Crestmont's Perspective: Beware The Assumptions!

Financial Independence/Retire Early -- Learn How!
Trex
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Joined: Sat Feb 22, 2003 1:16 am
Location: Tallahassee, FL

Post by Trex »

Hey Wanderer,

More than you asked for, I know. I was pleased that you were bold enuf to not post this on the newbies board and wanted to encourage you.

Thanks! We're right with you on motivation and lbym. That part is built in, fortunately. By the way, I was actually getting ready to post that on the newbies board :D


The majority of the time, TSM makes sense. Smithers and the q folks think broad market cap makes sense 2/3 of the time. But the average horizon, the dribs and drabs way of building one's port, the average temperament of the average investor, and the relatively high current (starting - for newbies) valuations are not conducive to "staying the course".

What would you say about people who do have a horizon of 40 years?
Strictly speaking in equities, the plan is to add diversification as we can. (a la Ben Solar's suggestion).

18 years of a bull market is what justifies ltbh. we have probably entered a period when that sort of approach will be difficult to sustain.

I think my arguement, which may or may not be valid, is that even if I buy for 18 bear years, hopefully I would set myself up for 22 bull years?

Trex
wanderer
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Location: anytown, usa

Post by wanderer »

Thanks! We're right with you on motivation and lbym. That part is built in, fortunately.

Then you are well on your way so cut the "newbie" stuff. :wink:

What would you say about people who do have a horizon of 40 years?
Strictly speaking in equities, the plan is to add diversification as we can. (a la Ben Solar's suggestion).

Not sure what bensolar said but if it means pick up what's cheap when it presents itself, i'm all for it. but that sounds at odds with what i'm hearing.

i would say that

1. real investors do not invest for such long periods. only their first year contribution earns for the complete 40 yr cycle. income and capacity to save tends to rise with age. the biggest amounts get contributed last. if significantly early FIRE is your goal, you gotta make hay in a 20-30 year period.

shorter investing periods lead to significantly reduced compounding. great if you are chips - born in 1940, hits his peak earning years with the market not having budged for 17 years, market PE at 7. lousy if you are wanderer, born in 1960, hits peak earning years with bubble.

and once retired, not only will you no longer be accumulating assets but consuming them, it will also become clear that a variety of simplifications of the SWR studies (all assets in tax deferred accts, no taxes on dividends, virtually no income tax at all for more than half the years of the study, etc.) all impact you negatively.

2. average real returns for equities versus competing assets are way overstated because of the unique 20th century experience: inflation that ate away at cash and bonds, overvaluation and absence of dividends will eat away at future total returns of tsm indices. the first appears tamed with index linked bonds; the latter appears likely to be in the process of being tamed.

I think my arguement, which may or may not be valid, is that even if I buy for 18 bear years, hopefully I would set myself up for 22 bull years?

inshaallah. we started pouring money into vpacx 5+ years ago. it recently started to outperform vfinx over a 5 year period. hard to keep pouring money down that drain, esp. when it underperforms other asset classes. if you can do it, faithfully for 18 years, god bless you and i suspect you will probably be fine. just don't underestimate the power of a financial 'wedgie'. :wink:
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
peteyperson
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Posts: 525
Joined: Tue Nov 26, 2002 6:46 am

Post by peteyperson »

So it becomes 3% inflation + 2-3% extra return, total 5-6%.

Taxable here at 34%. Drops to 3.3% to 3.96%. 0.3% real to 0.96% real. Doesn't sound so good now! It's the old one of the benefit of deferred taxation on capital gains for many years with long term stock purchases bought at just the right price!

Petey
raddr wrote:
peteyperson wrote: Raddr,

Am I correct in assuming that the principle will rise with inflation, which retains your buying power and so the 2-3% payment reflects that?


Yes, the "coupon" is the amount in excess of inflation.
At the end of 30 years, do you not get back your original funds, index linked all that time?


I think that is the way it works.
What part of the return is taxable in the US? If the inflation linked part isn't, how is this accomplished? I am trying to understand the mechanics of it to see how it might work for UK taxes. I assume the 2-3% real return is taxable and drops. Here that would drop to between 1.5% - 2.3%, excluding the inflation return which is ignored for now.


There's the rub. As a US citizen You pay taxes on the coupon as well as the inflation adjustment even though the latter is not paid out with the coupon and is only paid out at maturity. I think TIPS mutual funds usually pay out the inflation adjustment along with the coupon and both are taxable. I'm not sure how this would work for a UK citizen.
peteyperson
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Joined: Tue Nov 26, 2002 6:46 am

Post by peteyperson »

Lovely turn of phrase, wanderer!

Petey
wanderer wrote: shorter investing periods lead to significantly reduced compounding. great if you are chips - born in 1940, hits his peak earning years with the market not having budged for 17 years, market PE at 7. lousy if you are wanderer, born in 1960, hits peak earning years with bubble.
peteyperson
**** Heavy Hitter
Posts: 525
Joined: Tue Nov 26, 2002 6:46 am

Post by peteyperson »

Hi Trex,

Just wanted to say hi and add a comment or two.

I was wondering whether you had read John Bogle's book, Common Sense on Mutual Funds or Siegel's book on stock performance stats? Either would give a solid introduction to the markets which is useful whether you choose to invest in it or not (I read the Bogle book). Bogle felt that the average price to earnings ratio taken over the past 100-200 years was a reasonable reflection of what the market rates stocks. Higher or lower than the average P/E of 14.1 from 1930s to 1999 gives you a historic baseline. There are various other more complex methods for determining fair valuation which you can get into with more complex reading on the subject. I've just started Bernstein's Four Pillars (not for the faint of heart) where in the chapter 2 he addresses a classic way of valuing businesses.

There is not always one right answer to these things, sometimes you have to choose the method you feel is more correct than another, the average between the various methods or dependent on the circumstance (like with safe withdrawal rates) choose the lowest of the w/d percentages that is felt to be safe given your set of circumstances. Some here look forlornly for a single magic bullet answer, akin to the Warren Commission making a magic bullet do 180's back and forth to avoid the obvious conclusion of a conspiracy in the JFK assassination or in this case, the obvious conclusion that there is no single answer.

You'll never actually know what the markets will do when you are FIREd, so it is a matter of taking the most prudent course you can afford to take, I think. You have to balance that with how long you wish or should work for. Working beyond your early 50s when your body starts to get weary overall has a mutliplier draining effect on your health which starts to counteract the benefit of retiring better off at 65. Stress is also known to weaken your immune system and increase the liklihood of life threatening illnesses. So it is a difficult balance to be sure.

From what I can tell so far, those with a medium to high expense lifestyle will never have enough to retire. They are just so used to spending their salary as it climbs ever higher than the idea of living off 20% and saving the other 30% of net pay never enters their mind. LBYM without taking the fun out of life and turning into a money game, seems to be more of a key than the SWR. Putting money away, starting with a dollar and going from there is key. Sometimes I have to remind myself of this. Most never start because a dollar isn't worth saving..

:lol:

Petey
Trex wrote: You all know I am a true beginner, but in the few recommended books and dicsussions I have read- this makes sense to me. I don't know a whole lot about valuations- lately I have questioned the meaning of value (especially in real estate). Is there any correlation to equities?? If so, we never really know what "value" means, right? Any time I find myself questioning the TSM approach I tend to think I'm crystal-balling it- since I haven't really seen anyone talk in specifics about over-valuation. The only thing I'm sure of in my mind (as far as "timing") is to stay away from Bonds. Please remember that I know very little about equities and refrain from hammering me. :)

In the charts and graphs I have seen related to history, it seems that the "value" always increases. Maybe upwards of 60% of the time, people could have argued throughout history that stocks were overvalued. It is true that there are very long periods of time that have not done very well regarding long term TSM approach. From what I have seen, these 40+ year windows of time that were not very good for TSM are not the majority. And that most of the time, one would do exceptionally well using the TSM approach over a very long period.


Who is a newbie to believe?

Trex
Trex
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Location: Tallahassee, FL

Post by Trex »

Hi Petey,

Thanks for the words. I did read 4 pillars, not the other 2 though. Maybe I should read your words about the silver bullet again :) Seems that's what I'm doing here. I'm just one of those people who doesn't mind risk, as long as it's calculated. I will probably never be satisfied :wink:

Trex
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