t known, as far as I can tell, but we are a few years out from FI so I think we will be doing it soon. Then the plan is to spend down the bonds in the first ten years or so of RE and end up at practically all equities for the long term. If you are looking at 50 years of retirement you have to have a lot of equities to go the distance, but in the short and mid-term sequence of returns is a real risk.
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The other thing that catches my attention is that you mentioned Dave Ramsey. I think the general consensus is that he is good at getting the hopeless on a path to get out of debt, but his advice breaks down when it comes to investing, both when and in what. I recommend seriously looking into the threads here on the debate of whether to pay off the mortgage or not. On average you are better off not paying it off early and investing instead unless you have some crazy high interest rate. I’ve run my own scenarios in cFIREsim (my favorite retirement calculator/simulator) and paying off the mortgage early and/or buying in cash adds years to our timeline to reach FI. There are more subtleties to the debate (see the threads on these forums) but that is the big picture view.
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On average you should be fine.
The problem is that the downside (portfolio failure substantially reducing your retirement standard-of-living) is catastrophic, while the upside (if you're a mustachian, extra money in retirement shouldn't make you happier) is not that much better. So you're risking a catastrophe in exchange for a premium that is basically not worth much.
This
100% equities early in accumulation is a rockstar move. One I never had the balls to make. However, once living off the money, it's a totally different ball game. As a matter of fact, lower volatility with lower CAGR leads to higher sustained withdrawal rates... Read that again... lower returns can lead to higher withdrawal rates in drawdown phase.
I highly recommend you read both the above referenced meticulous study on WR from ERN, but also Tyler's Portfolio Charts (https://portfoliocharts.com/commentary/) commentary. In draw-down, insuring your equity position with options, or choosing non-coorleated asset classes for a portion of portfolio will absolutely reduce failure risk. The trade off is some of the upside, which just isn't needed anyway.
Ask yourself, is it worth substantially increasing portfolio failure risk to increase your chances of dying filthy rich? If the answer is "no" (which for most anticonsumer Mustchians it should be), then 100% equities in drawdown is not in line with your goals.
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I'm 49 and was 100 percent stock funds until a few months ago. Now I'm 80 percent stock funds and 20 percent bond fund. JL Collins approach for me from here to FIRE.
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MMM's post on the long term gains of the stock market have made me pretty comfortable with its volatility. So here is what I'm wondering. Why not just dump everything into a 100% stock portfolio, draw 4% when you need to retire, and just yolo it along the way?
Well, tell me what the stock market returns will be in the future and I will tell you if this is a good idea or not. Social security is an annuity and in many ways behaves like a bond, so is real estate, so you have bond-like exposure any way.
For many years I was 100% stocks since I did not care about volatility, so I am not to judge. Now that retirement is closer to the horizon and having lived through the tech crash and the housing crash, volatility and potential down turn and SORR does mater. It matters a lot. Many of the younger folks here did not live through the last two crashes, but looking back all you see is a quick recovery for those that stayed invested. Well, look back a little further. Look at the late sixties and the decade of stagflation that followed. Look at the great depression and the long recovery time. Looking at a charts it is real easy to convince yourself that you will not have a problem, but most people deceive themselves thinking they will have the stamina to hold on. You think the great depression and late sixties/seventies cannot happen again? Your are right, they will not happen again, because next time it will be different. It always is.
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In retrospect, i think it might make sense to go balls-out in equities from say 20 (or younger) until maybe mid-to-late thirties and then gradually ease into a more balanced portfolio.
It's also wise to consider RE (if you have any) as a stabilizing influence on your portfolio, letting you keep more in equities, while still achieving something of a balance. I bought RE fairly early on, and kept a "balanced" portfolio during those years. In retrospect, I believe that combination is overly conservative.
I also think there's a paradox here. The less you have, the more careful you want to be with it. The more experience and $$ you accumulate, the more risks you are willing to take, because you've learned everything ounces back eventually if you stay the course.
Key takeaway is the earlier in life you start, the fewer dollars you will actually need to reach your goals. The sooner your money your money starts making more that you do, the faster you can achieve the life of your dreams.
ETA - CoffeeR just cross-posted. This is the reason to ease into more conservative investments over time. It doesn't negate the case for going 100% equities in the early years. Assuming you're doing your equities the mustachian way, not speculating in individual stocks or any other stupid shit.
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Another thing to note is that we're in what is possibly the tail end of nearly a decade of artificially lowered bond rates. It's easy to say 100/0 now because the trade-off to bonds is so abysmal. You may find yourself more willing to go to something like 80/20 if bonds rise back to something like 4-5% instead of the 2-3% or so we're seeing now. Hell, the 70s and 80s saw bond rates in the double digits.
https://fred.stlouisfed.org/series/DGS10 (click on max)
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Another thing to note is that we're in what is possibly the tail end of nearly a decade of artificially lowered bond rates. It's easy to say 100/0 now because the trade-off to bonds is so abysmal. You may find yourself more willing to go to something like 80/20 if bonds rise back to something like 4-5% instead of the 2-3% or so we're seeing now. Hell, the 70s and 80s saw bond rates in the double digits.
https://fred.stlouisfed.org/series/DGS10 (click on max)
I agree that the present time seems like an exceptionally poor time to get into bonds. Yes, I realize this is a market timing statement. Still, I have *never* like bond funds, so if I could (and I cannot in my main retirement account), I might consider laddering treasuries and/or CD's.
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@Dicey
I agree all stocks early, the risk is worth the reward if your timing is lucky. I was not that smart, partially because of the paradox you wrote of... the less you have.
However, you're also assuming a fairly long accumulation period. Long accumulation means more SS, more chance some accumulation will be done during a period of asset depression. If someone is thinking 5-10 years and out, I think more conservative AA's should be considered at about the halfway point (in ETA to FIRE, not dollars). There's nothing wrong with switching it back up to US stock heavy if CAPE starts to look more favorable later.
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The other thing that catches my attention is that you mentioned Dave Ramsey. I think the general consensus is that he is good at getting the hopeless on a path to get out of debt, but his advice breaks down when it comes to investing, both when and in what. I recommend seriously looking into the threads here on the debate of whether to pay off the mortgage or not. On average you are better off not paying it off early and investing instead unless you have some crazy high interest rate. I’ve run my own scenarios in cFIREsim (my favorite retirement calculator/simulator) and paying off the mortgage early and/or buying in cash adds years to our timeline to reach FI. There are more subtleties to the debate (see the threads on these forums) but that is the big picture view.
Yeah I am a huge fan of Dave Ramsey. He convinced me how important behaviour and emotion are with money. So yeah. I am never going to f with debt again. I don't even want a mortgage really. I mean I might get one as per his advice (15 year less than 25% of take home) and move up in house if I ever wanted to. I have heard the arguements for holding a mortage, but I personally would never do them. Just not worth the stress.
I do understand that saving up to buy a house in cash is sort of hedging your bets and is equivalent to buying bonds. But I'm fine with that. I mean after a house and base expenses like food and gas. I'm good.
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So after reading all this advice. I think I will stay 100% stocks for now. Maybe I Will shift to bonds a bit when I am older and then start a glide path from there.
In the mean time I will continue to research more about AA heavily and investing as well as continue to look into increasing my income.
I think I am a bit more ok with risk since I already have low expenses. Also, being a Dave Ramseyer is making me a lot more conservative in other aspects of my life. E.G. building an emergency fund, getting rid of all debts, seeking to not have a mortage etc. etc. I think this sort of hedge is, in effect, my "bond".
Also, I don't think I hate working. I am currently a data scientist and could do this for a while. If not I will just change jobs or try entrepreneurship or something. I'm confident there will always be good work out there! The stocks are just a bonus. And Ionno. Fking YOLO. I am looking forward to the volatility.
I will look into some of the resources people have posted. I love yummy math but am also wary of paralysis of the analysis and the fact that no one models behaviour .
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I think I am a bit more ok with risk since I already have low expenses. Also, being a Dave Ramseyer is making me a lot more conservative in other aspects of my life. E.G. building an emergency fund, getting rid of all debts, seeking to not have a mortage etc. etc. I think this sort of hedge is, in effect, my "bond".
Why the emergency fund, though? It seems that you are avoiding bonds at 2-3% for an emergency fund at [peanuts]%.
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So after reading all this advice. I think I will stay 100% stocks for now. Maybe I Will shift to bonds a bit when I am older and then start a glide path from there.
In the mean time I will continue to research more about AA heavily and investing as well as continue to look into increasing my income.
I think I am a bit more ok with risk since I already have low expenses. Also, being a Dave Ramseyer is making me a lot more conservative in other aspects of my life. E.G. building an emergency fund, getting rid of all debts, seeking to not have a mortage etc. etc. I think this sort of hedge is, in effect, my "bond".
Also, I don't think I hate working. I am currently a data scientist and could do this for a while. If not I will just change jobs or try entrepreneurship or something. I'm confident there will always be good work out there! The stocks are just a bonus. And Ionno. Fking YOLO. I am looking forward to the volatility.
I will look into some of the resources people have posted. I love yummy math but am also wary of paralysis of the analysis and the fact that no one models behaviour .
If you love yummy math and data you should look into how good having a good mortgage can be for your investment returns. Dave Ramsey is a good salesman but far from a guru.
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If you love yummy math and data you should look into how good having a good mortgage can be for your investment returns. Dave Ramsey is a good salesman but far from a guru.
AMEN to both points!
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Do I really have to explain why I need an emergency fund? In case I need money so I don't have to pull from my investments and prematurely drain them. I won't use debt for this since I don't want credit cards. I'm self-aware enough to know that if I kept CCs for the sake of "emergencies", I'd overuse them.
As for mortgages. No. First I just don't like the idea of having debt and think it reduces quality of life. And two, I am quite certain that keeping and intending to keep a mortgage effects your behaviour in a negative way. Specificallly, it incentivizes you to stay in a larger house, and that is a good way of overleveraging and increasing risk too much. I mean I don't mind people making a case for larger mortgages. But any time I see an argument for them, they always have some convenient assumptions which lead me to believe that are constructed to some convenient conclusions. Which makes sense right? Of course people will mess with the math to justify a pretty house.
I mean I'm still not 100% sure on 100% stocks. And leveraged investing is even riskier.
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Do I really have to explain why I need an emergency fund? In case I need money so I don't have to pull from my investments and prematurely drain them. I won't use debt for this since I don't want credit cards. I'm self-aware enough to know that if I kept CCs for the sake of "emergencies", I'd overuse them.
That doesn't sound very YOLO to me..
Go 100% EM stocks on margin; now that's YOLO
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Do I really have to explain why I need an emergency fund? In case I need money so I don't have to pull from my investments and prematurely drain them. I won't use debt for this since I don't want credit cards. I'm self-aware enough to know that if I kept CCs for the sake of "emergencies", I'd overuse them.
That doesn't sound very YOLO to me..
Go 100% EM stocks on margin; now that's YOLO
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And two, I am quite certain that keeping and intending to keep a mortgage effects your behaviour in a negative way. Specificallly, it incentivizes you to stay in a larger house, and that is a good way of overleveraging and increasing risk too much.
This part of your thinking is very advanced, IMO. More advanced than many spendy folks you'll run into in financial forums.
Although the "hold a mortgage" crowd are absolutely correct in the math. Its been very cheap leverage for them over the past 8-9 years of very low rates (rates subsidized by the government to encourage home ownership). It doesn't mean they are better off for holding the loan/owning the home. There is very much a psychological component to home ownership.
However, your argument breaks down if you are going to own a home anyway (assuming the right size, etc). You should use the cheap leverage. Liken this to not using a rewards credit card because you are afraid you'll overspend and not pay the balance each month. Know thyself, but understand there are people out there who use the CC bonus wisely, even if you can't.
I like your current plan of 100% stocks and starting to learn more about investing. A small E-fund is inconsequential to results, it's not worth arguing about a few grand of allocation.
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Do I really have to explain why I need an emergency fund? In case I need money so I don't have to pull from my investments and prematurely drain them. I won't use debt for this since I don't want credit cards. I'm self-aware enough to know that if I kept CCs for the sake of "emergencies", I'd overuse them.
You don't need to explain why you need them (I'm not your mother), you might want to understand what it does in terms of returns over the long run. If you are comfortable foregoing that and with the dissonance between that stance and your questioning the wisdom of bonds on the same grounds, yolo away!
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I see no issues here. Personally, I can't tell the difference between an emergency fund and a safe bond allocation. Just be sure you are keeping the EF above inflation, and if you are not, consider moving it gradually to I-bonds (very safe, very cash-like after 1 year, and very high returns considering) or to ordinary bonds. A one-off five year CD ladder centered on a hard retirement date might increase your prospects, otherwise consider a ~25% bond allocation when you are finally depending on your money for sustenance.
I like your thinking that mortgages are just another way to justify a McMansion, and it seems like most rent-vs-buy discussions assume a house that is at least 50% larger with higher-end finishes than the hypothetical rental.
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I mean if someone is going to be in a house and like stay in a house, then I won't fault them. I more than under stand the argument that compares mortgage interest rates to inflation, and states that holding onto a mortgage means you get a house with "cheap money".
But nothing comes for free. You essentially pay for your house this way with increased risk. Which is why I completely don't buy the whole "It is stupid to pay down your mortgage argument". Also why I am not for leveraged real estate. investing in I mean I am sure it can work, but there is a reason people aren't as motivated to take loans of the same scale and invest in the stock market directly. There is just something about homes that makes people forget risk, and that is something I want to be aware of. In millenial speak we call this being #woke or more importantly #wokeasfuk
And yeah, I think behaviour factors a lot into personal finance. Anecdotally, on the path to getting out of debt, I have become noticeably more productive. It's just more motivation to want to work to do this. I actually got a 20% promotion this year and my boss pointed out that something in me "shifted". So were my debt payments really a type of investment that netted me returns in terms of changed behaviour? Ionno.
Then again, I also think that a lot of people make convenient assumptions about money to justify their actions. I am probably doing the same. This is why I am so wary about the overuse of math in personal finance, and I'm a Data Scientist that does nothing but build probabilistic models all day. And I am interested in making my own monte carlo simulations.
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And two, I am quite certain that keeping and intending to keep a mortgage effects your behaviour in a negative way. Specificallly, it incentivizes you to stay in a larger house, and that is a good way of overleveraging and increasing risk too much.
However, your argument breaks down if you are going to own a home anyway (assuming the right size, etc). You should use the cheap leverage. Liken this to not using a rewards credit card because you are afraid you'll overspend and not pay the balance each month. Know thyself, but understand there are people out there who use the CC bonus wisely, even if you can't.
I actually never would use a rewards card for points. Debt is icky to me. I have heard there are studies that state that rewards cards have a 7% chance of being profitable. So yeah. I just don't think the math works for them at all. Then again, I haven't yet seen said studies so I can't say for sure.
I, in general, just assume there is nothing free in finance. You pay for something somewhere. Be it paying with the increased risk of making a mistake or being more cavalier if using a rewards card. Or increased risk over all of your assets when leveraging a house. If you can't see exactly how you are paying something, then you probably just aren't modeling things properly.
But I mean its ok to do so. Money's ultimate purpose is to be enjoyed, even if you die you should hope to spend it in a way that makes you happy. I guess the key is to enjoy wisely and not be naive as to how much your emotions are effecting your decision making.
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I actually never would use a rewards card for points. Debt is icky to me. I have heard there are studies that state that rewards cards have a 7% chance of being profitable. So yeah. I just don't think the math works for them at all. Then again, I haven't yet seen said studies so I can't say for sure.
Right, so for 7% a rewards CC is a great idea and supplemental income source, see some of the threads around here, people bank thousands a year from them. I bet the numbers would be similar with mortgage use. 7% would likely spend the same on a home with mortgage as they would if paying cash. All that means is it's a bad idea for the 93% of people who utilize the financial tool incorrectly (or correctly as the bankers and financial company shareholders see it). For those of us in the 7%, we make bank on other peoples foolish behavior. Here you will find many of those 7%. Again, know thyself, if you can't be one of the 7%, don't even try. As you point out, the odds are stacked. However, that doesn't mean it's a bad idea.
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I see moresoe that, if you use a credit card, you have a 7% probability of making money off of it.
Here is a question. Of the many, many, many people that have lost money through credit cards, how many are likely to brag about it online? How many are even aware?
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I see moresoe that, if you use a credit card, you have a 7% probability of making money off of it.
I see moresoe that, if you use a credit card, you have a 100% probability of making money off of it, if you use it correctly.
Slight correction in italics.
Here is a question. Of the many, many, many people that have lost money through credit cards, how many are likely to brag about it online? How many are even aware?
Agreed
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As for mortgages. No. First I just don't like the idea of having debt and think it reduces quality of life. And two, I am quite certain that keeping and intending to keep a mortgage effects your behaviour in a negative way. Specificallly, it incentivizes you to stay in a larger house, and that is a good way of overleveraging and increasing risk too much. I mean I don't mind people making a case for larger mortgages. But any time I see an argument for them, they always have some convenient assumptions which lead me to believe that are constructed to some convenient conclusions. Which makes sense right? Of course people will mess with the math to justify a pretty house.
Warning you will now encounter the "mortgage-is-good" MMM police that cannot leave a comment like this alone. I agree with you, no debt which includes no mortgage. Can debt be used to increase leverage and increase wealth? Yes, most definitely. Companies do this all the time. Some succeed spectacularly, other go bankrupt trying.
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As for mortgages. No. First I just don't like the idea of having debt and think it reduces quality of life. And two, I am quite certain that keeping and intending to keep a mortgage effects your behaviour in a negative way. Specificallly, it incentivizes you to stay in a larger house, and that is a good way of overleveraging and increasing risk too much. I mean I don't mind people making a case for larger mortgages. But any time I see an argument for them, they always have some convenient assumptions which lead me to believe that are constructed to some convenient conclusions. Which makes sense right? Of course people will mess with the math to justify a pretty house.
Warning you will now encounter the "mortgage-is-good" MMM police that cannot leave a comment like this alone. I agree with you, no debt which includes no mortgage. Can debt be used to increase leverage and increase wealth? Yes, most definitely. Companies do this all the time. Some succeed spectacularly, other go bankrupt trying.
I, for one, can totally leave it alone. I find "I actually never would use a rewards card for points. Debt is icky to me" to be a total non-sequiter. FFS, we are mustachians here! We know how to manage our spending and how to purchase the right size abode for our needs. We are not Consumer Sukkas.
Real Estate, mortgages, prudent use of credit cards and creative frugality hoisted my non-high-wage-earning ass all the way to FIRE and wealth beyond my wildest imagination, but hey, what do I know? Why should I care about helping others find an easier path to FIRE? Oh, wait, isn't that the point of MMM? Let's not forget where we are, folks.
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I see moresoe that, if you use a credit card, you have a 7% probability of making money off of it.
Here is a question. Of the many, many, many people that have lost money through credit cards, how many are likely to brag about it online? How many are even aware?
It's not a "randomized chance" percentage. You can choose to use the tool well and be guaranteed to come out ahead. Or you can not pay attention and carry a balance like 93% of people (apparently) and be guaranteed to come out behind.
Same goes for mortgages. You do you, but it's just a tool and like all tools it can either be used well or poorly.
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Not using reward credit cards because of an aversion to debt is like not going to the doctor because they take a few weeks to send you the bill.
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I think I get it. But I still want to take the chance. Hmmm I guess I would rather not feel the FOMO of missing out on those gains.
Here is my question. I can understand changing allocation at like 50 - 65 or so, but should this be done gradually?
Oh I should say. All of my money is in betterment, which has fractional shares. So I can do that more easily.
I also have a fear of missing out on FOMO due to a fear of FOMO and missing out.
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BRAH
That is meta
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So after reading all this advice. I think I will stay 100% stocks for now. Maybe I Will shift to bonds a bit when I am older and then start a glide path from there.
In the mean time I will continue to research more about AA heavily and investing as well as continue to look into increasing my income.
I think I am a bit more ok with risk since I already have low expenses. Also, being a Dave Ramseyer is making me a lot more conservative in other aspects of my life. E.G. building an emergency fund, getting rid of all debts, seeking to not have a mortage etc. etc. I think this sort of hedge is, in effect, my "bond".
Also, I don't think I hate working. I am currently a data scientist and could do this for a while. If not I will just change jobs or try entrepreneurship or something. I'm confident there will always be good work out there! The stocks are just a bonus. And Ionno. Fking YOLO. I am looking forward to the volatility.
I will look into some of the resources people have posted. I love yummy math but am also wary of paralysis of the analysis and the fact that no one models behaviour .
You don't mention where you work, and most employers in the private sector don't offer pensions anymore, but if you happen to qualify for a pension, that could serve as your bond / safe cash fund.
As @Nords has written about extensively, having a government pension is equivalent to having an inflation-adjusted annuity. As I stand to qualify for a USG pension myself, I see no need to add more bonds to my portfolio and therefore use a 100% stock allocation. Well maybe closer to 98% stock and 2% options, but that's a discussion for a different thread.
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I would stick with MMM and ERN and plough everything into equity. My own path before I learned better was real estate, which sort of worked as a savings account. I think I may have lucked out on one of my properties because it did very well on AirBnB, but if I had to do it again I would definitely go 100% equities. In fact, I am trying to sell them so that I can put the proceeds into equities now.
The concerns expressed in the thread are about the sequence of returns, and they are real. However, since you are not on the cusp of FIRE, they are nothing to worry about.
Here is a good article about that risk, but the idea is intuitive. If you retire and the market tanks shortly thereafter, you could have to backpedal into work again:
https://earlyretirementnow.com/2017/05/17/the-ultimate-guide-to-safe-withdrawal-rates-part-14-sequence-of-return-risk/
As you near retirement, you would want to build an equity glidepath. The simplest form of that idea is to keep a couple of years of expenses in a bond portfolio. That way if your equity savings tank, you do not need to touch them. Here is a better explanation:
https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/
I think ERN actually has an article explaining how the traditional 60/40 or 70/30 equity/bond portfolio underperforms, but I could not find it. The idea is intuitive enough, though: if you keep part of your money yielding 2-3% (if that) for years, you are giving up the 7% cumulative gain of that money if it was in an equity portfolio for that time.
100% equities until very close to retirement, then a couple of years of expenses in bonds as you near your retirement date. Keep that at hand for the first 5-10 years of retirement until your SWR gets to about 3% and the likelihood of failure is nearly 0. It is not quite what you propose to do, but it is damn close to it.
Actually, re-reading your post, a 50-65% equities allocation does not seem sensible at all at any point - you'd be paying for too much insurance in the name of foregone returns.
bingo.
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Not using reward credit cards because of an aversion to debt is like not going to the doctor because they take a few weeks to send you the bill.
good analogy. BTW I just finished converting $3000 of visa gift cards from grocery stores --> my Amex serve accounts using discover/chase 5% cash back cards, netting $114 after less than an hours work.
credit cards are a game. know the game. play the game. win the game. you absolutely can make $$ off cc's, it's not complicated, just be aware of what you are doing. if you are on a MMM forum then clearly you are "advanced" enough to know how to game the credit card system.
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That is a terrible analogy. Going to a doctor has a high probability of improving your situation, and cost should not be an issue if you have saved and have health insurance. By comparison, credit card churning has a low probability of working. Maybe the conditional probability is higher or something, but, if you are going to assume you are "One of the few" that is better than average with financial behaviour, than that is something that flies in the face of most of the facts. Most likely you are average, perhaps especially if you think you aren't.
I don't play credit games with money because it isn't worth the headache for something that has a small probability of succeeding, and has a small payout. I think this because I do not make the assumption that I have perfect behaviour and that everything will go according to as planned. It should be noted. People, and especially Americans, have a natural tendency to overestimate how well things will occur. It is why we buy lottery tickets, take out loans to get degrees, and invest in bitcoin.
And no. I don't think being on a forum means you are good with money. That is intention not execution. Money isn't about ideas, it is about actually sticking to your guns and making those ideas reality. And that is considerably considerably more difficult.
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So after reading all this advice. I think I will stay 100% stocks for now. Maybe I Will shift to bonds a bit when I am older and then start a glide path from there.
In the mean time I will continue to research more about AA heavily and investing as well as continue to look into increasing my income.
I think I am a bit more ok with risk since I already have low expenses. Also, being a Dave Ramseyer is making me a lot more conservative in other aspects of my life. E.G. building an emergency fund, getting rid of all debts, seeking to not have a mortage etc. etc. I think this sort of hedge is, in effect, my "bond".
Also, I don't think I hate working. I am currently a data scientist and could do this for a while. If not I will just change jobs or try entrepreneurship or something. I'm confident there will always be good work out there! The stocks are just a bonus. And Ionno. Fking YOLO. I am looking forward to the volatility.
I will look into some of the resources people have posted. I love yummy math but am also wary of paralysis of the analysis and the fact that no one models behaviour .
You don't mention where you work, and most employers in the private sector don't offer pensions anymore, but if you happen to qualify for a pension, that could serve as your bond / safe cash fund.
As @Nords has written about extensively, having a government pension is equivalent to having an inflation-adjusted annuity. As I stand to qualify for a USG pension myself, I see no need to add more bonds to my portfolio and therefore use a 100% stock allocation. Well maybe closer to 98% stock and 2% options, but that's a discussion for a different thread.
I work for a medium sized startup that only offers a 401(k). I plan to only ever work in the private sector. I like small innovative companies that could possibly fail but are about delivering meaningful solutions over ones that are large, slow movie, and don't think of new ideas.
This is one of the reasons why I'd rather have an emergency fund. Over my carreer there is a high probability I will need to change jobs involuntarily.
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If you're very young and don't consider returning to work while still fairly young a disaster (I don't), and/or have leeway in your withdraws, then I think 100% allocation with 4% withdraw is fine. But do not let the bounce back of the markets and thus portfolios for those not yet retired and still contributing over the past couple decades make you think its by any means safe if you don't accept these risks. Someone who retired in 2000 using the 4% withdraw method and $1M with a 100% allocation to the Total Market has an approx nest egg today in inflation adjusted dollars of $415k, so at this point they are hitting the egg at almost 10% year. For someone who retired at 65 this is not exactly a disaster scenario as the money will still likely outlive the person, but someone retiring a lot earlier than that will likely see it completely evaporate before too long at that draw-down.
But again, given thats a pretty worse case scenario and I dont think having to work more later on is so unthinkable I think its a fine option to choose, just do it with eyes wide open
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That is a terrible analogy. Going to a doctor has a high probability of improving your situation, and cost should not be an issue if you have saved and have health insurance. By comparison, credit card churning has a low probability of working. Maybe the conditional probability is higher or something, but, if you are going to assume you are "One of the few" that is better than average with financial behaviour, than that is something that flies in the face of most of the facts. Most likely you are average, perhaps especially if you think you aren't.
I don't play credit games with money because it isn't worth the headache for something that has a small probability of succeeding, and has a small payout. I think this because I do not make the assumption that I have perfect behaviour and that everything will go according to as planned. It should be noted. People, and especially Americans, have a natural tendency to overestimate how well things will occur. It is why we buy lottery tickets, take out loans to get degrees, and invest in bitcoin.
And no. I don't think being on a forum means you are good with money. That is intention not execution. Money isn't about ideas, it is about actually sticking to your guns and making those ideas reality. And that is considerably considerably more difficult.
Games? I've had a simple 1% reward card for over 5 years (Chase Freedom). It's on autopay. There's simply no way to lose. It earns me hundreds of dollars per year (mostly through the 5% quarterly reward categories). It's like getting an invoice for your purchases two weeks later, except they pay you money to not pay up front. This has nothing to do with lottery tickets or bitcoin...
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That is a terrible analogy. Going to a doctor has a high probability of improving your situation, and cost should not be an issue if you have saved and have health insurance. By comparison, credit card churning has a low probability of working. Maybe the conditional probability is higher or something, but, if you are going to assume you are "One of the few" that is better than average with financial behaviour, than that is something that flies in the face of most of the facts. Most likely you are average, perhaps especially if you think you aren't.
I don't play credit games with money because it isn't worth the headache for something that has a small probability of succeeding, and has a small payout. I think this because I do not make the assumption that I have perfect behaviour and that everything will go according to as planned. It should be noted. People, and especially Americans, have a natural tendency to overestimate how well things will occur. It is why we buy lottery tickets, take out loans to get degrees, and invest in bitcoin.
And no. I don't think being on a forum means you are good with money. That is intention not execution. Money isn't about ideas, it is about actually sticking to your guns and making those ideas reality. And that is considerably considerably more difficult.
Games? I've had a simple 1% reward card for over 5 years (Chase Freedom). It's on autopay. There's simply no way to lose. It earns me hundreds of dollars per year (mostly through the 5% quarterly reward categories). It's like getting an invoice for your purchases two weeks later, except they pay you money to not pay up front. This has nothing to do with lottery tickets or bitcoin...
Yeah, that's an odd opinion.
I have about 3 cards in play at any moment, and another 15 cards that are either no-fee or waiting to be canceled/downgraded. That's risking a fuck-up but the risk-reward is well worth it.
But just getting a new card every 6 months for the points/miles/cash back is extremely low risk. Or, as you (Scortius) noted, get a rewards card and use it exclusively.
There is obviously a scale on what "considerably more difficult" means.
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I would just like to point out how odd it is that someone won't use rewards credit cards for fear of screwing up and accidentally getting hit with a hundred bucks in fees/interest. Yet the same person is so risk tolerate that 50-60% (loss of potentially hundreds of thousands of dollars) decrease in stash value with 100% US equities is no problem.
Somethings got to give. I encourage the OP to reconcile these views with her/his-self before a situation arises.
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If I followed correctly, here's the TL;DR:
"I'm gonna YOLO cuz I got the FOMO, so it's 100% stocks, except I don't trust the data or myself so I mix in a paid off house and no credit card usage."
You do you, OP.
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The idea is to get your base expenses as minimal as possible giving you the freedom to make sensible but risky investments.
If I can at any point only need to pull out 500$ a month, what will I care if the market falls 30% on 2 million dollars.
The way I see it, we will need to accept some level of risk one way or the other. I'd rather shift the risk to "Oh no my nest egg is temporarily down" to "Oh no I'm going to get evicted out of my house".
Also I trust the data. I'm a Data Scientist. Why wouldn't I. With that said, finance is a complex subject. And I am still learning, collecting, and forming my own models. This is why I asked this question. My opinion is still developing.
With that said. The first couple of posts directing me to those blogs full of yummy monte carlo methods and analysis that actually are aware that stochasticity is a thing were amazing and I am still reviewing the blogs they link to.
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That is a terrible analogy. Going to a doctor has a high probability of improving your situation, and cost should not be an issue if you have saved and have health insurance. By comparison, credit card churning has a low probability of working. Maybe the conditional probability is higher or something, but, if you are going to assume you are "One of the few" that is better than average with financial behaviour, than that is something that flies in the face of most of the facts. Most likely you are average, perhaps especially if you think you aren't.
I don't play credit games with money because it isn't worth the headache for something that has a small probability of succeeding, and has a small payout. I think this because I do not make the assumption that I have perfect behaviour and that everything will go according to as planned. It should be noted. People, and especially Americans, have a natural tendency to overestimate how well things will occur. It is why we buy lottery tickets, take out loans to get degrees, and invest in bitcoin.
And no. I don't think being on a forum means you are good with money. That is intention not execution. Money isn't about ideas, it is about actually sticking to your guns and making those ideas reality. And that is considerably considerably more difficult.
if you're a mustachian then presumably your income >> living expenses. So it would be foolish NOT to use a cc for all expenses and reap the rewards.... if you're living paycheck to paycheck then obviously stay away from cc's until you can either increase your income or decrease you lifestyle, or both. but if you have excess cash each month it's not all that difficult to make sure you pay off your cc in full w/o paying any interest... I just pay my cards off after each paycheck, it's pretty simple really, and since I am very aggressive w/ cc churning/sign-up bonuses I probably average around 5-10% off on all my expenses...
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Dear god can we not make this a "lets grill Shinn for not using CCs". I have my reasons, and I have heard this argument to so many times.
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This thread isn't going to go anywhere my friends.
Based off what I have seen, I assume the OP found Dave Ramsey first. While I appreciate What Ramsey has done (read his book, listen to a few of his podcasts), his followers believe in emotion > math. They don't believe in acquiring the most possible net wealth they can based on their situation, they simply follow exactly what Ramsey says, even if it causes you to lose tens of thousands of dollars in opportunity cost.
I am on their Facebook group and I posted my situation just to see the response. I stated that I have a $12,000 car loan with 35 months remaining on it at 0% interest. I also told them that i'm Maxing out my HSA/Roth IRA and 10% into my 401K. EVERYONE responded by stating that I should stop paying into my retirement accounts until I had the car paid off. Even after I explained to them how this would be irresponsible, they said it's about more than the math...
I also explained how, for people that are disciplined, having a credit card is an advantage. All you have to do is pay off the credit card the night that you use it and you will never be charged interest or over spend and you get FREE cash back rewards. They all told me I was wrong on this as well...
Again, I'm not bashing Ramsey as he is good for 90% of America, but his followers follow his 8BS's to a T and are not willing to expand their knowledge at all!
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I retired last year. 100% stock allocation, 55 years young. So I guess I'm YOLO at this point. i do have a pension that i can draw on at 60, so that helps with the YOLO attitude. I've been 100% stocks for the last 20 years or so (when I actually started saving). During the 20 years, I've taken very large hits during 2000 and 2008. Rode the storm out and came out on the other side in better condition so I've learned to deal with the emotional rollercoaster.
I don't need a lot of money. I have no debt, own my house and only have typical monthly bills. If my savings take a 50% haircut, I can deal with it.
If you are going to do it, then make sure you can withstand the down periods. Most people don't like the risk and the emotional hit.
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That is a terrible analogy. Going to a doctor has a high probability of improving your situation, and cost should not be an issue if you have saved and have health insurance. By comparison, credit card churning has a low probability of working. Maybe the conditional probability is higher or something, but, if you are going to assume you are "One of the few" that is better than average with financial behaviour, than that is something that flies in the face of most of the facts. Most likely you are average, perhaps especially if you think you aren't.
I don't play credit games with money because it isn't worth the headache for something that has a small probability of succeeding, and has a small payout. I think this because I do not make the assumption that I have perfect behaviour and that everything will go according to as planned. It should be noted. People, and especially Americans, have a natural tendency to overestimate how well things will occur. It is why we buy lottery tickets, take out loans to get degrees, and invest in bitcoin.
And no. I don't think being on a forum means you are good with money. That is intention not execution. Money isn't about ideas, it is about actually sticking to your guns and making those ideas reality. And that is considerably considerably more difficult.
Credit card churning or using credit cards for the return given based on rewards point have higher probabilies of working than going to a doctor. its a simple math equation if i use a credit card that gives me 1% back i'm guaranteed that 1% back as long as i dont change my spending habits from using cash. you say you're a data scientist and the way you're throwing around probability and success here scare me greatly. Credit card churning on the other hand can be run with Manufactured Spending like a business to reap insane rewards - millions of frequent flyer miles.
Personally it sounds like you have self control problems when it comes to credit and other debt so you've decided to personally not leverage these things - which is fine but to throw in words like success and probability when its a personal self control issue- these things dont play in the same arena.
The probability of a low fixed rate mortgage taken to term - based on history (which is the basis of your 4% rule) beating paying down that mortgage vs investing in 100% stocks is so overwhelmingly large - its hard to see how a data scientist cant see that probablity - we're talking great than 90% of the possible pay down windows in history the mortgage wins out when its at current mortgage rates vs paying it down or buying lump sum.
And the credit card thing drives me nuts still that you're trying to use chances of success or probability in doing better with a credit card. if you spend money the same way with or without a credit card the credit card wins 100% of the time. if you cant do that b/c of a self control issue thats a different story.
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The idea is to get your base expenses as minimal as possible giving you the freedom to make sensible but risky investments.
If I can at any point only need to pull out 500$ a month, what will I care if the market falls 30% on 2 million dollars.
The way I see it, we will need to accept some level of risk one way or the other. I'd rather shift the risk to "Oh no my nest egg is temporarily down" to "Oh no I'm going to get evicted out of my house".
Also I trust the data. I'm a Data Scientist. Why wouldn't I. With that said, finance is a complex subject. And I am still learning, collecting, and forming my own models. This is why I asked this question. My opinion is still developing.
With that said. The first couple of posts directing me to those blogs full of yummy monte carlo methods and analysis that actually are aware that stochasticity is a thing were amazing and I am still reviewing the blogs they link to.
this isnt a 4% SWR on 100% Stock allocation
this is a 0.3% Withdrawal rate
as you said you have lots to learn - first and foremost you should probably forget everything dave told you and start relearning finances from the much more intelligent people around here. He helped pull you out of the 90% of americans crowd now you're mixing with the 0.1% of americans who have in depth understanding of finances and can help you acheive your goals faster and more efficiently if you're willing to learn and blow up some of the foundational things DR has placed in your head.
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I retired last year. 100% stock allocation, 55 years young. So I guess I'm YOLO at this point. i do have a pension that i can draw on at 60, so that helps with the YOLO attitude. I've been 100% stocks for the last 20 years or so (when I actually started saving). During the 20 years, I've taken very large hits during 2000 and 2008. Rode the storm out and came out on the other side in better condition so I've learned to deal with the emotional rollercoaster.
I don't need a lot of money. I have no debt, own my house and only have typical monthly bills. If my savings take a 50% haircut, I can deal with it.
If you are going to do it, then make sure you can withstand the down periods. Most people don't like the risk and the emotional hit.
You didn't start actively saving for retirement until 35 and retired at 55? Well done!
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This thread isn't going to go anywhere my friends.
Based off what I have seen, I assume the OP found Dave Ramsey first. While I appreciate What Ramsey has done (read his book, listen to a few of his podcasts), his followers believe in emotion > math. They don't believe in acquiring the most possible net wealth they can based on their situation, they simply follow exactly what Ramsey says, even if it causes you to lose tens of thousands of dollars in opportunity cost.
I am on their Facebook group and I posted my situation just to see the response. I stated that I have a $12,000 car loan with 35 months remaining on it at 0% interest. I also told them that i'm Maxing out my HSA/Roth IRA and 10% into my 401K. EVERYONE responded by stating that I should stop paying into my retirement accounts until I had the car paid off. Even after I explained to them how this would be irresponsible, they said it's about more than the math...
I also explained how, for people that are disciplined, having a credit card is an advantage. All you have to do is pay off the credit card the night that you use it and you will never be charged interest or over spend and you get FREE cash back rewards. They all told me I was wrong on this as well...
Again, I'm not bashing Ramsey as he is good for 90% of America, but his followers follow his 8BS's to a T and are not willing to expand their knowledge at all!
I actually found MMM first, but started the serious path to financial freedom after being motivated by Dave Ramsey.
And I see it this way. The math is great. But day in and day out I do question how much of it actually applies. Spending money is easy and sticking to a budget is hard. I peruse through my finances constantly and have always found little trip ups and deviations. In fact it is hard to know when I have made mistakes since I will often change my budget as I go or not remember what my original projections or intentions were. Even using budgeting software and excel this happens, since their classifiers are often not so great. And then, sometimes I just want to deviate from my budget. I get emotional and want to enjoy myself.
For all of these reasons, I err to not assume perfect behaviour. I am also very suspicious of people that do, especially giving mounting evidence that most people do not, including those that are financially intelligent. I actually have a theory that more financially intellgient people out there are more likely to deviate from their budget since certain assumptions change when you don't model behaviour. Part of the evidence for this is that there is a evidence that (DR's own studies, millionaire next door, etc. etc.) people that get wealthy do so without debt or paying attention to the math. Yet every blog I see that focuses on wealth building is more about math than behvaiour. Again, a discrepancy I would like to understand.
For you I would question why you went to a DR group and asked how to deal with debt. His stances on it are pretty clear, so I don't know what you intended on expecting. And here is the thing. After listening to his show, there are people that ask him and others the same kinds of questions. And I think to some extent you just can't convince them. If you are not down with the plan, doin't expect some kind of magic revelation or truth to be unveiled that will convince you. Even if there were, people are not likely to change their thinking after seeing evidence that contradicts their world view. This is true even if the evidence is very compelling. I mean similiarly for me. I understand many of the arguments for using leverage to build wealth, but I am not comfortable using them. There is probably a bias on there on both sides and I think that is ok.
Some final notes:
- I really don't like the idea that "Its Math vs behaviour". You can mathematically model behaviour if you use probability theory but it is very difficult. Really the statement should be "Its simple math vs behaviour". There is probably some more work to be done in this field since behavioural economics is somewhat new.
- There are 6 Baby Steps
- I wonder about the "You are posting on this forum so you are an advanced user." idea. I question this because of the role sampling bias is in play. Can you really say any kind of inference on the number of people that post here extrapolates to a general case? I say no. BUT, could you assume that the conditional probability of posting here effects any assumptions on behaviour? I say perhaps so. BUT, what about selection bias in terms of people that are on the forums or self-identify but only post successes. E.G. Are people more likely to post if they succed in behaviour vs not. And that is something I think people should be wary of.
- I question the idea that "Dave Ramsey's investing advice is bad." Well I sort of agree. He does specifically say to go trhough mutual funds, but the baby steps do not specify how you should invest, just that you DO invest. In most cases, when people ask him to invest, he stresses that the intent to do so is greater than the method of hwo. And, when people report to him they invest differently, he praises them, as long as they are in something sensible like unleveraged securities or real estate. He has even praised someone who was in leveraged real estate. I think we should be careful to seperate dave's own preferences from the advice he gives. Even if he gives his preferences as advice.
- I personally prefer index funds. But there are some arguments against them. In particular, they don't value their underlying securities properly. Behaviourally they are perhaps too liquid. And some of the assumptions about their efficacy relative to active trading might be effected by traders' own biases. E.G. how many active traders are attempting to really beat the market vs invest more conservatively for older clients. Again, this doesn't mean that indexing is bad just that we should always be critical and evaluete investments on our own terms rather than doing what everyone else does. I think I've realized that investing is an individual thing, and it is hard for one person to really apply their situation to others, especailly when both parties have assumptions they aren't inherently aware of.
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Hey so I think I've learned as much as I can on this topic. I'm just going to stop replying to this thread. If we want to have a debate on credit card churning and behavioural economics, we should od it elsewhere. I also think there is another active topic onf safe withdrawal rates that is probably better. You should look at that.
I am not responding to any further messages. But hey feel free to post on this. Please try to avoid personal attacks,however. That is just uncouth
I responded I'm terrible. Yolo
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Hey so I think I've learned as much as I can on this topic. I'm just going to stop replying to this thread. If we want to have a debate on credit card churning and behavioural economics, we should od it elsewhere. I also think there is another active topic onf safe withdrawal rates that is probably better. You should look at that.
I am not responding to any further messages. But hey feel free to post on this. Please try to avoid personal attacks,however. That is just uncouth
not sure i've seen a personal attack at you just attacks at your ideas and how contradictory they are - when ideas are attacked people can take them personally - that however does not make it a personal attack.
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This thread isn't going to go anywhere my friends.
Based off what I have seen, I assume the OP found Dave Ramsey first. While I appreciate What Ramsey has done (read his book, listen to a few of his podcasts), his followers believe in emotion > math. They don't believe in acquiring the most possible net wealth they can based on their situation, they simply follow exactly what Ramsey says, even if it causes you to lose tens of thousands of dollars in opportunity cost.
I am on their Facebook group and I posted my situation just to see the response. I stated that I have a $12,000 car loan with 35 months remaining on it at 0% interest. I also told them that i'm Maxing out my HSA/Roth IRA and 10% into my 401K. EVERYONE responded by stating that I should stop paying into my retirement accounts until I had the car paid off. Even after I explained to them how this would be irresponsible, they said it's about more than the math...
I also explained how, for people that are disciplined, having a credit card is an advantage. All you have to do is pay off the credit card the night that you use it and you will never be charged interest or over spend and you get FREE cash back rewards. They all told me I was wrong on this as well...
Again, I'm not bashing Ramsey as he is good for 90% of America, but his followers follow his 8BS's to a T and are not willing to expand their knowledge at all!
I actually found MMM first, but started the serious path to financial freedom after being motivated by Dave Ramsey.
And I see it this way. The math is great. But day in and day out I do question how much of it actually applies. Spending money is easy and sticking to a budget is hard. I peruse through my finances constantly and have always found little trip ups and deviations. In fact it is hard to know when I have made mistakes since I will often change my budget as I go or not remember what my original projections or intentions were. Even using budgeting software and excel this happens, since their classifiers are often not so great. And then, sometimes I just want to deviate from my budget. I get emotional and want to enjoy myself.
For all of these reasons, I err to not assume perfect behaviour. I am also very suspicious of people that do, especially giving mounting evidence that most people do not, including those that are financially intelligent. I actually have a theory that more financially intellgient people out there are more likely to deviate from their budget since certain assumptions change when you don't model behaviour. Part of the evidence for this is that there is a evidence that (DR's own studies, millionaire next door, etc. etc.) people that get wealthy do so without debt or paying attention to the math. Yet every blog I see that focuses on wealth building is more about math than behvaiour. Again, a discrepancy I would like to understand.
For you I would question why you went to a DR group and asked how to deal with debt. His stances on it are pretty clear, so I don't know what you intended on expecting. And here is the thing. After listening to his show, there are people that ask him and others the same kinds of questions. And I think to some extent you just can't convince them. If you are not down with the plan, doin't expect some kind of magic revelation or truth to be unveiled that will convince you. Even if there were, people are not likely to change their thinking after seeing evidence that contradicts their world view. This is true even if the evidence is very compelling. I mean similiarly for me. I understand many of the arguments for using leverage to build wealth, but I am not comfortable using them. There is probably a bias on there on both sides and I think that is ok.
Some final notes:
- I really don't like the idea that "Its Math vs behaviour". You can mathematically model behaviour if you use probability theory but it is very difficult. Really the statement should be "Its simple math vs behaviour". There is probably some more work to be done in this field since behavioural economics is somewhat new.
- There are 6 Baby Steps
- I wonder about the "You are posting on this forum so you are an advanced user." idea. I question this because of the role sampling bias is in play. Can you really say any kind of inference on the number of people that post here extrapolates to a general case? I say no. BUT, could you assume that the conditional probability of posting here effects any assumptions on behaviour? I say perhaps so. BUT, what about selection bias in terms of people that are on the forums or self-identify but only post successes. E.G. Are people more likely to post if they succed in behaviour vs not. And that is something I think people should be wary of.
- I question the idea that "Dave Ramsey's investing advice is bad." Well I sort of agree. He does specifically say to go trhough mutual funds, but the baby steps do not specify how you should invest, just that you DO invest. In most cases, when people ask him to invest, he stresses that the intent to do so is greater than the method of hwo. And, when people report to him they invest differently, he praises them, as long as they are in something sensible like unleveraged securities or real estate. He has even praised someone who was in leveraged real estate. I think we should be careful to seperate dave's own preferences from the advice he gives. Even if he gives his preferences as advice.
- I personally prefer index funds. But there are some arguments against them. In particular, they don't value their underlying securities properly. Behaviourally they are perhaps too liquid. And some of the assumptions about their efficacy relative to active trading might be effected by traders' own biases. E.G. how many active traders are attempting to really beat the market vs invest more conservatively for older clients. Again, this doesn't mean that indexing is bad just that we should always be critical and evaluete investments on our own terms rather than doing what everyone else does. I think I've realized that investing is an individual thing, and it is hard for one person to really apply their situation to others, especailly when both parties have assumptions they aren't inherently aware of.
I enjoyed this response Shinn. This helped me understand the Ramsey followers thinking. Before, they would just attack by stating that i'm wrong because that's not how Dave Ramsey would do it. You understand that the math (for those that are disciplined) doesn't add up following Ramsey's way, but you also understand that most people aren't disciplined enough to forgo paying the debt because they know they would invest every penny they can to make up that difference.
You also stated this:
Part of the evidence for this is that there is a evidence that (DR's own studies, millionaire next door, etc. etc.) people that get wealthy do so without debt or paying attention to the math. Yet every blog I see that focuses on wealth building is more about math than behvaiour. Again, a discrepancy I would like to understand.
Anyone who is smart with their money and makes a decent income can be well off. There is no denying that someone making $150,000 a year who pays off all their debts/mortgage first, and then saves for retirement, can easily become wealthy. But this same person is also foregoing the opportunity at earning tens/hundreds of thousands of dollars of interest by selecting the less optimal way (for those that are disciplined).
After reading quite a bit of content on both forums, the disconnect is simple...
Dave's way works for 95% of America. People who can't trust themselves with credit cards or to invest instead of spend when they have debt, should follow Dave's plan.
But for the 5% who are so far deep into personal finance that they understand and are willing to do what needs to be done to optimize net wealth, Dave's plan has some major key flaws.
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Ok your response is more sensisble. So I'll break my silence for a bit.
Here is my thinking. I'm not confident many people can even know when they are spending properly. In my experience, human beings are unreliable narrators. We intend to take a certain course of action and then actually take another. This tends to be oberservable from the outside but isn't apparent to us. I think this is especially true in finance. This is why rewards programs exist, and make a ton of money. No one intends on going into debt or even holding a balance. But several people eventually do, including those that are good with money. Everyone thinks they are the select few that is better than the population. Now I have heard some evidence that people who truly due have high net worths and low debt to income ratios buck this trend. But, for the time being, I'm going to be healthily skeptical of anyone that claims their own spending habits are better than most people. I just don't believe anyone is really that special.
But I could be wrong. Rememebr the people that are posting here and are into FI are a tiny tiny selection of the population. Probably like less than .1 There are what like 200 FI blogs out there and 300 million americans? Suffice it to say this is a small community. So it is probably likely that whatever statistics apply here don't apply elsewhere. But that has yet to be proven.
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Ok your response is more sensisble. So I'll break my silence for a bit.
Here is my thinking. I'm not confident many people can even know when they are spending properly. In my experience, human beings are unreliable narrators. We intend to take a certain course of action and then actually take another. This tends to be oberservable from the outside but isn't apparent to us. I think this is especially true in finance. This is why rewards programs exist, and make a ton of money. No one intends on going into debt or even holding a balance. But several people eventually do, including those that are good with money. Everyone thinks they are the select few that is better than the population. Now I have heard some evidence that people who truly due have high net worths and low debt to income ratios buck this trend. But, for the time being, I'm going to be healthily skeptical of anyone that claims their own spending habits are better than most people. I just don't believe anyone is really that special.
But I could be wrong. Rememebr the people that are posting here and are into FI are a tiny tiny selection of the population. Probably like less than .1 There are what like 200 FI blogs out there and 300 million americans? Suffice it to say this is a small community. So it is probably likely that whatever statistics apply here don't apply elsewhere. But that has yet to be proven.
so what exactly is your point
b/c the avg american will make poor choices that you must be inclined to make them too so you shouldnt optimize for your thought that b/c most others cant do it you cant either?
we understand we're in the minority here - and somehow you found this place so stop thinking and quoting what the majority does b/c thats not the region of the internet this forum lies inside of. And for the record many here are natural savers like MMM and dont keep budgets - budgets actually lead for many people to spend more money than just becoming self aware of how you're spending and changing your habits to rethink whats valuable to you personally. When the average person budgets they either consistently over spend or always spend up to the max in a discresionary category b/c its ear marked for that. but money is fungible it doesnt live in artificial buckets. and to pass up a deal on chicken at the grocery store in may b/c you're almost out of your may grocery budget is a very short sighted look at budgeting and money in general. or to spend an exta 100 bucks next month b/c your budget shows you have 100 bucks to go out to blow on hookers even though you've found you dont enjoy them anymore doesnt really make sense either.
The point is budgetting in a general sense is not something you should strive to do - you should strive to figure out how to reprogram how you think about spending a dollar - then when you are spending that dollar you should be optimizing it - i use a 6% cash back grocery card a 3.6% cash back Gas card. that makes both of those purchases that much cheaper in real value in my life. i dont buy more gas b/c its on a credit card or more groceries for that matter.
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It's been interesting to follow along in this debate both as someone who's practiced the math (I frequently post on Boarder42's DON'T pay off your mortgage topic" and a longtime DR listener.
It's interesting to see some groups of people characterized: people who practice the Ramsey baby steps (Dave claims it's in the single-digit-millions), people who've graduated to the types of MMM-style lifestyle optimizations, readers of this blog/forum, and everybody else (consumer-suckas).
I've honestly felt like this community was about calling out the extravagance and damage that consumption culture--mainly practiced by Consumer-suckas--was doing to our people and our planet. I feel like the ignorance and poor impulse control that group is displaying is what creates the pollution and harmful culture damaging those of us trying to be financially independent. And it's insidious. Even though I think the talltexan HH is saving north of 20% of our income--many of you save more I imagine--I still see a thousand cuts a day where this insidious consumer culture is programming members of my family. And I myself even have weak moments. I went to a birthday party for a friend of my daughter's, and came away with this dark impulse toward enlarging our house from 3,088 ft^2 to 4,200 ft^2. Just being in a house at that larger size--with a Bistro/wine room! (imagine, a whole room of a house dedicated to consumption of one type of product that is not food)--made me want one. Consumption seems to have a gravity all its own.
I've listened to enough DR that I hear the respect Dave gives to people who've made serious money (one recent caller had approximately $3 million in equity) through leveraging real estate. I also take issue with some of the expensive conspicuous items (like a BMW or a Ford Raptor) he seems to endorse implicitly, by admitting he owns them, and I have no reason to believe he cannot afford them. The chance to change consumption-culture is where we mustachians should make our stand.
We'll have little chance of convincing Ramsey-disciples to change their no-credit-card practice, but we may be able to teach them to eschew consumerism. Since many of them will be building wealth anyway, what a victory that would be!
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100 bucks to go out to blow on hookers
Where are these 100 hookers?
Asking purely for research purposes.
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It's been interesting to follow along in this debate both as someone who's practiced the math (I frequently post on Boarder42's DON'T pay off your mortgage topic" and a longtime DR listener.
It's interesting to see some groups of people characterized: people who practice the Ramsey baby steps (Dave claims it's in the single-digit-millions), people who've graduated to the types of MMM-style lifestyle optimizations, readers of this blog/forum, and everybody else (consumer-suckas).
I've honestly felt like this community was about calling out the extravagance and damage that consumption culture--mainly practiced by Consumer-suckas--was doing to our people and our planet. I feel like the ignorance and poor impulse control that group is displaying is what creates the pollution and harmful culture damaging those of us trying to be financially independent. And it's insidious. Even though I think the talltexan HH is saving north of 20% of our income--many of you save more I imagine--I still see a thousand cuts a day where this insidious consumer culture is programming members of my family. And I myself even have weak moments. I went to a birthday party for a friend of my daughter's, and came away with this dark impulse toward enlarging our house from 3,088 ft^2 to 4,200 ft^2. Just being in a house at that larger size--with a Bistro/wine room! (imagine, a whole room of a house dedicated to consumption of one type of product that is not food)--made me want one. Consumption seems to have a gravity all its own.
I've listened to enough DR that I hear the respect Dave gives to people who've made serious money (one recent caller had approximately $3 million in equity) through leveraging real estate. I also take issue with some of the expensive conspicuous items (like a BMW or a Ford Raptor) he seems to endorse implicitly, by admitting he owns them, and I have no reason to believe he cannot afford them. The chance to change consumption-culture is where we mustachians should make our stand.
We'll have little chance of convincing Ramsey-disciples to change their no-credit-card practice, but we may be able to teach them to eschew consumerism. Since many of them will be building wealth anyway, what a victory that would be!
WE must have listened to that same episode, since I heard that and was astounded. My take away was that if someone earns a lot you should respect them, regardless of how they did it. It doesn't mean you shoudl change your beliefs about frugality or avoidance of debt since one person, or even a select few of people, are not enough data to change an opinion over. I sort of think of it in the purview of bayesian analysis in this sense.
So I think maybe you can understand the pull of consumer culture. And I think that DR does too. But I wonder. At what point should you become frugal enough vs live your life and find happiness. At what point is there a happy medium.
Here is the thing. I, probably more than most people here, am extremely frugal. I think there is a thread about 'living under 2000' and my budget allows me to down to 1000$ if I wanted, and 1200$ realistically. There have been portions of my life where I was even less (like 500 - 700 a month). So I understand a lack of consumerism. Do I think it grabs people and makes them irrational? Absolutely so. But would I wish an extremely frugal life on others? Not really. This is actually why I like DR. He says that you can have extravagance if you have worked for it. And I think that that is fair, and it makes sense.
To live the life I do, I have completely rejected most social engagements, sold my car, moved across from my workplace, eaten mostly fishsticks, and rented a room from a peruvian lady. Now, is this mustacian? IDK may? But it isn't a way I want to live forever. What it has done is given me perspective as to the purpose of money and work. Money should set you free and allow you to live happily. It shouldn't shackle you to a job and it shouldn't mean you spend a life in servitude of a finacnial institution. This is why I have a hybrid approach to DR and MMM's theories. I say remove as many obligations as possible. Get everything like living and car paid for, have a nest egg that covers base expenses. And literally be at the will of as few people as possible. Let everyone in the country work to make you rich, and use that freedom to take more risks to make you even richer. And, if you can accomplish that, then you can get the lambos and the cars. Or maybe you can give and be generous.
Final note. It is oft mentioned to "Not let emotions get in the way of finance." I think that is a fools errand. Think about how emotional we all are. Whether it is to be financially free, to reject consumerism, to be rid of debt. There is some level of feeling behind our financial decision making. If we didn't have emotion, we would just rent cheap af craigs list rooms, quite working once our nest eggs were like 200k or something. Live on beans and rice. Never have friends or personal connections. And do nothing until we die. Clearl we all have personal beliefs and values and our spending is a representation of that. So that is why I am all about the emotions. They are what make us human.
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100 bucks to go out to blow on hookers
Where are these 100 hookers?
Asking purely for research purposes.
That's only the upfront cost.
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Dear god can we not make this a "lets grill Shinn for not using CCs". I have my reasons, and I have heard this argument to so many times.
I agree, we should not pick on you for not using debt. It is a perfectly good strategy. On the flip side, half of this forum has similar credentials to you and many choose to use debt to their advantage, so believe us when we say we are not losing money. (though I would guess successful versus failed debt usage is a contributing factor to growing income wealth inequality)
The most basic and fool proof type of CC is a Fidelity 2% cash back card. After every $1000 you spend $50 appears in your investment account. Just use it the same way you would a debit card and have it set to automatic payments. Easy money. There are two other advantages: 1) third party between you and fraudsters, I know my Fido card info has been stolen twice, but it is better than having money removed directly from your bank account, 2) of course paper cash would not have this problem, but it could be physically taken, whereas a stolen credit card would not be a major loss to you. For me, I think it makes a lot of sense to use one, and I have definitely never carried a balance.
On the flip side, even though I might never carry a balance, might I spend 3% more than I otherwise would, because I think "oh well I get 2% back"? In that case I would still would be at a loss. Unfortunately I can't say if or to what extent this is true for me.
I think it is very that "emotions" are the reason most commonly given for not being 100% stocks, but "leverage and bonds" probably gives similar results to "no bonds and no leverage."
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So if it helps, after read Early Retirement Now's paper, I will probably go 100% Equities.
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So I think maybe you can understand the pull of consumer culture. And I think that DR does too. But I wonder. At what point should you become frugal enough vs live your life and find happiness. At what point is there a happy medium.
Here is the thing. I, probably more than most people here, am extremely frugal. I think there is a thread about 'living under 2000' and my budget allows me to down to 1000$ if I wanted, and 1200$ realistically. There have been portions of my life where I was even less (like 500 - 700 a month). So I understand a lack of consumerism. Do I think it grabs people and makes them irrational? Absolutely so. But would I wish an extremely frugal life on others? Not really. This is actually why I like DR. He says that you can have extravagance if you have worked for it. And I think that that is fair, and it makes sense.
To live the life I do, I have completely rejected most social engagements, sold my car, moved across from my workplace, eaten mostly fishsticks, and rented a room from a peruvian lady. Now, is this mustacian? IDK may? But it isn't a way I want to live forever. What it has done is given me perspective as to the purpose of money and work. Money should set you free and allow you to live happily. It shouldn't shackle you to a job and it shouldn't mean you spend a life in servitude of a finacnial institution. This is why I have a hybrid approach to DR and MMM's theories.
I think it's a common misconception, but I don't think that's really what MMM's message is. MMM is all about recognizing exactly what brings you happiness and what doesn't, and eliminating the things that don't. So that lends itself to a fairly frugal lifestyle since, in his view, most spending does not actually increase happiness.
So I'd say that MMM's preaching is actually - all by itself - that you should find that happy medium (just that it might be lower than you expect). It's not just a finance blog, it's a lifestyle blog. You're thinking more Early Retirement Extreme-style frugality. Dave Ramsay is more "Boggleheads" "more is always better" with his approach to wealth.
I think your "hybrid" is actually just reinventing MMM's actual message.
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So I think maybe you can understand the pull of consumer culture. And I think that DR does too. But I wonder. At what point should you become frugal enough vs live your life and find happiness. At what point is there a happy medium.
Here is the thing. I, probably more than most people here, am extremely frugal. I think there is a thread about 'living under 2000' and my budget allows me to down to 1000$ if I wanted, and 1200$ realistically. There have been portions of my life where I was even less (like 500 - 700 a month). So I understand a lack of consumerism. Do I think it grabs people and makes them irrational? Absolutely so. But would I wish an extremely frugal life on others? Not really. This is actually why I like DR. He says that you can have extravagance if you have worked for it. And I think that that is fair, and it makes sense.
To live the life I do, I have completely rejected most social engagements, sold my car, moved across from my workplace, eaten mostly fishsticks, and rented a room from a peruvian lady. Now, is this mustacian? IDK may? But it isn't a way I want to live forever. What it has done is given me perspective as to the purpose of money and work. Money should set you free and allow you to live happily. It shouldn't shackle you to a job and it shouldn't mean you spend a life in servitude of a finacnial institution. This is why I have a hybrid approach to DR and MMM's theories.
I think it's a common misconception, but I don't think that's really what MMM's message is. MMM is all about recognizing exactly what brings you happiness and what doesn't, and eliminating the things that don't. So that lends itself to a fairly frugal lifestyle since, in his view, most spending does not actually increase happiness.
So I'd say that MMM's preaching is actually - all by itself - that you should find that happy medium (just that it might be lower than you expect). It's not just a finance blog, it's a lifestyle blog. You're thinking more Early Retirement Extreme-style frugality. Dave Ramsay is more "Boggleheads" "more is always better" with his approach to wealth.
I think your "hybrid" is actually just reinventing MMM's actual message.
plus the do right by the environment piece. but yes his message and why his blog does so well is more balanced than ERE and bogleheads. its a mixture of both which allows for an insane level of support and why many say this site aint what it used to be as far as the people touting why their house keeper provides value. -
we can all choose what we want that makes us happy and if for you OP thats 0 debt ever even when you'll need to pay extra to get the protection a credit card brings to spending then so be it. Basically you can have anything you want you just cant have everything.
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A lot to unpack here. I think using money to buy luxury consumption items is contrary to MMM-ism.
I think using money to support situations in which you nurture relationships has a place in MMM-ism. It sounds as though you feel your frugal lifestyle has hampered relationships. We should encourage richer, more robust relationships.
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- I personally prefer index funds. But there are some arguments against them.
In particular, they don't value their underlying securities properly. Behaviourally they are perhaps too liquid. And some of the assumptions about their efficacy relative to active trading might be effected by traders' own biases. E.G. how many active traders are attempting to really beat the market vs invest more conservatively for older clients.
Again, this doesn't mean that indexing is bad just that we should always be critical and evaluete investments on our own terms rather than doing what everyone else does. I think I've realized that investing is an individual thing, and it is hard for one person to really apply their situation to others, especailly when both parties have assumptions they aren't inherently aware of.
This doesn’t make any sense. Or at least any sense that I can understand. Could you explain further, the part in the middle?
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There are 3 things I said:
- One of the issues with ETFs is they are too liquid, despite being a long term investment. You can enter and exit them with the click of a button. OR you can just change allocations. It is too easy to time the market, and therefore the likelihood of doing so increases. I see a lot of people scoff at this, but I honestly wonder how many actually will adhere to perfect behaviour in the future.
- ETFs, especially broad market etfs, might not properly price their underlying securities. Eventually, as they grow in popularity, they could cause ineffeciencies in the market that others could take advantage of. This is interest since means, in order for them to work, not everyone can use them. But I also worry of what would happen in the future if another type of investment becomes popular and it becomes compelling to leave them, at which point we are at the first problem.
- I think some of the assumptions people make about active traders not beating the market doesn't factor in if the are actually trying. It could be the case that many are focusing on more conservative or dividend portfolios for clients that are investing later in life. So really they are not trying to beat the market. Then again, I just believe this because a certain youtuber said, I don't know if it is true or not.
So yeah just some arguments against the ETFs we all love . Personally I am for ETFs regardless, although I go with a robo advisor. I sort of see it as having a "lightweight" financial advisor, since I think the benefits are mostly behavioural. But if someone wants to go with ETFs I think it is a good idea. However, they should be wary that they aren't as perfect as they seem.
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There are 3 things I said:
- One of the issues with ETFs is they are too liquid, despite being a long term investment. You can enter and exit them with the click of a button. OR you can just change allocations. It is too easy to time the market, and therefore the likelihood of doing so increases. I see a lot of people scoff at this, but I honestly wonder how many actually will adhere to perfect behaviour in the future.
- ETFs, especially broad market etfs, might not properly price their underlying securities. Eventually, as they grow in popularity, they could cause ineffeciencies in the market that others could take advantage of. This is interest since means, in order for them to work, not everyone can use them. But I also worry of what would happen in the future if another type of investment becomes popular and it becomes compelling to leave them, at which point we are at the first problem.
- I think some of the assumptions people make about active traders not beating the market doesn't factor in if the are actually trying. It could be the case that many are focusing on more conservative or dividend portfolios for clients that are investing later in life. So really they are not trying to beat the market. Then again, I just believe this because a certain youtuber said, I don't know if it is true or not.
So yeah just some arguments against the ETFs we all love . Personally I am for ETFs regardless, although I go with a robo advisor. I sort of see it as having a "lightweight" financial advisor, since I think the benefits are mostly behavioural. But if someone wants to go with ETFs I think it is a good idea. However, they should be wary that they aren't as perfect as they seem.
You are using the word "ETF" when you actually mean "index fund".
To respond just to #2, the "if everyone did it then it wouldn't work" argument has been around ever since index funds were first invented. You're not wrong, but we don't seem to be in any danger of that happening anytime soon.
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Your first bullet point “too liquid” is not specific to ETFs or mutual funds or index funds or even stocks and bonds. To combat this behavioral problem I suppose you could only deal by phone, not online, or snail mail, or through a local branch or advisor (with extra fees). But this cannot be an argument specific to index funds.
Your second bullet point I still don’t understand. Vanguards total market index has over $650,000,000 in assets. When is the “eventually” you speak of? They have pretty smart people running the index, with the assistance of computers, and they’ve been doing it really well for quite a long time.
Your third point, that some active investors aren’t trying to “beat the market” may be true if by “market” you mean 100% equities. But any fund manager or financial advisor should have a benchmark they compare to. And the overwhelming majority will not beat their benchmark over time,because of fees and taxes. That’s just the math.
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You guys are correct about my use of the TERM ETF. Really I mean Index fund ETF. As many ETFs don't track index funds. And there are mutual funds that track indexes.
As I understand, and correct me if I am wrong, but passive low fee ETFs don't have any work or research in them to weight the underlying securities. They use a simple metric and that's it, most of the time it is related to market cap, and most of the time the weight is equal. There is no thought to given to future returns, P/E, CEOs, etc. etc. As such you really can't say those ETF's are being priced correctly. Put it this way. If only the SPY or VTSAX existed, one could easily make money by trading individual stocks relative to it. So trading in index ETFs isn't something that works for everyone. If you do it, you have to accept this.
FWIW this isn't to say I am against index ETFs. I think they are great. But I am not a fan of the mentality that they are the universal solution to everyone. And I'm not a fan of the idea that investing in them is "The best strategy". I am finding continually there really is no best strategy. As each investor is different.
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To your goal of a 100% stock allocation in retirement, a low cost index ETF may not turn out to be “the best” (however you define that) but it is almost certain to be “better” than any alternative 100% stock portfolio you can come up with.
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You are using the word "ETF" when you actually mean "index fund".
As I understand, and correct me if I am wrong, but passive low fee ETFs don't have any work or research in them to weight the underlying securities.
You are still doing it.
They use a simple metric and that's it, most of the time it is related to market cap, and most of the time the weight is equal. There is no thought to given to future returns, P/E, CEOs, etc. etc.
Right, the idea is that "the market" has already taken all that into account.
To respond just to #2, the "if everyone did it then it wouldn't work" argument has been around ever since index funds were first invented. You're not wrong, but we don't seem to be in any danger of that happening anytime soon.
As such you really can't say those ETF's are being priced correctly. Put it this way. If only the SPY or VTSAX existed, one could easily make money by trading individual stocks relative to it. So trading in index ETFs isn't something that works for everyone. If you do it, you have to accept this.
But SPY / VTSAX are not the only things that exist, nor will they ever be, so this is a hypothetical that we don't have to worry about. As of an article I found from 2016, 70% of mutual fund / ETF investment was in active funds. And that doesn't even include the money invested directly in individual stocks.
The reasoning behind investing in index funds is not "index funds are a perfect representation of value and therefore it's impossible for you to do better than them." It's "you the average Joe don't have the team of experts and possibly inside information that the professionals do, so you're unlikely to outperform them directly. And even if you decide to use them, you'll come out behind where you would have been with index funds once you subtract out the fees."
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I see it a bit differently. Rather, if you want to invest and attempt to beat the market, you need to accept a higher amount of risk. This risk can come from several factors, be it more volatile stocks, use of advisors with higher fees, or the inevitable amount of errors you would make in the learning stage of investing. I think this is important since time is precious and there is an opportunity cost to spending time to beat the market vs trying to earn ane extra income somewhere else.
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But the problem I have with what you just said is it implies that beating the market is a skill that is tough to learn, but otherwise can be done with time and effort. There are thousands of people out there who try to do this for their careers and the research shows that almost every single one of them fail to beat the market in the long-term, and in fact usually lose after fees. Vanguard and others have white papers on this that are linked to a million times in all of the previous threads that have re-hashed this subject. There is a reason why Warren Buffet advises everyone to buy a low-cost passive index fund and be done with it.
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It comes down to rather simple math
https://web.stanford.edu/~wfsharpe/art/active/active.htm
After (necessary) fees and taxes the average (mathematically speaking, not a subjective term) active manager absolutely can not beat the market, and as time goes on, a greater and greater percentage of the active population will tend toward the average, until virtually all of them have total returns less than the index.
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I am a data scientist now.
If you are a data scientist and are willing to keep your mind open for facts and knowledge, then I believe that you will be a huge fan of not paying off your mortgage, using credit cards for benefits, using tradelines and many other things that Dave would say not to do. These are all mathematically beneficial if used properly.
You talk a lot about emotions, self control, etc. As a data scientist I think you will see that with facts, knowledge and information that your emotions will change. You will be emotionally happy to use your credit card to buy necessities, you will forego paying off low rate fixed rate mortgage early as you will be maximizing your investment purchases, and you will be delighted to open up additional credit cards to maximize your tradelines and build your credit.
You are going to have a lot of fun on these boards. There is a ton of knowledge on here. Keep an open mind, dig into the facts, knowledge, and logic and you will see your wealth increase substantially.
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I tend to think of risk as something that requires mental load (i.e. "worry"), which is something that we all have a capacity for. It's possible to change your capacity through disiplined work, not unlike weightlifting.
You may decide you can only take the amount of worrying of a 100% stock portfolio, and not mess with these other debt instruments TomSang mentions. Or, you may decide you're able to, ahem, YOLO it and do all of that, no bonds, lots of debt, etc. Good luck!
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I think @shinn497 has some excellent points throughout this entire thread re behavioral economics on both a micro and macro scale. I'm glad to see some of the heavy-weights of this forum join in the discussion.
The thing with using behavioral economics is it breaks down on a micro-scale when n=1. An individuals (or single economic unit) behavior can easily be understood or modified. This is why the whole mortgage leverage/CC use/ease of transaction/use of "lazy" index portfolios, etc debate turns into personal choice on a micro-level. Using them IS more efficient, IF used correctly and the behavior of the individual can be predicted or modified to ensure efficient use.
The impacts of the availability of these tools on the macroeconomic situation is another thing entirely. Many on this forum have actually argued (and I agree with them) some of these tools may have been a contributing factor to the elevated CAPE median we have seen since their use has been incorporated into the economy. So to say they have no macro impact is probably not correct either. To argue there may be some extra value in companies excluded from lazy indices (due to market cap, or whatever) may be valid. To argue the increased use of CC/liberal issuance of mortgage debt has caused the average household to spend more and service more debt is also a legitimate assumption.
Bottom line, OP has some really insightful thoughts on behavioral economic from a macro-level. However, instead of basing personal choices on heard behaviors, to avoid herd mistakes, one should use this insight to increase personal gains on the micro level. IOW, understand how these tools influence group behavior and use this to your personal advantage.
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I think @shinn497 has some excellent points throughout this entire thread re behavioral economics on both a micro and macro scale. I'm glad to see some of the heavy-weights of this forum join in the discussion.
The thing with using behavioral economics is it breaks down on a micro-scale when n=1. An individuals (or single economic unit) behavior can easily be understood or modified. This is why the whole mortgage leverage/CC use/ease of transaction/use of "lazy" index portfolios, etc debate turns into personal choice on a micro-level. Using them IS more efficient, IF used correctly and the behavior of the individual can be predicted or modified to ensure efficient use.
The impacts of the availability of these tools on the macroeconomic situation is another thing entirely. Many on this forum have actually argued (and I agree with them) some of these tools may have been a contributing factor to the elevated CAPE median we have seen since their use has been incorporated into the economy. So to say they have no macro impact is probably not correct either. To argue there may be some extra value in companies excluded from lazy indices (due to market cap, or whatever) may be valid. To argue the increased use of CC/liberal issuance of mortgage debt has caused the average household to spend more and service more debt is also a legitimate assumption.
Bottom line, OP has some really insightful thoughts on behavioral economic from a macro-level. However, instead of basing personal choices on heard behaviors, to avoid herd mistakes, one should use this insight to increase personal gains on the micro level. IOW, understand how these tools influence group behavior and use this to your personal advantage.
This is a good breakdown
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I think @shinn497 has some excellent points throughout this entire thread re behavioral economics on both a micro and macro scale. I'm glad to see some of the heavy-weights of this forum join in the discussion.
The thing with using behavioral economics is it breaks down on a micro-scale when n=1. An individuals (or single economic unit) behavior can easily be understood or modified. This is why the whole mortgage leverage/CC use/ease of transaction/use of "lazy" index portfolios, etc debate turns into personal choice on a micro-level. Using them IS more efficient, IF used correctly and the behavior of the individual can be predicted or modified to ensure efficient use.
The impacts of the availability of these tools on the macroeconomic situation is another thing entirely. Many on this forum have actually argued (and I agree with them) some of these tools may have been a contributing factor to the elevated CAPE median we have seen since their use has been incorporated into the economy. So to say they have no macro impact is probably not correct either. To argue there may be some extra value in companies excluded from lazy indices (due to market cap, or whatever) may be valid. To argue the increased use of CC/liberal issuance of mortgage debt has caused the average household to spend more and service more debt is also a legitimate assumption.
Bottom line, OP has some really insightful thoughts on behavioral economic from a macro-level. However, instead of basing personal choices on heard behaviors, to avoid herd mistakes, one should use this insight to increase personal gains on the micro level. IOW, understand how these tools influence group behavior and use this to your personal advantage.
correct OP keeps pointing out that everyone is jumping off a bridge so if he drives on that bridge he'll have to jump off too. once we understand poor behaviors we can adjust ours using data to govern our decision instead of emotion.
which you would think a data scientist would be interested in and more inclined to do.
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I think @shinn497 has some excellent points throughout this entire thread re behavioral economics on both a micro and macro scale. I'm glad to see some of the heavy-weights of this forum join in the discussion.
The thing with using behavioral economics is it breaks down on a micro-scale when n=1. An individuals (or single economic unit) behavior can easily be understood or modified. This is why the whole mortgage leverage/CC use/ease of transaction/use of "lazy" index portfolios, etc debate turns into personal choice on a micro-level. Using them IS more efficient, IF used correctly and the behavior of the individual can be predicted or modified to ensure efficient use.
The impacts of the availability of these tools on the macroeconomic situation is another thing entirely. Many on this forum have actually argued (and I agree with them) some of these tools may have been a contributing factor to the elevated CAPE median we have seen since their use has been incorporated into the economy. So to say they have no macro impact is probably not correct either. To argue there may be some extra value in companies excluded from lazy indices (due to market cap, or whatever) may be valid. To argue the increased use of CC/liberal issuance of mortgage debt has caused the average household to spend more and service more debt is also a legitimate assumption.
Bottom line, OP has some really insightful thoughts on behavioral economic from a macro-level. However, instead of basing personal choices on heard behaviors, to avoid herd mistakes, one should use this insight to increase personal gains on the micro level. IOW, understand how these tools influence group behavior and use this to your personal advantage.
correct OP keeps pointing out that everyone is jumping off a bridge so if he drives on that bridge he'll have to jump off too. once we understand poor behaviors we can adjust ours using data to govern our decision instead of emotion.
which you would think a data scientist would be interested in and more inclined to do.
Going to the bridge Analogy, I would start with a prior.
Lets say I highly believe that that you jump off the bridge if you go on it (there is no conditional for going on the bridge here, assumine it is marginal in the prior). Lets make this prior 70% or something.
I'd model it using bayes rule with some likelhood. The likelihood has all of the factors I suspect could involve you jumping off the bridge. The car you drive, the speed with which you jump, etc, etc, These go into some vector that is conditioned on the outcome of you jumping off (the anti outcome is you don't jump off)
Now, as a good bayesian, I can assume a prior, but I don't assume a posterior inference until I have some data. So lets say I observe some examples, model it, etc. etc.
What I would end up is a conditional on each factor. E.g, given each factor, what is the probability distribution of you jumping off. Lets assume everything is gaussian so it would be some value and uncertainty.
As a Data Scientist, this model doesn't guarantee if I make it across the bridge. I can isolate some factors, but what if my data set is too small, and my posterior has too great of uncertainty. What if I come to the conclusion that there is some bias in the dataset I am inferencing of. What if I look at other data sources and have contradicting results. etc. etc.
Notice, I would not naively calculating the probabilities and making a decision tree and saying at the end I have a perfect understanding of what will get me to live or not. I'm not assuming perfect confidence
Having the data alone, doesn't necessarily mean you can make a good model. And, even if you make a good model, that model might give you a result you disagree with. Modeling is hard, especially when talking about human behaviour.
Going back to the finance world. There are a LOT of variables here that I don't understand and I can't properly infer. This is doubly true when looking at others' situations. I know what people claim, what they project, and what they expect. And I even know a couple of results and that is good. But we are talking about financial expectations that go over decades. Given what I don't know, I can't look others'situations and extrapolate to myself with perfect, or even very good confidence. But this is more due to my own prior than anything.
So yeah. I'm all for the data. But having data doesn't mean you can make a perfect decision. So, in the face of this, I have to go back on my feelings. I mean I know they are irrational, but that is ok. If they cause me to err on the side of caution, I don't think I can do wrong.
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my point is you dont have to model shit. you just have to stop making choices driven by emotion and use the data in front of you and make your choices based on the data it doesnt fucking matter if 90% of people would make some choice given a particular situation if those 90% are making that choice driven by emotion and not looking at dta.
the problem is when you think your feelings are making you safer when they arent. ie not using credit cards or not keeping a mortgage. both of these historically are safer to use and leverage than not use. if my debit card number is stolen i could be F'd for a while if my CC number is stolen i call the bank and they dont pay the fraudulent charges. with a mortgage historical data says keep the thing and leverage it investing the difference thats the data. your feelings of being safer actually create more risk in your life but thats b/c you're not actually looking at the data and analyzing it. i fear for the world where a data scientist talks this much about feelings.
your fundamental problem is your lack of knowledge of finances, the historical models that created the 4% "rule" and an understanding for how all of this has worked together in the past.
If your answer is well that doesnt predict the future. you're correct but if thats what you truly believe you'll never be able to retire relying on that concept.
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I’m not a data scientist so I can’t speak in your language, but all the same, that strikes me as a but absurd. You can’t build a perfect model so therefore you are going to throw out imperfect data and rely on your emotions instead? Poppycock.
Of course the models aren’t going to be perfect because: human behavior. However you can look at averages and infer something meaningful. Averages say that we suck at predicting the future, and people who think they can (market timers) overwhelmingly underperform. The people with the best investment returns are those who are dead or otherwise forgot they had an investment account.
You don’t need to be perfect, you just need to be good enough. Don’t get so tripped up on optimization that you throw the baby out with the bath water and fail to enact reasonable strategies that have been shown to be successful in the majority of cases.
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Yeah, this is a bit ridiculous. You don't need a model with extended data points to have confidence that you can use a rewards credit card and pay it off every month. You don't need a model to know yourself enough to know that you won't panic and sell off all your assets during a market downturn.
And, if we do want to go back to the Bayesian modeling analogy at an individual level, you have to accept that all of these separate data points you claim to be using to fit your model are all incredibly correlated due to the fact that you're modeling the behavior of one person: yourself. This completely violates the assumption that your data are all IID, which means you can't simply use a Naive Bayes method to fit a model of simple behavior and likelihood. The benefit is that it becomes a much simpler problem since all you have to do is understand your own behavior at a basic level (which despite its challenges, isn't actually all that hard to do at the coarse level required to make long-term financial plans).
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What blows me away is a person that appears to be very emotional and who is perceived risk adverse asking about a 100% stock allocation and a 4% draw down. Typically, when you see someone like this they are storing all of their money in an FDIC insured savings accounts earning 1.5% as they perceive their long term retirement savings to be safer.
I still go with once he digs into the knowledge of the 4% rule, inflation risk, stock market expectations and how they all impact when you can retire, etc. That he will run the models, create his own models, and he will see that he is safer keeping the mortgage, safer getting credit card rewards, and safer doing many other things that he is currently repulsed by because of emotions that are not based on reality, facts, logic, etc.
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I don't personally agree with OP's position because I tend to make decisions based on expected value (EV). So credit card bonuses, indexing, leveraged real estate (which I do not presently own) are definitely positive EV decisions. However, I get his point, and it's valid. Even with EV-based decision making it can be hard to determine the V in real life. Not everything is a logical accounting decision. The value of something isn't always measured in monetary gain. There is value (even economic value not defined in dollars) in happiness, friendships, fulfillment of desires, etc.
Devils advocate on OP's side of the argument. Humans are not logical. Behavioral economics is the attempt to understand the in aggregate. Even if we, at some time in the future, do understand the macroeconomic movements based on behavior, we can't accurately predict this individually (n=1). We (me included) like to think we understand our behavior and act logically, but this isn't always the case. Ever been in love?
The amount of resources being expended on the physiological and behavioral warfare we call advertising is immense. There is a reason most people are "spend all we earn" consumers. Some of it is even based genetic/biological conditioning related to social signaling, etc. This is extremely powerful stuff! Add to that social pressures and human emotions, random events, and behavioral conditioning. Hell, some studies like this one (https://www.wired.com/2008/04/mind-decision/) show we make decisions before we even know we have made them.
The potential for mistakes exist even in the most logical person. To ignore that risk is rather foolish; I think this is the big take away for an average forum member from OP's contributions. The OP's decisions are like taking out an insurance policy to reduce that risk. The policy pays in peace of mind and helps to prevent the psychological and emotional mistakes, but it's rather expensive. I have decided the cost of that policy is too high, but at least I'm recognizing the risk being taking.
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I don't personally agree with OP's position because I tend to make decisions based on expected value (EV). So credit card bonuses, indexing, leveraged real estate (which I do not presently own) are definitely positive EV decisions. However, I get his point, and it's valid. Even with EV-based decision making it can be hard to determine the V in real life. Not everything is a logical accounting decision. The value of something isn't always measured in monetary gain. There is value (even economic value not defined in dollars) in happiness, friendships, fulfillment of desires, etc.
Devils advocate on OP's side of the argument. Humans are not logical. Behavioral economics is the attempt to understand the in aggregate. Even if we, at some time in the future, do understand the macroeconomic movements based on behavior, we can't accurately predict this individually (n=1). We (me included) like to think we understand our behavior and act logically, but this isn't always the case. Ever been in love?
The amount of resources being expended on the physiological and behavioral warfare we call advertising is immense. There is a reason most people are "spend all we earn" consumers. Some of it is even based genetic/biological conditioning related to social signaling, etc. This is extremely powerful stuff! Add to that social pressures and human emotions, random events, and behavioral conditioning. Hell, some studies like this one (https://www.wired.com/2008/04/mind-decision/) show we make decisions before we even know we have made them.
The potential for mistakes exist even in the most logical person. To ignore that risk is rather foolish; I think this is the big take away for an average forum member from OP's contributions. The OP's decisions are like taking out an insurance policy to reduce that risk. The policy pays in peace of mind and helps to prevent the psychological and emotional mistakes, but it's rather expensive. I have decided the cost of that policy is too high, but at least I'm recognizing the risk being taking.
You seem to be closer in line to my type of thinking.
I would also say I make decisions on expected value except I never assume perfect behavior. On a side note I don't think of behaviour in terms of things like spending but also earning and trust. I hypothesize that having good values helps with the income side of the equation perhaps more than the spending side. This is why I suspect that giving is an important part of becoming wealthy.
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You seem to be closer in line to my type of thinking.
I would also say I make decisions on expected value except I never assume perfect behavior.
Except you aren't "not assuming perfect behavior," you are "assuming random behavior."
But go ahead, do what you've already decided to do. And in the process invalidate your whole point.
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So just going back to basics.
Do we all agree that the 100% in equities isn't a bad idea? Outside of behaviour. From a returns standpoint only?
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In accumulation phase, especially well in your career I think 100% equities is great. We are around 90% right now. Go Curry Cracker has a blog post on the path they took to get to 100% equities that you can look up. I believe they had a bond/annuity-like personal mortgage they were being paid that provided some diversification. They also can employ geo arbitrage to reduce their expenses significantly if needed in a way that most of us probably can’t, do all of that gets factored into the risk analysis.
Personally I resonate with the Kitces’ reverse equity glide path approach to reduce sequence-of-returns risk right before FI and for the first 10 years of FI. I am pretty close to pulling the trigger on scaling bonds up to 40% for that reason as we are a few years from reaching out number and the downside risk of equities weighs more heavily now that we have more to “lose”, and it would materially push out our FIRE date if a downturn happened right now. To each their own though.
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I'll check it out!
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https://www.kitces.com/blog/valuation-based-tactical-asset-allocation-in-retirement-and-the-impact-of-market-valuation-on-declining-and-rising-equity-glidepaths/ (https://www.kitces.com/blog/valuation-based-tactical-asset-allocation-in-retirement-and-the-impact-of-market-valuation-on-declining-and-rising-equity-glidepaths/)
https://www.google.com/amp/s/earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/amp/ (https://www.google.com/amp/s/earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/amp/)
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So just going back to basics.
Do we all agree that the 100% in equities isn't a bad idea? Outside of behaviour. From a returns standpoint only?
For you I think it's a terrible idea.
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You should clarify why you think that is a terrible idea for the OP
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You should clarify why you think that is a terrible idea for the OP
The op appears to have self control issues in general with their assumptions of what they will do with cc debt and a mortgage and due to this lack of self control in a market down turn I believe similar lack of control problems will present themselves and op will make devastating decisions around no longer holding 100% stocks.
Op is already using betterment and paying them a gross .25% to try to stop some of this but still has miles to learn about how that doesn't change the level of control they have over there money.
There is a large lack of understanding of the market and how it works from the op Imo.
For all these reasons 100% stocks is a terrible idea for the OP.
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You should clarify why you think that is a terrible idea for the OP
The op appears to have self control issues in general with their assumptions of what they will do with cc debt and a mortgage and due to this lack of self control in a market down turn I believe similar lack of control problems will present themselves and op will make devastating decisions around no longer holding 100% stocks.
Op is already using betterment and paying them a gross .25% to try to stop some of this but still has miles to learn about how that doesn't change the level of control they have over there money.
There is a large lack of understanding of the market and how it works from the op Imo.
For all these reasons 100% stocks is a terrible idea for the OP.
Can we not make the conversation about this again. I was just starting to get some more interesting information. If you don't have anything to add outside of judging me based on your values (which I don't agree with) than you aren't contributing.
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You should clarify why you think that is a terrible idea for the OP
The op appears to have self control issues in general with their assumptions of what they will do with cc debt and a mortgage and due to this lack of self control in a market down turn I believe similar lack of control problems will present themselves and op will make devastating decisions around no longer holding 100% stocks.
Op is already using betterment and paying them a gross .25% to try to stop some of this but still has miles to learn about how that doesn't change the level of control they have over there money.
There is a large lack of understanding of the market and how it works from the op Imo.
For all these reasons 100% stocks is a terrible idea for the OP.
Can we not make the conversation about this again. I was just starting to get some more interesting information. If you don't have anything to add outside of judging me based on your values (which I don't agree with) than you aren't contributing.
Maybe you're being judged advised based on your actual input, not anyone else's values.
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You should clarify why you think that is a terrible idea for the OP
The op appears to have self control issues in general with their assumptions of what they will do with cc debt and a mortgage and due to this lack of self control in a market down turn I believe similar lack of control problems will present themselves and op will make devastating decisions around no longer holding 100% stocks.
Op is already using betterment and paying them a gross .25% to try to stop some of this but still has miles to learn about how that doesn't change the level of control they have over there money.
There is a large lack of understanding of the market and how it works from the op Imo.
For all these reasons 100% stocks is a terrible idea for the OP.
Can we not make the conversation about this again. I was just starting to get some more interesting information. If you don't have anything to add outside of judging me based on your values (which I don't agree with) than you aren't contributing.
Maybe you're being judged advised based on your actual input, not anyone else's values.
correct this has nothing to do with values how do credit cards and mortgages fit into a "values" category - and if they do what makes your currently poor knowledge of investing and use of betterment different from them. You've yet to present any data that would lead me to believe you'd personally be successful at your original question. Odds are it will work out regardless b/c it worked historically over 91% of the time but that assumes you have the ability to not change your path when the market takes a 30% dump which you have routinely tried to present "data" about how humans typically would react to this and keep making the assumption it applies to everyone and we arent able to control ourselves. unless you're assuming you can control yourself in this instance which would be quite a hilarious assumption you'd be making based on your opinions of your analysis of the data around mortgages and credit cards.
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I thinking carving out a base and then moving up there, buying everything in cash, means I'll have enough freedom to be riskier with investments.
buying everything in cash increases your risk profile - having a mortgage or using credit cards decreases it.
I think I am a bit more ok with risk since I already have low expenses. Also, being a Dave Ramseyer is making me a lot more conservative in other aspects of my life. E.G. building an emergency fund, getting rid of all debts, seeking to not have a mortage etc. etc. I think this sort of hedge is, in effect, my "bond".
incorrect having a mortgage acts more like a bond than not having one.
Do I really have to explain why I need an emergency fund? In case I need money so I don't have to pull from my investments and prematurely drain them. I won't use debt for this since I don't want credit cards. I'm self-aware enough to know that if I kept CCs for the sake of "emergencies", I'd overuse them.
doesnt have self control to use credit cards but thinks they will have self control to be 100% stocks in a down market.
I, in general, just assume there is nothing free in finance. You pay for something somewhere. Be it paying with the increased risk of making a mistake or being more cavalier if using a rewards card. Or increased risk over all of your assets when leveraging a house. If you can't see exactly how you are paying something, then you probably just aren't modeling things properly.
if nothing is free in finance then there are two sides to a risk equation you continual bring up risk when leveraging a house but i dont think you actually understand what the risks are on both sides of the equation please elaborate on what risks effect both owning a house outright vs investing and holding a mortgage
I see moresoe that, if you use a credit card, you have a 7% probability of making money off of it.
please show data to back up this statement b/c its ridiculous
Also I trust the data. I'm a Data Scientist. Why wouldn't I.
much data has been presented here and you've laughed in the face of it - yet another reason i dont believe you personally could stick to a 100% equity play withdrawing 4% in a down market
The idea is to get your base expenses as minimal as possible giving you the freedom to make sensible but risky investments.
If I can at any point only need to pull out 500$ a month, what will I care if the market falls 30% on 2 million dollars.
please elaborate on this b/c this isnt a 4% SWR its a 0.3% SWR - you're all over the place here dude.
And I see it this way. The math is great. But day in and day out I do question how much of it actually applies. Spending money is easy and sticking to a budget is hard.
if you dont think the math applies to using a credit card or a mortgage how does it apply to a 100% stock allocation and a 4% SWR.
Here is my thinking. I'm not confident many people can even know when they are spending properly. In my experience, human beings are unreliable narrators. We intend to take a certain course of action and then actually take another. This tends to be oberservable from the outside but isn't apparent to us. I think this is especially true in finance. This is why rewards programs exist, and make a ton of money. No one intends on going into debt or even holding a balance. But several people eventually do, including those that are good with money. Everyone thinks they are the select few that is better than the population.
so your logic that we're irrational when it comes to spending with credit cards and observations made by outside observers only applies to debt and spending and doesnt apply to your idea that you could maintain a 100% stock allocation at a 4% SWR.
"Not let emotions get in the way of finance." I think that is a fools errand.
so if you truly believe this then its hard to imagine how you could hold 100% stocks with a 4% SWR. then a few posts later you said this again
So if it helps, after read Early Retirement Now's paper, I will probably go 100% Equities.
One of the issues with ETFs is they are too liquid, despite being a long term investment. You can enter and exit them with the click of a button. OR you can just change allocations. It is too easy to time the market, and therefore the likelihood of doing so increases. I see a lot of people scoff at this, but I honestly wonder how many actually will adhere to perfect behaviour in the future.
ETFs, especially broad market etfs, might not properly price their underlying securities. Eventually, as they grow in popularity, they could cause ineffeciencies in the market that others could take advantage of. This is interest since means, in order for them to work, not everyone can use them. But I also worry of what would happen in the future if another type of investment becomes popular and it becomes compelling to leave them, at which point we are at the first problem.
I think some of the assumptions people make about active traders not beating the market doesn't factor in if the are actually trying. It could be the case that many are focusing on more conservative or dividend portfolios for clients that are investing later in life. So really they are not trying to beat the market. Then again, I just believe this because a certain youtuber said, I don't know if it is true or not.
now we have an entire post about ETFs when you should be saying index funds. - again more education needed if you plan to stick to a 100% stocks with 4% SWR.
I see it a bit differently. Rather, if you want to invest and attempt to beat the market, you need to accept a higher amount of risk. This risk can come from several factors, be it more volatile stocks, use of advisors with higher fees, or the inevitable amount of errors you would make in the learning stage of investing.
use of advisors with higher fees - this has been proven with data over years to be a fools errand. again more education needed
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There is something I am curious about. Can you explain to me why you believe using a CC is safer than using debit/cash. I understand the argument that you can use debt of any kind to pay for a purchase while investing the difference. But I want to be clear we are not talking about that. We are talking about funneling purchases, otherwise made with cash/debit, through a credit card for the sake of rewards.
The only benefit I see to this is you get exposure to potential rewards at the increased risk of paying credit card fees. Given that this has a higher potential payoff but also higher potential cost, this is certainly a more risky way of doing things. Unless I am missing something.
Do you have the assumptions that the protections given to you by a credit card are somehow greater than a debit card? To which I would aregue debit cards have the same protections, are linked to accounts that are FDIC insured, and such a thing isn't that big of an issue since the cash portion of your portfolio isn't the greatest anyway. Also consider that most banks spend a ton of resources on anti-fraud measures to stop fraud before it happens. Really the only thing you have to worry about with a debit card is a couple of days inconvenience.
Am I missing something?
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Also, since I'd rather get some knowledge out of all the salt you guys are sprinkling in the thread.
I really want to know some better arguments against Betterment,
given all of the benefents you get from paying for them (https://help.betterment.com/hc/en-us/articles/115004257446-What-am-I-getting-for-Betterment-s-fee-). The real kicker for me is that their fee covers all trading expenses, which I would have paid anyway. I do understand that the .25% adds up over time (super naive calc of (.9975)^30 = .927), and could potentially cut into my SWR. But if they can cause me to earn more, I think it should cancel out.
My biggest concern really is their portfolio allocation. But I won't be satisfied with that until I pick apart the Black-Litterman Model.
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There is something I am curious about. Can you explain to me why you believe using a CC is safer than using debit/cash. I understand the argument that you can use debt of any kind to pay for a purchase while investing the difference. But I want to be clear we are not talking about that. We are talking about funneling purchases, otherwise made with cash/debit, through a credit card for the sake of rewards.
The only benefit I see to this is you get exposure to potential rewards at the increased risk of paying credit card fees. Given that this has a higher potential payoff but also higher potential cost, this is certainly a more risky way of doing things. Unless I am missing something.
Do you have the assumptions that the protections given to you by a credit card are somehow greater than a debit card? To which I would aregue debit cards have the same protections, are linked to accounts that are FDIC insured, and such a thing isn't that big of an issue since the cash portion of your portfolio isn't the greatest anyway. Also consider that most banks spend a ton of resources on anti-fraud measures to stop fraud before it happens. Really the only thing you have to worry about with a debit card is a couple of days inconvenience.
Am I missing something?
1. the rewards benefit is large and has the same risk as overdrawaing a checking account that would come with fees associated if you over spend. The risk you speak of here is non existent. spending money with credit or debit both have risks of spending more money than you have. This is the dumbest strawman argument i ever hear on these forums. you spend what you spend how you pay for what you spend should not matter a whole lot - if you have over spending problems and self control issues with a credit card s a debit then you likely have many other issues as i pointed out with financial control. YOU HAVE A SPENDING PROBLEM the risk does not lie in the damn form of paying for shit.
2. your debit account is highly unprotected compared to a credit card. Have someone steal your debit card and use it and see how long that takes for you to get money back on the flip side have the same thing occur with a credit card - typically fraud alert stops it and you get alerted before you even see it on your bill and the credit card company puts it on the person who accepted the card for proof that you made the purchase - debit cards work the other way all the burden of proving you didnt make the purchase is on you and this can tie up money for months to years in some cases. its not days it can be months or years.
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...benefit...is you get...[guaranteed cash back] rewards at the increased risk of paying credit card fees.
...
Am I missing something?
Perhaps that, for many, the "increased" risk is negligible. Paying the CC balance in full each month means no interest charges and no late fees.
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Also, since I'd rather get some knowledge out of all the salt you guys are sprinkling in the thread.
I really want to know some better arguments against Betterment,
given all of the benefents you get from paying for them (https://help.betterment.com/hc/en-us/articles/115004257446-What-am-I-getting-for-Betterment-s-fee-). The real kicker for me is that their fee covers all trading expenses, which I would have paid anyway. I do understand that the .25% adds up over time (super naive calc of (.9975)^30 = .927), and could potentially cut into my SWR. But if they can cause me to earn more, I think it should cancel out.
My biggest concern really is their portfolio allocation. But I won't be satisfied with that until I pick apart the Black-Litterman Model.
the .25% cuts the SWR by .25% so if you were going with 4% you either need to increase the spending side of your equation to include what you're paying them annually - 5k or you decrease your withdrawal to 3.75%
the .25% are their fees this does not cover the underlying expense ratios of the funds you're investing in.
They wont likely cause you to earn more - what makes you think they have some magic powder to help you earn more. their standard funds have underperformed the total US stock market since inception plus you're paying extra. the only value they add is to a taxable account for loss harvesting but this doesnt account for the cost of .25% of your portfolio.
https://begintoinvest.com/expense-ratio-calculator/
i posted this in another thread you were in and if you had 2MM and withdrew 80k per year your cost over 50 years of the .25% would be over 2MM which is more money than you even started your retirement with
if 2MM is nothing to you go right ahead and keep using them. There is no statistical or historical evidence of any service such as this outperforming the market consistently to account for their high fees. which as stated above are above and beyond the expense ratios of whatever investments they put you in.
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...benefit...is you get...[guaranteed cash back] rewards at the increased risk of paying credit card fees.
...
Am I missing something?
Perhaps that, for many, the "increased" risk is negligible. Paying the CC balance in full each month means no interest charges and no late fees.
Yeah man. I think we are taking this whole rewards idea way to far out of proportion. I don't think it is a big deal either way you go, and really not something I want to spend much time debating, but hey here we are. I was more curious if there is a good argument for it being "safer".
I mean I see it this way. PEople are so passionate about this. I don't want to convince them. But I might be able to learn something, even if I disagree.
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...benefit...is you get...[guaranteed cash back] rewards at the increased risk of paying credit card fees.
...
Am I missing something?
Perhaps that, for many, the "increased" risk is negligible. Paying the CC balance in full each month means no interest charges and no late fees.
Yeah man. I think we are taking this whole rewards idea way to far out of proportion. I don't think it is a big deal either way you go, and really not something I want to spend much time debating, but hey here we are. I was more curious if there is a good argument for it being "safer".
I mean I see it this way. PEople are so passionate about this. I don't want to convince them. But I might be able to learn something, even if I disagree.
i told you how it was safer above MMM even has a post about why you should use them and how much safer they are.
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http://money.cnn.com/2013/12/20/pf/expert/debit-credit-cards/index.html
here is the law about how they are different.
but you've already commented on another thread that paying a financial robot 2MM dollars really probalby close to 3MM over the course of your life isnt a big deal to you so maybe dealing with this hassle isnt a big deal to you either. just gotta make it rain money.
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...benefit...is you get...[guaranteed cash back] rewards at the increased risk of paying credit card fees.
I mean I see it this way. PEople are so passionate about this. I don't want to convince them. But I might be able to learn something, even if I disagree.
I would posit that people are not so much hyped up about the particulars of CC rewards than your weird and inconsistently applied notion of safety.
I don't see how it makes sense to be talking about going 100% stocks while simultaneously saying "CC rewards? Too risky for me!".
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2 MM - 3MM ???
Betterment's fees are capped at 5000k a year. This won't sum to anything close to 2mm or 3mm.
I mean if you are talking 60 years or something I could see that. but you also have to think that your net worth at the end would be in the decamillions.
Anywway all of this is moot if you believe their service to be worthwhile, which I do, but if you disagree I will gladly accept any dissenting opinions.
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2 MM - 3MM ???
Betterment's fees are capped at 5000k a year. This won't sum to anything close to 2mm or 3mm.
I mean if you are talking 60 years or something I could see that. but you also have to think that your net worth at the end would be in the decamillions.
Anywway all of this is moot if you believe their service to be worthwhile, which I do, but if you disagree I will gladly accept any dissenting opinions.
yes it does use the calculator i showed you above and on another thread. and no none of this is moot. there is no DATA to show that they outperform the market above the .25% fee. There is acutally DATA that shows they've underperformed just throwing your money in a simple index fund you continual post on here for people to make counter points and you blatantly ignore them and use strawman statements to negate it "i believe its better" is not a data driven answer to something.
and i'll run the damn numbers again for you since you dont seem capable of using the calculator i attached. and this assumes they are investing in the lowest cost index funds available ie vanguard funds i'm giving them the benefit of that doubt if they arent this gets worse.
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I see no problem with 100% stocks. If it unfortunately crashes right when you've accumulated "enough," just work a few more years. No biggie. Most people will have to work for most of their able-bodied adult lives, which is a nice reminder of just how big this "problem" is.
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I’d be careful about being so glib about a few more years of work. The difference between working 15 years and 18 years may not seem that big of a deal, but where I am at right now, if things go well then I have maybe three more years left. If things go to hell and that becomes 6 more years, that changes my outlook and plans quite a bit. That is why personally I am looking into the bond tent idea to hedge against my near-term risk and aversion to working a few more years. Clearly people will have different personal situations and will be more or less willing to work extra in the case of a market downturn.
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OP, first I want to say I like your thread title. If you don't want to use credit cards, to each their own. But if you can't see the benefits (or lower risk) compared to a debit card, then you are deliberately being obtuse and/or have ignored further reading.
Fraud protection, insurance, foreign transaction fees, rental cars, etc. All of these things are generally (some debit cards have perks, sure) superior with a credit card and notice I didn't say anything about rewards. I don't see the downside other than laziness to research.
If all of my credit cards had zero rewards and a debit had card somehow had ALL of the benefits listed above, I'd still use credit cards for the improved credit rating plus the month or so of float that I receive for FREE. Set the auto payment to wipe out the balance each month, find cards with no annual fee, and you're golden.
As others have mentioned, a spending problem has nothing to do with credit vs. debit. I mean, I guess you can argue it does if you went off the deep end and charged the max on credit cards and didn't have the money to repay. Yeah, your problem is bigger than if you had done the same with a debit card but that's a bit extreme. Does having a Costco Citi card that I get 4% back on Costco gas make me drive around more so I can "save more" by purchasing more gasoline? Uhh, no.
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I’d be careful about being so glib about a few more years of work. The difference between working 15 years and 18 years may not seem that big of a deal, but where I am at right now, if things go well then I have maybe three more years left. If things go to hell and that becomes 6 more years, that changes my outlook and plans quite a bit. That is why personally I am looking into the bond tent idea to hedge against my near-term risk and aversion to working a few more years. Clearly people will have different personal situations and will be more or less willing to work extra in the case of a market downturn.
starting a reverse equity glide path prior to FIRE if this is a risk you're looking to eliminate would make a lot of sense. I've personally got a unique situation and a market drop a few years prior to FIRE likely wouldnt effect me but if your goal is to eliminate that risk of working an extra year or two starting the glide path a year or two before FIRE would definitely help ensure that.
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Why do you have to implement the glide path two years before fire? Why not right before fire date (tax consequences permitting )?
If the market keeps going up before you RE, you just keep 100% or almost 100% equities, then rebalance to your desired bond RE allocation, then fire. If the market declines significantly before you rebalance, you still have your job, just keep it until you have replenished your portfolio, then fire.
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Why do you have to implement the glide path two years before fire? Why not right before fire date (tax consequences permitting )?
If the market keeps going up before you RE, you just keep 100% or almost 100% equities, then rebalance to your desired bond RE allocation, then fire. If the market declines significantly before you rebalance, you still have your job, just keep it until you have replenished your portfolio, then fire.
ysette9 was talking about eliminating the risk of having to work longer. so if you are trying to do that you're going to have to miss out on some gains to protect your FIRE date. different risk elimination.
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Exactly. I don’t want to work an extra couple of years, so doing a bond tent is a way to hedge against that risk, giving up some upside of potential gains for those few years pre-FIRE in échange. The research hasn’t been done yet on how many years before retirement is optimal to begin that transition, so we are having to just make a guess. There is some good analysis on how to do the transition from more to fewer bonds after the retirement date. I posted a link already in this thread that gets into that in some detail.
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Exactly. I don’t want to work an extra couple of years, so doing a bond tent is a way to hedge against that risk, giving up some upside of potential gains for those few years pre-FIRE in échange. The research hasn’t been done yet on how many years before retirement is optimal to begin that transition, so we are having to just make a guess. There is some good analysis on how to do the transition from more to fewer bonds after the retirement date. I posted a link already in this thread that gets into that in some detail.
i mean its really just a market timing play at that point. wait too long and it doesnt help too early and you end up working longer thats why i just plan to stick with 100% stocks b/c i'd rather bet on the market going up like it normally does than the outside chance it goes down.
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OP, first I want to say I like your thread title. If you don't want to use credit cards, to each their own. But if you can't see the benefits (or lower risk) compared to a debit card, then you are deliberately being obtuse and/or have ignored further reading.
Fraud protection, insurance, foreign transaction fees, rental cars, etc. All of these things are generally (some debit cards have perks, sure) superior with a credit card and notice I didn't say anything about rewards. I don't see the downside other than laziness to research.
If all of my credit cards had zero rewards and a debit had card somehow had ALL of the benefits listed above, I'd still use credit cards for the improved credit rating plus the month or so of float that I receive for FREE. Set the auto payment to wipe out the balance each month, find cards with no annual fee, and you're golden.
As others have mentioned, a spending problem has nothing to do with credit vs. debit. I mean, I guess you can argue it does if you went off the deep end and charged the max on credit cards and didn't have the money to repay. Yeah, your problem is bigger than if you had done the same with a debit card but that's a bit extreme. Does having a Costco Citi card that I get 4% back on Costco gas make me drive around more so I can "save more" by purchasing more gasoline? Uhh, no.
I have long been well aware of the arguments for debit cards. I guess I just interprit their weight differently. In fact, the thing I find most curious about this discussion is how passionate and emotional people seem to be. I think this underscores why I am so curious about behavioural economics. We are all looking at the same information, yet we have widly different interpretations and assumptions. We often argue and exchange ideas without properly being aware of this.
Case in point. Earlier we talked about Betterment's fees. My argument is that, even over 30 years, you wouldn't have 2M lost in opportunity cost. @boarder42 then showed me a graph that supported his claim. However, his term was over the drawdown phase. All this time I've been thinking about the accumulation phase. He then insulrted me, which you know is super effective at convincing people of your opinion.
So here is what gets me. I have pretty much learned what I want to learn, I mean some of the links in the first couple of responses were very helpful. I was not so confident of the 100% withdraw rate and now I am. However, this discussion has continued for 2 pages because of a couple things about my MO that are unrelated to the topic at hand. I think this underscores something about finance. Its personal. Its irrational. We all overlay our own experiences and hopes and tell ourselves we are being objective and we are not. Not only this, but some feel it necessary to convince others that they must join their own method. And, if they don't, they are stupid/minformed/lazy etc. etc. . I find that fascinating. Especially, when we are making real decisions with real money.
I think that money has the multiplier effect on peoples' emotions, and that is something I am very curious about. Since I suspect it could possibly be one of the keys to using it to your advantage.
Then again what do I know. I'm just a stupud physicist that doesn't credit cards and thinks actually owning the things you buy is a good idea.
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clearly you're not open to listening to anyone that counters your ideas
so
dont ever have debt
dont use credit cards
blindly follow 100% stocks at a 4% SWR with betterment.
chances are you'll be fine.
on the outside chance you're not it could be devastatingly bad.
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I also sometimes don't feel too impressed with how much a 75/25 or 80/20 stock/bond mix mitigates a market drop vs. simply going 100/0. I think psychologically the hit would probably lead to feeling a need to work/save longer either way with such a stock-heavy AA. I remember running some scenarios on Portfolio Visualizer that seemed to illustrate the difference being pretty small. Now if you were to go really heavy into bonds, it might feel differently, but then there is the risk of avoiding market gains because only 25% of your investment was in equities.
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Exactly. I don’t want to work an extra couple of years, so doing a bond tent is a way to hedge against that risk, giving up some upside of potential gains for those few years pre-FIRE in échange. The research hasn’t been done yet on how many years before retirement is optimal to begin that transition, so we are having to just make a guess. There is some good analysis on how to do the transition from more to fewer bonds after the retirement date. I posted a link already in this thread that gets into that in some detail.
i mean its really just a market timing play at that point. wait too long and it doesnt help too early and you end up working longer thats why i just plan to stick with 100% stocks b/c i'd rather bet on the market going up like it normally does than the outside chance it goes down.
In the long term, yes, the market goes up. I’m sure I’ve read all over the place that there isn’t a ten-year period where the US market wasn’t up once you factor in dividends. That said, I am not talking about long-term but short term. I wouldn’t describe this as a “market timing play” because it isn’t a decision based on how the market is performing, but based on my personal FIRE timeline. It is buying insurance: if I don’t need it then I have lost out on some $. If I do need it then it reduces my negative impact, in this case in avoiding extra years of work.
Again, the links I provided above do a much better job of discussing the details, including probabilities based on past market performance data and what risks are being mitigated.
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I also sometimes don't feel too impressed with how much a 75/25 or 80/20 stock/bond mix mitigates a market drop vs. simply going 100/0. I think psychologically the hit would probably lead to feeling a need to work/save longer either way with such a stock-heavy AA. I remember running some scenarios on Portfolio Visualizer that seemed to illustrate the difference being pretty small. Now if you were to go really heavy into bonds, it might feel differently, but then there is the risk of avoiding market gains because only 25% of your investment was in equities.
there is actually no really noticeable gain in 90/10 vs 100/0 at least compared to the jump from 80/20 and everything lower to 90/10 the curve really flattens out from 90/10 to 100/0, 10% of your stache is also 2.5 years worth of withdrawals that could give you time for a market bounce back by drawing down only bonds over that time you get 5 years out of 80/20 give or take obviously
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To the OP: it sounds like you plan on exiting Betterment once you reach FI to, presumably, save on the fees. Can you walk me through why their service and fees are the right move in accumulation and not in retirement?
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I plan on staying with them indefinitely. In retirement I will probably draw down 3 - 4% each year.
I think that their features create enough added post tax benefit to cover their fees. And I rather enjoy using their service. Over the life, I project this will incentivize me to put more in to my accounts which will result in an effectively higher end amount and improved quality of life.
I see it this way. I could do nearly everything they have done. I've looked at their whitepapers and pretty much everything they have on their site. I've even talked to customer service to correct some of issues they have (mostly broken links). I just don't want to. At some point it has to be less about the money and more about enjoying life. And they help, not hinder, that end goal.
Would I recommend them? I would recommernd them to people that don't want to put effort into investing. But I wouldn't state that they are better than DIY, although I personally think this to be true. I would actually not recommend them to people going the FIRE route of drawing a small amount in retirement (like under 40k) since some of their tax strategies are counterintuitive and would probably not work very well. And I'd make it clear that you are paying a fee to use their service. So it isn't for free.
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clearly you're not open to listening to anyone that counters your ideas
so
dont ever have debt
dont use credit cards
blindly follow 100% stocks at a 4% SWR with betterment.
chances are you'll be fine.
on the outside chance you're not it could be devastatingly bad.
Mah dude. I am totally open to new idea. But, if you want to convince someone of something , you should consider empathizing with them more instead of insulting them.
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Thanks for clarifying. In that case the analysis on fees shown upthread is applicable to you.
I pulled up a random investment fees calculator online and put in an initial investment of $2M, annual return of 6%, and a holding period of 50 years.
Total investment without fees is $32M, without fees is $36M. This is different than above since it is simple and doesn’t include withdrawals, but the overall point remains. Even low fees have a big impact over long time periods due to the magical powers of compounding.
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Bear in mind. BEtterment's fees are capped at 5000,as it only puts a percentage on the first 2MM.
On a side note. If I ever have 32Million.
Yeah.
I would'nt give a fuk
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I see no problem with 100% stocks. If it unfortunately crashes right when you've accumulated "enough," just work a few more years. No biggie. Most people will have to work for most of their able-bodied adult lives, which is a nice reminder of just how big this "problem" is.
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Bear in mind. BEtterment's fees are capped at 5000,as it only puts a percentage on the first 2MM.
On a side note. If I ever have 32Million.
Yeah.
I would'nt give a fuk
Again you clearly don't understand here. You'd be withdrawing over time so you'd be at an inflation adjusted return of 2MM over that time. And I doubt that the 2MM is fixed forever it likely will move up with inflation. But what was demonstrated was the 4MM dollar difference. Which is apparently pennies to you.
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Bear in mind. BEtterment's fees are capped at 5000,as it only puts a percentage on the first 2MM.
$5,000 invested annually for 30 years comes to about $100,000 at 7% return per year. And I think you are overblowing the difficulty level of "DIY". Get a Vanguard account (or schwab or fidelity or whoever) with the allocations you want in a low-fee index fund (100% stock in your case), set up auto-transfers and forget about it.
If you're saying that Betterment's user interface is so much better and easier that you simply won't invest or invest as much if you use a different service... I find that a bit odd. And unlikely. If you're willing to spend time posting on this forum then you have time to set up a Vanguard account.
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Also, since I'd rather get some knowledge out of all the salt you guys are sprinkling in the thread.
I really want to know some better arguments against Betterment,
given all of the benefents you get from paying for them (https://help.betterment.com/hc/en-us/articles/115004257446-What-am-I-getting-for-Betterment-s-fee-). The real kicker for me is that their fee covers all trading expenses, which I would have paid anyway. I do understand that the .25% adds up over time (super naive calc of (.9975)^30 = .927), and could potentially cut into my SWR. But if they can cause me to earn more, I think it should cancel out.
My biggest concern really is their portfolio allocation. But I won't be satisfied with that until I pick apart the Black-Litterman Model.
Here is a good thing to ctrlV into google: betterment site:bogleheads.org.
Way more in depth discussion in zillions of threads. Generally we are a DIY crowd, and paying betterment 0.25%-5k to do the same thing we would be doing for free isn't the style of regulars here. Even if fees are capped at "only" $5,000/yr that is not acceptable to a crowd with annual spending averaging $50,000/yr. I would absolutely manage my finances if being paid five grand a year to do it, especially as that is more than 10% of my annual spending.
Convenient way to play around with the black litterman model if desired (and a billion other things to play with):
https://www.portfoliovisualizer.com/black-litterman-model
I always have more money in my bank account than credit card spend, so penalties are not a risk. You could view it as a way to reduce the drag of cash without additional risk. I don't care if you choose otherwise. If you think I have a 93% chance of losing money you are 100% wrong (but I don't make as much as I would like to think). Perhaps we should make a new credit card thread?
Wide array of topics in this thread. I think the optimum reverse glide path is probably very similar to this graphic from Maizeman, possibly with a 5% higher stock allocation. My best guess for the accumulation stage is divide the horizontal access by two and taper to 100% stocks at some point. The problem is that only a handful of months give the worst case scenarios which define SWR's, so obviously your results will vary greatly.
(https://raw.githubusercontent.com/maizeman/dead_broke/master/stocks_vs_bonds_vs_cash/projections_threeway_example.png)
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$5,000 invested annually for 30 years comes to about $100,000 at 7% return per year.
If you contributed evenly throughout the year, I get $488,835.
If you threw 5k all in on Dec 31 of each year, I get $472,304.
If you threw 5k all in on Jan 1 of each year, I get $505,365.
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$5,000 invested annually for 30 years comes to about $100,000 at 7% return per year.
If you contributed evenly throughout the year, I get $488,835.
If you threw 5k all in on Dec 31 of each year, I get $472,304.
If you threw 5k all in on Jan 1 of each year, I get $505,365.
I think you are closer to the truth.
Bear in mind though. The 5k a year is If you have more than 2 million.
I mean at that level of wealth, what is 500k after 30 years really? Ionno.
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$5,000 invested annually for 30 years comes to about $100,000 at 7% return per year.
If you contributed evenly throughout the year, I get $488,835.
If you threw 5k all in on Dec 31 of each year, I get $472,304.
If you threw 5k all in on Jan 1 of each year, I get $505,365.
I think you are closer to the truth.
Bear in mind though. The 5k a year is If you have more than 2 million.
I mean at that level of wealth, what is 500k after 30 years really? Ionno.
its a quarter of your total wealth. the .25% puts a drag on your investments and doesnt return the same. smartest investor in history - warren buffett - routinely says put all your money in a low cost S&P500 index fund - you're incresing your cost knowledgeably and continue to down play the signficance.
pshh who cares about 500k when you have 2MM i would think everyone does its 25% of your stash. think of it this way you retire with 2MM and you use betterment 30 years later your inflation adjusted account is now 1.5MM
another person uses vanguard S&P500 index their acocunt is still worth 2MM but yeah who cares about 500k are you listening to yourself.
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the .25% puts a drag on your investments and doesnt return the same.
This is really the point at the end of the day. You're adding an unnecessary drag on your returns. Which when taken over long time periods makes a HUGE difference in your outcome.
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$5,000 invested annually for 30 years comes to about $100,000 at 7% return per year.
If you contributed evenly throughout the year, I get $488,835.
If you threw 5k all in on Dec 31 of each year, I get $472,304.
If you threw 5k all in on Jan 1 of each year, I get $505,365.
I think you are closer to the truth.
Bear in mind though. The 5k a year is If you have more than 2 million.
I mean at that level of wealth, what is 500k after 30 years really? Ionno.
Ummm no. You don't compare a net worth lump sum with ongoing annual spending and say "hey this one is like... way smaller!" Amazing quantification Sherlock. You compare the annual cash flow produced with annual cash flow required. It is $5k/yr of $80k/yr. 4% rule on 2 million is 80k. You will need to invest as if you planned to withdraw $80k, but then only be able to withdraw 75k. A 6.25% loss every year for life.
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I plan on staying with them indefinitely.
I am reflecting on the number of times in my life I thought I was in for something "indefinitely" and I turned out to be wrong. You tell me you are data driven. I think you will find living will provide you with a lot of unanticipated data.
It is probably impossible to convince you this, but I see a lot of confirmation bias in your replies. The data you select, the priors you choose are designed to reenforce your existing conclusions. This is not to say that some of your conclusions or not correct, but I believe you are far less analytical and data driven than you think you are.
I wish you the best, I really do.
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In the long term, yes, the market goes up. I’m sure I’ve read all over the place that there isn’t a ten-year period where the US market wasn’t up once you factor in dividends.
I know this isn't the main point, but a recent 13 year period ended with the S&P 500 having a negative real return (includes dividend reinvestment and adjusted for inflation.) This is an example of one particular window in recent history of just over 13 years:
(http://i65.tinypic.com/e02y3c.jpg)
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I stand corrected.
I learn so many insightful things on these forums and then can’t find where I read something, I feel like I should be keeping a notebook of references for the future or something. :)
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Thanks for bringing it up DreamFIRE. I will add that it's happened numerous times.
Here are a couple more
Sept 1929 - Sept 1947, -.1% per year or -2% cumulative, with dividends, inflation adjusted. 18 years with negative real return.
Jan 1966 - Jan 1982, -1.4% per year or -20% cumulative, with dividends, inflation adjusted. 16 years with negative real return.
Jan 1906 - Jan 1921, -1.9% per year or -25% cumulative, with dividends, inflation adjusted. 15 years with negative real return.
In all cases, the market exploded after the period where I ended the study so you could say I am cherry picking but still these are some long periods to not make any money.
I am heavily invested in the market but I will tell you, you need a very long time horizon to be investing in it.
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Thanks for bringing it up DreamFIRE. I will add that it's happened numerous times.
Here are a couple more
Sept 1929 - Sept 1947, -.1% per year or -2% cumulative, with dividends, inflation adjusted. 18 years with negative real return.
Jan 1966 - Jan 1982, -1.4% per year or -20% cumulative, with dividends, inflation adjusted. 16 years with negative real return.
Jan 1906 - Jan 1921, -1.9% per year or -25% cumulative, with dividends, inflation adjusted. 15 years with negative real return.
In all cases, the market exploded after the period where I ended the study so you could say I am cherry picking but still these are some long periods to not make any money.
I am heavily invested in the market but I will tell you, you need a very long time horizon to be investing in it.
Fortunately, being a regular saver shortens your duration, so you have a lot less risk if you are still working towards FI. If you are saving 50% of your salary every month you will come out ahead in just a few years in even the bleakest periods. (you can test this in the 2000+ period in portfolio visualizer)
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I think OP is deliberately being obtuse. If they really think this way then I agree with Border42, they are not emotionally ready for 100% stock and run a very real risk of exiting market on a downturn and doing worse than 100% cash/bonds.
Wait I agree with you. I'm completely emotionally driven.
But i also think everyone else here is too.
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I plan on staying with them indefinitely.
I am reflecting on the number of times in my life I thought I was in for something "indefinitely" and I turned out to be wrong. You tell me you are data driven. I think you will find living will provide you with a lot of unanticipated data.
It is probably impossible to convince you this, but I see a lot of confirmation bias in your replies. The data you select, the priors you choose are designed to reenforce your existing conclusions. This is not to say that some of your conclusions or not correct, but I believe you are far less analytical and data driven than you think you are.
I wish you the best, I really do.
This is a good point.
, I'm completely open to some good arguments. This is why I have asked some people to further clarify their positions.
The issue is that every time someone wants to try to convince me of something, they also insult my intelligence. Which just makes me defensive. Anyway, the first couple of posts answered my question. I am really not sure why this thread is still going on, if only to further insult my intelligence. Which is more amusing at this point than anything.
I do want to clarify. I haven't done any proper modeling of some of my ideas about behavior. I'm curious. I'd like to, but I don't have the time. So that is more just hypothesis at this moment. I personally am fine with this. If you are not then that is fine. I'm really not one to do a masters thesis in behavioural finance to win an internet debate i didn't even want.
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Thanks for bringing it up DreamFIRE. I will add that it's happened numerous times.
Here are a couple more
Sept 1929 - Sept 1947, -.1% per year or -2% cumulative, with dividends, inflation adjusted. 18 years with negative real return.
Jan 1966 - Jan 1982, -1.4% per year or -20% cumulative, with dividends, inflation adjusted. 16 years with negative real return.
Jan 1906 - Jan 1921, -1.9% per year or -25% cumulative, with dividends, inflation adjusted. 15 years with negative real return.
In all cases, the market exploded after the period where I ended the study so you could say I am cherry picking but still these are some long periods to not make any money.
I am heavily invested in the market but I will tell you, you need a very long time horizon to be investing in it.
Fortunately, being a regular saver shortens your duration, so you have a lot less risk if you are still working towards FI. If you are saving 50% of your salary every month you will come out ahead in just a few years in even the bleakest periods. (you can test this in the 2000+ period in portfolio visualizer)
I think the issue is that once you are FI, your savings is your income. So it is more a matter of keeping some kind of buffer while also having such low monthly expenses that you can weather any downturn. I think as you go older the buffer would increase for health reasons.
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Fortunately, being a regular saver shortens your duration, so you have a lot less risk if you are still working towards FI. If you are saving 50% of your salary every month you will come out ahead in just a few years in even the bleakest periods. (you can test this in the 2000+ period in portfolio visualizer)
It is actually ideal for this to happen while you are saving, you are basically buying stocks on the cheap and if you then retire after the recovery you are set. I'm worried about the other case where you save during high periods and retire after a crash. It's not the end of the world and only so much you can do about it but for that reason I would want to hold a sizable buffer when I'm ready to retire.
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It is actually ideal for this to happen while you are saving, you are basically buying stocks on the cheap and if you then retire after the recovery you are set. I'm worried about the other case where you save during high periods and retire after a crash. It's not the end of the world and only so much you can do about it but for that reason I would want to hold a sizable buffer when I'm ready to retire.
Not exactly the same, but close enough and it hasn't been mentioned (that I saw) in this thread: http://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/.
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I have long been well aware of the arguments for debit cards. I guess I just interprit their weight differently. In fact, the thing I find most curious about this discussion is how passionate and emotional people seem to be. I think this underscores why I am so curious about behavioural economics. We are all looking at the same information, yet we have widly different interpretations and assumptions. We often argue and exchange ideas without properly being aware of this.
Case in point. Earlier we talked about Betterment's fees. My argument is that, even over 30 years, you wouldn't have 2M lost in opportunity cost. @boarder42 then showed me a graph that supported his claim. However, his term was over the drawdown phase. All this time I've been thinking about the accumulation phase. He then insulrted me, which you know is super effective at convincing people of your opinion.
So here is what gets me. I have pretty much learned what I want to learn, I mean some of the links in the first couple of responses were very helpful. I was not so confident of the 100% withdraw rate and now I am. However, this discussion has continued for 2 pages because of a couple things about my MO that are unrelated to the topic at hand. I think this underscores something about finance. Its personal. Its irrational. We all overlay our own experiences and hopes and tell ourselves we are being objective and we are not. Not only this, but some feel it necessary to convince others that they must join their own method. And, if they don't, they are stupid/minformed/lazy etc. etc. . I find that fascinating. Especially, when we are making real decisions with real money.
I think that money has the multiplier effect on peoples' emotions, and that is something I am very curious about. Since I suspect it could possibly be one of the keys to using it to your advantage.
Then again what do I know. I'm just a stupud physicist that doesn't credit cards and thinks actually owning the things you buy is a good idea.
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I would also say I make decisions on expected value except I never assume perfect behavior. On a side note I don't think of behaviour in terms of things like spending but also earning and trust. I hypothesize that having good values helps with the income side of the equation perhaps more than the spending side. This is why I suspect that giving is an important part of becoming wealthy.
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As for mortgages. No. First I just don't like the idea of having debt and think it reduces quality of life. And two, I am quite certain that keeping and intending to keep a mortgage effects your behaviour in a negative way. Specificallly, it incentivizes you to stay in a larger house, and that is a good way of overleveraging and increasing risk too much. I mean I don't mind people making a case for larger mortgages. But any time I see an argument for them, they always have some convenient assumptions which lead me to believe that are constructed to some convenient conclusions. Which makes sense right? Of course people will mess with the math to justify a pretty house.
After thinking through my demonstration that Betterment fees add $5k/annum to retirement expenses, I want to expand my response. Consider a Boarder42 who is in the same situation and is a DIY investor and also churns credit cards. I'd say a diligent credit card churner could get back an additional 6.25% of $80,000k in annual spend. So now you are looking at a 12.5% difference in retirement expenses: 6.25% lost to Betterment and 6.25% to hypothetical cash back (or possibly better if you do the point thing and don't change your behavior to justify it). It's pretty hard to get over 12% greater expenses for the exact same lifestyle.
But there's more. We know through backtesting that paying down your mortgage has historically been worse than investing in nearly all cases. The sequence matters, and similar to the "bond tent" or reverse equity glide path discussed a few posts ago it may be possible to have similar chances of success with investing if you do pay your mortgage in a single payment taken from investments in the year or two before you retire. But on the whole, periodic stock investing has an expected return that is several percent higher than mortgage payments and is far more reliable than the market returns themselves (see my previous post). Further, you say that giving money to others makes you wealthier. Actual data says the wealthy give a smaller percentage of their wealth away than the poor. They don't say whether lack of giving caused the wealth, but I'd guess that type of thinking and behaviour did. The Millionaire Next Door (I think I got it as a free download, look around) states that "my favorite charity is myself" is a common thing for millionaires to say. Now giving away money might make you a better person, but it will probably not make you a person with more money. I'm not stopping you at all, I'm just saying that you continually try to justify your money losing positions (relatively) as money making positions.
The common theme in all of these is that the positions you are defending are the opposite of what math and data support. If you do one or two or all of them then good on you, your life, live like YOLO and just one will probably not matter much or may even work to your advantage if targeted carefully. But all of them definitely put you at a relative disadvantage. And at least three of them are simply ways of becoming wealthier simply by moving your money in different ways, they are not even life style changes. You might well be right in one or two of them, but as you add more and more the odds turn increasingly against you.
And the funny thing is on top of this how often you say "I'm a Data Scientist" (especially the capitalization) to try and justify your positions. We would more or less give you a pass if you said "I make my decisions based on my own personal perceived values and my emotions, and I perceive debt from a moral rather than mathematical perspective" but you keep trying to pass it off as something else. Also, most people here are engineers, programmers, CPA's, scientists, et cetera (PizzaSteve implies he was in the boardroom or something), and we have generally been over this ground many times already. You aren't like an Enron employee (or, based on how Eron turned out, maybe you are).
And at the end you want to follow a 100% stock allocation, which is typically only justifiable in the strictest, data driven, non-emotional sense (and often not even then, based on backtesting it increases your risk around and possibly after retirement). Which is the exact opposite of your position on pretty much every other financial topic in this thread.
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Thanks for bringing it up DreamFIRE. I will add that it's happened numerous times.
Here are a couple more
Sept 1929 - Sept 1947, -.1% per year or -2% cumulative, with dividends, inflation adjusted. 18 years with negative real return.
Jan 1966 - Jan 1982, -1.4% per year or -20% cumulative, with dividends, inflation adjusted. 16 years with negative real return.
Jan 1906 - Jan 1921, -1.9% per year or -25% cumulative, with dividends, inflation adjusted. 15 years with negative real return.
In all cases, the market exploded after the period where I ended the study so you could say I am cherry picking but still these are some long periods to not make any money.
I am heavily invested in the market but I will tell you, you need a very long time horizon to be investing in it.
Fortunately, being a regular saver shortens your duration, so you have a lot less risk if you are still working towards FI. If you are saving 50% of your salary every month you will come out ahead in just a few years in even the bleakest periods. (you can test this in the 2000+ period in portfolio visualizer)
I think the issue is that once you are FI, your savings is your income. So it is more a matter of keeping some kind of buffer while also having such low monthly expenses that you can weather any downturn. I think as you go older the buffer would increase for health reasons.
Yup. It is especially a big issue in the few years just after you retire. The data we use is coarse (only one or two backtested years often determine our actions, ignoring the other 100+) and heavily biased towards the US market history, which I'd say is one of our bigger weakness. Personally I recommend keeping at least 10% in bonds/cash for that reason.
About betterment and why you might want to bail, it is a counterparty risk. https://forum.mrmoneymustache.com/investor-alley/in-kind-transfer-from-betterment-to-vanguard-denied/. There is already an ETF and market participants between you and the companies you own. Adding Betterment is another layer of people who can screw things up. The Permanent Portfolio book is the best discussion I know of counterparty risk.
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Fortunately, being a regular saver shortens your duration, so you have a lot less risk if you are still working towards FI. If you are saving 50% of your salary every month you will come out ahead in just a few years in even the bleakest periods. (you can test this in the 2000+ period in portfolio visualizer)
It is actually ideal for this to happen while you are saving, you are basically buying stocks on the cheap and if you then retire after the recovery you are set. I'm worried about the other case where you save during high periods and retire after a crash. It's not the end of the world and only so much you can do about it but for that reason I would want to hold a sizable buffer when I'm ready to retire.
Totally. Regular contributions are a win-win situation, you get more money if the market goes up and more shares if it goes down. I'm not even sure if there has ever been a 15 year period where (in retrospect) you would have been unable to quit your day job after 50% savings, regardless of market performance. Sadly regular withdrawals work in reverse.
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An argument against debt: I am not in a position to say I know anything, but I am one of those people who is concerned about the debt piling up in the nation and world. Eventually that will turn against us, and money will flow from people with weak hands to people with strong hands (which is a poker analogy about what happens to bluffers when they put their cards on the table, not anything to do with actual hands). So... look out for debt and stocks if you are not in a strong position.
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I have long been well aware of the arguments for debit cards. I guess I just interprit their weight differently. In fact, the thing I find most curious about this discussion is how passionate and emotional people seem to be. I think this underscores why I am so curious about behavioural economics. We are all looking at the same information, yet we have widly different interpretations and assumptions. We often argue and exchange ideas without properly being aware of this.
Case in point. Earlier we talked about Betterment's fees. My argument is that, even over 30 years, you wouldn't have 2M lost in opportunity cost. @boarder42 then showed me a graph that supported his claim. However, his term was over the drawdown phase. All this time I've been thinking about the accumulation phase. He then insulrted me, which you know is super effective at convincing people of your opinion.
So here is what gets me. I have pretty much learned what I want to learn, I mean some of the links in the first couple of responses were very helpful. I was not so confident of the 100% withdraw rate and now I am. However, this discussion has continued for 2 pages because of a couple things about my MO that are unrelated to the topic at hand. I think this underscores something about finance. Its personal. Its irrational. We all overlay our own experiences and hopes and tell ourselves we are being objective and we are not. Not only this, but some feel it necessary to convince others that they must join their own method. And, if they don't, they are stupid/minformed/lazy etc. etc. . I find that fascinating. Especially, when we are making real decisions with real money.
I think that money has the multiplier effect on peoples' emotions, and that is something I am very curious about. Since I suspect it could possibly be one of the keys to using it to your advantage.
Then again what do I know. I'm just a stupud physicist that doesn't credit cards and thinks actually owning the things you buy is a good idea.
...
I would also say I make decisions on expected value except I never assume perfect behavior. On a side note I don't think of behaviour in terms of things like spending but also earning and trust. I hypothesize that having good values helps with the income side of the equation perhaps more than the spending side. This is why I suspect that giving is an important part of becoming wealthy.
...
As for mortgages. No. First I just don't like the idea of having debt and think it reduces quality of life. And two, I am quite certain that keeping and intending to keep a mortgage effects your behaviour in a negative way. Specificallly, it incentivizes you to stay in a larger house, and that is a good way of overleveraging and increasing risk too much. I mean I don't mind people making a case for larger mortgages. But any time I see an argument for them, they always have some convenient assumptions which lead me to believe that are constructed to some convenient conclusions. Which makes sense right? Of course people will mess with the math to justify a pretty house.
After thinking through my demonstration that Betterment fees add $5k/annum to retirement expenses, I want to expand my response. Consider a Boarder42 who is in the same situation and is a DIY investor and also churns credit cards. I'd say a diligent credit card churner could get back an additional 6.25% of $80,000k in annual spend. So now you are looking at a 12.5% difference in retirement expenses: 6.25% lost to Betterment and 6.25% to hypothetical cash back (or possibly better if you do the point thing and don't change your behavior to justify it). It's pretty hard to get over 12% greater expenses for the exact same lifestyle.
But there's more. We know through backtesting that paying down your mortgage has historically been worse than investing in nearly all cases. The sequence matters, and similar to the "bond tent" or reverse equity glide path discussed a few posts ago it may be possible to have similar chances of success with investing if you do pay your mortgage in a single payment taken from investments in the year or two before you retire. But on the whole, periodic stock investing has an expected return that is several percent higher than mortgage payments and is far more reliable than the market returns themselves (see my previous post). Further, you say that giving money to others makes you wealthier. Actual data says the wealthy give a smaller percentage of their wealth away than the poor. They don't say whether lack of giving caused the wealth, but I'd guess that type of thinking and behaviour did. The Millionaire Next Door (I think I got it as a free download, look around) states that "my favorite charity is myself" is a common thing for millionaires to say. Now giving away money might make you a better person, but it will probably not make you a person with more money. I'm not stopping you at all, I'm just saying that you continually try to justify your money losing positions (relatively) as money making positions.
The common theme in all of these is that the positions you are defending are the opposite of what math and data support. If you do one or two or all of them then good on you, your life, live like YOLO and just one will probably not matter much or may even work to your advantage if targeted carefully. But all of them definitely put you at a relative disadvantage. And at least three of them are simply ways of becoming wealthier simply by moving your money in different ways, they are not even life style changes. You might well be right in one or two of them, but as you add more and more the odds turn increasingly against you.
And the funny thing is on top of this how often you say "I'm a Data Scientist" (especially the capitalization) to try and justify your positions. We would more or less give you a pass if you said "I make my decisions based on my own personal perceived values and my emotions, and I perceive debt from a moral rather than mathematical perspective" but you keep trying to pass it off as something else. Also, most people here are engineers, programmers, CPA's, scientists, et cetera (PizzaSteve implies he was in the boardroom or something), and we have generally been over this ground many times already. You aren't like an Enron employee (or, based on how Eron turned out, maybe you are).
And at the end you want to follow a 100% stock allocation, which is typically only justifiable in the strictest, data-driven, non-emotional sense (and often not even then, based on backtesting it increases your risk around and possibly after retirement). Which is the exact opposite of your position on pretty much every other financial topic in this thread.
Let's not talk about the mortgage and credit card stuff since I made those decisions. The way you guys seem to want me to use debt makes it seem like you are more concerned with convincing yourselves. And the only reason I could see to do this is because you deep down know those methods are very risky. The fact that you will certainly respond to this with another piece convincing me otherwise, and probably involving more insults to my intelligence, is going to prove my point.
But I want to go back to 100% stock allocation. Did you read ERN's paper on Safe Withdrawal rates? He used monte carlo tests (I will have to rereview if they were back tests) and found that the 100% equity rate was optimal in nearly all cases. Would you be against this conclusion, or is your advice against the 100% allocation behavioral? My personal thing is I have a while before I get close to retirement so I am sort of open on this one a bit.
Ok so if you want to make an argument against betterment. Outside of their whole "Its a roboadvisor its bad". Do you have anything more specific? For example, do you disagree with their use of tax loss harvesting? Do you think that automated tax loss harvesting is not worth it? Do you disagree with their portfolio (I'm still not done evaluating their portfolio since I have to go through the Black Littner model to do so).? Do you not like the company as a whole? I actually really do want to seek criticism on them. Every time you say I will be irrational and emotional it just makes me want to stay with them more. I also honestly do buy in that TLH alone justifies their cost (actually after some thought this could use some evaluation too), especially in the accumulation phase when you can rack up harvests early on while your fee is low. And yes I understand it is a tax deferment strategy not a tax avoidance one.
As for the whole me being a data scientist thing. I don't know what to tell you buddy. Other than maybe I know enough about evaluating data to realize that doing so doesn't always result in a concrete answer. Or maybe most of the calculations most people have presented are not as compelling or well thought out as they seem.
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Out of curiosity, what do you do in your role as a data scientist?
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Let's not talk about the mortgage and credit card stuff since I made those decisions. The way you guys seem to want me to use debt makes it seem like you are more concerned with convincing yourselves. And the only reason I could see to do this is because you deep down know those methods are very risky. The fact that you will certainly respond to this with another piece convincing me otherwise, and probably involving more insults to my intelligence, is going to prove my point.
But I want to go back to 100% stock allocation. Did you read ERN's paper on Safe Withdrawal rates? He used monte carlo tests (I will have to rereview if they were back tests) and found that the 100% equity rate was optimal in nearly all cases. Would you be against this conclusion, or is your advice against the 100% allocation behavioral? My personal thing is I have a while before I get close to retirement so I am sort of open on this one a bit.
Ok so if you want to make an argument against betterment. Outside of their whole "Its a roboadvisor its bad". Do you have anything more specific? For example, do you disagree with their use of tax loss harvesting? Do you think that automated tax loss harvesting is not worth it? Do you disagree with their portfolio (I'm still not done evaluating their portfolio since I have to go through the Black Littner model to do so).? Do you not like the company as a whole? I actually really do want to seek criticism on them. Every time you say I will be irrational and emotional it just makes me want to stay with them more. I also honestly do buy in that TLH alone justifies their cost (actually after some thought this could use some evaluation too), especially in the accumulation phase when you can rack up harvests early on while your fee is low. And yes I understand it is a tax deferment strategy not a tax avoidance one.
As for the whole me being a data scientist thing. I don't know what to tell you buddy. Other than maybe I know enough about evaluating data to realize that doing so doesn't always result in a concrete answer. Or maybe most of the calculations most people have presented are not as compelling or well thought out as they seem.
I probably speak for most when I say we don't actually care if you avoid debt. We only argue because we know we are right and we want the satisfaction of winning a pointless internet argument.
I never said anything about bad roboadvisor. I only said I doubt the fees justify it versus DIY investing and TLH. I decided not to use robo advisors a few years ago and haven't kept up with the reasons why that is a less than optimal idea, but if you google betterment site:bogleheads.org like I suggested above you will find lots of discussion by very knowledgeable people. The chief arguments are something like TLH becomes impossible after a decade or two because of a higher cost basis and all you are left with is higher fees and no escape without massive taxes if betterment doesn't allow you to transfer in kind (or otherwise a maybe undesirable set of ETFs), also as I linked above. Also there is already a lot of doubt about whether a multiple funds strategy such as betterment uses is worth it versus a three fund portfolio at all, much less with the slightly higher fund costs, and even less with the 0.25% wrapper. And there is simply an additional party who can screw things up, also noted above (really, there are some good reading suggestions) But basically it is all about costs. Most of the argument against boils down to the 0.25% fee. Why not VT total world stock index? Do you have a reason to think VT will do worse?
And you are right that there are no concrete answers. But if you tilt enough odds slightly in your favor, a series of uncertain situations will usually work to your advantage. Things that seem inconsequential individually, done often and in several varieties, can add up.
Also, my best guess at the optimal lifetime stock/bond allocation is also above beside Maizeman's illustration. But it's hard to make predictions, especially about the future.
About black-litterman: it looks like it uses backtests of probably mostly recent data regarding returns, correlation, and volatility. Not really a novel concept, I would not have more trust in it than "factor" investing, naive 1/n allocation, valuation based investing, and even trend following. William Bernstein's old blog "the efficient frontier" and old book "The Intelligent Asset Allocator discuss aspects of it, but not black-litterman specifically. But you will get the point.
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The fact that you will certainly respond to this with another piece convincing me otherwise [...] is going to prove my point.
That's really not how discussions, arguments, or debates work.
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We only argue because we know we are right and we want the satisfaction of winning a pointless internet argument.
And therein lies your failing. Bruh if you want satisfaction of "winning" and argument you are going to be chasing your tail endlessly. Especially since.
And you are right that there are no concrete answers.
The way I see it. I only argue to learn. LPT Most people will never be convinced of something by arguing with them, even in the face of unflinching evidence. We are too prideful to really change our minds in such a way. If you truly wish to change someone, you need to empathize with them.
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Out of curiosity, what do you do in your role as a data scientist?
I write AI for space drones.
But really most of it is implementing discriminative models (naive bays, SVM, random forests, ensembling basically everything on kaggle) and making bayesian probabilistic models from papers i read. It is actually a bit different from some of the math used in finance, which is more centered around time series and especially stuff like stochastic differential equations, so I'm not gonna be quant like tommorow or anything, but it does make me curious enough to work through some mathematical finance papers.
Also like 50% of my work is dropping NULL rows from csvs and tweaking thresholds, as you do.
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The fact that you will certainly respond to this with another piece convincing me otherwise [...] is going to prove my point.
That's really not how discussions, arguments, or debates work.
It works to get people to refocus a discussion with me on something I pretty much said I wasn't open to discussing. Which, if you think about it, wastes less time of both parties involved.
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The only benefit I see to this is you get exposure to potential rewards at the increased risk of paying credit card fees.
Just one last nitpick from me. They aren't "potential" rewards. They are real, quantifiable, hard dollars. And the "risk" of paying CC fees is so easily mitigated, it is difficult to watch someone so casually wave the whole business away. You don't even have to churn multiple cards or anything like Boarder does. There's a citi card that give you 2% cash back. You can make 2% on virtually all your spending just by setting up one easy automatic transfer.... It's just weird that you are so adamantly against it. I wouldn't even call this "debt" since you aren't carrying a balance. It is a free 2%. But you will PAY .25% for what's been shown to be an unquantifiable benefit from Betterment's service.
I think the juxtaposition of what you do and don't seem to care about is what's throwing people off.
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@shinn497, if you're not open to discussion, why post on an open forum? Why don't you just ask the mods to remove your thread or even delete your whole account? You are clearly not open to feedback from others.
General note: if a person has commented on a thread that proves unfruitful, they can remove their comments and the thread will stop popping up in their recent replies. I may end up taking my own advice on this one, because I keep getting whiffs of citrus.
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@shinn497, if you're not open to discussion, why post on an open forum? Why don't you just ask the mods to remove your thread or even delete your whole account? You are clearly not open to feedback from others.
General note: if a person has commented on a thread that proves unfruitful, they can remove their comments and the thread will stop popping up in their recent replies. I may end up taking my own advice on this one, because I keep getting whiffs of citrus.
yeah i've considered it. - but hopeful he'll actually read something i wrote and do the math rather than scoff at it pshhhh 500k who needs that - well i'll take it if you dont want it you can pay me .25% of you money and i'll put it in VTSAX for you.
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@shinn497, if you're not open to discussion, why post on an open forum? Why don't you just ask the mods to remove your thread or even delete your whole account? You are clearly not open to feedback from others.
General note: if a person has commented on a thread that proves unfruitful, they can remove their comments and the thread will stop popping up in their recent replies. I may end up taking my own advice on this one, because I keep getting whiffs of citrus.
There are certain things I wanted to discuss and certain other things I didn't. People latched onto the things I didn't and rolled with it. Which tells me they care more about proving it to themselves than they do me.
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Yes, you’ve said before you don’t want to discuss those points. It’s just that dangling an easy sub-optimization situation in front of people on a forum focused on maximal optimization of dollars is like dangling a piece of bacon in front of a dog and then expecting it not to leap. :)
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There are certain things I wanted to discuss and certain other things I didn't. People latched onto the things I didn't and rolled with it. Which tells me they care more about proving it to themselves than they do me.
Also remember, over the past couple of years this forum has developed into celebrity status on the interwebs. It very much represents the frugality-FIRE mindset to anyone interested in the subject. When you post broad generalizations like "I think debt is bad because it is misused by most", expect hard-line push back. Its just not true for us (frugality FIRE folks). If someone new to theses ideas reads such statements without counterpoint it really jabs those of us who have substantially contributed and learned from the information available here. IOW, "just to win an argument", has bigger implications than winning an argument.
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Thanks for bringing it up DreamFIRE. I will add that it's happened numerous times.
Here are a couple more
Sept 1929 - Sept 1947, -.1% per year or -2% cumulative, with dividends, inflation adjusted. 18 years with negative real return.
Jan 1966 - Jan 1982, -1.4% per year or -20% cumulative, with dividends, inflation adjusted. 16 years with negative real return.
Jan 1906 - Jan 1921, -1.9% per year or -25% cumulative, with dividends, inflation adjusted. 15 years with negative real return.
In all cases, the market exploded after the period where I ended the study so you could say I am cherry picking but still these are some long periods to not make any money.
I am heavily invested in the market but I will tell you, you need a very long time horizon to be investing in it.
Fortunately, being a regular saver shortens your duration, so you have a lot less risk if you are still working towards FI. If you are saving 50% of your salary every month you will come out ahead in just a few years in even the bleakest periods. (you can test this in the 2000+ period in portfolio visualizer)
Also the reverse is true; much MORE risk if someones withdrawing from funds in extended real returns drought. Which is why I am such a fan of noncoorlated asset classes. Give up some of the upside of 90/10, while simultaneously reducing the number of downside scenarios (4% rule potential failures).
I think 100% equities is a great idea early on in accumulation. First, it gets one used of the feeling of losing thousands of dollars in market tantrums, can you tolerate that? Secondly, it significantly decreases average time to FI (due to the reduced risk @Radagast mentions above). However, once substantial assets are accumulated, and FIRE date becomes more of a reality than a wild dream, I think most would benefit from a more diversified portfolio of non coorleators. This bot only reduced failure risk (in reasonable WR's), but it also reduced FIRE date risk.
Of course, each person's situation is different. I'd be cool with 100% or 90/10 if I had long-term relativity stable income generation equivalent to maybe halve my annual spending. Also, as with everything related to FIRE, savings rate is important as well. Someone with 75-80% savings rate has a different early accumulation risk/benefit profile to high equity exposure than someone with 40-50%.
The tax system makes is much easier to have the best plan early on, changing strategy towards end-game can be devastating. Which is why @ysette9 is so wise to build the glidepath in advance.
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But I want to go back to 100% stock allocation. Did you read ERN's paper on Safe Withdrawal rates? He used monte carlo tests (I will have to rereview if they were back tests) and found that the 100% equity rate was optimal in nearly all cases. Would you be against this conclusion, or is your advice against the 100% allocation behavioral? My personal thing is I have a while before I get close to retirement so I am sort of open on this one a bit.
Back on track. I 100% believe that you should not do 100% stock allocation. Based on all of your posts relating to emotions, people screwing up decisions which makes them sub-optimal, your statements relating to the fact that you have not dug in on the various other topics, etc. I think at most you should be 50% equities.
Based on your posts, it does not appear that you can control yourself from doing suboptimal transactions. 100% equities is for people that are very calculated, unemotional, and follow a plan. You have flat out stated that people can't do that and that they are kidding themselves if they say that the can or will.
100% equities is a recipe for disaster for people that are emotional and can't follow a plan. They tend to pull their money out after the market drops and put their money in after the market has had a run. They kill themselves chasing the money with their emotions.
I believe that if you dig into the various posts and comments that people have provided that you have the potential to optimize your finances, but at this point I think at most you should invest is 50% in equities.
Good luck!
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But I want to go back to 100% stock allocation. Did you read ERN's paper on Safe Withdrawal rates? He used monte carlo tests (I will have to rereview if they were back tests) and found that the 100% equity rate was optimal in nearly all cases. Would you be against this conclusion, or is your advice against the 100% allocation behavioral? My personal thing is I have a while before I get close to retirement so I am sort of open on this one a bit.
Back on track. I 100% believe that you should not do 100% stock allocation. Based on all of your posts relating to emotions, people screwing up decisions which makes them sub-optimal, your statements relating to the fact that you have not dug in on the various other topics, etc. I think at most you should be 50% equities.
Based on your posts, it does not appear that you can control yourself from doing suboptimal transactions. 100% equities is for people that are very calculated, unemotional, and follow a plan. You have flat out stated that people can't do that and that they are kidding themselves if they say that the can or will.
100% equities is a recipe for disaster for people that are emotional and can't follow a plan. They tend to pull their money out after the market drops and put their money in after the market has had a run. They kill themselves chasing the money with their emotions.
I believe that if you dig into the various posts and comments that people have provided that you have the potential to optimize your finances, but at this point I think at most you should invest is 50% in equities.
Good luck!
OP is young. I vote for 80/20.
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An argument against debt: I am not in a position to say I know anything, but I am one of those people who is concerned about the debt piling up in the nation and world. Eventually that will turn against us, and money will flow from people with weak hands to people with strong hands (which is a poker analogy about what happens to bluffers when they put their cards on the table, not anything to do with actual hands). So... look out for debt and stocks if you are not in a strong position.
Can you go into more detail about weak hand/strong hands here? Are you saying that having an ability to raise funds quickly will enable buying assets cheaply after the crash?
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OP: I wish you all the best, whatever you decide. Asset allocation is all about your appetite for risk. It's more of a function of your personality type than anything else. I am 60/40 and I am perfectly happy with that. If you are happy at 100/0 or 90/10 or whatever, that's great. If you won't blink when you lose 2 years of contributions and gains in one day, (a "very bad day"), good for you. I would have a really hard time swallowing that kind of loss, which is why I am at 60/40.
I get the aversion to debt too. The CC churning game is not for everyone. I decided to limit it to 3 cards, each of which is designated for something I was going to spend anyway, whether CC or not. So for example, one card gets a 4% cash back on gasoline, and all our gasoline always goes on that card. We were going to buy gasoline anyway. Another one gets 4% on groceries, so all our groceries go on that card. Everything gets paid off as we go. It's a simple system and easy for me to keep up with. I don't go around opening new cards or getting new cards in connection with new bank accounts and avoiding fees and all that jazz just simply because I don't have the patience for that game.
I also get your desire for a mortgage-free home. There is a post on another thread suggesting that a homeowner could sequester extra money into an investment account in an S&P 500 index fund until there is enough to pay off the mortgage in a lump sum, and then make the decision whether to pay off or continue investing. During the time you are investing instead of paying down the mortgage, you make the spread between the stock returns and the mortgage interest rate. You can still pull the trigger on the mortgage at the end if that is what you want, and the elapsed time will be the same as if you had been paying down all along, perhaps even less.
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OP is young. I vote for 80/20.
My post is not an age post. I don't think he can handle it. I am 48 and I am at 100%. At his age he should be 100%, but after reading his posts regarding emotions, that everyone screws their plans, that it is ok to pay a provider a management fee, that there is too much risk in using credit cards, tradelines, prepaying a low interest rate mortgage, etc. This tells me that he has little confidence in his emotional ability to manage a 100% equity account.
If he said he was going to set it up and that it required a notarized copy from a trusted advisor to change it, then I would recommend a 100% portfolio for him and everyone else that is capable of handling large market swings.
My account has market swings of $40k in a day, the market brought it down $300k in one year. I don't flinch, I also don't have much emotions regarding my plan. I just follow it. I don't get the sense that he can stomach that and would second guess himself and pull money off the table when he should be leaving it alone.
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Forgot about the emergency fund. Do whatever works for your situation. Too little and you are fracked, too much and you have a bunch of cash sitting around on the sidelines. I have $12k in a credit union account, with no online access (!), and no check writing privileges. I would have to drag my fat ass to the brick and mortar credit union to make a withdrawal. So the money just sits there, earning some pathetic little interest rate. That's okay, if there is an emergency I will be glad it's there. Once we are FIRE, we will just liquidate that account and spend it on something.
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Forgot about the emergency fund. Do whatever works for your situation. Too little and you are fracked, too much and you have a bunch of cash sitting around on the sidelines. I have $12k in a credit union account, with no online access (!), and no check writing privileges. I would have to drag my fat ass to the brick and mortar credit union to make a withdrawal. So the money just sits there, earning some pathetic little interest rate. That's okay, if there is an emergency I will be glad it's there. Once we are FIRE, we will just liquidate that account and spend it on something.
This seems backwards to me. When you are working and cash flowing with your salary, why do you need an emergency fund? When you are drawing down on your investments, why don't you need an emergency fund?
My emergency fund is my LOC's, Credit Cards, my excess monthly cash flow from my salary, 401k loans, liquidating a Roth, pulling money out of investments, etc. I have a lot of excess cash each month so I can absorb a large emergency. When I am retired, I will probably have some dollars set aside so that I am not pulling money out at the worst possible time. Probably less than 2% of net worth, currently I have zero.
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It's self-insurance for something unforeseen that our cash flow can't handle, or alternatively for an unexpected interruption in our cash flow. If I was in extremis, the last thing I would want to do is take on more debt. I do have a "taxable" brokerage account with about 50 grand in it that I could invade if, Zeus forbid, we ran through the EF. I would be very, very reluctant to take out a HELOC.
During FIRE all income comes from the investments (or nearly all if I keep a side gig for awhile), so I don't have to self-insure against a job loss as it were. I don't know that we will need cash on the sidelines at that point.
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The fact that you will certainly respond to this with another piece convincing me otherwise [...] is going to prove my point.
That's really not how discussions, arguments, or debates work.
It works to get people to refocus a discussion with me on something I pretty much said I wasn't open to discussing. Which, if you think about it, wastes less time of both parties involved.
You also wrote that you weren't going to post in this thread anymore. Yet, here we are.
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The fact that you will certainly respond to this with another piece convincing me otherwise [...] is going to prove my point.
That's really not how discussions, arguments, or debates work.
It works to get people to refocus a discussion with me on something I pretty much said I wasn't open to discussing. Which, if you think about it, wastes less time of both parties involved.
You also wrote that you weren't going to post in this thread anymore. Yet, here we are.
Indeed we are. So that is how well Shinn follows their own advice
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Thanks for bringing it up DreamFIRE. I will add that it's happened numerous times.
Here are a couple more
Sept 1929 - Sept 1947, -.1% per year or -2% cumulative, with dividends, inflation adjusted. 18 years with negative real return.
Jan 1966 - Jan 1982, -1.4% per year or -20% cumulative, with dividends, inflation adjusted. 16 years with negative real return.
Jan 1906 - Jan 1921, -1.9% per year or -25% cumulative, with dividends, inflation adjusted. 15 years with negative real return.
In all cases, the market exploded after the period where I ended the study so you could say I am cherry picking but still these are some long periods to not make any money.
I am heavily invested in the market but I will tell you, you need a very long time horizon to be investing in it.
Fortunately, being a regular saver shortens your duration, so you have a lot less risk if you are still working towards FI. If you are saving 50% of your salary every month you will come out ahead in just a few years in even the bleakest periods. (you can test this in the 2000+ period in portfolio visualizer)
Also the reverse is true; much MORE risk if someones withdrawing from funds in extended real returns drought. Which is why I am such a fan of noncoorlated asset classes. Give up some of the upside of 90/10, while simultaneously reducing the number of downside scenarios (4% rule potential failures).
I think 100% equities is a great idea early on in accumulation. First, it gets one used of the feeling of losing thousands of dollars in market tantrums, can you tolerate that? Secondly, it significantly decreases average time to FI (due to the reduced risk @Radagast mentions above). However, once substantial assets are accumulated, and FIRE date becomes more of a reality than a wild dream, I think most would benefit from a more diversified portfolio of non coorleators. This bot only reduced failure risk (in reasonable WR's), but it also reduced FIRE date risk.
Of course, each person's situation is different. I'd be cool with 100% or 90/10 if I had long-term relativity stable income generation equivalent to maybe halve my annual spending. Also, as with everything related to FIRE, savings rate is important as well. Someone with 75-80% savings rate has a different early accumulation risk/benefit profile to high equity exposure than someone with 40-50%.
The tax system makes is much easier to have the best plan early on, changing strategy towards end-game can be devastating. Which is why @ysette9 is so wise to build the glidepath in advance.
Yes, for sure. Regular savings greatly reduce the length of market drawdowns for you personally, but regular withdrawals greatly prolong them for you personally, maybe even make them permanent. I can't recommend 100% stocks approaching or while you need money for that reason, and usually I recommend either approximately 25% in bonds as a static allocation or a reverse glide path. Uncorrelated assets are useful too, they are more controversial because they have low expected returns but several of them seem to have remained uncorrelated since I first read the debate about their utility five years ago.
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An argument against debt: I am not in a position to say I know anything, but I am one of those people who is concerned about the debt piling up in the nation and world. Eventually that will turn against us, and money will flow from people with weak hands to people with strong hands (which is a poker analogy about what happens to bluffers when they put their cards on the table, not anything to do with actual hands). So... look out for debt and stocks if you are not in a strong position.
Can you go into more detail about weak hand/strong hands here? Are you saying that having an ability to raise funds quickly will enable buying assets cheaply after the crash?
To my mind this is a stable or flexible life situation. You can either raise funds, or at least avoid the need to take money from a strongly down market. Things like have a job that is recessionproof, be a two income household with income from two very different sources, have a cashflowing rental property, a recession proof side hustle, a place you can live for free if you need too, being able to easily relocate for a better situation, have very low monthly cashflow requirements, the usual MMM stuff. If you don't have those then you probably want a 20% safe bond allocation or a largish emergency fund (I can't really tell the difference between those two). Even though those might slow growth over the long term for the median investor, if you have a high chance of unemployment in a combined recession/stock crash the insurance value might become very worth it.
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I know you may not want to see, but many posters seem to be picking up on a common thread in your thinking. I'm sure there are many ways of looking at it. One I notice is that you think complex explanations have more explanatory power than basic explanations. This causes you to reject the basic math which is really most relevant.
You want to study Black-Litterman (probably not the world's most interesting model but you will still learn interesting things by studying it) when actually the most useful numbers are that $37.5k is lower than $40k and 4%-0.25%=3.75%.
You want a model that explains both general human behaviour and yours specifically (good luck) but multiplying your spending by 0.98 is actually the best model.
You want to have a deep understanding of risk but really the most applicable math is that 4% with no inflation adjustment is less than both 7% in real terms while saving and 4% real while withdrawing.
But you would be correct in your basic model that ~6% real return with variations is better than 3% nominal over the long term.
There's nothing wrong with learning more about complex models and they can be very revealing, but in personal finance generally the most basic math explains virtually the entire outcome, while more sophisticated approaches add very little, nothing, and frequently even detract from the basics. Even the stuff we are arguing is almost beside the point, simply deciding to save and invest 50% of your income will determine virtually the entire outcome.
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I know you may not want to see, but many posters seem to be picking up on a common thread in your thinking. I'm sure there are many ways of looking at it. One I notice is that you think complex explanations have more explanatory power than basic explanations. This causes you to reject the basic math which is really most relevant.
You want to study Black-Litterman (probably not the world's most interesting model but you will still learn interesting things by studying it) when actually the most useful numbers are that $37.5k is lower than $40k and 4%-0.25%=3.75%.
You want a model that explains both general human behaviour and yours specifically (good luck) but multiplying your spending by 0.98 is actually the best model.
You want to have a deep understanding of risk but really the most applicable math is that 4% with no inflation adjustment is less than both 7% in real terms while saving and 4% real while withdrawing.
But you would be correct in your basic model that ~6% real return with variations is better than 3% nominal over the long term.
There's nothing wrong with learning more about complex models and they can be very revealing, but in personal finance generally the most basic math explains virtually the entire outcome, while more sophisticated approaches add very little, nothing, and frequently even detract from the basics. Even the stuff we are arguing is almost beside the point, simply deciding to save and invest 50% of your income will determine virtually the entire outcome.
I mean my savings rate rn is 60% and I'm pretty confident my income could double soon!
I don't know if I would say that it is universally the case that simple models win over complex one. I think people can have a bias either way. When it is more often the case that there is some middle ground that is perhaps even harder to explain. I think that a lot of what people chalk up to "experience" and "feelings" are really just very complex models. OR moderately complex models with some amount of acceptable noise (one of the reason I'm not a fan of any kind of model with no uncertainty baked in).
I mean personally have a bias against simpler models because, well they are just so boring. It is like when I tell people I used to be an experimentalist and they ask me how to do simple ballistics problems. I'd rather learn about covariance matrices and such. With that said I'd like to think I'm woke enough to separate what is really an academic interest in economics over something that will govern my exact decision making.
Also curious. What is more interesting than Black-Littner. One of the reasons I Am interested in it is that it has been extensively studied, the orignal paper haven been cited 36k times. I feel something so important I should be aware of.
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During FIRE all income comes from the investments (or nearly all if I keep a side gig for awhile), so I don't have to self-insure against a job loss as it were. I don't know that we will need cash on the sidelines at that point.
That is why I think it is more important to have an Emergency Fund when you are retired. If the market drops 50% for six months or a year, then you are selling your investments at the bottom. You don't have your salary to earn your way out.
If you are working and have taxable assets that you could tap for an emergency, then an emergency fund is not that useful. I have had a lot of large expenses pop up. Rarely, do they need $'s within hours. I also have access to around $400k in credit card lines if the emergency was very large. That would give me 25 days to find the money. That may also cost me a 2% in CC fees, but that is a small price to pay. Having a large chunk sitting in a savings or checking account is a huge drain on your finances when you are in the accumulation phase.
If you are a married couple that both work and make about the same and your saving rate is 50%, then by definition you would both need to lose your job to have an issue. If you are working at different companies and don't feel like you would both lose your job, then an emergency fund is not that useful.
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And the same reasons are why I personally feel comfortable with the reverse glide path at retirement. Have a good chunk of bonds hat gets spent down during the first ten heads of FIRE to protect against sequence of returns risk, until you reach the safe zone when your portfolio is too big to fail. I believe The Mad Fientist, Wade Pfau, and Michael Kitces have all done analyses on this and shown it to be robust, at least in backtesting.
A side note: I’ve generally read that when modeling market returns, many people feel that previous data is more appropriate as Monte Carlo assumes events are unrelated and therefore any jumble of prévois year’s market performance is as likely as another. In fact markets are driven by human behavior, and a down market is more likely to be followed by a recovery than another downturn. Meaning, modeling the stock market crash of the 1920s followed by the Great Recession isn’t likely to happen because markets don’t behave like that.
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A side note: I’ve generally read that when modeling market returns, many people feel that previous data is more appropriate as Monte Carlo assumes events are unrelated and therefore any jumble of prévois year’s market performance is as likely as another. In fact markets are driven by human behavior, and a down market is more likely to be followed by a recovery than another downturn. Meaning, modeling the stock market crash of the 1920s followed by the Great Recession isn’t likely to happen because markets don’t behave like that.
That is a good point. Like you could do model the motion of the market as an increasing average with Gaussian noise. Or even layer in either seasonality or some markovian assumptions to add in the effects of market cycles. But I think you would be hard-pressed to predict anomalous and irrational behavior.
I think this is why we all make conjecture and disagree about the markets. While there are some clear patterns, what causes these patterns is unexpected.
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My account has market swings of $40k in a day, the market brought it down $300k in one year. I don't flinch, I also don't have much emotions regarding my plan. I just follow it.
Just curious, and I'm not doubting you. Why do you believe this about yourself? Do you have low fixed costs relative to your passive income? HAve you audited or vetted your own behavior? Or do you just feel this way because of confidence?
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My account has market swings of $40k in a day, the market brought it down $300k in one year. I don't flinch, I also don't have much emotions regarding my plan. I just follow it.
Just curious, and I'm not doubting you. Why do you believe this about yourself? Do you have low fixed costs relative to your passive income? HAve you audited or vetted your own behavior? Or do you just feel this way because of confidence?
During the accumulation stage, the fluctuations are meaningless. If I was retiring with a 4% SWR and the market dropped the first year, I would be concerned even if the models showed that based on the worst sequence I was still safe. During the accumulation stage if the markets dropped 50% the year before I was going to retire, I would just work another year or even two to ensure that I was safe. During the accumulation stage, I believe most people should be 100% equity. If they can't handle the market swings then they need to create a portfolio that works for their emotional state. I also think that people that are paying off their 4% fixed rate 30 year mortgages are crazy. They are emotionally feeling better about getting rid of debt, even though it is hurting their financial well being. If they had the facts, they would be emotionally feel safer keeping their mortgage.
I look forward to seeing you grow your knowledge over the next few years. I think your emotional state will change.
Good Luck!
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The issue is that every time someone wants to try to convince me of something, they also insult my intelligence. Which just makes me defensive. Anyway, the first couple of posts answered my question. I am really not sure why this thread is still going on, if only to further insult my intelligence. Which is more amusing at this point than anything.
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It's hard to learn anything when your ego is on the line all the time. We've all been there. Some of us have also mistakenly called it our "intelligence".
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I know you may not want to see, but many posters seem to be picking up on a common thread in your thinking. I'm sure there are many ways of looking at it. One I notice is that you think complex explanations have more explanatory power than basic explanations. This causes you to reject the basic math which is really most relevant.
You want to study Black-Litterman (probably not the world's most interesting model but you will still learn interesting things by studying it) when actually the most useful numbers are that $37.5k is lower than $40k and 4%-0.25%=3.75%.
You want a model that explains both general human behaviour and yours specifically (good luck) but multiplying your spending by 0.98 is actually the best model.
You want to have a deep understanding of risk but really the most applicable math is that 4% with no inflation adjustment is less than both 7% in real terms while saving and 4% real while withdrawing.
But you would be correct in your basic model that ~6% real return with variations is better than 3% nominal over the long term.
There's nothing wrong with learning more about complex models and they can be very revealing, but in personal finance generally the most basic math explains virtually the entire outcome, while more sophisticated approaches add very little, nothing, and frequently even detract from the basics. Even the stuff we are arguing is almost beside the point, simply deciding to save and invest 50% of your income will determine virtually the entire outcome.
I mean my savings rate rn is 60% and I'm pretty confident my income could double soon!
I don't know if I would say that it is universally the case that simple models win over complex one. I think people can have a bias either way. When it is more often the case that there is some middle ground that is perhaps even harder to explain. I think that a lot of what people chalk up to "experience" and "feelings" are really just very complex models. OR moderately complex models with some amount of acceptable noise (one of the reason I'm not a fan of any kind of model with no uncertainty baked in).
I mean personally have a bias against simpler models because, well they are just so boring. It is like when I tell people I used to be an experimentalist and they ask me how to do simple ballistics problems. I'd rather learn about covariance matrices and such. With that said I'd like to think I'm woke enough to separate what is really an academic interest in economics over something that will govern my exact decision making.
Also curious. What is more interesting than Black-Littner. One of the reasons I Am interested in it is that it has been extensively studied, the orignal paper haven been cited 36k times. I feel something so important I should be aware of.
I definitely have the opposite problem, I love to cook up simple rules of thumb that are 80% correct and ignore the details. But I don't generally cite experience or feelings because I generally feel I have little meaningful experience in anything and my head works in numbers and quantities more than feelings, but I can make bad decisions based on anecdotal observations.
I haven't looked at Blacklitterman in depth, only read some general information. Portfolio Visualizer says it "combines ideas from the Capital Asset Pricing Model (CAPM) and the Markowitz’s mean-variance optimization model" and then lets the user adjust the results based on their own opinion. But CAPM was shown to have little explanatory value shortly after it was introduced and MVO results change drastically with small changes in input and are not very useful in practice. Opinions are as common as assholes. Also, if the Betterment people's opinions are so good, why do they even need to use Black Litterman? Basically I view it as a little box that you put numbers in and it gives you numbers back, and if you don't like them you put different numbers in until you get a result you like. What's the point?
A morningstar paper says "The Black-Litterman model enables investors to combine their unique views regarding the performance of various assets with the market equilibrium in a manner that results in intuitive, diversified portfolios...The Black-Litterman model uses a Bayesian approach to combine the subjective views of an investor regarding the expected returns of one or more assets with the market equilibrium vector of expected returns (the prior distribution) to form a new, mixed estimate of expected returns."
Now I am biased here because seeing "Bayesian" in this context gives me a similar feeling to "denotes a person who is full of shit". "Vector" also gives me that feeling, as does "subjective views of an investor." Peoples unique views are notoriously bad in investing, even experts.
From what I can tell, Betterment determines an asset allocation that seems reasonable and not too far out of line from what other people use and then uses the Black-Litterman model to justify it, and perhaps give it a few tweaks to add decimal points and percentages that look sophisticated. Also, it may allow them to make small tweaks over time that make backtesting difficult, meaning people can't readily verify their performance compared to other investments, meaning it is hard to falsify. You can't enter their portfolio into portfoliovisualizer and check it against the S&P over the past 10 or 30 years because you can't know what it would have been. It reduces transparency.
A Betterment 100% stock allocation includes US total market, large value, mid value, small value, emerging markets, and developed markets. You probably don't like guesses, but I guess weighting each of these at 16.7% has a 50/50 chance (or better!) of being better than whatever weightings they use. But that wouldn't give the appearance of justifying 0.25% fees. It would make people just decide to do it themselves.
If you do it yourself I have less issue, but many of the same comments apply. Why use this instead of some other weighting system? If your subjective guesses are good, why bother with this extra layer of complexity to give what you already "know" to be true? Can you prove it is better than 1/n investing, or allocating according to nice round numbers, or only allocating in prime numbers? How about a valuation weighting system using CAPE10 and bond yields minus trailing 10 year inflation?
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My account has market swings of $40k in a day, the market brought it down $300k in one year. I don't flinch, I also don't have much emotions regarding my plan. I just follow it.
Just curious, and I'm not doubting you. Why do you believe this about yourself? Do you have low fixed costs relative to your passive income? HAve you audited or vetted your own behavior? Or do you just feel this way because of confidence?
During the accumulation stage, the fluctuations are meaningless. If I was retiring with a 4% SWR and the market dropped the first year, I would be concerned even if the models showed that based on the worst sequence I was still safe. During the accumulation stage if the markets dropped 50% the year before I was going to retire, I would just work another year or even two to ensure that I was safe. During the accumulation stage, I believe most people should be 100% equity. If they can't handle the market swings then they need to create a portfolio that works for their emotional state. I also think that people that are paying off their 4% fixed rate 30 year mortgages are crazy. They are emotionally feeling better about getting rid of debt, even though it is hurting their financial well being. If they had the facts, they would be emotionally feel safer keeping their mortgage.
I look forward to seeing you grow your knowledge over the next few years. I think your emotional state will change.
Good Luck!
Can I make another note of mortgages and such. I am so not married to the idea of owning a home. It would be cool, I like going on redfin and imagining things, but I'm also not saving for a downpayment. In fact, more and more it is just seeming like it isn't worth it to do so vs keeping my money in the market. Really I would only save for a down payment if I switched jobs and negotiated a much higher salary relative to whatever cost of living I have. Or, through some other means, my income increased relative to my current housing market, OR the housing market I planned to live in.
I also would only move into a house if the cost of staying there was low. Outside of any tax advantages or equity appreciate, it would have to comparable to my current rent, which is 15% of my take home pay. I think I mentioned earlier, but I would pretty much follow DR's advice and go with less than 25% on a 15 year. I actually realized something. At this level, I could pretty much be FIRE, since the option would be available to take on room mates or airbnb to cover the rest of the cost. I'm not saying I'd go this route necessarily but it would be comforting.
Here is the thing. Looking at the country as a whole. There are some areas where I could do this in less than decade. Places I wouldn't mind working, like austin, rahleigh, atlanta, colorodo, etc. etc. OR I could go to a HCOL area like SF or LA, negotiate a higher salary, work for a decade, and then geo arbitrage.
Now I know this is a lot of planning. But when I say I want a paid off house asap. Those are the assumptions I'm working with. What I wouldn't do is go get a house tommorow, put it on a 30 year loan, deal with house BS, pay closing, inspection, fees, insurance, and property taxes, spend time doing maintence, and then pat myself on the back for being a grown upy adult. And then justify the whole thing because I'm investing the difference. I'd rather avoid that, invest the difference anyway, live in my tiny apt (which is across from my job and gives me an incredible 5 minute walking commute), and utilize the flexibility of being a single 30 year to improve my financial decision 5,10,15, 200 years later (Why not live to 200 YOLO).
I'm not saying this path is for everyone, but those are the assumptions I'm dealing with. But they are the reason I think mortgaging a 30 year place is kind of insane relative to the alternative.
Also I'm curious. Are people really taking 4% SWRs and having that match closely with their expected costs. I actually think that is a bit pushing it. I could understand if your fixed costs were like 15k and 4% gave you 20,30, or 40k per year. But if you absolutely NEED that 4% to the extent that you'll be hosed if you don't get it, then I can understand glide paths and such. Ionno, people seem to really like the 4%, when I say it is important to give yourself some wiggle room.
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BTW @Radagast I do appreciate that opinion.
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Also I'm curious. Are people really taking 4% SWRs and having that match closely with their expected costs.
"Some" people, yes. Others have a big buffer or will start pulling down a pension after some years or might be closer to SS wage. I could pay my regular living expenses on less than 2% SWR of my current stash, so over half of a 4% SWR is discretionary - travel, entertainment, etc.
I actually think that is a bit pushing it. I could understand if your fixed costs were like 15k and 4% gave you 20,30, or 40k per year. But if you absolutely NEED that 4% to the extent that you'll be hosed if you don't get it, then I can understand glide paths and such. Ionno, people seem to really like the 4%, when I say it is important to give yourself some wiggle room.
Glide paths can provide a little extra protection during times of high stock valuations, even if you have a buffer. The 4% rule already has protections built-in. There's a whole thread dedicated to that topic:
https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/
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I'm not saying this path is for everyone, but those are the assumptions I'm dealing with. But they are the reason I think mortgaging a 30 year place is kind of insane relative to the alternative.
I think your Dave Ramsey emotions are coming out regarding a 30 year mortgage. If you are Mustachian, you buy a house that meets your needs. You don't look at monthly payments, interest rates, etc. You find the house that meets your needs. The next step is figuring out financing. If the US is still offering 4% 30 year mortgages, then you snag that as this is a once in a life time opportunity. It actually, is probably over as rates are increasing. If you happen to have a 30 year fixed mortgage at 4% or less, then you keep it until term. All the math, knowledge and logic show that you will be significantly better off over 30 years keeping your mortgage if you are disciplined enough to invest. Dave Ramsey and others are dealing with 95% of the population that lives paycheck to paycheck and emotionally have to spend money on crap if they have money in their checking account. You and I are not like the herd. We see money in our checking account and we transfer it to our investments. We pay ourselves first. We transfer money into our 401k, Roth IRA, taxable investments, etc. before it hits our checking accounts. We make sure that we are investing everything over what it takes to live well so that way we are not tempted to blow it on a jet ski, car, airplane, big screen TV, and other consumeristic junk. Those that are prepaying their mortgage are hurting their financial future to lock up their money from themselves. If you are logical, and disciplined then you don't need to hurt yourself to protect yourself from spending. You just invest and you get the emotional high from your 7 figure investment accounts.
Also I'm curious. Are people really taking 4% SWRs and having that match closely with their expected costs. I actually think that is a bit pushing it. I could understand if your fixed costs were like 15k and 4% gave you 20,30, or 40k per year. But if you absolutely NEED that 4% to the extent that you'll be hosed if you don't get it, then I can understand glide paths and such. Ionno, people seem to really like the 4%, when I say it is important to give yourself some wiggle room.
The heading of your post seemed like that is what you were asking. "draw 4% at retirement, and yolo it?". Some people are drawing down 5%. With the belief that if the markets tank, they would go back to work, leave the country, or change their spending in a significant manner.
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Also we are not a buy a house because you can crowd. There are strong arguments that renting is better for many or most situations, and many even say all situations. I am a home owner and my house is a duplex that brings in $750-700 on an $805 mortgage while I live in the other half. Even I would struggle to say it has been worth the time and opportunity cost. I would have probably been better off in an apartment spending the weekends at home depot as an employes rather than a customer. But if you must buy then the argument is that mortgage is better than cash, and paying it off as a lump later is certainly better than "making payments", and keeping a 30 year mortgage to term might be best of all (but possibly only similar to a lump as you are about to retire). If your rent vs. buy calculator says to buy even including maintenance and opportunnity costs, then get the mortgage product that matches your duration. Get a 5/1, 10/1, or 30 year mortgage depending on when you will leave. The lower monthly payments will give you more money to shovel into the FIRE.
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I'm not saying this path is for everyone, but those are the assumptions I'm dealing with. But they are the reason I think mortgaging a 30 year place is kind of insane relative to the alternative.
I think your Dave Ramsey emotions are coming out regarding a 30 year mortgage. If you are Mustachian, you buy a house that meets your needs and those of your possible future spouse and possible future family. You don't look at monthly payments, interest rates, etc. You find the house that meets your needs. The next step is figuring out financing. If the US is still offering 4% 30 year mortgages, then you snag that as this is a once in a life time opportunity. It actually, is probably over as rates are increasing. If you happen to have a 30 year fixed mortgage at 4% or less, then you keep it until term. All the math, knowledge and logic show that you will be significantly better off over 30 years keeping your mortgage if you are disciplined enough to invest. Dave Ramsey and others are dealing with 95% of the population that lives paycheck to paycheck and emotionally have to spend money on crap if they have money in their checking account. You and I are not like the herd. We see money in our checking account and we transfer it to our investments. We pay ourselves first. We transfer money into our 401k, Roth IRA, taxable investments, etc. before it hits our checking accounts. We make sure that we are investing everything over what it takes to live well so that way we are not tempted to blow it on a jet ski, car, airplane, big screen TV, and other consumeristic junk. Those that are prepaying their mortgage are hurting their financial future to lock up their money from themselves. If you are logical, and disciplined then you don't need to hurt yourself to protect yourself from spending. You just invest and you get the emotional high from your 7 figure investment accounts.
Also I'm curious. Are people really taking 4% SWRs and having that match closely with their expected costs. I actually think that is a bit pushing it. I could understand if your fixed costs were like 15k and 4% gave you 20,30, or 40k per year. But if you absolutely NEED that 4% to the extent that you'll be hosed if you don't get it, then I can understand glide paths and such. Ionno, people seem to really like the 4%, when I say it is important to give yourself some wiggle room.
The heading of your post seemed like that is what you were asking. "draw 4% at retirement, and yolo it?". Some people are drawing down 5%. With the belief that if the markets tank, they would go back to work, leave the country, or change their spending in a significant manner.
All if this, with a slight modification added in bold to specifically for the OP. And who says we don't look at monthly payments and interest rates, especially on a first house? That's crazy talk! Besides, even paid-for houses have monthly (or at least recurring) payments: utilities, taxes, insurance, maintenance, etc.
Also we are not a buy a house because you can crowd. There are strong arguments that renting is better for many or most situations, and many even say all situations. I am a home owner and my house is a duplex that brings in $750-700 on an $805 mortgage while I live in the other half. Even I would struggle to say it has been worth the time and opportunity cost. I would have probably been better off in an apartment spending the weekends at home depot as an employes rather than a customer. But if you must buy then the argument is that mortgage is better than cash, and paying it off as a lump later is certainly better than "making payments", and keeping a 30 year mortgage to term might be best of all (but possibly only similar to a lump as you are about to retire). If your rent vs. buy calculator says to buy even including maintenance and opportunnity costs, then get the mortgage product that matches your duration. Get a 5/1, 10/1, or 30 year mortgage depending on when you will leave. The lower monthly payments will give you more money to shovel into the FIRE.
Yes to this! And some of us are FI/RE and rich beyond our wildest dreams because we bought affordable(-ish) houses, carried long, deductible (US) mortgages, did reasonable DIY renos, then sold them years later for astronomical tax-free gains. Plus we invested in equities while we weren't prepaying those mortgages, just as @ Radagast suggests. This is not theoretical math, it's actual life experence. Your mileage, obviously, will vary.
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Here is a thought.
Does anyone of use really need a house? I've lived in apartment complexes and rented rooms where people had entire families in a smallish space and it was fine. In fact the very apartment complex I am in is full of people doing this very thing. Maybe I'm just a dumb naive millenial but I can't think of a reason why anyone would need anything more. The rent for such setups would pretty much almost always be less than a single family house. Unless you lived in one of those cheap towns.
So, when I hear people taking out 30-year mortgages. I'm just really skeptical that they are really doing it because it is the best idea. There is no free lunch in economics. Each mortgage has their own level of risk. And the level of risk decreases when you take out less interest. Even if you invest the difference, mathematically it is the same as making a leveraging. With that in mind, there are two reasons to go 30 year. You want a house and the house you want requires you to do so. Which, if you think about it, is the very kind of consumerism and entitlement that a lot of people seem to scoff at. OR, you are being really modest with a house (that you still want and not need) and are taking more risk for higher return. Which hey. Honestly that is fine with me. But I do wish people would accept that this is a risk play for greater return and not something that is universally better.
I think that is the big thing that I am learning and would highly respect anyone for realizing. All of this is more about our own persoanl preferences and risk tolerances. And different solutions match different people. The idea that some of us are daft or unreasonable just comes off as very close minded and ultimately not productive.
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Here is a thought.
Does anyone of use really need a house? I've lived in apartment complexes and rented rooms where people had entire families in a smallish space and it was fine. In fact the very apartment complex I am in is full of people doing this very thing. Maybe I'm just a dumb naive millenial but I can't think of a reason why anyone would need anything more. The rent for such setups would pretty much almost always be less than a single family house. Unless you lived in one of those cheap towns.
So, when I hear people taking out 30-year mortgages. I'm just really skeptical that they are really doing it because it is the best idea. There is no free lunch in economics. Each mortgage has their own level of risk. And the level of risk decreases when you take out less interest. Even if you invest the difference, mathematically it is the same as making a leveraging. With that in mind, there are two reasons to go 30 year. You want a house and the house you want requires you to do so. Which, if you think about it, is the very kind of consumerism and entitlement that a lot of people seem to scoff at. OR, you are being really modest with a house (that you still want and not need) and are taking more risk for higher return. Which hey. Honestly that is fine with me. But I do wish people would accept that this is a risk play for greater return and not something that is universally better.
I think that is the big thing that I am learning and would highly respect anyone for realizing. All of this is more about our own persoanl preferences and risk tolerances. And different solutions match different people. The idea that some of us are daft or unreasonable just comes off as very close minded and ultimately not productive.
Yes, at this point in my life, I do need a house. You do you and I'll happily do me.
There are so many crazy-making statements in the above post that I don't know where to begin. I will limit it to one.
"And the level of risk decreases when you take out less interest" principle. Fingernails on the chalkboard, right there.
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Here is a thought.
Does anyone of use really need a house? I've lived in apartment complexes and rented rooms where people had entire families in a smallish space and it was fine. In fact the very apartment complex I am in is full of people doing this very thing. Maybe I'm just a dumb naive millenial but I can't think of a reason why anyone would need anything more. The rent for such setups would pretty much almost always be less than a single family house. Unless you lived in one of those cheap towns.
So, when I hear people taking out 30-year mortgages. I'm just really skeptical that they are really doing it because it is the best idea. There is no free lunch in economics. Each mortgage has their own level of risk. And the level of risk decreases when you take out less interest. Even if you invest the difference, mathematically it is the same as making a leveraging. With that in mind, there are two reasons to go 30 year. You want a house and the house you want requires you to do so. Which, if you think about it, is the very kind of consumerism and entitlement that a lot of people seem to scoff at. OR, you are being really modest with a house (that you still want and not need) and are taking more risk for higher return. Which hey. Honestly that is fine with me. But I do wish people would accept that this is a risk play for greater return and not something that is universally better.
I think that is the big thing that I am learning and would highly respect anyone for realizing. All of this is more about our own persoanl preferences and risk tolerances. And different solutions match different people. The idea that some of us are daft or unreasonable just comes off as very close minded and ultimately not productive.
You don't need to pontificate. There are dozens of online rent vs. buy calculators. You can use the actual numbers that apply to your individual situation. May the best math win! https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
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Here is a thought.
Does anyone of use really need a house? I've lived in apartment complexes and rented rooms where people had entire families in a smallish space and it was fine. In fact the very apartment complex I am in is full of people doing this very thing. Maybe I'm just a dumb naive millenial but I can't think of a reason why anyone would need anything more. The rent for such setups would pretty much almost always be less than a single family house. Unless you lived in one of those cheap towns.
So, when I hear people taking out 30-year mortgages. I'm just really skeptical that they are really doing it because it is the best idea. There is no free lunch in economics. Each mortgage has their own level of risk. And the level of risk decreases when you take out less interest. Even if you invest the difference, mathematically it is the same as making a leveraging. With that in mind, there are two reasons to go 30 year. You want a house and the house you want requires you to do so. Which, if you think about it, is the very kind of consumerism and entitlement that a lot of people seem to scoff at. OR, you are being really modest with a house (that you still want and not need) and are taking more risk for higher return. Which hey. Honestly that is fine with me. But I do wish people would accept that this is a risk play for greater return and not something that is universally better.
I think that is the big thing that I am learning and would highly respect anyone for realizing. All of this is more about our own persoanl preferences and risk tolerances. And different solutions match different people. The idea that some of us are daft or unreasonable just comes off as very close minded and ultimately not productive.
Yes, at this point in my life, I do need a house. You do you and I'll happily do me.
There are so many crazy-making statements in the above post that I don't know where to begin. I will limit it to one.
"And the level of risk decreases when you take out less interest" principle. Fingernails on the chalkboard, right there.
Its interest. If you pay more interest on a loan, in order for it to be worth it, you must make up the difference with more investing. And this means more risk, since any investment with a rate of return greater than a typical mortgage is going to be volatile. Why do you not see that?
And yeah we are different. With different values and needs. I've been saying this all along.
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Here is a thought.
Does anyone of use really need a house? I've lived in apartment complexes and rented rooms where people had entire families in a smallish space and it was fine. In fact the very apartment complex I am in is full of people doing this very thing. Maybe I'm just a dumb naive millenial but I can't think of a reason why anyone would need anything more. The rent for such setups would pretty much almost always be less than a single family house. Unless you lived in one of those cheap towns.
So, when I hear people taking out 30-year mortgages. I'm just really skeptical that they are really doing it because it is the best idea. There is no free lunch in economics. Each mortgage has their own level of risk. And the level of risk decreases when you take out less interest. Even if you invest the difference, mathematically it is the same as making a leveraging. With that in mind, there are two reasons to go 30 year. You want a house and the house you want requires you to do so. Which, if you think about it, is the very kind of consumerism and entitlement that a lot of people seem to scoff at. OR, you are being really modest with a house (that you still want and not need) and are taking more risk for higher return. Which hey. Honestly that is fine with me. But I do wish people would accept that this is a risk play for greater return and not something that is universally better.
I think that is the big thing that I am learning and would highly respect anyone for realizing. All of this is more about our own persoanl preferences and risk tolerances. And different solutions match different people. The idea that some of us are daft or unreasonable just comes off as very close minded and ultimately not productive.
You don't need to pontificate. There are dozens of online rent vs. buy calculators. You can use the actual numbers that apply to your individual situation. May the best math win! https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
Bruh my rent is 700$, which is the most I have ever paid (and I used to live in SoCal). I actually could decrease it if I was willing to bike to work (instead of walk). To get a comparable house, it would need to be 193k and those are an hour away. Now that would probably cost more in commuting time and mental anguish. But, even if I wanted to do that, renting in that area is way cheaper. Which sort of supports my claim. There is just no way around the fact that renting allows you to go to a lower end that you'll never reach with buying. And the fact that you can do this makes buying an unnecessary excess. Which, hey I'm fine with people doing, but its true. You pay more for space you really don't need. There is no way around it.
Like I'm fine with people buying. And even taking out a really long loan on their house and using the market to pay for it. But thats a strategy that comes with drawbacks. It subjects you to market risk. It means you need to be in a house (which also means all the BS that comes with). It is a more expensive way of living (since you are buying more space). I'm not saying it is even a bad idea. But it isn't universally superior and not something that makes you more clever or insightful than anyone else.
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Bruh, if what you are saying is true, it will show up in the numbers. If what you are saying is not true, it will not show up in the numbers and you will actually, genuinely, be provably wrong. That's why you run the numbers.
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Here is a thought.
Does anyone of use really need a house? I've lived in apartment complexes and rented rooms where people had entire families in a smallish space and it was fine. In fact the very apartment complex I am in is full of people doing this very thing. Maybe I'm just a dumb naive millenial but I can't think of a reason why anyone would need anything more. The rent for such setups would pretty much almost always be less than a single family house. Unless you lived in one of those cheap towns.
So, when I hear people taking out 30-year mortgages. I'm just really skeptical that they are really doing it because it is the best idea. There is no free lunch in economics. Each mortgage has their own level of risk. And the level of risk decreases when you take out less interest. Even if you invest the difference, mathematically it is the same as making a leveraging. With that in mind, there are two reasons to go 30 year. You want a house and the house you want requires you to do so. Which, if you think about it, is the very kind of consumerism and entitlement that a lot of people seem to scoff at. OR, you are being really modest with a house (that you still want and not need) and are taking more risk for higher return. Which hey. Honestly that is fine with me. But I do wish people would accept that this is a risk play for greater return and not something that is universally better.
I think that is the big thing that I am learning and would highly respect anyone for realizing. All of this is more about our own persoanl preferences and risk tolerances. And different solutions match different people. The idea that some of us are daft or unreasonable just comes off as very close minded and ultimately not productive.
Yes, at this point in my life, I do need a house. You do you and I'll happily do me.
There are so many crazy-making statements in the above post that I don't know where to begin. I will limit it to one.
"And the level of risk decreases when you take out less interest" principle. Fingernails on the chalkboard, right there.
Its interest. If you pay more interest on a loan, in order for it to be worth it, you must make up the difference with more investing. And this means more risk, since any investment with a rate of return greater than a typical mortgage is going to be volatile. Why do you not see that?
And yeah we are different. With different values and needs. I've been saying this all along.
Nope, no hope. See you later, alligator. I think I'll go get myself some orange juice or something. Buh-bye. Best of luck to you.
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Two thoughts:
Riskier investments are more volatile, but if you are investing for the long-term, then volatility doesn’t matter as much. I don’t care if my 401(k) balance goes up or down by 30% this week because I don’t plan on tapping those funds for another 25 years.
Second thought: you seem to be mixing up the idea of laying your mortgage off early versus keeping it for the full-term and investing with the tendency to upgrade one’s lifestyle when purchasing a house. These are two separate concepts. Many people do buy more house than they had when renting, but we are less prone to that on these forums because we believe in spending consciously. There is no doubt that the masses fall prey to this.
As for the paying-your-mortgage-early debate, this has been discussed ad naseum on these forums already. You are welcome to assign a $ value to your personal feeling of comfort that comes from paying off a mortgage early for your own risk tolerance. That is a legit technique per my own classes in risk analysis and decision making. However, looking at the cold, raw numbers, keeping the mortgage and investing the difference is the right answer, period.
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As for the paying-your-mortgage-early debate, this has been discussed ad naseum on these forums already. You are welcome to assign a $ value to your personal feeling of comfort that comes from paying off a mortgage early for your own risk tolerance. That is a legit technique per my own classes in risk analysis and decision making. However, looking at the cold, raw numbers, keeping the mortgage and investing the difference is the right answer, period.
This has to be a simple calculation. Take two mortgages, same principle, different interest rates, or different terms (which means different amounts of interest paid over the life of the loan). No matter how you slice it, if you pay more interest, you need to have that covered by investing. While avoiding interest is guaranteed to earn you less returns, investing is not (but we believe will with some probability).
Take some assumptions, apply it to different situations, add in some real-world considerations, but that first fact is something pretty hard to dispute. The disparity and debate come with the assumptions. Especially since people conveniently leave in or out the assumptions that fit their own use case, sometimes without realizing it. That is why I don't buy the whole "we are so advanced and clever" idea. The minute your success relies on you thinking you are better than 95% of the population, without actually having accomplished anything yet, I become highly suspicious.
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No matter how you slice it, if you pay more interest, you need to have that covered by investing.
Not in general. Plenty of people pay mortgages without investing, e.g., with cash flow from work wages.
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(https://uploads.tapatalk-cdn.com/20180603/9adc7d63c60f30f3f7a4f6f2802a470f.jpg)
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Two thoughts:
Riskier investments are more volatile, but if you are investing for the long-term, then volatility doesn’t matter as much. I don’t care if my 401(k) balance goes up or down by 30% this week because I don’t plan on tapping those funds for another 25 years.
Second thought: you seem to be mixing up the idea of laying your mortgage off early versus keeping it for the full-term and investing with the tendency to upgrade one’s lifestyle when purchasing a house. These are two separate concepts. Many people do buy more house than they had when renting, but we are less prone to that on these forums because we believe in spending consciously. There is no doubt that the masses fall prey to this.
As for the paying-your-mortgage-early debate, this has been discussed ad naseum on these forums already. You are welcome to assign a $ value to your personal feeling of comfort that comes from paying off a mortgage early for your own risk tolerance. That is a legit technique per my own classes in risk analysis and decision making. However, looking at the cold, raw numbers, keeping the mortgage and investing the difference is the right answer, period.
A good post, but there is an implicit assumption in the red text. That assumption is that the past history of positive market gains over a long period will percist.
One is free to assume that if they wish, and a lot of data supports it. However, it is not fact, it is an assumption.
Hence the "only one right answer, period" is over stating the evidence supporting that conclusion. If you assume long term market returns will continue inserted in front of that sentence is a better representation for decision makers.
I am really tired of people without training in finance and market theory stating that long term market returns are a guaranteed fact over a long enough time period. No scholars would assert this. is it a a good bet? Yes. A fact? No.
Students of financial history look back hundreds of years over multiple societies. Only looking at US market data for 80 years is a narrow data set. Personally, I think the OP should hold the morgage and invest in retirement accounts, but it is their family's decision to make after understanding and deciding their view of the data and global future business prospects.
I'm single and make all of my own financial decisions. I also don't currently have a mortgage. I stated earlier that I don't particularly want one either, if I did it, it would be small and very short term.
Do you have financial training? What would you assert are the reasons for market gains over the long term? I haven't finished it, but I think a great read is Ray Dalio's "The Economic machine." In it he says that things such as deleveragings have been sort of understood and anticipated since ancient times. However, that knowledge was expressed more in allegory than the more direct academic way it is now.
My current understanding of why markets increase over time is based off the idea that society just gets more efficient as it progresses. However, that increase in productivity isn't always expressed in the market. On it are layered things such as credit cycles and peoples' emotions. And this is where the uncertainty comes from. Also we simply don't know how well we will progress in the future. When will the next big discovery happen, like the transistor or penicillin. Or are we in a local minima that requires some large paradigm to escape from. Hard to know really .
And yes all of this is a degree of belief and nothing guaranteed.
No matter how you slice it, if you pay more interest, you need to have that covered by investing.
Not in general. Plenty of people pay mortgages without investing, e.g., with cash flow from work wages.
Well of course. But this further supports the idea that mortgages that require you to pay more interest are more expensive. The cost comes through as added capital or increased risk. Again, there is no free lunch.
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I didn't mean to make my post read like I was making the assumption that we know what the future market gains will bring. Of course we don't know the future. No one does, so you are right that we can't be guaranteed that it is the best path forward regardless. However, given the data that we have, that is the best bet you can make. Absent a crystal ball, looking at past performance is the best tool we have for making future decisions.
I don't want this to devolve into a Bogleheads forums-style race to the bottom to see who can psych themselves into the lowest withdrawal rate. Everything having to do with investing and certainly FIRE is a game of chance. You can hope (and I argue, reasonably assume) that the future market performance will not be any worse than the past over long periods of time such as 30-year mortgage terms. You can hope that nuclear war won't devastate developed nations. You can hope that the zombie apocalypse won't happen in our lifetimes. You can hope that your particular life is long enough that you can ponder whether the 4% SWR will be safe enough (https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/700/ (https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/700/) reply #712), though statistics say you are more likely to be dead than run out of money for a given age. Those things could all happen and you could be left holding the bag, wishing you'd paid off your mortgage early and chosen a 2% withdrawal rate. It is just more likely that the zombie apocalypse won't happen and you will have lost extra years of your life to work.
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No matter how you slice it, if you pay more interest, you need to have that covered by investing.
Not in general. Plenty of people pay mortgages without investing, e.g., with cash flow from work wages.
Well of course. But this further supports the idea that mortgages that require you to pay more interest are more expensive.
Compared with...?
If "compared with mortgages that require you to pay less interest" then, as someone once said, "well of course". Did you have another comparison in mind?
The cost comes through as added capital or increased risk. Again, there is no free lunch.
Capital added to what?
Risk increased compared with what? Again, I'm guessing it must be something other than "compared with mortgages that require you to pay less interest", but what...?
Just trying to understand....
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We are running in circles here, twisting each others' words, and playing with assumptions, to disprove each other in our minds.
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This has got to be either, 1. The best troll I've ever seen. or 2. The biggest case of someone not picking up what everyone else is throwing down.
Carry on...
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This has got to be either, 1. The best troll I've ever seen. or 2. The biggest case of someone not picking up what everyone else is throwing down.
Carry on...
Or both. ;-)
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This has got to be either, 1. The best troll I've ever seen. or 2. The biggest case of someone not picking up what everyone else is throwing down.
Carry on...
I was thinking the same thing, and he doesn't make much sense in his own comments, either. A lot of nonsense.
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I'm completely serious. But also beleive nothing of what I say.
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We are running in circles here, twisting each others' words, and playing with assumptions, to disprove each other in our minds.
I think the bigger issue is you lumping unrelated considerations together and assuming your own limited experience is all the experience possible.
Rent vs Buy
House vs Condo
950 vs 3576 square feet
Mortgage vs cash
5/1 vs 30 vs 15
Pay off early vs hold to term
Single vs. living with kids and in-laws
These are all unrelated, but you seem to assume a 1 bed / 1 bath apartment or a 3576 SF corner house with a 30yr mortgage carried to term for the "pride" of having a mortgage and too much house are the only options. In fact there are countless others, and in any case most posters here lean more strongly towards the 1 bed/1 bath optimization crowd so you aren't even arguing against people on the opposite side from you. We just can't stand to see your poor understanding of numbers and poor reasoning.
And that is before we even look at numbers. Two weeks ago I was looking at a condo for $110,000, while rents for comparables were $1250/mo, and other parts of town more expensive than that. What is your philosophy there? But I am actually more like you and decided (along with DW) that renting would be better (in this case we probably made a bad decision by the numbers, trading a poor but fairly low crime area for a more expensive area just to avoid DW's perceived stigma and some paperwork hassle).
There are risks on all sides. A mortgage is tied to the dollar. If the dollar loses 90% of its value, your monthly mortgage payment will cost the same as a cheeseburger while rental prices will go up 90%. Many people think inflation is the biggest risk. But you have to get on with life, so you use the numbers that apply to your situation to the best of your knowledge and do what you can with what you have.
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If I were you. I'd just buy the condo in cash. 110k is like nothing.
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I'm completely serious. But also beleive nothing of what I say.
Oh, no doubt, and complete doubt, respectively.
OTOH and FWIW, you can believe everything I say.
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I'm completely serious. But also beleive nothing of what I say.
Oh, no doubt, and complete doubt, respectively.
OTOH and FWIW, you can believe everything I say.
Bruh LPT you might actually be speaking my literally language almost always™ TBH
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Lets back up. You don't have a mortgage because your rent is dirt cheap.
Why not get a mortgage, rent out the house and maintain your current place? There is absolutely no reason to use your current place as a reason for or against a mortgage. Before bashing mortgages, just consider the possibility of buying a house that you can rent out. Once you approach house ownership from the perspective of numbers, it removes all the fluff about your current rent and distance to work.
A lot of people assume that you need to live in the first house you buy. In simple terms, a house is just another tool to diversify your NW. Stocks, bonds, houses, art, land, gold etc. are all just tools to accumulate NW that have different levels of returns and risk.
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Lets back up. You don't have a mortgage because your rent is dirt cheap.
Why not get a mortgage, rent out the house and maintain your current place?
Bruh, all debt is Bad. Evil. You can't trust yourself not to abuse the debt. Never done that? BS. You're a fallible human. You've definitely used those credit cards on hookers and blow.
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Lets back up. You don't have a mortgage because your rent is dirt cheap.
Why not get a mortgage, rent out the house and maintain your current place? There is absolutely no reason to use your current place as a reason for or against a mortgage. Before bashing mortgages, just consider the possibility of buying a house that you can rent out. Once you approach house ownership from the perspective of numbers, it removes all the fluff about your current rent and distance to work.
A lot of people assume that you need to live in the first house you buy. In simple terms, a house is just another tool to diversify your NW. Stocks, bonds, houses, art, land, gold etc. are all just tools to accumulate NW that have different levels of returns and risk.
There are a couple of reasons I don't this:
- I'm currently don't have enough capital to do this, and my credit score is shit. I'd have to take out a subprime loan, and the interest rate would be garbage. To get a good interest rate, I'd have to either wait awhile OR deal with credit bullshit to get a credit score. And I don't want a good credit score.
- It is a buyers market right now. To get a decent house, I'd have to do a ton of research, work with buyers, get a real estate agent, negotiate a deal, etc. etc. THEN I'd have to either vette a housing manager or deal with the renters myself. None of this I want to do.
- I have no idea how long I'm going to be in my area. I'll be here as long as I'm working for my current employer, but, if I leave my job for some reasons, I'm most likely going to move. I definitely don't want something like a rental property holding me back, as I don't think managing a rental from long distance is a good idea.
- After all is said and done. I'd just end up with an investment. An illiquid investment that is tied to a very specific area of the country. This investment would take time to acquire. Time to be profitable, and a lot of BS I'd rather not deal with. By comparison, I could just invest more online, and not have nay of that.
Now that is me and my situation specifically. In general, I don't think real estate investing is a bad idea. Personally, I'd only do it if I knew I was going to be in an area for a long time (10+ years), it wasn't my entire portfolio (preferably less than 30 - 40%), and I could buy any investments in cash. Even then I still might never since I don't really put houses on a pedestal and arguments could be made for other types of investments.
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- I'm currently don't have enough capital to do this, and my credit score is shit. I'd have to take out a subprime loan, and the interest rate would be garbage. To get a good interest rate, I'd have to either wait awhile OR deal with credit bullshit to get a credit score. And I don't want a good credit score.
I now understand why this thread has gone on for so long and why you continue to not see eye-to-eye with the regulars on this forum.
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That quote got mis-attributed and was the OP talking, not Prairie Stash. Damn Tapatalk on my phone.
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Lets back up. You don't have a mortgage because your rent is dirt cheap.
Why not get a mortgage, rent out the house and maintain your current place?
Bruh, all debt is Bad. Evil. You can't trust yourself not to abuse the debt. Never done that? BS. You're a fallible human. You've definitely used those credit cards on hookers and blow.
Well played, sir.
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Lets back up. You don't have a mortgage because your rent is dirt cheap.
Why not get a mortgage, rent out the house and maintain your current place?
Bruh, all debt is Bad. Evil. You can't trust yourself not to abuse the debt. Never done that? BS. You're a fallible human. You've definitely used those credit cards on hookers and blow.
And....American Express won't give me rewards points for hookers and blow.
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There has got to be a rewards card that taps into that particular niche market.
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There has got to be a rewards card that taps into that particular niche market.
I should be able to figure out a way to have the blow show up on my statements as a "grocery" purchase for the 6% rebate.
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I'm 49 and was 100 percent stock funds until a few months ago. Now I'm 80 percent stock funds and 20 percent bond fund. JL Collins approach for me from here to FIRE.
He's most recently espoused the all-in on Stocks (VTSAX), has he not?
http://jlcollinsnh.com/2018/06/07/stocks-part-xxxiii-optimism/
"But taking the very long view, at some point VTSAX might no longer be enough. If/when that time comes, I tell her (and tell her to tell her children) to continue to keep things as simple as possible. I’d look at VTWSX: Total World Stock Index Fund (current expense ratio .19). This fund invests all over the world, including ~50% in the USA. With it you no longer even need to hold VTSAX."
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I'm 49 and was 100 percent stock funds until a few months ago. Now I'm 80 percent stock funds and 20 percent bond fund. JL Collins approach for me from here to FIRE.
He's most recently espoused the all-in on Stocks (VTSAX), has he not?
http://jlcollinsnh.com/2018/06/07/stocks-part-xxxiii-optimism/
"But taking the very long view, at some point VTSAX might no longer be enough. If/when that time comes, I tell her (and tell her to tell her children) to continue to keep things as simple as possible. I’d look at VTWSX: Total World Stock Index Fund (current expense ratio .19). This fund invests all over the world, including ~50% in the USA. With it you no longer even need to hold VTSAX."
Why VTWSX at .19%, not the ETF version (VT) with .1% expense ratio?
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I'm 49 and was 100 percent stock funds until a few months ago. Now I'm 80 percent stock funds and 20 percent bond fund. JL Collins approach for me from here to FIRE.
He's most recently espoused the all-in on Stocks (VTSAX), has he not?
While accumulating (http://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/) his advice has always been 100% stocks, yes.
He used to say that "near or during" retirement you should switch to 50/25/20/5 stocks/REIT/bonds/cash, but then he decided to eliminate the REITs and go 75/25 stocks/bonds and only as much cash as you need.
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Why VTWSX at .19%, not the ETF version (VT) with .1% expense ratio?
I personally would like to know why the expense rates are so different. They're essentially the same thing, so why the almost double expense ratio? Is the expense ratio for the actual mutual fund "hidden" inside the EFT in the form of lower performance, and the .1% an additional fee on top of that?
Edit: No, it appears the difference is primarily because ETFs are easier to administer. There was an interesting thread (https://www.bogleheads.org/forum/viewtopic.php?t=64649) on bogleheads about it.
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I'm 49 and was 100 percent stock funds until a few months ago. Now I'm 80 percent stock funds and 20 percent bond fund. JL Collins approach for me from here to FIRE.
He's most recently espoused the all-in on Stocks (VTSAX), has he not?
http://jlcollinsnh.com/2018/06/07/stocks-part-xxxiii-optimism/
"But taking the very long view, at some point VTSAX might no longer be enough. If/when that time comes, I tell her (and tell her to tell her children) to continue to keep things as simple as possible. I’d look at VTWSX: Total World Stock Index Fund (current expense ratio .19). This fund invests all over the world, including ~50% in the USA. With it you no longer even need to hold VTSAX."
I just read that and he mentioned that EM isn't going to be worthwhile in this life time. Personally I think one's own portfolio should match the world.
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100% stock if you have 30 years out before draw-down and/or can basically never look at the balance when SHTF. Otherwise, you will want to diversify as most people that lost 70% of their portfolio in a matter of months in the dotcom crash, and almost the same in 2008/09 mostly sold into the carnage due to panicking. We are not talking about "some" people sold, MOST people sold. It's like this... you are at a movie theater and 1 person gets up and shouts (OMG FIRE GET OUT!). Most people will look around, see no fire and keep watching the movie. But what if the same thing happens but 10 people run out, then 20 people follow them, then pretty much everyone runs out. That is what happens and you should be prepared for that scenario.
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The market didn't drop 70% either of those times.
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The market didn't drop 70% either of those times.
Right, PEOPLE, not the market.
Plenty of people have (too much) company stock or other funds in their 401k that don't reflect the overall market and performance will obviously not always match the bigger picture.
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The market didn't drop 70% either of those times.
Right, PEOPLE, not the market.
Plenty of people have (too much) company stock or other funds in their 401k that don't reflect the overall market and performance will obviously not always match the bigger picture.
MOST was the term used - and i think we have to assume MOST people cant lose more than the market lost half of the people lose more half the people lose less the avg person loses what the market does as a whole minus fees.
so unless someone can present statistical data showing MOST people losing 70% during those two time frames i think thats just a terrible comment with no data to back it.
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The market didn't drop 70% either of those times.
Right, PEOPLE, not the market.
Plenty of people have (too much) company stock or other funds in their 401k that don't reflect the overall market and performance will obviously not always match the bigger picture.
MOST was the term used - and i think we have to assume MOST people cant lose more than the market lost half of the people lose more half the people lose less the avg person loses what the market does as a whole minus fees.
so unless someone can present statistical data showing MOST people losing 70% during those two time frames i think thats just a terrible comment with no data to back it.
Sure, the word most was used - but not in the way you describe it.
The quote was, of those that lost 70% (author doesn't say how much this is of overall investing population, could be a tiny fraction) that most of that sub-group then went and did some sub-optimal selling further locking in their losses. That is different than saying most people lost 70% overall.
You're right, there aren't data being referenced. The actual proportion locking in their 70% losses by selling is a giant question mark. However, I am sure it happened to a non-zero number of people and they made two critical mistakes which is the takeaway for me, not debating whether it was "some" or "most" - (1) diversify and (2) invest in what you can stomach long-term.
My uncle is getting close to retirement so he's got more of an ear to the ground than in the past. He went to a late-career retirement seminar at work and he said about 10 or so of the ~25 in his session had FIFTY PERCENT or more of their 401k in company stock! Sure, it's tripled in the last five years but it also lost 70% in 2008. He didn't know everyone but he knew a couple people and they are the ones that brag about their gains now as well as were as were the ones bellyaching the most a decade ago. Doesn't mean they panicked and sold low or will necessarily do it again (if that is indeed what they did previously) but the behavior sends up some warning flags no doubt.
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50% in company stock? YIKES! If any youngsters don't know why that is bad, please do some research on a company called Enron.
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100% stock if you have 30 years out before draw-down and/or can basically never look at the balance when SHTF. Otherwise, you will want to diversify as most people that lost 70% of their portfolio in a matter of months in the dotcom crash, and almost the same in 2008/09 mostly sold into the carnage due to panicking. We are not talking about "some" people sold, MOST people sold. It's like this... you are at a movie theater and 1 person gets up and shouts (OMG FIRE GET OUT!). Most people will look around, see no fire and keep watching the movie. But what if the same thing happens but 10 people run out, then 20 people follow them, then pretty much everyone runs out. That is what happens and you should be prepared for that scenario.
no this quote here is what i was responding to @simonsez
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100% stock if you have 30 years out before draw-down and/or can basically never look at the balance when SHTF. Otherwise, you will want to diversify as most people that lost 70% of their portfolio in a matter of months in the dotcom crash, and almost the same in 2008/09 mostly sold into the carnage due to panicking. We are not talking about "some" people sold, MOST people sold. It's like this... you are at a movie theater and 1 person gets up and shouts (OMG FIRE GET OUT!). Most people will look around, see no fire and keep watching the movie. But what if the same thing happens but 10 people run out, then 20 people follow them, then pretty much everyone runs out. That is what happens and you should be prepared for that scenario.
no this quote here is what i was responding to @simonsez
Yep, me too. I am taking the whole sentence in context.
"Otherwise, you will want to diversify as most people that lost 70% of their portfolio in a matter of months in the dotcom crash, and almost the same in 2008/09 mostly sold into the carnage due to panicking."
It does not say most people lost 70%, that's omitting the key word 'that' which shows it is a conditional. If it helps, trim the sentence down to "Most people that lost 70% sold." This is same thing as saying "Of those that lost 70%, most sold."
Hypothetically, if only 5 investors lost 70% and 3 of them sold while in low positions, the statement would be factual even though there are millions of investors. In that example, of those that lost 70%, most sold. We don't really know if this is true or not, but this was the gist of the claim presented.
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its a completely anecdotal statement with nothing to back it up.
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So gaiz.
Have you looked up any research of what happens to people during tiomes of crisis?
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what do you mean your assumption that you will move with what the heard does when a market crashes. i submit that its a moronic assumption and dont give 2 shits what the general population does. you on the other hand seem to think you will do what the heard does so if thats the case you had better keep a low SWR sub 2% ...
this entire forum is counter culture. if you cant control your emotions to leverage amortgage i doubt you can do it to retire on 100% stocks.
again i give 2 shits what the general culture does and dont view it as valid data b/c the general culture spends more than they make.
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what do you mean your assumption that you will move with what the heard does when a market crashes. i submit that its a moronic assumption and dont give 2 shits what the general population does. you on the other hand seem to think you will do what the heard does so if thats the case you had better keep a low SWR sub 2% ...
this entire forum is counter culture. if you cant control your emotions to leverage amortgage i doubt you can do it to retire on 100% stocks.
again i give 2 shits what the general culture does and dont view it as valid data b/c the general culture spends more than they make.
So thats a no I take it.
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why should we care about what research says how the average person handles crises? I've been through the 2000 tech bubble and the 2008 recession. what did i do with my investments? Nothing. Is so hard to believe that some people have actually figured it out and take advantage of cheap mortgage rates and rewards cc's
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why should we care about what research says how the average person handles crises? I've been through the 2000 tech bubble and the 2008 recession. what did i do with my investments? Nothing
So far I haven't seen much research actually posted. Just opinions and anecdotes.
I am VERY wary, however, to take up the opinion that I am anything but average. I don't like the idea that by posting in this forum, reading books, or watching youtube videos, I am so much more special than a normal person (esp. since who's normal? A US citizen? A westerner? An earth denizen?). I could see maybe being slightly more passionate than the subject, but I do take the opinion that there is not much difference between me and anyone else. I dunno call it humility.
For brevity's sake, would you like to chime in more about the experience? Did you have a more secure job? Any big debts? did you have an interest in finance? A mortgage? I do think memories of times like this should come with more context.
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I'll chime in. In 2000, I was in grad school and had no investments to speak of. I've had an interest in finance for as long as I can remember. In 2008, I worked for the same company that I work for now. I was 100% in stocks then and I'm 100% in stocks now. I also bought a house with an FHA loan in 2008. I still own that home and I'm still underwater.
I will remain 100% in stocks for the foreseeable future because my investment horizon is about 60 years. I do plan to sell the house in the next few years and buy something bigger however.
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ok if your opinion is youre not different than the herd you probably should leave this site go by brand new car and a large house and eat out everyday and just spend all the money you make b/c thats what the herd does. you also should definitely not YOLO it with a 100% allocation and 4% SWR b/c the avg person couldnt do that.
Mr. data scientist you're looking at the wrong fucking data. the data you should look at is what the markets have done historically and create a plan that optimizes your outcome based on your situation. looking at data of what people typically do isnt really data b/c people are uneducated about finance in general.
i'm still convinced you're a troll b/c i dont know how many times you can repeat the same worthless shit and not actually reach any conclusion but just ask more bullshit questions that dont apply
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I'll chime in. In 2000, I was in grad school and had no investments to speak of. I've had an interest in finance for as long as I can remember. In 2008, I worked for the same company that I work for now. I was 100% in stocks then and I'm 100% in stocks now. I also bought a house with an FHA loan in 2008. I still own that home and I'm still underwater.
I will remain 100% in stocks for the foreseeable future because my investment horizon is about 60 years. I do plan to sell the house in the next few years and buy something bigger however.
Wait, I'm going to go by your username and assume you are over 50. HOW DO YOU STAY SPRY DUDE
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ok if your opinion is youre not different than the herd you probably should leave this site go by brand new car and a large house and eat out everyday and just spend all the money you make b/c thats what the herd does. you also should definitely not YOLO it with a 100% allocation and 4% SWR b/c the avg person couldnt do that.
Mr. data scientist you're looking at the wrong fucking data. the data you should look at is what the markets have done historically and create a plan that optimizes your outcome based on your situation. looking at data of what people typically do isnt really data b/c people are uneducated about finance in general.
i'm still convinced you're a troll b/c i dont know how many times you can repeat the same worthless shit and not actually reach any conclusion but just ask more bullshit questions that dont apply
Its more a matter of attitude. I don't want the notion that I save money and live frugally to go to my head and make me arrogant. It is a way of staying less emotional and involved in this. Since emotion leads to bad financial decisions.
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why should we care about what research says how the average person handles crises? I've been through the 2000 tech bubble and the 2008 recession. what did i do with my investments? Nothing
For brevity's sake, would you like to chime in more about the experience? Did you have a more secure job? Any big debts? did you have an interest in finance? A mortgage? I do think memories of times like this should come with more context.
1. i'm an engineer and have always felt secure in my jobs.
2. no big debts (always lived below my means)
3. interest in finance = yes
4. first mortgage in 2002. it was a 5/1 adjustable and we were lucky to ride the super low interest rates after the recession
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I'll chime in. In 2000, I was in grad school and had no investments to speak of. I've had an interest in finance for as long as I can remember. In 2008, I worked for the same company that I work for now. I was 100% in stocks then and I'm 100% in stocks now. I also bought a house with an FHA loan in 2008. I still own that home and I'm still underwater.
I will remain 100% in stocks for the foreseeable future because my investment horizon is about 60 years. I do plan to sell the house in the next few years and buy something bigger however.
Wait, I'm going to go by your username and assume you are over 50. HOW DO YOU STAY SPRY DUDE
Since it says "age 40" beneath his user name, I assumed he was 40 and that his username meant he would FIRE at age 50.
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My grandpa is almost 90 and he’s been 100% in stocks his entire life. Although he has quite a few index funds these days he’ll still buy thousands of shares of tech stocks like NFLX and AMZN. He might be slower to find a tech stock because he doesn’t use the technology like we do, but he’s not afraid to buy in big when he finds a company growing like bonkers.
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I'll chime in. In 2000, I was in grad school and had no investments to speak of. I've had an interest in finance for as long as I can remember. In 2008, I worked for the same company that I work for now. I was 100% in stocks then and I'm 100% in stocks now. I also bought a house with an FHA loan in 2008. I still own that home and I'm still underwater.
I will remain 100% in stocks for the foreseeable future because my investment horizon is about 60 years. I do plan to sell the house in the next few years and buy something bigger however.
Wait, I'm going to go by your username and assume you are over 50. HOW DO YOU STAY SPRY DUDE
Since it says "age 40" beneath his user name, I assumed he was 40 and that his username meant he would FIRE at age 50.
You sire are perceptive.
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My grandpa is almost 90 and he’s been 100% in stocks his entire life. Although he has quite a few index funds these days he’ll still buy thousands of shares of tech stocks like NFLX and AMZN. He might be slower to find a tech stock because he doesn’t use the technology like we do, but he’s not afraid to buy in big when he finds a company growing like bonkers.
NICE!
Any any how he has ridden out recessions and such?
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My grandpa is almost 90 and he’s been 100% in stocks his entire life. Although he has quite a few index funds these days he’ll still buy thousands of shares of tech stocks like NFLX and AMZN. He might be slower to find a tech stock because he doesn’t use the technology like we do, but he’s not afraid to buy in big when he finds a company growing like bonkers.
NICE!
Any any how he has ridden out recessions and such?
He’s the luckiest guy I know. In early 2000 he was about to take a trip around the world with my grandma and he didn’t want to be worried about his stocks on the other side of the world. He sold everything. By the time he came back the meltdown was in full swing. So, he skipped that recession.
2008 caught him by surprise just like most everyone else. He was heavily invested in oil and gas before that as that was the industry he worked in during his career. I asked him how he was doing and he said “I’m not even looking at it, just makes me sick.” He was selling stock on the way down as he has “been on margin for 50 years.”
I couldn’t tell you his compound returns over the years. He’s a millionaire for sure but has told me he’s done better with land deals and oil/gas royalties than anything else. For the first time ever recently he gave my dad an idea of the kind of money he’s slinging around. He was lamenting that he just now learned Roku was publicly traded. He said “if I had known about their IPO I’d have bought $350k worth. Everyone I know has a Roku so it’s probably a good stock.” He’s a Peter Lynch fan, “buy what you know” kind of thing.
His views toward bonds is “why would I buy something that pays 3% when I can be in stocks and make 8-10%? I’ve been in stocks all my life and that’ll never change.”
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I'll chime in. In 2000, I was in grad school and had no investments to speak of. I've had an interest in finance for as long as I can remember. In 2008, I worked for the same company that I work for now. I was 100% in stocks then and I'm 100% in stocks now. I also bought a house with an FHA loan in 2008. I still own that home and I'm still underwater.
I will remain 100% in stocks for the foreseeable future because my investment horizon is about 60 years. I do plan to sell the house in the next few years and buy something bigger however.
Wait, I'm going to go by your username and assume you are over 50. HOW DO YOU STAY SPRY DUDE
Since it says "age 40" beneath his user name, I assumed he was 40 and that his username meant he would FIRE at age 50.
You sire are perceptive.
No worries - you'll catch on.
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My grandpa is almost 90 and he’s been 100% in stocks his entire life. Although he has quite a few index funds these days he’ll still buy thousands of shares of tech stocks like NFLX and AMZN. He might be slower to find a tech stock because he doesn’t use the technology like we do, but he’s not afraid to buy in big when he finds a company growing like bonkers.
NICE!
Any any how he has ridden out recessions and such?
He’s the luckiest guy I know. In early 2000 he was about to take a trip around the world with my grandma and he didn’t want to be worried about his stocks on the other side of the world. He sold everything. By the time he came back the meltdown was in full swing. So, he skipped that recession.
2008 caught him by surprise just like most everyone else. He was heavily invested in oil and gas before that as that was the industry he worked in during his career. I asked him how he was doing and he said “I’m not even looking at it, just makes me sick.” He was selling stock on the way down as he has “been on margin for 50 years.”
I couldn’t tell you his compound returns over the years. He’s a millionaire for sure but has told me he’s done better with land deals and oil/gas royalties than anything else. For the first time ever recently he gave my dad an idea of the kind of money he’s slinging around. He was lamenting that he just now learned Roku was publicly traded. He said “if I had known about their IPO I’d have bought $350k worth. Everyone I know has a Roku so it’s probably a good stock.” He’s a Peter Lynch fan, “buy what you know” kind of thing.
His views toward bonds is “why would I buy something that pays 3% when I can be in stocks and make 8-10%? I’ve been in stocks all my life and that’ll never change.”
Been on margin for 50 years? Like leveraging???? :/
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My grandpa is almost 90 and he’s been 100% in stocks his entire life. Although he has quite a few index funds these days he’ll still buy thousands of shares of tech stocks like NFLX and AMZN. He might be slower to find a tech stock because he doesn’t use the technology like we do, but he’s not afraid to buy in big when he finds a company growing like bonkers.
NICE!
Any any how he has ridden out recessions and such?
He’s the luckiest guy I know. In early 2000 he was about to take a trip around the world with my grandma and he didn’t want to be worried about his stocks on the other side of the world. He sold everything. By the time he came back the meltdown was in full swing. So, he skipped that recession.
2008 caught him by surprise just like most everyone else. He was heavily invested in oil and gas before that as that was the industry he worked in during his career. I asked him how he was doing and he said “I’m not even looking at it, just makes me sick.” He was selling stock on the way down as he has “been on margin for 50 years.”
I couldn’t tell you his compound returns over the years. He’s a millionaire for sure but has told me he’s done better with land deals and oil/gas royalties than anything else. For the first time ever recently he gave my dad an idea of the kind of money he’s slinging around. He was lamenting that he just now learned Roku was publicly traded. He said “if I had known about their IPO I’d have bought $350k worth. Everyone I know has a Roku so it’s probably a good stock.” He’s a Peter Lynch fan, “buy what you know” kind of thing.
His views toward bonds is “why would I buy something that pays 3% when I can be in stocks and make 8-10%? I’ve been in stocks all my life and that’ll never change.”
Been on margin for 50 years? Like leveraging???? :/
Yes, he’s very aggressive. He’s got balls of steel. However, it cuts both ways so I don’t know how much he’s lost as well. He makes more than enough from land deals and oil/gas royalties so that his stock holdings won’t kill him if he blows it up. Most of us don’t have that luxury.
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The personality of the grandpa sounds admirable. But--once again--we're looking only at anecdotal data. He sounds as though he could be similar to a lot of people who've been doing the "dividend growth investing" and don't actually know how their returns compare to what indexing would have done. It's possible this grandfather has done worse than he could have because he's chased things that were already hot.
But missing out on the tech bubble does indeed sound fortuitous. I have no idea why a guy who believes in stocks so strongly that he'd never own bonds would feel as though a trip around the world should imply he needs to cash out, though. There's some cognitive dissonance there.
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The personality of the grandpa sounds admirable. But--once again--we're looking only at anecdotal data. He sounds as though he could be similar to a lot of people who've been doing the "dividend growth investing" and don't actually know how their returns compare to what indexing would have done. It's possible this grandfather has done worse than he could have because he's chased things that were already hot.
But missing out on the tech bubble does indeed sound fortuitous. I have no idea why a guy who believes in stocks so strongly that he'd never own bonds would feel as though a trip around the world should imply he needs to cash out, though. There's some cognitive dissonance there.
This was before internet trading (for grandpas at least) so he’d have to find a newspaper in Asia somewhere to see quotes, then spend an ungodly amount of money making a phone call around to world to place a trade if needed. He wanted to enjoy his trip.
At least this is the story he gave me.
I agree about the returns vs the index. I asked him before what his returns were, all he gave me was that he wanted to make 8% or more over the long haul. Once again, he’s been buying more index funds than individual stocks in his late 80s.
As well, I’ve asked my dad and uncles if they can begin getting access to his account to make sure he doesn’t do anything stupid. As in, his mind starts going south and he puts everything in GE or whatever. They agreed that is a good idea and are making steps towards that with him.
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I've heard stories about when Mom and Dad try to take grandpa's car keys. Trying to take grandpa's eTrade login seems wayyyy more drama-y.
When I cruised in Europe, I was too cheap to buy internet, so I made the only news I got each day walking to the exchange desk and checking the USD/Euro exchange rate. As long as that rate wasn't moving too much, I figured things were fine.
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The man who most influenced Warren Buffett (besides Benjamin Graham) was Philip Fisher. He was a pretty successful investor who focused on growth stocks that could increase their earnings over the long term. Late in his life, his mind went south and he ended up making very poor investment decisions. He'd buy the stocks he remembered from back in the 50s and 60s, only those companies were poorly run in the 90s. His son (Ken Fisher) said that if his dad had just put it in index funds during that time, he'd have at least twice as much when he died.
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Back to the original question, "Why not do 100% allocation, draw 4% at retirement, and yolo it?"
Why not? Well, I find the quoted post below, titled Importance of stock/bond allocation, from Taylor Larimore over on the bogleheads.org site instructive. (Bolded text is highlighted by me, not Taylor.)
I guess that the lesson is that it is important to select an appropriate Asset Allocation now, before a downturn comes, as to never face the need for a plan B.
Thanks you!
Longvest:
You are absolutely right. An investor should never have more in stocks than they can afford to lose. I learned this from my own family experience:"
Our family owned "Larimore's Diner" in Foxboro, Mass. in 1929. When the depression hit, my parents lost the Diner and we moved to Miami into one of my grandfather's empty homes.
My Grandfather, Christopher F. Coombs, was one of the three principals of American Founders Group, the largest investment trust in the roaring 20s. He lost nearly everything (approximately $50M)--including the Miami home we lived in (next door to where I live today).
These figures show what REAL bear markets are like:
BEAR MARKET OF 1929-1937 One huge loss after another. (Dow plunged 89%)
-1929--1930--1931--1932
(-31%)(-25%)(-43%)(-08%) Large Cap Stocks
(-34%)(-35%)(-47%)(-06%) Mid/Small Cap Stocks
(-47%)(-38%)(-50%)(-05%) Micro Cap Stocks
(+04%)(+07%)(-02%)(+09%) 5-Year Treasury Bonds
BEAR MARKET OF 1973-1976 (S&P fell 43%)
-1973--1974
(-15%)(-26%) Large Caps
(-39%)(-29%) Micro Caps
---(-70%) Coca-Cola
---(-82%) Intel
---(-73%) McDonald's
---(-86%) Merrill Lynch
---(-86%) Walt Disney
---(-71%) Xerox
Figures cannot convey the horrifying and debilitating effects of a deep and long bear market. You watch in agony as month after month your life savings evaporate before your eyes. Gloom and doom articles are in the media, radio, (and now TV and internet). Nearly everyone else is selling. You have no idea when, or if, your portfolio will stop losing money.
Your friends and relatives urge you to sell. Nearly all financial experts recommend "sell". You are ridiculed for trying to hold on. You begin to have self-doubt. Dispair sets in. Buying stocks is unthinkable. Divorce and suicide's increase.
That's what a bad bear market is like.
Best wishes.
Taylor
[/quote]
You can see the thread here: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=142846
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Bogle heads save too much and are overly conservative. Quoting one time when it failed that we're all aware of doesn't mean you should hold more bonds.
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Bogle heads save too much and are overly conservative. Quoting one time when it failed that we're all aware of doesn't mean you should hold more bonds.
Yes. Holding a lot of bonds will lower your chances of success in a long retirement. Numbers bellow are for a 40yr FIRE @4%WR using cFIREsim [all settings default unless noted]:
Stocks %/Bonds % = Success %
- 100/0 = 91.7%
- 90/10 = 91.7%
- 80/20 =90.7%
- 70/30 = 88.9%
- 60/40 = 82.4%
These historical success rates include the events jacoavluha is highlighting.
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Bogle heads save too much and are overly conservative. Quoting one time when it failed that we're all aware of doesn't mean you should hold more bonds.
The question isn’t more bonds. It’s any bonds.
I just think it’s easy for young folks, me included, to ponder a more (or most) aggressive allocation, when we haven’t really experienced a bear market where we had real money on the table.
I’m 40, and about 65/35, the 35% bond/cash allocation including emergency fund and additional short term cash for a house project. So my retirement money is more like 80/20. Having never been through it I just don’t know how I’m going to react when I see my retirement accounts accumulate hundreds of thousands in sustained losses over months to years. I’d like to think that I’ll stick to the plan, rebalance occasionally, and be well positioned when the market rebounds. But I just don’t know.
It’s not that big of a deal in the accumulation phase. Heck, I should be down on my knees hoping for a bear now, since I’m saving about half my income these days. But a decade or so from now, just retired, with my kids in college, I don’t think I could stomach a 100% allocation.
Certainly the more you save, and the more you have expenses under control, should allow you to be comfortably more aggressive with your retirement allocation.
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Your AA is so low in equities you have to save more to actually retire to me that's absurd but whatever floats your boat. Just know 4% is crappy with a 65% stock allocation. As seen above you're decreasing your chances of success and if you're still accumulating then your greatly extending time to fire
I'm greatly of the mindset that if you can't understand that the volatility is just a thing you have to deal with and that's forced you to such a suboptimal AA you should learn more if you've learned it and truly understand risks from all sides you should be ok with the higher equity AA.
Also youre 40 you should have lived thru the housing crash already unless you're in an alternate universe
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Haha I really was in an alternate universe 07-09, residency post med school so the housing crisis and bear market really went unnoticed by me.
Statistically of course you’re right. But the question of holding some bonds or not is more about behavior, which is difficult to predict and difficult to “learn.”
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I disagree it's a choice you make you're here you have a support group you control your behavior.
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If we get into a serious full blown trade tariff war then we very well might see a bear market.
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@jacoavluha
Don't let anyone convince you your risk profile is different than what it is. I like your historically example quote, however, I also think bogleheads are overly conservative. The MMM tribe is very pro-index equities. This is for good reason, it tends to work well for fast accumulation, they are younger and frugal so going back to work/cutting spending is an option in highly volatile times. They tend to forget not everyone is a highly paid 30 year old analytical engineer with the main life goal of RE ASAP.
If you like to view through a historical lens, I suggest you go and grab investment books/publications from various times in US history. It's fascinating to read the general advice of each era, also fascinating to see how they all would have failed miserably (meaning a different strategy would have performed much better). Recency bias in investing is huge!
In the end, do what lets you sleep at night and BE FLEXIBLE, as times (personal and macroeconomic) change. It's important to tailor an investment strategy that is synergistic with your personal goals and needs, while simultaneously considering the macroeconomic changes taking place.
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But a decade or so from now, just retired, with my kids in college, I don’t think I could stomach a 100% allocation.
(https://farm1.staticflickr.com/843/28270271467_ca6a32c0a8.jpg)
Personally I think investment psychology is important and if you really can't handle a 100% stock AA in a significant crash and would likely to something unfortunate like sell at the bottom and buy gold at its peak then it makes sense to do something about it. That said I always wonder...is the person that will flip out at going from $1M to sub-$500K going to hold their shit together at ~$560K or $660K? I mean those loses look marginally better than sub-$500K in the spreadsheet above, but when you have nothing to compare it with and your portfolio is vaporizing will that psychologically weak person not still buckle?
Depending on your answer to the question above 20% or even 40% bonds may not be enough to prevent catastrophe.
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Thanks for illustrating my point much better than I was able to put into words @Retire-Canada. I don't get people who say I need this lower AA and assume that's going to stop them from panicing
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Forget the behavioral aspect. Serious question: who shouldn’t be 100% equities?
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Forget the behavioral aspect. Serious question: who shouldn’t be 100% equities?
Depends on your withdrawal strategy. It's been shown that a reverse equity glide path helps prevent sequence of return risk pretty well so starting heavier in bonds and moving towards a 100% equity portfolio. I plan to be 90-10 max and use variable withdrawal. We have a lot of ways to earn money and alot of fluffy spending. So we can cut withdrawal by 10k and get to a historical 100% success. So like I said above you should he doing more research. Not just assuming you're preventing risk by using bonds.
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What about before retirement?
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Forget the behavioral aspect. Serious question: who shouldn’t be 100% equities?
If people were robots and never did anything harmful/stupid most people should be high equities for a long retirement. If you read these forums much you'll quickly see that you cannot avoid/ignore harmful behaviour for at least a significant chunk of the "population". So my advice would be to select an AA based on performance that you can reasonably stick with through thick and thin. That said it's important to look at the performance implications of your choice and be realistic whether the AA you have chosen will actually do the thing you think it will do. As I pointed out above picking a 60/40 AA for "safety" may actually put your FIRE at greater risk and maybe even 40% bonds won't stop you from panic selling in a big crash.
To give you a personal example I am currently 100% equities and will be until I am close to FIRE. I don't need the money. I have lived through the tech bubble and 2008. I had significant money invested both times and did not do anything stupid. So I am confident I can stay the course when the next crash comes if it is during the accumulation phase.
When I get ready to FIRE I'll hold some cash/bonds. A fixed amount like $100K or maybe even $150K. This would be 2-3 years at full spend or 4-5 at reduced spend that would get me through an early crash during FIRE. The performance hit for my portfolio over 100% equities is little to nothing, but I know when I need to live off my investments that will make me feel better and I can put my head down for the likely duration of a big crash early in FIRE. Beyond that I won't buy more bonds or rebalance to them so they'll either get spent or will be out run by my stocks and become insignificant and I'll be back to ~100% equities. I think this will work for me and my psychology.
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What about before retirement?
I like the idea of Bonds increasing slowly up until retirement and then slowly decreasing to 100% stocks. The problem with this approach is to me it is a little more art than science. I don't want to sell my bonds in the first year of retirement if the market goes up 20%. I want the bonds for when my portfolio drops by 20%. At the same time 5 years of 20% growth would mean you are probably fine to handle a 50% portfolio drop.
I don't think any of us are going to obtain the perfect portfolio. I think it's more about getting it close to right which to me means having firstly a reasonable expectation of your expenses in retirement, getting to a 5% WR (or lower) and having some ability to handle SORR.
I am aiming for 20% bonds in a portfolio that will have a WR of 5%. Once I am at that level I intend to work a little and save up a little extra into cash. I also will have 6 months paid leave which should last at least one years withdrawal. The plan at this point is to have enough cash/leave to not withdraw for 2 years and at that point to have gotten to a 5% WR.
The trick to me is not to over save and honestly this is hard. If you are cool with working for longer and getting to a lower WR (say 3%) then I think you can decrease your safety margin for SORR. So you could have more equities and just be prepared to handle a down turn by having a lower WR.
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What about before retirement?
Have you played with Portfolio Charts (https://portfoliocharts.com/calculators/)? Data is only back to 1970's due to the number of asset classes being utilized.
Forget the behavioral aspect. Serious question: who shouldn’t be 100% equities?
Me!
I can never, nor will I ever be able to stomach a 50% loss of assets. This goes doubly so for when the assets are providing most of my income.
I can tolerate fluctuation of 25% or so and keep my head in the game. I'm more than happy to trade CAGR for peace of mind. Particularly the upper end outliers, since I have no interest in legacy or score-keeping.
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The problem with this approach is to me it is a little more art than science.
Nothing about equity ownership is pure science. If you think otherwise you will end lucky or burned.
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The problem with this approach is to me it is a little more art than science.
Nothing about equity ownership is pure science. If you think otherwise you will end lucky or burned.
The problem is that when we talk about this stuff we tend to talk in terms of science or maybe better put we are too precise with all our analysis. I suppose you need that precision but you have to accept that you are betting on a future event.
My FIL was a foreign currency trader/hedge fund manager. It's interesting because I was interested in trading when I was younger and I read a bunch of books on how to trade. They all have as the best practice approach that you need a stop-loss. This is considered the only way to protect your account. My FIL thought this idea was stupid. People with set in stone stop-losses in his opinion tended to blow out whereas he made money. His idea is that you need the stomach to hold onto your position. When it came to picking a position to be in there was also a high degree of how the market feels rather than just fundamentals or technical analysis.
Taking it further if you think at some carefully defined point you will pull your bonds out and reinvest in equities then I think you may be deluding yourself. My opinion is to have some buffer available and use it when you think the time is right.
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Me!
I can never, nor will I ever be able to stomach a 50% loss of assets. This goes doubly so for when the assets are providing most of my income.
I can tolerate fluctuation of 25% or so and keep my head in the game. I'm more than happy to trade CAGR for peace of mind. Particularly the upper end outliers, since I have no interest in legacy or score-keeping.
What's your AA?
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@Stevo
Your FIL sounds like a smart man. I would look at stop losses as essentially saying; at point "X", I'll agree with the markets current opinion and admit I was wrong.
100% indexing in equities is more like thinking "the market is always right", I have no opinion.
I look at my position as not needing a stop loss, because I can ride my opinion all the way down. If I have enough in relatively stable funds to wait out the market's current "wrong" opinion. If it ends up I'm wrong, I have the ability to play the next game.
Something along the lines of Warren Buffets paraphrased quote of "The markets can remain irrational for longer than you can remain solvent". :)
Anyway, I have no opinion on what you, or anyone else should do. I just know what I should do.
Taking it further if you think at some carefully defined point you will pull your bonds out and reinvest in equities then I think you may be deluding yourself. My opinion is to have some buffer available and use it when you think the time is right.
I really don't intent to do that. What I intend to do is look at my personal situation to understand the risk I'm taking with investments and determiner how much of it is truly needed.
If I owned personal real estate and knew it was my "forever" home, I know my housing expenses are relatively inflation resistant. So I need less protection from inflation than if I kept renting.
OR
If I have maintained a relatively high paying, recession resistant skill and live on less than 20K a year, I really don't have to worry too much about cash flow, I can just work a few months every year. The questions become; would I rather spend time selling this skill, or typing to Steveo on the interweb? How much do I prefer the typing over work? How much risk should I take to ensure I never need my skilled income? IOW, How much stable value holdings do I really need for my life right now?
Couple these personal items with macroeconomic conditions. If 10 year Tbills are Yielding 2.8% and I can get 2.5% on one year CD's. What's the inflation risk look like? Are TIPS paying based on that risk? What are the chances of a recession the near future? 10yr - 2ys yields? IOW, Whats the best way for me to hold my determined amount of stable value funds for the short to mid term based on this information?
This is how I think and invest. Certainly not "set it and forget it". Like I stated up-thread, historically, those types of recency biased strategies ended less than well.
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What's your AA?
I am taking a sabbatical in the near future for 6 to 12 months. It will begin in 3-18 mos depending on the outcome of quality of life job issues currently being discussed. AA is reflective of that.
I'm also plan a long term semi-FIRE after sabbatical with period of FT work intermixed with additional sabbaticals, some periods of PT work.
I have two mental buckets, longer term for "older age retirement" which has some tax advantaged funds, post tax, and roth. IOW, RE inevitability fund. Also, a shorter term liquid fund. The allocation is subdivided in these bucket to maximize investment type, tax advantages, length until it may be needed, potential for growth, etc. (ex) all cash is in liquid bucket for obvious reasons.
Current totals as of 6/3/18 are about:
28% Total US (Index)
22% Total World (Index)
9% Small Cap Value (VISVX)
5% REIT (Individual Stocks)
2% Emerging (Index)
---- 66% Stock
6% I-Treauries
---- 6% Bonds
8% Gold (mostly ETF's some physical and some silver in the pysical as well)
---- 8% Gold
20% Cash (MM/CD ladders/taking advantage of deposit bonuses)
---- 20% Cash
Some of the cash is waiting to be DCA to more Treasuries when 10 year yield is above 3% again (If it happens), some is for sabbatical. I tend to not believe in holding more than 10% cash at any given time with out a plan for it, beyond that doesn't seem justifiable historically. Total is about 14x 12 mo rolling spend.
I showed you mine... :)
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Really all I am getting from this thread is if you are confident in your emotions, then 100% equities and YOLO it.
Otherwise hold bonds.
The comment about not everyone being a 30 something tech worker is interesting. I am really curious if there is a correlation between older people, people with kids, and people with health concerns vs someone younger and with less responsibilities or needs.
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I showed you mine... :)
Thanks. I appreciate the detail and explanation.
I'm closing in on a 5%WR this year and should hit 4%WR in the next couple years barring a huge market crash.
Current AA
- CDN Total Stock - 20%
- US Total Stock - 50%
- International Dev - 15%
- International EM - 15%
When I get close to pulling the FIRE trigger I'll add in a static 2-3 yrs at full spend in cash/bonds. This will provide some sequence of returns risk peace of mind. I'll either spend it or let my stocks outrun it if I don't spend it.
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Really all I am getting from this thread is if you are confident in your emotions, then 100% equities and YOLO it.
Otherwise hold bonds.
The comment about not everyone being a 30 something tech worker is interesting. I am really curious if there is a correlation between older people, people with kids, and people with health concerns vs someone younger and with less responsibilities or needs.
I still don't see this as being as simple as the initial statement however there is nothing wrong with 100% equities. I think the big risk is SORR. That is why you have some bonds/cash as a buffer. You may retire and stocks drop 50%, you are 100% equities and you have to go back to work as you are withdrawing way too much stock to survive 30+ years. That to me is an ER failure.
If you have a way to manage SORR and you are okay with taking up that option then I suppose 100% equities is good.
In some ways I also view this as a keeping score approach compared to a conservative I've won and all I have to do is stay in the game. You can go 100% equities and you will probably end up with the biggest stache but does that really matter to you.
I've reflected on the idea of having the biggest stache when I die and it is appealing but it's not as appealing to me as being able to stay retired if the markets crash at the wrong time for me.
Some people only care about having the biggest stache. Some people want to work till the day they die.
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Really all I am getting from this thread is if you are confident in your emotions, then 100% equities and YOLO it.
Otherwise hold bonds.
The comment about not everyone being a 30 something tech worker is interesting. I am really curious if there is a correlation between older people, people with kids, and people with health concerns vs someone younger and with less responsibilities or needs.
I still don't see this as being as simple as the initial statement however there is nothing wrong with 100% equities. I think the big risk is SORR. That is why you have some bonds/cash as a buffer. You may retire and stocks drop 50%, you are 100% equities and you have to go back to work as you are withdrawing way too much stock to survive 30+ years. That to me is an ER failure.
If you have a way to manage SORR and you are okay with taking up that option then I suppose 100% equities is good.
In some ways I also view this as a keeping score approach compared to a conservative I've won and all I have to do is stay in the game. You can go 100% equities and you will probably end up with the biggest stache but does that really matter to you.
I've reflected on the idea of having the biggest stache when I die and it is appealing but it's not as appealing to me as being able to stay retired if the markets crash at the wrong time for me.
Some people only care about having the biggest stache. Some people want to work till the day they die.
i think you're dramatically overstating the risk but thats just my opinion. you 100% guarantee you have failed at FIRE every extra year you work to have a lower equity AA. in general with 90% + equities it takes 10-15% of your withdrawal that is either cut by spending less or just earning that little bit extra in FIRE if you hit SORR in the first few years.
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you 100% guarantee you have failed at FIRE every extra year you work to have a lower equity AA.
That is, unless bonds beat equities over the time period. Which you have to admit is possible.
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you 100% guarantee you have failed at FIRE every extra year you work to have a lower equity AA.
That is, unless bonds beat equities over the time period. Which you have to admit is possible.
its possible to bet on green on a roulette wheel and win as well. i choose to place my bets on the highest probability of success so i'll take the rest of the wheel.
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I think you’re dramatically overstating the probability of an equities win with your roulette wheel analogy. But then we didn’t define the game. To be clear we’re talking about pre-FIRE.
If the time horizon is 20-25 years then your analogy may be reasonable. Equities are almost guaranteed to win.
If the time horizon is 3-5 years then about 1/3 of the wheel should be green.
And, your risk of suffering a large and sustained loss is much greater betting against green.
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I think you’re dramatically overstating the probability of an equities win with your roulette wheel analogy. But then we didn’t define the game. To be clear we’re talking about pre-FIRE.
If the time horizon is 20-25 years then your analogy may be reasonable. Equities are almost guaranteed to win.
If the time horizon is 3-5 years then about 1/3 of the wheel should be green.
And, your risk of suffering a large and sustained loss is much greater betting against green.
not really - your still guessing and youre guessing wrong.
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But that’s the data. Historically bonds beat equities about 1/3 of the time looking at rolling 3 year periods. A little less than 30% of the time over 5 year periods. I think that data I saw was only through 2010. Would be a little worse if brought up to date. I think that went back to 1927.
If I was 3 years from FIRE right now I’d be awfully nervous sitting at 100% equities.
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But that’s the data. Historically bonds beat equities about 1/3 of the time looking at rolling 3 year periods. A little less than 30% of the time over 5 year periods. I think that data I saw was only through 2010. Would be a little worse if brought up to date. I think that went back to 1927.
If I was 3 years from FIRE right now I’d be awfully nervous sitting at 100% equities.
it'd be awfully dumb to feel nervous sitting in 100% equities
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If I was 3 years from FIRE right now I’d be awfully nervous sitting at 100% equities.
I'm a few years out from FIRE and 100% equities. I'm not worried at all. The main reason is that there is no amount of bonds [that I would reasonably hold] that would get me to pull the retirement trigger right at the start of a serious market crash. I'd keep working a bit longer [probably only part-time] until I saw the recovery was in full swing. So to me shifting to a significant portion of bonds a few years out just pushes my FIRE date further away in most cases and in the case of a crash doesn't mean I'll FIRE and sail away into the sunset.
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If I was 3 years from FIRE right now I’d be awfully nervous sitting at 100% equities.
I'm a few years out from FIRE and 100% equities. I'm not worried at all. The main reason is that there is no amount of bonds [that I would reasonably hold] that would get me to pull the retirement trigger right at the start of a serious market crash. I'd keep working a bit longer [probably only part-time] until I saw the recovery was in full swing. So to me shifting to a significant portion of bonds a few years out just pushes my FIRE date further away in most cases and in the case of a crash doesn't mean I'll FIRE and sail away into the sunset.
bingo!
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you 100% guarantee you have failed at FIRE every extra year you work to have a lower equity AA.
So if you have to work a little longer before FIRE because you didn’t take enough risk, that’s a failure? But if you have to work a little longer before FIRE because you took too much risk, that’s not a failure?
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So if you have to work a little longer before FIRE because you didn’t take enough risk, that’s a failure? But if you have to work a little longer before FIRE because you took too much risk, that’s not a failure?
If the probability of one event is 70-90% and the other 10-30% [we can argue about the numbers] it would be smart to have a plan that works best in the first case. Essentially what you are saying is "I am okay with a 100% chance of working more to avoid and 10-30% chance of having to work more." That doesn't compute for me.
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So if you have to work a little longer before FIRE because you didn’t take enough risk, that’s a failure? But if you have to work a little longer before FIRE because you took too much risk, that’s not a failure?
If the probability of one event is 70-90% and the other 10-30% [we can argue about the numbers] it would be smart to have a plan that works best in the first case. Essentially what you are saying is "I am okay with a 100% chance of working more to avoid and 10-30% chance of having to work more." That doesn't compute for me.
yet again you word your answers much better than i would.
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Really all I am getting from this thread is if you are confident in your emotions, then 100% equities and YOLO it.
Otherwise hold bonds.
The comment about not everyone being a 30 something tech worker is interesting. I am really curious if there is a correlation between older people, people with kids, and people with health concerns vs someone younger and with less responsibilities or needs.
I still don't see this as being as simple as the initial statement however there is nothing wrong with 100% equities. I think the big risk is SORR. That is why you have some bonds/cash as a buffer. You may retire and stocks drop 50%, you are 100% equities and you have to go back to work as you are withdrawing way too much stock to survive 30+ years. That to me is an ER failure.
If you have a way to manage SORR and you are okay with taking up that option then I suppose 100% equities is good.
In some ways I also view this as a keeping score approach compared to a conservative I've won and all I have to do is stay in the game. You can go 100% equities and you will probably end up with the biggest stache but does that really matter to you.
I've reflected on the idea of having the biggest stache when I die and it is appealing but it's not as appealing to me as being able to stay retired if the markets crash at the wrong time for me.
Some people only care about having the biggest stache. Some people want to work till the day they die.
i think you're dramatically overstating the risk but thats just my opinion. you 100% guarantee you have failed at FIRE every extra year you work to have a lower equity AA. in general with 90% + equities it takes 10-15% of your withdrawal that is either cut by spending less or just earning that little bit extra in FIRE if you hit SORR in the first few years.
I don't see any dramatic overstating of risk. It just is what it is. You can flip the whole conversation and state that you are increasing your risk for no benefit. Extra money past already getting to a decent WR is not required.
The idea is to get a portfolio that can support you for life but post that point extra money by taking on extra risk is only going to enable you to die with more money with the potential to lose more.
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you 100% guarantee you have failed at FIRE every extra year you work to have a lower equity AA.
So if you have to work a little longer before FIRE because you didn’t take enough risk, that’s a failure? But if you have to work a little longer before FIRE because you took too much risk, that’s not a failure?
There are some mental gymnastics happening here. It's cool whatever you want to do as well because it's a choice. It's a choice weighing up the risks on either side. If there is a crash just after or before I FIRE or even right now (say a maximum of 5 years till I RE) I can use my smallish bond percentage to help manage those events. The closer I move towards FIRE the more lower volatility assets I personally want to obtain.
As I move further into retirement I will probably increase my equity allocation.
If you choose to take on a mortgage or increase your equity allocation you are just taking on more risk over shorter time periods in return for gaining potentially increased returns over the longer term. Those longer term returns may actually not be required. So you may in fact be taking on increased risk that you will have to work more for a potential long term benefit that probably won't be required.
Each to his own on these issues but it's not black and white.
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I haven't read the whole thread, but I think this is a sensible plan.
I ran historical simulations with variable stock/bond allocations, equity glide paths and flexible withdrawal strategies, and I observed that stock/bond allocations only play a small (if not negligible) effect. For example at 4% WR, you'd get 95% success rate over 30 years with 100% stock, and 96% success rate with 80% stock / 20% bond. You can further boost success rate to 97% with a 60% -> 90% equity glide path. I'm not sure this is statistically significant, and even if it is, it might not be worth bothering with bonds, especially with flexible withdrawals.
Flexible withdrawals (e.g. as a fraction of your current stash instead of inflated-adjusted original stash) become more biased towards stock, i.e. they work better with higher stock percentages. And this is the strategy that most people will end up using in practice if they adjust their spending/earning at all during FIRE. So in that case I'd just go 90% stock or even 100% for simplicity.
In the end, it's not going to matter more than one percentage point to your success rate, and there are better things to focus on.
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MMM's post on the long term gains of the stock market have made me pretty comfortable with its volativity. So here is what I'm wondering. Why not just dump everything into a 100% stock porfolio, draw 4% when you need to retire, and just yolo it along the way?
Would it be mathematically better to go with less volatility on retirement? If there are dips early on could these destroy your nest egg if you withdraw? Part of me just underscores the need to remain flexible?
Personally I see it this way. I'm 31, I don't actually hate working, and plan on earning a lot of money in life. I am a data scientist now, but I think when I am older I might pursue something else but still make money doing it. I plan on living in a paid off house ASAP, like dave ramsey suggests. And want 200k for health purposes or something by the time I'm 60. So I don't see the need to not be risky.
I am 47. I am 90% equities. I didn't panic during the crashes. (then again, I didn't need the money)... I don't have plans to change my allocation any time soon.
I am paying off my mortgage too. I firmly believe in having the house paid of sooner than later...Especially if you are highly invested in the market. Shift some of the excess cash to pay down your debts.
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So I started investing in 2000...
Nearly doubling a 100% stock allocation with only 50% stocks in total returns... And my volatility is MUCH lower, around 20% max draw-down vs over 50% max draw-down with 100% stocks. I mean, you guys can ignore smart asset allocations like on https://portfoliocharts.com/ and work much longer when the next couple downturns hit, or you can be smart and hedge. 100% stocks is very time sensitive and I would only do this if you are emotionless and can ignore drops and have a very long time horizon before you need to touch the funds. Even then, you are leaving money on the table if we have another rocky decade like 2000. There are many systemic problems with the economy right now that were papered over with fed printing, it is only a matter of time for that to catch up with us.
Even Jack Bogle, the godfather of investing, only has a 50/50 allocation. Most of us are retired or close to that magic date. I see the appeal of the lazy 100% VTI approach, but in real life, it rarely does well for people due to emotions, life, etc... besides that, you can juice your returns with a little smarter asset allocation.
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Even Jack Bogle, the godfather of investing, only has a 50/50 allocation. Most of us are retired or close to that magic date. I see the appeal of the lazy 100% VTI approach, but in real life, it rarely does well for people due to emotions, life, etc... besides that, you can juice your returns with a little smarter asset allocation.
Jack's older, so no need to be aggressive. I've moved from 80/20 to 60/40 this year myself because I'm planning to FIRE in 2019, will draw SS in 15 years, and cFireSim gives me 100% with that allocation factoring in SS. And that's with more than half of my approximate 4% WR going to discretionary spending, which means I also have a big cushion to cut back if I feel the need.
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So I started investing in 2000...
Nearly doubling a 100% stock allocation with only 50% stocks in total returns... And my volatility is MUCH lower, around 20% max draw-down vs over 50% max draw-down with 100% stocks. I mean, you guys can ignore smart asset allocations like on https://portfoliocharts.com/ and work much longer when the next couple downturns hit, or you can be smart and hedge. 100% stocks is very time sensitive and I would only do this if you are emotionless and can ignore drops and have a very long time horizon before you need to touch the funds. Even then, you are leaving money on the table if we have another rocky decade like 2000. There are many systemic problems with the economy right now that were papered over with fed printing, it is only a matter of time for that to catch up with us.
Even Jack Bogle, the godfather of investing, only has a 50/50 allocation. Most of us are retired or close to that magic date. I see the appeal of the lazy 100% VTI approach, but in real life, it rarely does well for people due to emotions, life, etc... besides that, you can juice your returns with a little smarter asset allocation.
I understand what you are stating but I'm not sold on this approach either or maybe better put I think that this approach may fail in the future.
Yes modern portfolio theory in relation to diversified assets makes sense but within limits. The past will be different to the future. You might be able to juice your returns via increasing your exposure to international small cap equities or commodities at the right time but it might also be a dismal failure over the longer term.
We don't know exactly how the future will pan out and we are just betting on probabilities that we are comfortable with. The math isn't 100% verified and clear cut.
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I think I'd be a lot more relaxed during something like the tech crash in 2000-2002 if I were 50% bonds.
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So I started investing in 2000...
Nearly doubling a 100% stock allocation with only 50% stocks in total returns... And my volatility is MUCH lower, around 20% max draw-down vs over 50% max draw-down with 100% stocks. I mean, you guys can ignore smart asset allocations like on https://portfoliocharts.com/ and work much longer when the next couple downturns hit, or you can be smart and hedge. 100% stocks is very time sensitive and I would only do this if you are emotionless and can ignore drops and have a very long time horizon before you need to touch the funds. Even then, you are leaving money on the table if we have another rocky decade like 2000. There are many systemic problems with the economy right now that were papered over with fed printing, it is only a matter of time for that to catch up with us.
Even Jack Bogle, the godfather of investing, only has a 50/50 allocation. Most of us are retired or close to that magic date. I see the appeal of the lazy 100% VTI approach, but in real life, it rarely does well for people due to emotions, life, etc... besides that, you can juice your returns with a little smarter asset allocation.
I understand what you are stating but I'm not sold on this approach either or maybe better put I think that this approach may fail in the future.
Yes modern portfolio theory in relation to diversified assets makes sense but within limits. The past will be different to the future. You might be able to juice your returns via increasing your exposure to international small cap equities or commodities at the right time but it might also be a dismal failure over the longer term.
We don't know exactly how the future will pan out and we are just betting on probabilities that we are comfortable with. The math isn't 100% verified and clear cut.
I would argue that the math is pretty solid. it is the assumptions that aren't clear cut.
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I think I'd be a lot more relaxed during something like the tech crash in 2000-2002 if I were 50% bonds.
And if you had stayed 50/50 from 2002-2018, how would you feel?
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I think I'd be a lot more relaxed during something like the tech crash in 2000-2002 if I were 50% bonds.
And if you had stayed 50/50 from 2002-2018, how would you feel?
the chances of 50/50 saving you from a crash are much much smaller than the chances of it killing your portfolio due to inflation over a long FIRE timeline with withdrawals around 4%. At least if we look at history which is all we can really do here.
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Forgot to mention: anything lower than 60% stock allocation and performance starts to drastically go down
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So I started investing in 2000...
Nearly doubling a 100% stock allocation with only 50% stocks in total returns... And my volatility is MUCH lower, around 20% max draw-down vs over 50% max draw-down with 100% stocks. I mean, you guys can ignore smart asset allocations like on https://portfoliocharts.com/ and work much longer when the next couple downturns hit, or you can be smart and hedge. 100% stocks is very time sensitive and I would only do this if you are emotionless and can ignore drops and have a very long time horizon before you need to touch the funds. Even then, you are leaving money on the table if we have another rocky decade like 2000. There are many systemic problems with the economy right now that were papered over with fed printing, it is only a matter of time for that to catch up with us.
Even Jack Bogle, the godfather of investing, only has a 50/50 allocation. Most of us are retired or close to that magic date. I see the appeal of the lazy 100% VTI approach, but in real life, it rarely does well for people due to emotions, life, etc... besides that, you can juice your returns with a little smarter asset allocation.
I understand what you are stating but I'm not sold on this approach either or maybe better put I think that this approach may fail in the future.
Yes modern portfolio theory in relation to diversified assets makes sense but within limits. The past will be different to the future. You might be able to juice your returns via increasing your exposure to international small cap equities or commodities at the right time but it might also be a dismal failure over the longer term.
We don't know exactly how the future will pan out and we are just betting on probabilities that we are comfortable with. The math isn't 100% verified and clear cut.
I would argue that the math is pretty solid. it is the assumptions that aren't clear cut.
I'm not sure what you mean. Can you expand on this ?
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I think I'd be a lot more relaxed during something like the tech crash in 2000-2002 if I were 50% bonds.
And if you had stayed 50/50 from 2002-2018, how would you feel?
the chances of 50/50 saving you from a crash are much much smaller than the chances of it killing your portfolio due to inflation over a long FIRE timeline with withdrawals around 4%. At least if we look at history which is all we can really do here.
Using a modified golden butterfly (with only 50% stocks) end up with the following results from 2002-2018
100% stocks: $35,522 final balance, 50.89% max drawdown
50% stocks/50 other: $44,016, 21.77% max drawdown.
The only way the total stock strategy would probably do better, if you are constantly adding to your position during the downturn and are able to keep emotions in check, not listen to the news, and keep plowing money in. I remember in both early 2000's and 2008 crashes, the media made it sound like we are all living in cardboard boxes soon and we should get out of the market, then everyone starts saying the same thing and the pressure to do so is pretty high, much like when all your neighbors paint their house and fix up your yard and you are the last person to have old looking house and you feel like you need to fix it up too. So when that max drawdown of 50%+ hits you are telling me HALF my portfolio vanished... I worked very hard in a few shit jobs to accumulate that and now its gone? Gone forever. Should I start drinking? Shotgun time? Will it come back? Media says no... everyone says we are screwed... I am destined to work at this unfulfilling desk job forever.
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Cherry picking a year and a portfolio that doesn't even back test past the 70s and changing the variables in it does not make the statement I made incorrct bc my statement wasn't 50/50 equities to whatever the hell else you want. Shit 50/50 alpaca farm. It was specifically addressing 50/50 stock to bond. You're free to choose to believe golden butterfly will work in the future I don't believe it has enough longer term data to support it. Like many of the things on Tyler's site the data doesn't exist. I doubt you have the where with all to with stand a 50% draw down on 50% of your portfolio with the way you're talking. In general avoiding that in the first 5-10 years more or less guaranteed a successful fire.
The times you can pin point where holding less than 80% equities to bonds wins are few and far between and involve cherry picking years.
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Cherry picking a year and a portfolio that doesn't even back test past the 70s and changing the variables in it does not make the statement I made incorrct bc my statement wasn't 50/50 equities to whatever the hell else you want. Shit 50/50 alpaca farm. It was specifically addressing 50/50 stock to bond. You're free to choose to believe golden butterfly will work in the future I don't believe it has enough longer term data to support it. Like many of the things on Tyler's site the data doesn't exist. I doubt you have the where with all to with stand a 50% draw down on 50% of your portfolio with the way you're talking. In general avoiding that in the first 5-10 years more or less guaranteed a successful fire.
The times you can pin point where holding less than 80% equities to bonds wins are few and far between and involve cherry picking years.
woah i agree with you on something that is cray.
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Cherry picking a year and a portfolio that doesn't even back test past the 70s and changing the variables in it does not make the statement I made incorrct bc my statement wasn't 50/50 equities to whatever the hell else you want. Shit 50/50 alpaca farm. It was specifically addressing 50/50 stock to bond. You're free to choose to believe golden butterfly will work in the future I don't believe it has enough longer term data to support it. Like many of the things on Tyler's site the data doesn't exist. I doubt you have the where with all to with stand a 50% draw down on 50% of your portfolio with the way you're talking. In general avoiding that in the first 5-10 years more or less guaranteed a successful fire.
The times you can pin point where holding less than 80% equities to bonds wins are few and far between and involve cherry picking years.
woah i agree with you on something that is cray.
It's a first for me as well.
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Cherry picking a year and a portfolio that doesn't even back test past the 70s
But cherry picking has a purpose!
Listen, If I'm using the 4% rule, I dont give a shit about about anything within about 1.5 standard deviations of historical norm...Why?... Because those situations work out with me dying rich as fuck with any allocation of mostly US stocks. Why, would anyone want to wast time picking apart and analyzing those scenarios?
What I care about (and what anyone here should care about) are those outliers in which 4% failed or nearly failed AND personal ability to remain psychologically comfortably with AA. The later avoids investing mistakes at critical times. How can we address the former? Well, how about cherry picking those known historical points of weak 4% rule performance and fiddle under the hood to see if any patterns emerge.
Like many of the things on Tyler's site the data doesn't exist.
This is a bold statement. It reads as if you are stating Tyler's data is inaccurate? Please clarify.
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i didnt say his data was inaccurate just that it doesnt exist pre 1970 so you cant backtest theories past then. I'm becoming more and more of the mindset that a 10-20% maybe even higher REIT allocation makes a lot of sense. as REITs dont always track with stocks but generate similar returns. the problem again here is the back testing ability since they havent existed long enough. and as far as the golden butterfly there are miles of posts online discussing its ability to be the best portfolio in the future since its timed with the US coming off the gold standard and many other strange occurances that make it look really really good but likely are replicable in the future.
to your other point - planning a portfolio around what worked in an outlier year seems dumb to me. b/c those events arent likely to occur in the same way again- planning a portfolio that is successful most of the time is a much better play in my opinion. which is why i'm exploring REITs - i wont however explore something that returns considerably less than equities to smooth out the unlikely bump that could kill my portfolio - b/c in doing so i could be creating a much worse situation. the one most rarely talk about which is too much smoothness leading to inflation erosion and a failed FIRE.
the "fear" of losing money is over valued by too many in my opinion but makes sense b/c its a natural human feeling to have.
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i didnt say his data was inaccurate just that it doesnt exist pre 1970 so you cant backtest theories past then.
Got it, thanks for clarifying. Precision vs accuracy though. There is only so much data on historical performance. IOW, to think that the economic details of today resemble the 1880's US equity market in any way, shape, or form is a bit silly. So, why include that in back testing performance at all? Simply because it's available and, as such, does help with precision... but whats it doing to accuracy?... something to reflect on at least.
and as far as the golden butterfly there are miles of posts online discussing its ability to be the best portfolio in the future since its timed with the US coming off the gold standard and many other strange occurances that make it look really really good but likely are replicable in the future.
Agreed, things change and there are aberrations in data. Does that mean we should compeltely exclude that data and ignore what happened? Sounds like cherry picking :) . In the very least it's useful to understand what happened from a macro economic perspective.
to your other point - planning a portfolio around what worked in an outlier year seems dumb to me. b/c those events arent likely to occur in the same way again- planning a portfolio that is successful most of the time is a much better play in my opinion.
Agreed. Don't plan around an outlier, rather analyse, understand what happened, and have plans to mitigate an outlier. I think your idea with REIT's is exactly that.
The past will not repeat exactly, but certain fundamentals regarding return on capital remain present. If there is a way to reduce risk exposure in the event of an outlier, it will come at a cost. One way to pay the cost is substantial oversaving to a 3% WR (we see this all the time and the expense is years of life working). Another is staying partially active in investments based on macro economic conditions. The expense here is risk of being wrong and requirement of higher levels of knowledge. Or perhaps one could adjust AA in such a way risk of outliers is mitigated with the expense being the really fantastic outcomes are sacrificed.
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the "fear" of losing money is over valued by too many in my opinion but makes sense b/c its a natural human feeling to have.
This is important as well. Loss aversion is real and can be VERY damaging. However, much like many potentially dangerous emotions, it has it's place and should be considered. My only advice here is know thyself.
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the "fear" of losing money is over valued by too many in my opinion but makes sense b/c its a natural human feeling to have.
This is important as well. Loss aversion is real and can be VERY damaging. However, much like many potentially dangerous emotions, it has it's place and should be considered. My only advice here is know thyself.
Agree with this assessment. People are the tiny minority if they can ignore the "fear", you are going to have a few, but they are very rare. Most people on this earth are driven by fear, especially when it comes to some complicated system that looks rigged and they feel like they have ZERO control over. I rather mitigate this fear and look at the dates where the portfolio failed and figure out ways to avoid that and still get the highest possible returns rather than ignore them and wing it.
In my working career, I have lived in back to back devastating recessions, both times my industry was hit very hard. I have seen people lose their job, house, family (due to being broke), and portfolio ALL at the same time. If they had just diversified, that would have not happened, but no, they were 100% stocks. I say this as a warning to all those following this blind 100% stock advice. I have seen real people kill themselves over this. PLEASE diversify, do not put all your eggs in one basket if it will risk other important things in your life. It is very irresponsible to not talk about diversification. Not everyone is a robot.
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This post is hyperbolic and ridiculous. I'm sorry. The people in these forums aren't at serious risk of what you speak. The mainstream American possibly.
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I have seen people lose their job, house, family (due to being broke), and portfolio ALL at the same time. If they had just diversified, that would have not happened, but no, they were 100% stocks. I say this as a warning to all those following this blind 100% stock advice.
Around 2003 I had 80,000 in I Bonds
and approx. 80,000 in the Vanguard SP 500 Index.
In 2018 the I bonds are worth approx. $139,000
the Vanguard SP 500 Index is worth approx. $300,000
No changes were made to these particular investments during those 15 years.
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"Please diversify" is not really an extreme stance though, it is solid, fundamental, universal investment advice. Even if you are a 100% stock advocate I'm sure you are still telling people to diversify across broad indexes.
It is also a perfectly valid point that some people / professions are more at-risk during a downturn than others, and that you are in fact more likely to be loosing your job at precisely the same time as the stock market is crashing and your ROI is negative.
My investments are in 100% stocks (for now), however I mitigate that risk by having a large 6-month-expenses emergency-fund and I am also unlikely to be laid off in a downturn. If either of those things are not true for you then diversifying into bonds or something is a very practical step you can take to reduce your risk.
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"Please diversify" is not really an extreme stance though, it is solid, fundamental, universal investment advice. Even if you are a 100% stock advocate I'm sure you are still telling people to diversify across broad indexes.
It is also a perfectly valid point that some people / professions are more at-risk during a downturn than others, and that you are in fact more likely to be loosing your job at precisely the same time as the stock market is crashing and your ROI is negative.
My investments are in 100% stocks (for now), however I mitigate that risk by having a large 6-month-expenses emergency-fund and I am also unlikely to be laid off in a downturn. If either of those things are not true for you then diversifying into bonds or something is a very practical step you can take to reduce your risk.
depending on the size of your stache and what your income level is i'd consider your 6 month emergency fund a huge waste of little soldiers. this also isnt a 100% stock allocations you have cash as part of your allocation which without knowing your stache size could be a large percentage.
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Are you younger? Higher savings rate? Managing callable debt?
Married to a high-earner? These all affect what the optimal emergency fund would be.
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I'm building my emergency fund to 5 months and slowly going to ramp to 6. Maybe more. But bear in mind, I don't need much to live off of. Also EM funds are for other things besides losing a job. Doing so will only require 2 months of savings at my current income.
I swear all of this makes me really want to experience a downturn. I just want to understand what it is like. We will see. I think with low expenses, a tech job, and a fully built out EM fund I'll be fine.
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What is the harm in having 20-30% in bonds? You will appreciate it when the markets tank. Imagine having $1 million invested 100% in equities and the markets drop 50%. Now you have 500k invested. That would not stress you out? You would still have 600k at 20% bonds and 650k at 30% bonds. I understand that you won't have the highest possible return if you have bonds in your portfolio, but that has never been the reason for bonds.
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What is the harm in having 20-30% in bonds? You will appreciate it when the markets tank. Imagine having $1 million invested 100% in equities and the markets drop 50%. Now you have 500k invested. That would not stress you out? You would still have 600k at 20% bonds and 650k at 30% bonds. I understand that you won't have the highest possible return if you have bonds in your portfolio, but that has never been the reason for bonds.
pretty sure the stress is the same for everyone in those 2 scenarios..
The reason for bonds was that they dont track with stocks. and create less volatility thru being deversified. I think a REIT index actually meets this need better as the returns are on the level of stocks but they dont move the same way as stocks.
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What is the harm in having 20-30% in bonds? You will appreciate it when the markets tank. Imagine having $1 million invested 100% in equities and the markets drop 50%. Now you have 500k invested. That would not stress you out? You would still have 600k at 20% bonds and 650k at 30% bonds. I understand that you won't have the highest possible return if you have bonds in your portfolio, but that has never been the reason for bonds.
Actually wouldn't you do better than that with the 20% and 30% bond allocations? I thought that in a stock crash that bond funds generally increase in value, as people seek a safer place to move their money? The assumption above is that bonds stay flat in value while stocks tank.
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https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/
This article sets forth the reasons for a glide path decreasing your equity exposure in the 10 years or so leading up to retirement and then increasing your equity exposure during the 10 years or so after your retirement date. The idea is to mitigate the sequence of returns risk.
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What is the harm in having 20-30% in bonds? You will appreciate it when the markets tank. Imagine having $1 million invested 100% in equities and the markets drop 50%. Now you have 500k invested. That would not stress you out? You would still have 600k at 20% bonds and 650k at 30% bonds. I understand that you won't have the highest possible return if you have bonds in your portfolio, but that has never been the reason for bonds.
The main reason is that it can be more risky to hold a high % of bonds.
Using cFIREsim:
- 40yr FIRE 100% stocks at 4%WR gives a success rate of ~92%
- 40yr FIRE 70/30 stocks/bonds at 4%WR gives a success rate of ~89%
If you retire early:
- 50yr FIRE 100% stocks at 4%WR gives a success rate of ~90%
- 50yr FIRE 70/30 stocks/bonds at 4%WR gives a success rate of ~80%
Second issue is that in your example of losing 50% on stocks [let's assume bonds stay flat] during a crash your 100% stock portfolio will get to the crash with more money in it than the 70/30 portfolio so the differential between the two will not be as dramatic as you suggest. By outperforming bonds before the crash stocks will mitigate the severity of the crash when it happens.
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What is the harm in having 20-30% in bonds? You will appreciate it when the markets tank. Imagine having $1 million invested 100% in equities and the markets drop 50%. Now you have 500k invested. That would not stress you out? You would still have 600k at 20% bonds and 650k at 30% bonds. I understand that you won't have the highest possible return if you have bonds in your portfolio, but that has never been the reason for bonds.
The main reason is that it can be more risky to hold a high % of bonds.
Using cFIREsim:
- 40yr FIRE 100% stocks at 4%WR gives a success rate of ~92%
- 40yr FIRE 70/30 stocks/bonds at 4%WR gives a success rate of ~89%
If you retire early:
- 50yr FIRE 100% stocks at 4%WR gives a success rate of ~90%
- 50yr FIRE 70/30 stocks/bonds at 4%WR gives a success rate of ~80%
Second issue is that in your example of losing 50% on stocks [let's assume bonds stay flat] during a crash your 100% stock portfolio will get to the crash with more money in it than the 70/30 portfolio so the differential between the two will not be as dramatic as you suggest. By outperforming bonds before the crash stocks will mitigate the severity of the crash when it happens.
This is the number one thing overlooked. People trying to mitigate volatility always do so assuming that they had that AA at the height of a market crash and not before. The risk of opportunity cost is far greater.
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https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/
This article sets forth the reasons for a glide path decreasing your equity exposure in the 10 years or so leading up to retirement and then increasing your equity exposure during the 10 years or so after your retirement date. The idea is to mitigate the sequence of returns risk.
I'm sort of doing that, but I decreased my equity mostly in the final year leading up to retirement from about 80% to 60%. After FIRE, I plan to use a rising equity glide path over a longer time period as in the article. Factoring in future benefit income, cFireSIM gives me 100% with my current AA even without the glide path, based on total expected spending, not just bare bones.
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pretty sure the stress is the same for everyone in those 2 scenarios..
The reason for bonds was that they dont track with stocks. and create less volatility thru being deversified. I think a REIT index actually meets this need better as the returns are on the level of stocks but they dont move the same way as stocks.
I agree with this.
If you were retiring now, what do you think your your AA would be? including all the classes (cash, bonds, reits, infra, equities, etc)?
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No more than 10% bonds with 20-40% REITs. The rest equities
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Doesn't really matter how many bonds you have if you get hot with a 50% drop the first 5-8 years historically you're very likely to fail. Reverse equity glide path may prevent this failure in some cases. But to just assume more bonds are the answer is highly inaccurate
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Thanks boarder42.
Thats a ton of REITs Do you have any opinion about splitting that into some infrastructure?
Yeah I've been thinking about a reverse glide path slowly going back up to more equities over the first 10 years of retirement, but in the country I am from cash and bonds yield about the same, which is the rate of inflation, so the more bonds you have, the more money that is going nowhere in real terms. The present is very different to the past where we had a 30 year bull run on bonds due to massive inflation and interest rates steadily coming down and there is no more down for it to go. I am thinking 5 years of cash, which along with 10 years of dividends would give me 10 years of no selling equities from the point of retirement. That would automatically give me a reverse glide path back upto more equities over the 10 years. The downside with using buckets this way instead of a percentage is, if there is a crash, I don't have any fixed interest to rebalance into equities to be able to buy equities when they are low.
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The downside with using buckets this way instead of a percentage is, if there is a crash, I don't have any fixed interest to rebalance into equities to be able to buy equities when they are low.
I never understand this logic. People want to hold a significant chunk of dry powder [cash/bonds, gold, etc...] that hurts their returns for the 90%+ of the time there are no major crashes just so when there is a 30%-50% crash they can buy stocks on sale. That does not compute for me. You lost more than that with your dry powder waiting for the crash. All it did was feel good for a few days when you made the buy. It hurt you the rest of the time.
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Just my opinion, but I think most people who don't believe in bonds to smooth things out are most likely right on the cusp of having their numbers work to support their retirement using the 4% rule. Math and history dictates that these people are correct in their plan and will be totally fine.
Now imagine for a minute that you had your 100% equity stash (or damn close), and lets just you had a windfall of an amount great enough that if invested in boring old bonds would pay for your "fatfire" dream lifestyle forever including inflation. You can still keep your original stash 100% equities and never need to touch it...it just keeps growing, but you never have to even blink or consider money ever again.
Now you are a true mustacian, so you don't believe in lifestyle inflation, you aren't greedy, and you already know what lifestyle will make you the happiest and have planned for that. What reason other than 1) You really undersold your "fatfire" number in the first place to make yourself feel better, but it was really much higher 2) Charitable endeavors 2) Creating generational wealth, admittedly I don't believe in 4) Ego associated with having your name on a building, would their be to take on the added risk?
I know many people who would be considered very wealthy in the $10M to $200M range and not one of them thinks like this. I'm just saying that there are going to be some people on this forum who blow way by their # years down the road, and I'm guessing their tune will change when instead of having 33X their annual burn they have 100X or more. Anyway, just food for thought, that might be a reason to not totally poop on the idea of owning a bond portfolio.
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Not needing the money would be all the more reason to remain aggressive with it.
Also, if I do end up with more money than I need for my current lifestyle expectations, I would absolutely spend it on more of what I already plan to do in retirement.
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Not needing the money would be all the more reason to remain aggressive with it.
Yup. If I suddenly went to 2%WR I would not be buying 50%+ bonds in my portfolio. 2%WR is already so secure as to be ridiculous.
My fatfire $/yr is higher than my target FIRE spend. It's not worth me chaining myself to a desk for extra years to hit the fatfire number, but if it came to me without effort I would spend a bit more. Particularly in a nicer place to live.
I would also share the wealth with family and friends so I would spend some of the extra income that the windfall would generate...pay for group travel/holidays...maybe help out with education costs for lower income folks, medical costs, etc.... I have no kids so eventually all my money is going to charity. I may decide to leave some to the kids of friends/relatives, but at this point I don't feel that way.
Another way to look at it is if a 2%WR on globally diversified stock portfolio fails because the world economy collapses those bonds you are relying on won't be worth anything. If the global economy doesn't collapse the 2%-3%WR stock portfolio won't fail. I'm trying to see where investing the windfall in massive amounts of bonds protects me.
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Not needing the money would be all the more reason to remain aggressive with it.
Also, if I do end up with more money than I need for my current lifestyle expectations, I would absolutely spend it on more of what I already plan to do in retirement.
Correct on the keep it invested this arguement always makes me laugh. But what if you had a shit ton of money. Then I'd keep my current AA and make a difference in more people's lives
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Not needing the money would be all the more reason to remain aggressive with it.
Yup. If I suddenly went to 2%WR I would not be buying 50%+ bonds in my portfolio. 2%WR is already so secure as to be ridiculous.
I agree. I'm diversifying a bit but only because I'm not going to get to that low a WR. The lower my WR goes the more I think the only investment I need is a low cost diversified all world equity tracker. Since I'm not saving to that level I want some cash and bonds to help me out if something goes wrong early in my retirement but even that I'm skeptical how much it will help me out.
I suppose answering the question of getting to 4% with 100% stocks being a bad idea is it depends but it's definitely not a bad idea. If you are thinking about spending more and that is beneficial to you I think choosing 100% stocks and working part time for a year or two is a really good idea as well.
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4) Ego associated with having your name on a building, would their be to take on the added risk?
My alma mater current president said that $20M USD would get you name on a building. This is a very small private college, so anything bigger would be even more $. If your ego AND stache is that big, go for it :-)
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This is the number one thing overlooked. People trying to mitigate volatility always do so assuming that they had that AA at the height of a market crash and not before. The risk of opportunity cost is far greater.
Which is why static portfolios are foolish, IMO. Your life changes, your goals change, your investments should change with them. You are correct in that there is a huge opportunity cost of someone with a 10-15 year accumulation period holding 30% bonds throughout. That literally makes zero sense, assuming the goal is FIRE ASAP. This person should be 100% equities for at least the first 75%.
However, as time goes on the same person may become sensitive to FIRE date, so decreasing portfolio volatility has advantages. After that, for the first five or so years of RE, this same person is at the height of sequence risk, so adding additional noncorrelators makes more sense. Later if this person gets to a 2-3% WR due to good returns or a windfall as discussed above (ie almost dividends only), then noncorrelators are worthless to goals and only serve as a drag to runaway wealth.
Why do we always assume a well educated mustachian is so stupid that they need to hold the exact portfolio mix from beginning of accumulation until death? It's not "market timing" if one adjusts portfolio to mitigate the risks associated with their phase of life or financial goals.
One other point, the assumption is not bonds or other non correlated assets remain static during a general market downturn. The point is they generally perform better than their average. Capital often flows to one or more of those other asset classes, that's one of the reasons the general equity market drops.
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One other point, the assumption is not bonds or other non correlated assets remain static during a general market downturn. The point is they generally perform better than their average. Capital often flows to one or more of those other asset classes, that's one of the reasons the general equity market drops.
Bonds can go up, stay steady or go down in a crash. It just depends. Assuming they hold steady is a reasonable simplification given that it could go either way.
https://obliviousinvestor.com/what-happens-to-bonds-in-a-stock-market-crash/
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One other point, the assumption is not bonds or other non correlated assets remain static during a general market downturn. The point is they generally perform better than their average. Capital often flows to one or more of those other asset classes, that's one of the reasons the general equity market drops.
Bonds can go up, stay steady or go down in a crash. It just depends. Assuming they hold steady is a reasonable simplification given that it could go either way.
https://obliviousinvestor.com/what-happens-to-bonds-in-a-stock-market-crash/
Right, your link shows not all bonds are created equal. Nor are all equities. Hence the idea of noncorrelation with investments to smooth the ride. Obviously corporate bonds (particularly the high yield/riskier subset) tend to suffer at the same time as equities, after all, they are different investments in the same companies. This seems common sense, no?
I wouldn't consider equities and corporate bonds in the same companies as noncorrelated asset classes. I never argued they were. Although there are economic conditions when they perform differently, just not enough differently.
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Right, your link shows not all bonds are created equal.
The author makes the point that treasury bonds may go negative in a crash as well. Again it all depends on the situation.
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All you need is negative correlation. REITs supply this much more nicely than bonds since they return the same.
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Right, your link shows not all bonds are created equal.
The author makes the point that treasury bonds may go negative in a crash as well. Again it all depends on the situation.
True (increasing rates due to inflation with a recession would be the driver), which is why treasuries are not the only option, nor the only noncoorelator I own. But they are much less correlated with the total equity market than a total bond fund, which is stacked with 50% corporate.
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PLEASE diversify, do not put all your eggs in one basket if it will risk other important things in your life.
This is a bold statement (emphasis added).
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The author makes the point that treasury bonds may go negative in a crash as well.
I think for practical investing purposes, short-term treasuries can be considered
a risk-free investment. The government bond yields may fall if the Fed lowers
rates to stimulate economic activity, but your funds are "safe". Warren Buffett
considers t-bills to be risk-free and parks Berkshire's excess cash there.
My current mix is 90% equities and 10% cash equivalents (e.g. short-term
government notes or similar). That might seem high, but the 10% represents
a reasonable period of living expenses -- and I'm currently drawing other income.
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What is the harm in having 20-30% in bonds? You will appreciate it when the markets tank. Imagine having $1 million invested 100% in equities and the markets drop 50%. Now you have 500k invested. That would not stress you out? You would still have 600k at 20% bonds and 650k at 30% bonds. I understand that you won't have the highest possible return if you have bonds in your portfolio, but that has never been the reason for bonds.
Except that Bond Guy almost certainly didn't have $1M when the market crashed, as he missed out on the (likely) equity runup.
Maybe 20% Bond Guy only had $800k (total) and 30% Bond Guy only had $720k.
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i didnt say his data was inaccurate just that it doesnt exist pre 1970 so you cant backtest theories past then. I'm becoming more and more of the mindset that a 10-20% maybe even higher REIT allocation makes a lot of sense. as REITs dont always track with stocks but generate similar returns. the problem again here is the back testing ability since they havent existed long enough. and as far as the golden butterfly there are miles of posts online discussing its ability to be the best portfolio in the future since its timed with the US coming off the gold standard and many other strange occurances that make it look really really good but likely are replicable in the future.
I looked at some deeper historical record on gold value - you can use loaves of bread (remember to correlate size) and such.
Typically, over the long term - gold is roughly the same value. Coming off the gold standard was a definite outlier, where heavy-handed government interference had artificially held down the price for a long time.
The comparison I liked best was the pay of a Roman Centurion, roughly equivalent to an Army Captain today. Very similar pay when I ran the numbers using the weight paid the centurion and modern price per ounce to equate with a Captain salary.
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Not needing the money would be all the more reason to remain aggressive with it.
Yup. If I suddenly went to 2%WR I would not be buying 50%+ bonds in my portfolio. 2%WR is already so secure as to be ridiculous.
My fatfire $/yr is higher than my target FIRE spend. It's not worth me chaining myself to a desk for extra years to hit the fatfire number, but if it came to me without effort I would spend a bit more. Particularly in a nicer place to live.
I would also share the wealth with family and friends so I would spend some of the extra income that the windfall would generate...pay for group travel/holidays...maybe help out with education costs for lower income folks, medical costs, etc.... I have no kids so eventually all my money is going to charity. I may decide to leave some to the kids of friends/relatives, but at this point I don't feel that way.
Another way to look at it is if a 2%WR on globally diversified stock portfolio fails because the world economy collapses those bonds you are relying on won't be worth anything. If the global economy doesn't collapse the 2%-3%WR stock portfolio won't fail. I'm trying to see where investing the windfall in massive amounts of bonds protects me.
Everybody talks real tough here after a decade march higher in equities, but there are not a ton of people on here who can speak from a position of knowing how you would behave if you actually had $10M of investable assets, or having had $5M in 100% equities in 2007. Yes I get the math works out, but living through seeing 30+ years of living expense evaporate overnight is a whole different ball game. I think my only point is the number of people with 8 figure investable net worth's who stay 100% equities is probably close to 0.1%...they diversify. Not just bonds, but paid for real estate generating income, alternative investments that you have access to at HNW, investments in private businesses, and silly old laddered CD's to throw off income when CD's start paying higher percentages. Then yes you rebalance appropriately over the years. To each their own, reality is we've all won the ball game at that point and likelihood of failure is remote.
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Using data from the Roman economy makes little sense when compared to our modern one because it was:
- based on agriculture and labor (ours is based on capital and technology)
- an environment of zero population growth (ours is positive)
- on a commodity standard, while ours is intended to have modest inflation
- able to grow the macroeconomy through military conquest of new lands (ours should not do this; US historians will note that our high-growth period did include a rapid expansion of land area of our country from 1803-1900)
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All you need is negative correlation. REITs supply this much more nicely than bonds since they return the same.
Running some numbers on Portfolio Visualizer, bonds are a much better choice for anti-correlation than REITs:
total stock market vs total bond market
https://www.portfoliovisualizer.com/asset-correlations?s=y&symbols=VTSMX+VBMFX&endDate=08%2F12%2F2018&timePeriod=4&numTradingDays=60
-0.01 correlation
total stock market vs reit index
https://www.portfoliovisualizer.com/asset-correlations?s=y&symbols=VTSMX+VGSIX&endDate=08%2F12%2F2018&timePeriod=4&numTradingDays=60
0.43 correlation
These numbers only go back to the 90s (when the corresponding Vanguard funds were created), if you have data going back further, or other considerations for this strategy I would love to see it. I'll stick with bonds for my portfolio ballast.
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Go put it in Tyler's calculator if you want older data. It's not the amount of negative correlation alone. It's the combination of the extremely better returns and negative correlation. If you want no correlation hold cash it correlates to losing money.
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Using data from the Roman economy makes little sense when compared to our modern one because it was:
Yet we all use Cfiresim with data starting from the 1880's. No Federal Reserve, gold standard, no SEC, no income tax, etc.
Telegram vs international video conferences. Times have changed, so it's up to us to use information and comparisons wisely.
If you want no correlation hold cash it correlates to losing money.
Hahaha!
I actually plugged in 100% T-bills and according to Tyler's site it supports a 0.4% perpetual WR. Ahh the days of yore, when you could earn real returns on cash.
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If you are always 100% equities, in a market weight globally diversified portfolio you’ll be fine.
I like risk and I get joy from markets shooting up AND crashing. Over the long term I believe the trend is up and I like excitement along the way.
Fuck bonds
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My REIT hasn't done well over the last year, and it crashed back in 2009. I just consider it another stock holding.
If you are always 100% equities, in a market weight globally diversified portfolio you’ll be fine.
I like risk and I get joy from markets shooting up AND crashing. Over the long term I believe the trend is up and I like excitement along the way.
Fuck bonds
As long as you have long enough of a retirement horizon and are prepared to ride out the storms...
https://forum.mrmoneymustache.com/investor-alley/10-years-of-negative-returns/
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My REIT hasn't done well over the last year, and it crashed back in 2009. I just consider it another stock holding.
If you are always 100% equities, in a market weight globally diversified portfolio you’ll be fine.
I like risk and I get joy from markets shooting up AND crashing. Over the long term I believe the trend is up and I like excitement along the way.
Fuck bonds
As long as you have long enough of a retirement horizon and are prepared to ride out the storms...
https://forum.mrmoneymustache.com/investor-alley/10-years-of-negative-returns/
Buying equities cheaper every year for the next 10 - 15 years would suit me fine
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Go put it in Tyler's calculator if you want older data. It's not the amount of negative correlation alone. It's the combination of the extremely better returns and negative correlation. If you want no correlation hold cash it correlates to losing money.
But it's not even a small negative correlation, it's a positive correlation. I understand there are greater returns (historically).
Could you link to Tyler's calculator? I'm not familiar with a lot of the common calculators around here other than PV - don't know where to find it.
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Could you link to Tyler's calculator? I'm not familiar with a lot of the common calculators around here other than PV - don't know where to find it.
Here are all of Tyler's calculators: https://portfoliocharts.com/calculators/
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Using data from the Roman economy makes little sense when compared to our modern one because it was:
Yet we all use Cfiresim with data starting from the 1880's. No Federal Reserve, gold standard, no SEC, no income tax, etc.
Telegram vs international video conferences. Times have changed, so it's up to us to use information and comparisons wisely.
If you want no correlation hold cash it correlates to losing money.
Hahaha!
I actually plugged in 100% T-bills and according to Tyler's site it supports a 0.4% perpetual WR. Ahh the days of yore, when you could earn real returns on cash.
It is true that the US was still on gold standard in 1880's (at the start of cFiresim), as they were on throughout much of the next ninety years. But the FDR gold seizure of the 1930's would have been punishing to anyone who tried to keep their savings stored there.
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Using data from the Roman economy makes little sense when compared to our modern one because it was:
Yet we all use Cfiresim with data starting from the 1880's. No Federal Reserve, gold standard, no SEC, no income tax, etc.
Telegram vs international video conferences. Times have changed, so it's up to us to use information and comparisons wisely.
If you want no correlation hold cash it correlates to losing money.
Hahaha!
I actually plugged in 100% T-bills and according to Tyler's site it supports a 0.4% perpetual WR. Ahh the days of yore, when you could earn real returns on cash.
It is true that the US was still on gold standard in 1880's (at the start of cFiresim), as they were on throughout much of the next ninety years. But the FDR gold seizure of the 1930's would have been punishing to anyone who tried to keep their savings stored there.
You managed to completely miss my point, or I'm an ineffective communicator. In any event, we are on completely different levels on this topic.
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I thought your point was: since we use data from the 1880's economy--and I agree with you that a lot of things are different in 1880's than today--in cFireSim, it's not too much more of a leap to draw conclusions about economics from Ancient Rome.
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I read an article (which I'm not going to try to find) but it had a graph showing that the risk/return of equities, topped out around 85-90%. That is, it's not going to give you any more return over the long term to go past around 90% (the other 10% being bonds, etc). I'm older and conservative and so my balance is about 65% equities. But even if I was younger and going for the big returns I wouldn't go past 90% stocks.
I do have a coworker who is doing 100% equities. But she works for the government and will be getting a decent pension as well as soc sec, so she is comfortable with the risk of it.
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I read an article (which I'm not going to try to find) but it had a graph showing that the risk/return of equities, topped out around 85-90%. That is, it's not going to give you any more return over the long term to go past around 90% (the other 10% being bonds, etc). I'm older and conservative and so my balance is about 65% equities. But even if I was younger and going for the big returns I wouldn't go past 90% stocks.
I do have a coworker who is doing 100% equities. But she works for the government and will be getting a decent pension as well as soc sec, so she is comfortable with the risk of it.
there was a post here about this and the returns flatten out alot after you get past 90% equities. what does 10% bonds really buy you though. 2.5 years of possible recovery time. i'd rather have somthing like 20-30% REIT
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My mental model used to be this:
Cash: Store stuff here to spend in the next year.
Bonds: Store stuff needed within the next ~5-10 years here.
Equities: Store everything else here for the long term.
By that approach my thought was to be 100% stocks until retirement got close, then shift some into cash/bonds (5%/~30%) as my retirement date got close, and stay in that allocation forever.
My mental model has shifted a bit. I now see that the money I stuck into my 401k 20 years ago was best put into stocks and left alone. I can think of those early years of contributions as my first few year's withdrawals. Money I put in today will be ~2038's withdrawals. Given that time horizon it is quite likely that stocks are the place to let it sit and grow, so why would I ever put it into bonds that are almost guaranteed to have grown it less by time I need it? So I am in the 100% stocks and YOLO it category I guess.
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I read an article (which I'm not going to try to find) but it had a graph showing that the risk/return of equities, topped out around 85-90%. That is, it's not going to give you any more return over the long term to go past around 90% (the other 10% being bonds, etc). I'm older and conservative and so my balance is about 65% equities. But even if I was younger and going for the big returns I wouldn't go past 90% stocks.
I do have a coworker who is doing 100% equities. But she works for the government and will be getting a decent pension as well as soc sec, so she is comfortable with the risk of it.
I remember that graph but the salient point was that even though the maximum of the risk/return curve was around 90% stock, the curve was almost flat there, in other words 80% to 100% stock are about the same (this is true also for historical success rates). So it doesn't matter much, if at all. At this point I go for simplicity, 100% stock has fewer funds and doesn't need rebalancing.
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90-100 is about the flattening point still alot of rise from 80-90
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90-100 is about the flattening point still alot of rise from 80-90
Generally true although it does vary somewhat with planning period (20 years vs. 60 years) and degree of safety required (100% safe WR curves look somewhat different than 80% save WR curves).
Personally I use a 40 year planning period and aim for between 95% and 100% historically safe WR. I'm at 92% equities and am undecided about whether to raise or lower my equity allocation. Since for me the curve is pretty flat in that area I think it doesn't much matter.
With shorter planning durations and higher historical safety required, the top end of the curve drops; i.e. 80% equities is more safe historically than 90% equities which is more safe historically than 100% equities. But I think this is only for planning durations under about 20 years, which probably nobody around here uses because we're all young and YOLO'ing things.