Concerns regarding the ability to retire comfortably after age 65

[Vanadium 50]

just saying what works for me.

No, that's not what you did. You told StaGuy2000 what to do. Had you said "I have had good luck with technology funds" I wouldn't have complained. But you decided instead to say "invest in technology investment funds. You should be able get over 20%+ return per annum."

 

[PeroK]

Let's take a real look at that.

Consider a 20 year mortgage, $200K @ 3.5% ('worse' than your 3.0% example), monthly payments are $1,160. $13,920 annual.

Before I continue, I'll point out that your "(assuming any dividends are consumed by other living expenses)" is double-counting. If you didn't have the mortgage, you would not have the $200,000 invested to provide divs for other living expenses either, so cross that, in both cases those expenses need to be paid out of other sources.

https://www.crestmontresearch.com/docs/Stock-20-Yr-Returns.pdf
Zooming in, I estimate year 2018 to have returned 6.67% ( 5% plus ~ 1/3rd of the next 5% line), the lowest in recent history. That conveniently puts us right on the border of the lowest 10% and 20% decile points, so that makes a pretty good 'bad-case' scenario; worse than ~ 90% of history.

We can back test this here:

https://www.portfoliovisualizer.com/backtest-portfolio#analysisResults
This shortened link shows you that a 75/25 Asset Allocation (pretty typical for someone in the accumulation phase of life, and accepts your premise that most people are not 100% stocks) returned ~ 6.38% annualized (with annual re-balance), in-line with our market return estimate of 6.67%: http://bit.ly/2Zd0LNG

The tool let's you adjust for deposits/withdrawals, so here is a short link with a monthly $1,160 withdrawal (fixed, no inflation adjustment to match a fixed rate mortgage): http://bit.ly/2ZeoAVc

At the end of 20 years, the mortgage is paid off, you both have 100% equity in the house, but the mortgage holder has $100,098 additional money in their portfolio. And this is a 'bad-case' scenario. 90% of the time periods in history were better, many far, far better. And the worst ones were not so far down from that.
N
If I take a recent 'good-case' (but far from the best - it looks to be close to median returns), 1994-2014, the mortgage holder ends up with an astounding $460,535 additional money in their portfolio!

This is dangerous nonsense. There are fundamental issues with your analysis.

First, what does "risk" actually mean? It means simply that things may not turn out as forecast. On the one hand you imply that these forecast figures are almost guaranteed - with even the "worst case" scenario showing high annual returns. Then you mention "risk" but it never seems to enter your analysis as something that might actually happen.

In the UK, for example, "endowment" mortgages were very popular, with exactly this idea. Instead of repaying the debt you invested, with the projection that your investments would eventually be enough to repay the debt and give you these wondrous sums of money left over. It ended with many people abandoning this amidst acrimony over poor returns and mis-selling.

Second, you are fond of quoting that stocks beat whatever 90% of the time. But what about the other 10% of the time? If stocks crash one year in 10 that can wipe out your 9 years gains and more.

Finally, there are statistically bound to be funds that have done well over a period of time. But, that is no guarantee that those funds will continue to do well. So quoting that fund X has done such and such over the last Y years means vety little. Especially if you believe that no one can accurately predict future economic outcomes.

 

[Michael Price]

No, that's not what you did. You told StaGuy2000 what to do. Had you said "I have had good luck with technology funds" I wouldn't have complained. But you decided instead to say "invest in technology investment funds. You should be able get over 20%+ return per annum."

I also said, do your own research. And, of course, the returns are variable; some years will be good, some bad.

 

[NTL2009]

This is dangerous nonsense. There are fundamental issues with your analysis. ...

I'll agree the analysis is flawed, it isn't trivial to take everything into account, it is far from perfect. But to say it is "dangerous nonsense" is going a bit too far I think. It is meant to provide some perspective for consideration, that is all.

...

Second, you are fond of quoting that stocks beat whatever 90% of the time. But what about the other 10% of the time? If stocks crash one year in 10 that can wipe out your 9 years gains and more. ...

Look at the chart, even the lowest 20 year period had returns of 3.1%. So if one had taken out a 3.5% mortgage at this time (if they were even available in 1929?), one would not have been hurt so very badly. This is why I'm saying that based on history, it's a pretty good bet (not a guarantee). There is mostly upside, and only a little, limited downside.

...

Second, you are fond of quoting that stocks beat whatever 90% of the time. But what about the other 10% of the time? If stocks crash one year in 10 that can wipe out your 9 years gains and more. ...

So quoting that fund X has done such and such over the last Y years means very little. Especially if you believe that no one can accurately predict future economic outcomes.

We agree that we can't predict the future, but I don't think that means reviewing and considering the past has no merit.

As I've said all along, I'm just trying to provide some perspective to the discussion. If you look at the data, and you still don't like that chance of it going upside down on you, then don't take that bet. I see absolutely nothing wrong with that, it is for each person to decide.

And it isn't a do-or-die decision. While I feel it has a very good chance of enhancing my portfolio, and I choose to take the bet, not taking it isn't going to automatically doom someone to a retirement of cat food and a van by the river. I'm talking about a 'reasonably' sized mortgage, like the $200K and a $1M portfolio we've discussed. That, IMO, is not an out-sized risk, nor is it likely to pay off in life-changing amounts either. But I think our portfolio (and lives in general) are enhanced when we take some risks, and strongly consider those risks that appear to have an attractive risk/reward profile.

 

[PeroK]

Look at the chart, even the lowest 20 year period had returns of 3.1%. So if one had taken out a 3.5% mortgage at this time (if they were even available in 1929?), one would not have been hurt so very badly. This is why I'm saying that based on history, it's a pretty good bet (not a guarantee). There is mostly upside, and only a little, limited downside.

The data you referenced is from 1919 until 2018, which includes the stock market crash of 1929 and the subsequent great depression.

If their and your analysis concludes investors during this period comfortably saw returns of at least 3.1%, then forgive me for being sceptical.

Many investors during this period were wiped out and lost everything.

I do not know how this is reconciled with the data, but I suggest that "dangerous nonsense" is not too far from the truth.

 

[NTL2009]

The data you referenced is from 1919 until 2018, which includes the stock market crash of 1929 and the subsequent great depression.

If their and your analysis concludes investors during this period comfortably saw returns of at least 3.1%, then forgive me for being sceptical.

Many investors during this period were wiped out and lost everything.

I do not know how this is reconciled with the data, but I suggest that "dangerous nonsense" is not too far from the truth.

I always welcome skepticism, I've been known to be wrong a time or two! :) It's part of the learning process.

However, if you don't like my data, please present some of your own. Here's another source (cfiresim.com), and it shows the prudent investor/retiree would not have been "wiped out and lost everything". I entered a start year of 1929, with a 75/25 AA, a 3.5% initial withdraw rate, adjusted for inflation each year ($35,000 on a $1,000,000 portfolio). So while this was a scary ride, he was far from being "wiped out". The $1M stayed above $500,000 in buying power. It dipped again by the end of WWII, and then took off. Thirty years later, he has a portfolio with more buying power than he started with, even though he withdrew an inflation adjusted $35,000 for 30 years!

If this appears to be contrary to your sense of the Great Depression, it is seldom considered that this was also a period of high deflation. Your (limited) money bought much more, I even recall my Father telling me that if you had cash, you were a King in those days (sadly, my family had only land, poor dirt-farmers). This chart is shown as adjusted for inflation/deflation.

And even this chart overstates things. This really represents someone who "won the lottery", and suddenly has $1M appear out of nowhere, and put it all in the stock market at one time, (and was one of the worst market-timers in history!). In reality, the much more common, and more realistic scenario is someone who was earning and investing for ten or more years prior to retirement. So they also benefited from the big rise in the market in those early years. You could re-run this for the accumulation scenario for the previous 10-20 years, and I think you'll find this retiree would have been thrilled with the > $500,000 portfolio at it's trough - he put far less than that into it!

 

[Stephen Tashi]

Many investors during this period were wiped out and lost everything.

Is it also true that many investors who were wiped out had bought stocks "on the margin"? - effectively borrowing money to buy stocks.

 

[PeroK]

I always welcome skepticism, I've been known to be wrong a time or two! :) It's part of the learning process.

However, if you don't like my data, please present some of your own. Here's another source (cfiresim.com), and it shows the prudent investor/retiree would not have been "wiped out and lost everything". I entered a start year of 1929, with a 75/25 AA, a 3.5% initial withdraw rate, adjusted for inflation each year ($35,000 on a $1,000,000 portfolio). So while this was a scary ride, he was far from being "wiped out". The $1M stayed above $500,000 in buying power. It dipped again by the end of WWII, and then took off. Thirty years later, he has a portfolio with more buying power than he started with, even though he withdrew an inflation adjusted $35,000 for 30 years!

If this appears to be contrary to your sense of the Great Depression, it is seldom considered that this was also a period of high deflation. Your (limited) money bought much more, I even recall my Father telling me that if you had cash, you were a King in those days (sadly, my family had only land, poor dirt-farmers). This chart is shown as adjusted for inflation/deflation.

And even this chart overstates things. This really represents someone who "won the lottery", and suddenly has $1M appear out of nowhere, and put it all in the stock market at one time, (and was one of the worst market-timers in history!). In reality, the much more common, and more realistic scenario is someone who was earning and investing for ten or more years prior to retirement. So they also benefited from the big rise in the market in those early years. You could re-run this for the accumulation scenario for the previous 10-20 years, and I think you'll find this retiree would have been thrilled with the > $500,000 portfolio at it's trough - he put far less than that into it!

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Taken at face value, your analysis implies there is essentially no risk investing in stocks. I'm highly sceptical. The moral that stocks can go down as well as up would appear, in the long term, to be false. They must, in your analysis, double every 20 years?

My guess is that an element of hindsight bias has crept in. With hindsight the prudent investor would have done X, Y and Z over the years. And A, B and C are considered mistakes.

In other words, the strategy you propose has been tailored to the specific stock market conditions of the last 100 years. A strategy that would have looked equally viable at the time but would have lost money has subsequently, with hindsight, been deselected.

I'm also sceptical about how one tracks the indexes and to what extent these are a true reflection of long term stock market growth. Amazon was not a company in 1919, so at some point stocks need to be swapped in and out. This costs money and not everyone can buy stocks at exactly the same time etc.

The third point is how charges and fund management fees are accounted for.

Fourth, I suspect there is an element of averaging here. The average investor may get 3.1%, but that does not mean that everyone gets exactly 3.1%. Some investors do very well, some okay, some break even and some lose money. That is the nature of "risk". Unlike fixed returns where everyone gets the same.

The first research I would do is to determine how the raw stock market growth equates to the returns that an individual investor can expect.

I can well imagine that if I invested a sum in the stock market and came back 20 years later I would have doubled my money or better. But, I can also imagine (perhaps wrongly) that I might not and that I might even have lost money.

 

[BWV]

I always welcome skepticism, I've been known to be wrong a time or two! :) It's part of the learning process.

However, if you don't like my data, please present some of your own. Here's another source (cfiresim.com), and it shows the prudent investor/retiree would not have been "wiped out and lost everything". I entered a start year of 1929, with a 75/25 AA, a 3.5% initial withdraw rate, adjusted for inflation each year ($35,000 on a $1,000,000 portfolio). So while this was a scary ride, he was far from being "wiped out". The $1M stayed above $500,000 in buying power. It dipped again by the end of WWII, and then took off. Thirty years later, he has a portfolio with more buying power than he started with, even though he withdrew an inflation adjusted $35,000 for 30 years!

If this appears to be contrary to your sense of the Great Depression, it is seldom considered that this was also a period of high deflation. Your (limited) money bought much more, I even recall my Father telling me that if you had cash, you were a King in those days (sadly, my family had only land, poor dirt-farmers). This chart is shown as adjusted for inflation/deflation.

And even this chart overstates things. This really represents someone who "won the lottery", and suddenly has $1M appear out of nowhere, and put it all in the stock market at one time, (and was one of the worst market-timers in history!). In reality, the much more common, and more realistic scenario is someone who was earning and investing for ten or more years prior to retirement. So they also benefited from the big rise in the market in those early years. You could re-run this for the accumulation scenario for the previous 10-20 years, and I think you'll find this retiree would have been thrilled with the > $500,000 portfolio at it's trough - he put far less than that into it!

View attachment 248620

I don’t believe those numbers, the stock market lost 90% of its value between 1929 and 1933

Also your inflation-adjusted fixed withdrawal will wipe you out in the 70s where the stock return for the decade was actually worse than the 30s if you adjust for inflation (aggregate prices declined during the Depression)

 

[Stephen Tashi]

I'm also sceptical about how one tracks the indexes and to what extent these are a true reflection of long term stock market growth.

Some forum members agree with the late John Boogle and are vocal advocates for investing in "index funds". Of course, I don't know if projecting this strategy back to years ago is realistic.

 

[NTL2009]

Taken at face value, your analysis implies there is essentially no risk investing in stocks. I'm highly sceptical. The moral that stocks can go down as well as up would appear, in the long term, to be false. They must, in your analysis, double every 20 years?
...

With all due respect, I am at a loss as to how you can make that statement based on what I posted. I've said, and implied, no such thing. I hope my communications skills are not this poor!

... My guess is that an element of hindsight bias has crept in. With hindsight the prudent investor would have done X, Y and Z over the years. And A, B and C are considered mistakes.

In other words, the strategy you propose has been tailored to the specific stock market conditions of the last 100 years. A strategy that would have looked equally viable at the time but would have lost money has subsequently, with hindsight, been deselected. ...

This sounds to me that you are thinking I may have cherry-picked the data to fit my view? Just the opposite, I chose those dates based on input from others that they would be the very worst time to invest.

I did choose a source with 20 year rolling returns for the market, as I do believe that if someone is trying to make a mortgage pay-off decision, they should consider the long run. I'd say that is appropriate and meaningful to the discussion.

... I'm also sceptical about how one tracks the indexes and to what extent these are a true reflection of long term stock market growth. Amazon was not a company in 1919, so at some point stocks need to be swapped in and out. This costs money and not everyone can buy stocks at exactly the same time etc.

The third point is how charges and fund management fees are accounted for. ...

You can find the data sources on the internet. A search on "shiller stock data 1871" will get you one commonly used data set.

Management fees are accounted for in the cfiresim source I linked. Now it's true, low cost, broadly diversified mutual funds/ETFs were not available in 1929, trading costs were higher, so this isn't meant so much as a literal analysis of what a person in 1929 could do, but more useful (since none of us are going back to 1929), as to what we might expect if the market took a similar plunge today (as they say, history doesn't repeat so much as it rhymes).

... Fourth, I suspect there is an element of averaging here. The average investor may get 3.1%, but that does not mean that everyone gets exactly 3.1%. Some investors do very well, some okay, some break even and some lose money. That is the nature of "risk". Unlike fixed returns where everyone gets the same.

The first research I would do is to determine how the raw stock market growth equates to the returns that an individual investor can expect. ...

But I don't care what the 'average person' did or will do. I'm trying to plan for myself and my family, arming myself with knowledge. I could make parallels, if (for illustration), we say the average person who attends college does not get a good paying/satisfying job in their field, do we use that to tell someone they should not pursue an advanced degree in Physics? I think not. Many people have made very good use of their degrees, or by learning an in-demand trade. Who cares about the 'average people', I don't want to be average, I want to excel (at least in some things).

... I can well imagine that if I invested a sum in the stock market and came back 20 years later I would have doubled my money or better. But, I can also imagine (perhaps wrongly) that I might not and that I might even have lost money.

The chart I presented showed no loss in the market for any 20 year period (there are some 10 year periods with losses). That doesn't mean, and I certainly did not intend to imply, that such a loss is impossible, or beyond consideration. But I do think it is worth considering that it hasn't happened in this reported time frame. I'm not going to ignore it, and I'm not going to say anything outside of that is impossible either. But w/o a crystal ball, I can only look backwards, apply some reasoning, and be willing to place a bet, if/when I think conditions warrant it.

Turning this around, does the fear of a chance of losing money in the market over a 20 year period keep you 100% out of stocks? And if so, what is the alternative? You are almost guaranteed of losing significant buying power if you keep your money in cash/bonds. You might try TIPS, but I think there are limits to those, and will they be around in the future if you need to roll them over?

 

[NTL2009]

I don’t believe those numbers, the stock market lost 90% of its value between 1929 and 1933

Also your inflation-adjusted fixed withdrawal will wipe you out in the 70s where the stock return for the decade was actually worse than the 30s if you adjust for inflation (aggregate prices declined during the Depression)

If you present your data, I think you will find (as I mentioned upstream), that stock prices may have dropped 90% from their peak. However (relevant to your next statement), that does not take into account the deflationary environment of the times. And it does not take into account dividends, which make up a significant % of the value of those stocks (I think more so then than today).

And my chart includes some bonds (75/25), I'm not sure how bonds reacted at the time, but I assume that was a smoothing effect. I have not advocated for a 100% stock portfolio in any of my posts.

And you are correct that the 80's inflation was actually harder on the retiree than the Great Depression. But the Great Depression is what people like to point out, so that is what often gets the response. My research indicates that 1966 was the worst 30 year scenario for someone drawing down an inflation adjusted amount from their 'nest egg'.

 

[BWV]

Taken at face value, your analysis implies there is essentially no risk investing in stocks. I'm highly sceptical. The moral that stocks can go down as well as up would appear, in the long term, to be false. They must, in your analysis, double every 20 years?

My guess is that an element of hindsight bias has crept in. With hindsight the prudent investor would have done X, Y and Z over the years. And A, B and C are considered mistakes.

So the seemingly over-generous excess return of stocks over bonds is a much studied phenomenon in the finance literature. In the Dimson Marsh data set (you can google it and get the Credit Suisse annual report with that data) in every single country that had a stock and bond market in 1900 the return from stocks equaled or exceeded bonds on an inflation-adjusted basis (albeit in some cases like Russia they were both -100%). That said there are bad 10 and 20 year stretches where leverage or a too-aggressive withdrawal strategy would have wiped you out. The economic answer to the equity risk premium is the timing of the losses - the stock market drops during bad market economic periods - I.e at the same time you are likely to get laid off and need to draw on your savings. This is why stocks have a risk premium.

I'm also sceptical about how one tracks the indexes and to what extent these are a true reflection of long term stock market growth. Amazon was not a company in 1919, so at some point stocks need to be swapped in and out. This costs money and not everyone can buy stocks at exactly the same time etc.

The index returns are legit and reflect all the companies that went bankrupt and new entries like Amazon. The key point is the average stock has a lower return than t-bills with the stock market return driven by the skew of a relatively small number of winners like Amazon. The Dimson Marsh date has a world index the includes every stock market that existed in 1900. With some markets going to zero, like Russia in 1917, the real return is still something like 5% annualized

The third point is how charges and fund management fees are accounted for.

Fair, open end mutual funds began in the 20s and the first index fund in the 70s, fees and transaction costs were much higher.

Fourth, I suspect there is an element of averaging here. The average investor may get 3.1%, but that does not mean that everyone gets exactly 3.1%. Some investors do very well, some okay, some break even and some lose money. That is the nature of "risk". Unlike fixed returns where everyone gets the same.

The return of a cap-weighted index like the S&P 500 reflects the return of the average dollar invested - it is the return everyone in theory can get. Every dollar that outperforms the market must be offset by a dollar that underperforms

 

[PeroK]

So the seemingly over-generous excess return of stocks over bonds is a much studied phenomenon in the finance literature. In the Dimson Marsh data set (you can google it and get the Credit Suisse annual report with that data) in every single country that had a stock and bond market in 1900 the return from stocks equaled or exceeded bonds on an inflation-adjusted basis (albeit in some cases like Russia they were both -100%). That said there are bad 10 and 20 year stretches where leverage or a too-aggressive withdrawal strategy would have wiped you out. The economic answer to the equity risk premium is the timing of the losses - the stock market drops during bad market economic periods - I.e at the same time you are likely to get laid off and need to draw on your savings. This is why stocks have a risk premium.The index returns are legit and reflect all the companies that went bankrupt and new entries like Amazon. The key point is the average stock has a lower return than t-bills with the stock market return driven by the skew of a relatively small number of winners like Amazon. The Dimson Marsh date has a world index the includes every stock market that existed in 1900. With some markets going to zero, like Russia in 1917, the real return is still something like 5% annualized
Fair, open end mutual funds began in the 20s and the first index fund in the 70s, fees and transaction costs were much higher.
The return of a cap-weighted index like the S&P 500 reflects the return of the average dollar invested - it is the return everyone in theory can get. Every dollar that outperforms the market must be offset by a dollar that underperforms

Whether we accept your more knowledgeable analysis or my more naive scepticism, it all adds up to genuine risk. And risk, by definition, means you can lose some or all of your money. In contradiction to the blithe analysis of the raw data.

 

[NTL2009]

This was directed at BWV, but I'll respond from my point of view:

Whether we accept your more knowledgeable analysis or my more naive scepticism, it all adds up to genuine risk. ...

Where has anyone stated that the stock market is w/o risk? Why do you keep repeating this?

I'll try to make myself crystal clear. Investing in the stock market has risks. Your portfolio can be expected to drop from time to time, maybe for a long time. Maybe longer and deeper than we have ever experienced in modern history. Records are made to be broken.

But context is required. As I stated above, other investments, including 'investing' in cash, have risks too. Inflation will almost certainly reduce their buying power (the only meaningful measure of 'value') over time.

As my son, the Pharmacist says, "All medicines are also poisons". Everything in life involves a risk/reward scenario. So you pick your medicine/poison, and you pick your investment vehicle. But there is no place to hide.

... And risk, by definition, means you can lose some or all of your money. In contradiction to the blithe analysis of the raw data.

I see no contradiction. If you want to say the data is incomplete, fine, I agree. It is pretty rare that we approach anything in life with complete data. And when we do, there is probably little discussion, the answer may be obvious and trivial, so we decide and get on with our day. Ho-Hum.

A scenario where a prudent person would lose all their money due to prudent stock market exposure, would be an extreme one. Not impossible at all, but again, we must have context - if that scenario raises it's head, what are the alternatives? If he would have been better off 100% in bonds, would that have been predictable? Maybe an alternate scenario (more likely, based on history), would have occurred, making stocks far more valuable than bonds. But our investor has no crystal ball.

You make it sound as if stocks could go to zero? I suppose that's a mathematical possibility, but I can't see it happening in real life. And if it did, we'd probably have bigger worries (like food, shelter and water), than a number on our brokerage statement. But yes, if I'm drawing on my portfolio, and stocks dive, I risk depleting my portfolio. But historically, this is more likely with conservative investments, as historically, they have not provided enough protection against inflation. So I don't see avoiding stocks as any sort of solution, the data we have says that would be a worse problem. I can't ignore that data, in favor of unknown future data.

What do you propose?

 

[PeroK]

This was directed at BWV, but I'll respond from my point of view:Where has anyone stated that the stock market is w/o risk? Why do you keep repeating this?

I'll try to make myself crystal clear. Investing in the stock market has risks. Your portfolio can be expected to drop from time to time, maybe for a long time. Maybe longer and deeper than we have ever experienced in modern history. Records are made to be broken.

But context is required. As I stated above, other investments, including 'investing' in cash, have risks too. Inflation will almost certainly reduce their buying power (the only meaningful measure of 'value') over time.

As my son, the Pharmacist says, "All medicines are also poisons". Everything in life involves a risk/reward scenario. So you pick your medicine/poison, and you pick your investment vehicle. But there is no place to hide.
I see no contradiction. If you want to say the data is incomplete, fine, I agree. It is pretty rare that we approach anything in life with complete data. And when we do, there is probably little discussion, the answer may be obvious and trivial, so we decide and get on with our day. Ho-Hum.

A scenario where a prudent person would lose all their money due to prudent stock market exposure, would be an extreme one. Not impossible at all, but again, we must have context - if that scenario raises it's head, what are the alternatives? If he would have been better off 100% in bonds, would that have been predictable? Maybe an alternate scenario (more likely, based on history), would have occurred, making stocks far more valuable than bonds. But our investor has no crystal ball.

You make it sound as if stocks could go to zero? I suppose that's a mathematical possibility, but I can't see it happening in real life. And if it did, we'd probably have bigger worries (like food, shelter and water), than a number on our brokerage statement. But yes, if I'm drawing on my portfolio, and stocks dive, I risk depleting my portfolio. But historically, this is more likely with conservative investments, as historically, they have not provided enough protection against inflation. So I don't see avoiding stocks as any sort of solution, the data we have says that would be a worse problem. I can't ignore that data, in favor of unknown future data.

What do you propose?

I don't propose anything. In my lifetime by far and away the best investment has been property. But I can't say that property will continue this trend into the future. In any case, property prices in the UK have risen to levels that exclude most new potential house buyers.

In terms of retiring at 65, I think the biggest factors are earnings and expenses. If you are lucky or clever perhaps you can conjure significant returns out of the stock market or other shrewd investments. But, maybe that's all just down to luck at the end of the day. Simply put, you need to earn enough. If you earn £30K and have four children you can forget about it. If you earn £100K and are single then the only risks are spending too much or losing money on foolish investments!

 

[Klystron]

Do not overlook unanticipated illness / disability in the primary income provider and family. Perhaps healthcare in the UK and EU minimize this risk but not in the USA.

 

[Vanadium 50]

The data you referenced is from 1919 until 2018, which includes the stock market crash of 1929 and the subsequent great depression...I do not know how this is reconciled with the data

It might be instructive to look at the differences between 2019 and 1929.

One is that investors were more highly leveraged then, and since then regulations have been put in place limiting margin. Indeed, the idea of slow-paying one's mortgage has been premised on the idea that it's better to do it this way and avoid these very same rules.

Another is that dividends were larger then. The 3% gain over 20 years was entirely in dividends, since it took until 1954 for the DJIA to reach 1929 levels (and most of that was at the end). In 1932, the dividend rate was 14%. Today it's closer to 2%.

A third is that people invested in fewer stocks then: you couldn't buy an index fund, and mutual funds were barely a "thing". They also looked rather different than today's funds. This means they took on more risk then is typical today. Similarly, the modern"institutional investor" didn't really exist in 1929. CREF, for example, didn't even exist until the 50's.

Banking is very different today. 11,000 banks closed during the Great Depression. Today there are about 6000 banks in the US.

 

[NTL2009]

... I don't propose anything. In my lifetime by far and away the best investment has been property. ...

This explains a lot. I've seen numerous exchanges on forums, where the real estate investors just can't seem to grasp stock/bond investments. Many people do well with real estate, maybe it is just lack of familiarity with stocks/bonds that breeds distrust, but as you say...

... But I can't say that property will continue this trend into the future. In any case, property prices in the UK have risen to levels that exclude most new potential house buyers. ...

So where does that leave someone like the OP? Of course, they need to get their earning and budgeting in line first, but if they are successful with that, they will have money to invest, in something.

... If you are lucky or clever perhaps you can conjure significant returns out of the stock market or other shrewd investments. ...

It is not about luck, or cleverness, and certainly no 'conjuring' - investing in a Total Stock fund and a Total Bond Market fund, and forgetting about it, involves none of that. In the long run, the stock market grows, because it is driven by people trying hard to create value. And if that fails, people won't be able to pay rent, property values will go down, etc. No man is an island.

What concerns me about property is that the individual investor can't get anywhere near the diversification of the stock/bond fund investor (unless they invest in REITs - not sure those have done better than the general market). Maybe a dozen properties? Versus lterally thousands of companies in so many diferent markets, many/most of them with international exposure.

I'm not trying to change anyone's mind. If real estate has been good for, that's good for you. I just think others should look at everything as objectively as they can.

... If you earn £100K and are single then the only risks are spending too much or losing money on foolish investments!

Avoid foolish investments!

 

[Michael Price]

This explains a lot. I've seen numerous exchanges on forums, where the real estate investors just can't seem to grasp stock/bond investments. Many people do well with real estate, maybe it is just lack of familiarity with stocks/bonds that breeds distrust, but as you say...

So where does that leave someone like the OP? Of course, they need to get their earning and budgeting in line first, but if they are successful with that, they will have money to invest, in something.
It is not about luck, or cleverness, and certainly no 'conjuring' - investing in a Total Stock fund and a Total Bond Market fund, and forgetting about it, involves none of that. In the long run, the stock market grows, because it is driven by people trying hard to create value. And if that fails, people won't be able to pay rent, property values will go down, etc. No man is an island.

What concerns me about property is that the individual investor can't get anywhere near the diversification of the stock/bond fund investor (unless they invest in REITs - not sure those have done better than the general market). Maybe a dozen properties? Versus lterally thousands of companies in so many diferent markets, many/most of them with international exposure.

I'm not trying to change anyone's mind. If real estate has been good for, that's good for you. I just think others should look at everything as objectively as they can.
Avoid foolish investments!

Agreed. Equities/stocks will beat property, over the long run. Where I live.(London, UK) return on property (rent + capital appreciation) has been about the 10% p.a. over the last 30 years. You can comfortably beat that with some technology stock trackers. Likewise, the property investment funds, available in my pension plan, are very mediocre compared to the technology investment funds.

Some people say, "as safe as houses", but property goes down in a recession, just like stocks.

 

[PeroK]

Agreed. Equities/stocks will beat property, over the long run.

You don't know that. No one knows that. You quote that as though it's a law of nature.

It's madness to think that you know the future relative growth of property, stocks and technology stocks in particular.

Also, if that were a law of nature, then the future growth would already be built into the current price.

 

[PeroK]

So where does that leave someone like the OP?

Facing an uncertain future. Like the rest of us.

 

[BWV]

The problem with real estate is diversification - hard to do (outside of buying REITs, but those are stocks) for most individuals. London real estate may have been a good investment but when the UK becomes a post apocalyptic wasteland on Nov 1, who knows?

 

[Michael Price]

The problem with real estate is diversification - hard to do (outside of buying REITs, but those are stocks) for most individuals. London real estate may have been a good investment but when the UK becomes a post apocalyptic wasteland on Nov 1, who knows?

Brexit is another topic, which I won't go into - except to say the EU is protectionist, anti-free trade, anti-free market scheme. The UK should do just fine outside the EU.
https://qph.fs.quoracdn.net/main-qimg-fdf8c398523d58282b7c607058fd9665

 

[PeroK]

London real estate may have been a good investment but when the UK becomes a post apocalyptic wasteland on Nov 1, who knows?

Brexit is another topic, which I won't go into - except to say the EU is protectionist, anti-free trade, anti-free market scheme. The UK should do just fine outside the EU.
https://qph.fs.quoracdn.net/main-qimg-fdf8c398523d58282b7c607058fd9665

At least one of you must be wrong.

 

[Michael Price]

At least one of you must be wrong.

And we shall find out who in a couple of months.

 

[Klystron]

What would investment advice be without a few hoary truisms?

"People can live in houses."

Although maligned in literature, the landlord invests capital in buildings that provide shelter and living space for many people beginning with their own family. Modern city law also demands a certain level of maintenance investment in livable properties. Bond and bond fund investment also provide funds for civic improvements, transportation projects, and many endeavors that benefit others, particularly real estate investors.

 

[Vanadium 50]

Where I live.(London, UK) return on property (rent + capital appreciation) has been about the 10% p.a. over the last 30 years. You can comfortably beat that with some technology stock trackers.

You're focusing on the future again, and had you said "I would have been better investing in X than Y in the past" I would again have let it slide. But

• You cannot predict the future
• You are predicting that technology will continue to be undervalued for thirty years
• Previously the claim was 20% for 20 years. If you have 10% for 30, and 20% for 20, that means there can be a period of a decade with -7.6% growth. Because math. Pretending that this income is guaranteed does nobody a service, and is belied by your very own numbers.

 

[Michael Price]

You're focusing on the future again, and had you said "I would have been better investing in X than Y in the past" I would again have let it slide. But

• You cannot predict the future
• You are predicting that technology will continue to be undervalued for thirty years
• Previously the claim was 20% for 20 years. If you have 10% for 30, and 20% for 20, that means there can be a period of a decade with -7.6% growth. Because math. Pretending that this income is guaranteed does nobody a service, and is belied by your very own numbers.

The past is the best guide to the future. And people here are smart enough to add the usual caveats. Technology is always undervalued because most punters live in the present.

 

[Vanadium 50]

What concerns me about property is that the individual investor can't get anywhere near the diversification of the stock/bond fund investor (unless they invest in REITs - not sure those have done better than the general market)

There are ways. TIAA Real Estate is technically an annuity, but it's set up to behave like a mutual fund. The 10-year annualized return is 6.91% vs 7.25% for the S&P 500, including dividends.

I own some of this. There are things to like, and things not to. On the plus side, it's relatively uncorrelated with stocks and bonds, and it's value is fairly stable. So it's a sensible element of a diverse portfolio. On the minus side it's expensive compared to index funds (0.8%) for obvious reasons and is relatively illiquid (restrictions on how quickly one can withdraw money), again for obvious reasons.

I don't own more for several reasons, not least of which is that I own my house, so my total real estate holdings are about 16% of my net worth. My target is 15-20%. I'm on the low end of where I want to be, but still in the window, and I may pick up a little more at my next rebalancing.