No, if I needed $148k for my intended lifestyle the extra may be 'kinda nice' but falling short would be unacceptable - so cutting off the downside risk outweighs the potential upside. It's really basic economics, diminishing returns and all... Now figuring out what you 'need' and what the slope of those diminishing returns is neither basic nor simple but such is life.Thought Exercise: $100K invested for 20 years that you're not allowed to touch.Because 2% may be all you need and, even if the data is accurate (and would hold true from say 1965 to 1985) it is still ridiculous to think that the realized results over 50 years represents the universe of possible results, or even a meaningful representation of them. So you are still choosing guaranteeing what you need to earn versus no guarantees at all and maybe a high chance of more than you need but some chance of less...I always appreciate your thought-through comments but why wait? And why settle for 2% over 20 years.... ?That's a good question. I think the answer is in the way I now think about TIPS ladders.
As someone grappling with this decision,
Why is it "ok" to use the 2% long term real return on long government bonds since 1900 as a "timing" mechanism,
... but NOT ok to use the long term real stock returns since 1900 (reflected in the OP) as a timing mechanism?
- A ladder will always provide an annual real amount (ARA) close to the required desired annual real amount (DARA) for each year in the ladder; it's only "close to" because we can only by in increments of $1K face value, which often is more than $1K in inflation-adjusted value.
- This is the main difference between a TIPS ladder and stocks, with which there is much less certainty that our ARA will equal our DARA.
- The difference between buying the ladder at 0% yield and 2% yields is cost; i.e., the former will cost more than the latter.
- At 0% (flat yield curve) a 30y ladder with a DARA of $100K costs $3,145,675.
- At 2% the same ladder costs $2,385,473.
- As Warren Buffet says, we don't need to swing at very pitch, so unless we need to build the ladder at a particular point in time, we can wait until the cost of the ladder is acceptable to us. If we never get to that point, we'll either need to pay more or build a shorter ladder.
- If you're comfortable relying on a statistical approach to portfolio construction, given the caveats I've mentioned, then the same arguments could be applied to stocks; i.e., wait for an acceptable CAPE when the cost of the required stock portfolio is acceptable, but pay more if you don't get the CAPE you're hoping for in time.
2% is worst case for Global stocks from 1970-2023...
$100K at 2% = $148K real
...but wouldn't ($320K real, invested at 6% US/Global Average) be kinda nice...?
Especially when the worst case for US stocks since 1900 was getting your $100K (real) back, and the the worst case for Global Dev'd since 1970 matched the 2% result of $148K real.
And it still is ridiculous for you to keep bringing up the 'worst case for global dev'd since 1970' as if it is a useful number at all. Really, scrap that nonsense from your mind. The dataset really gives you no useful insight into the true worst case possibility or even the true probabilities of the real distribution - we have exactly one realized sequence out of an infinite number of possible ones.
Statistics: Posted by avalpert1 — Sat Jun 08, 2024 11:33 pm