Bogleheads.org

if the real rate of return is 3%, the retiree will be able to take out $44,470 (inflation adjusted) each year. If instead, the retiree enters a nominal interest rate of 5%, the calculator says that they can take out $60,434 per year. But that's in nominal dollars, so real consumption will decline each year by the inflation rate. So what I didn't understand is if we are using real rates of return and it is adjusting for inflation, then if we set the (g) at -1 or -1.5, it would still adjust the reduced value by inflation. In other words the inflation adjusted feature would be left alone while the (g) would change. if you are using real rates of return, then you don't need to include the inflation rate in g. Suppose real return is 3%, inflati...

After reading the ABW method and doing some calculations I have a question about withdrawal growth (g). So it seems you can put 0 for constant growth, a negative or positive number for more or less withdrawal at the start and end. Is the positive and negative (g) after inflation adjustment. For example: Let say we take 40K per year set to a -1, So the next year you reduce the overall amount you take out. Is that overall reduced amount inflation adjusted? The analysis can be done in real or nominal dollars. From the ABW wiki > Real vs nominal rate of return : If a real (inflation adjusted) rate of return is used, the withdrawal strategy becomes automatically adjusted for inflation. In the above example, if the real rate of return is 3%, the...

This is a theory question that has been bugging me and I'd love to get this community's take on it. The bogleheads wiki indicates that risk tolerance is the primary factor in determining equity allocation, stating: How much in bonds? That's the basic question of asset allocation. Before you decide, you first need to balance your ability, willingness, and need to take risk. The more risk you can handle, the less bonds you need. I'm wondering whether the risk-free rate plays any role in determining your equity allocation, especially relevant as the 30y TIPS yield has recently swung from negative territory to exceeding 1.5%. If real yields went to say 3% on the 30y TIPS, my lizard brain would feel tempted to buy some in lieu of equities. Asse...

The math always argues for taking debt (within reason) so long as the interest rate is below the SWR. If we take this logic further, we can conclude that infinite leverage leads to infinitely high safe withdrawals in retirement. There must be something wrong with that logic. That something is the SWR methodology being assumed. - If you go beyond the pass/fail grading used in the SWR methodology, failures in a leveraged strategy will be harder (i.e. you will run out of money sooner) - If you go beyond the fixed spending assumed in SWR methodology and allow variable spending, more stocks will make spending more uncertain and volatile. See amortization based withdrawal (ABW) . Using a more realistic withdrawal strategy than SWR will show more...

The math always argues for taking debt (within reason) so long as the interest rate is below the SWR. If we take this logic further, we can conclude that infinite leverage leads to infinitely high safe withdrawals in retirement. There must be something wrong with that logic. That something is the SWR methodology being assumed. - If you go beyond the pass/fail grading used in the SWR methodology, failures in a leveraged strategy will be harder (i.e. you will run out of money sooner) - If you go beyond the fixed spending assumed in SWR methodology and allow variable spending, more stocks will make spending more uncertain and volatile. See amortization based withdrawal (ABW) . Using a more realistic withdrawal strategy than SWR will show more...

The math always argues for taking debt (within reason) so long as the interest rate is below the SWR. If we take this logic further, we can conclude that infinite leverage leads to infinitely high safe withdrawals in retirement. There must be something wrong with that logic. That something is the SWR methodology being assumed. - If you go beyond the pass/fail grading used in the SWR methodology, failures in a leveraged strategy will be harder (i.e. you will run out of money sooner) - If you go beyond the fixed spending assumed in SWR methodology and allow variable spending, more stocks will make spending more uncertain and volatile. See amortization based withdrawal (ABW) . Using a more realistic withdrawal strategy than SWR will show more...

That Thing Rich People Do by Kaye Thomas

Accepted: Pitt, Purdue, CU-Boulder, George Mason Univ, Virginia Commonwealth Univ. Wait listed at the following: Rice, Georgia Tech, UVA, UW-Madison. Denied at CMU, UT-Austin, U of Wash, Stanford. Not yet announced-Duke. Will update after our Purdue visit. At this point it is Purdue vs Pitt. Purdue, Pitt and CU Boulder are good options. Some of the state school rejections may be driven by the limited number of spots for computer science majors for out of state students. I know that the University of Washington reserves most of its CS spots for in-state students, likely leading to extreme competition for the few remaining out of state spots. But UW-Madison does not admit direct to the CS major. So that's a head-scratcher. Not sure why they ...

FWIW, S&P puts out a spreadsheet for the S&P 500 index https://us.spindices.com/documents/additional-material/sp-500-eps-est.xlsx Thanks. I have been using the S&P 500 earnings from that site as a proxy for US total. I'm guessing it will be fairly close for VTSAX, given it's dominated by the S&P 500. But I tilt to small, value and international. So I was hoping I could get earnings for those specifically, ideally for the specific fund I'm investing in. If not, for a related index. Be aware that the 'earnings per share' for an index is done differently than a mutual fund would use to aggregate the earnings for a portfolio of individual stocks. The S&P index itself will aggregate all of the earnings of all the companies a...

While CAPM makes some specific assumptions about preferences, the broader idea that assets that pay out in good times will be cheaper than assets that pay out in bad times follows directly and naturally from basic economics. It's as fundamental as the idea of risk. The theory is so strong that if CAPM (broadly interpreted) didn't work, then that would be the puzzle. Are you sure about that? Wikipedia: https://en.m.wikipedia.org/wiki/Equity_premium_puzzle The equity premium puzzle refers to the inability of an important class of economic models to explain the average equity risk premium (ERP) provided by a diversified portfolio of U.S. equities over that of U.S. Treasury Bills, which has been observed for more than 100 years. There is a sig...

This would be true if ... Thanks for the follow up - appreciate the detailed thoughts. I'm with you on the put option example and the diversification across a large pool of companies is what I was referencing in my last paragraph of the initial comment. But there's still just something about it I'm having trouble shaking from my head. Another example might be venture capital, investing in some of the smallest operations out there right now. With the skewed return profile they have - despite investing in potentially hundreds of companies to diversify idiosyncratic risk - I presume they still seek a return on capital in excess of what the S&P500 is expected to return. And wouldn't the reason for that, at least in part, be the size of the...

The idea that small firms for example should pay a premium does not come from basic economics. If it is empirically true, then that would be a puzzle for which someone has to come up with a more narrow and specific theoretical justification. I assume that, on average, smaller companies have higher cost of capital than their well-entrenched industry leading counterparts. Like McDonalds probably gets better rates on it's corporate bonds than Jim Bob's Regional Burger Chain. So wouldn't it follow that in order to make an equity investment in Jim Bob's Regional Burger Chain, you would demand a higher expected return for similar reasons? Otherwise you could invest in the safer McDonalds operation. This would be true if investors are not diversi...

By the way, as a final thought--one could argue that CAPM itself is no more privileged in this sense than any other model. Meaning even a single "equity risk premium" could be "pure luck"--in theory. I don't believe that is likely, but if you are not doing careful empirical work, just pointing out theoretical possibilities, then there is no particular reason to draw the line between CAPM and multi-factor models. You should be saying any observed difference between stocks and very low risk assets could be pure luck. Which is technically true. One way to reduce the probability of false positives is to ask how ex ante justified (i.e. rooted in reasonable theory) a factor is. By that metric, CAPM is at a completely differen...

Looks like Bogle thought it was just pure luck, and we can't rule that out . It depends on what you mean by that. The cross-section of stock returns is subject to statistical analysis. In many different empirical studies, there have been cross-sectional return observations that were statistically significant. Some of these have then survived out of sample testing. Given that, it is quite unlikely those observations were the product of "pure luck" in the sense of just being generated by random variations. What actually explains them is, of course, a very challenging question. As is the related question of how, if at all, we should account for these observations in financial planning. Data dredging can generate false positive resul...

tvanzo wrote: ↑Sat Mar 18, 2023 10:47 am Does he not believe in the basic idea of CAPM?

CAPM does not say that small cap stocks have a higher expected return than large cap stocks. It says that assets that are more highly correlated to the aggregate market portfolio will have higher expected return than assets that are less correlated to the aggregate market portfolio.

The small cap value premium puzzle is that these assets have done better than what would be implied by their correlation to the aggregative market portfolio, i.e. beyond what CAPM would suggest. Whether that's just pure luck, or pricing inefficiency, or fair premium for some less-apparent risk, is a matter of debate. Looks like Bogle thought it was just pure luck, and we can't rule that out.

My point earlier was that none of these products actually keep up with inflation. They collect tax on inflation. A win-win for Uncle Sam. I'm not sure this is necessarily accurate for TIPS held in a tax-advantaged account. Of course tax will typically be paid at some point, but in terms of the payment not corresponding with the methodology, I cannot say that I'm following the suggestion. https://www.bogleheads.org/forum/viewtopic.php?p=2371309#p2371309 I agree my point is not true if these are held in a Roth IRA; otherwise, the tax keeps yield less than inflation regardless of methodology. It would apply to traditional IRAs too, since the tax will be paid in inflated dollars. The traditional vs Roth difference will come down to the usual m...

Inflation indexed bonds provide inflation protection for both sides to the transaction--both the lender and the borrower know what they are going to get/pay in the future. Nominal bonds introduce inflation risk for both sides of the transaction--neither the lender nor the borrower know what they are going to get/pay in the future. So all loans and promises--treasury bonds, corporate bonds, personal loans to your nephew, pension payouts etc.--should have been made in real dollars, not nominal dollars. It's better for both sides ex ante. The reason it's not happening is money illusion. Money illusion is pervasive and leads to poor financial decisions. One of the key goals of financial education should be to help people see through nominal dol...

I know the standard advice is to withdraw from taxable accounts first in retirement. But if one wants to leave their taxable account for heirs (for the stepped-up basis), how damaging is it to withdraw from tax-deferred first and leave taxable alone as long as possible? Is there a way to calculate this? Lots of variables at play in a situation like this. But leaving a substantial traditional account to heirs may not be a good idea because of the potential tax hit to heirs from the 10 year rule for inherited IRAs. You'll likely want to convert to Roth before leaving to heirs. If so, an optimal strategy might be: - Consume dividends and interest flowing out of taxable, plus RMDs from traditional. - Leave principal from taxable to heirs (avoi...

TinyHouse wrote: ↑Tue Mar 14, 2023 9:45 pm I have yet to see any forward-looking models that are helpful. The only thing I found helpful is honestly considering historical data and current market conditions. Which is in fact exactly what Karsten has done with his toolbox without playing any games with modeling or making assumptions not supported by history. Yes, anything can happen in the future, but when, considering likelihood, we only know the past.

We don't only know the past. We also know what the current yields of stocks and bonds are, and we know that they are significantly lower than what prevailed historically. I think it's important to include that information in our financial planning.

Normchad wrote: ↑Tue Mar 14, 2023 9:29 pm

Ben Mathew wrote: ↑Tue Mar 14, 2023 9:08 pm
If we use 1/CAPE as the expected stock return and 20 year TIPS yield as the expected bond return, we get expected real returns of 3.6% for stocks and 1.4% for bonds.

Expected return of a 50/50 portfolio would be 2.5%.

Even if your portfolio grew at 2.5% that rate every year like clockwork, you would run out of money after 27 years. years.

Is this math correct? If he withdraws 5% real per year, and the portfolio grows by 2.5% real per year, wouldn’t the portfolio last 40 years?

Actually, I just whomped the math up, and it looks like you are correct!

https://i0.wp.com/earlyretirementnow.com/wp-content/uploads/2016/11/swr-part1-table1.png?resize=764%2C500&ssl=1 The problem with this type of graph is that it tells people that 100% stocks is the best. Fixed "safe withdrawal rate" analyses that define success and failure as binary, combined with a history where stocks have done better than bonds, yield graphs like this that give the impression that more stocks make portfolios safer. This goes against basic portfolio theory and should give people some pause. Switch to forward looking modeling that acknowledge that stocks can do worse than bonds over long horizons, combined with flexible withdrawals that are not graded pass/fail, and you get back to the basic idea that more sto...

I think this is very optimistic and aggressive for a 58 year retirement, even with Social Security kicking in in the latter half. If we use 1/CAPE as the expected stock return and 20 year TIPS yield as the expected bond return, we get expected real returns of 3.6% for stocks and 1.4% for bonds. Expected return of a 50/50 portfolio would be 2.5%. Even if your portfolio grew at 2.5% that rate every year like clockwork, you would run out of money after 27 years. That's without accounting for precautionary savings to address gross return risk (average return <2.5%) and sequence of return risk (poor returns came early). Bump up expected stock return to 4.4% 5.6% based on 1/CAPE regressions, and the 50/50 portfolio grows at 3.5%. Money runs out i...

I don't know what's in the book, but the withdrawal rates are in IRS Publication 590-B. See the wiki: Required Minimum Distribution Thanks for the heads up. A clear and concise read as always. Can you point me to the life expectancy table used to calculate the withdrawal rates prior to age 72? RMDs during the original owner's life expectancy are based on the Uniform Lifetime Table from Pub 590-B , which is just drawing data from the Joint and Last Survivor Tables from the same publication. Specifically, the RMD for a given age is based on the joint life expectancy of somebody that age and somebody 10 years younger. For example for somebody age 80, we'd look up the intersection of 80 and 70 in the Joint table, and that's what you'll see as ...

Thanks for the heads up. A clear and concise read as always.

Can you point me to the life expectancy table used to calculate the withdrawal rates prior to age 72?

He's right, though, about naïve investors who look at the little risk gauges in their 401(k) plan literature and believe that taking more risk all but guarantees higher return. And I'm not kidding about that. A former acquaintance of mine was a teacher, chronically short of money, and couldn't really afford to save for retirement until she was in her fifties. Her plan literature had some model portfolios that participants could choose as a package, and she intentionally chose the "highly aggressive" plan because "I need to catch up, and I don't have much time left." Among all the vile marketing rhetoric used by investment firms, one of the vilest is using the word "aggressive" rather than "risky." Se...

Most of the time, taking more risk means you are most likely to earn lower returns , [my emphasis] with a smaller chance that you will earn fantastic returns to compensate. Depends on the investment. True for highly leveraged positions like out of the money stock options, but not generally true for stocks. However, agree with the broader point that people too often think risk means reward without thinking of the range and downsides. People often assume that stocks are pretty much guaranteed to do well in the long run if only you hang on tight and ride the short term volatility. That leads to the behavior described by nisiprius: He's right, though, about naïve investors who look at the little risk gauges in their 401(k) plan literature and ...

For the sake of my main question, let’s ignore taxes, fees and inflation for the moment. Then, an estimate of the nominal return on equities before personal taxes, fees, and inflation is just the inverse of the P/E ratio. Yes, but it might be easier to do everything in real terms from the get go. If you include inflation, then the earnings yield (E/P, or 1/PE ratio) is an estimate of the real return of stocks rather than the nominal return. That's because stocks are a claim on the real assets of the firm, and the profits generated by those real assets would automatically keep up with inflation. My question: might it be that the forces of innovation, new product development, creative destruction, etc., generate a “true” rate of economic dep...

Say I am 40 now, planning early retirement at 50, and only to receive this pension at 70. An estimation my pension will grow at 6% a year for the next ten years contributing, and only grows 2% after that until the age of 70. Thus assuming 8,000 a year income as of now, will grow to 14,325 at age 50, will grow to 21,280 at age 70. Now back to the tpaw planner: Which of these numbers do I fill in as 'Amount per month', and should I tick either real or nominal dollars? Given that the pension is COLA adjusted after age 50, sounds like the 2% growth after age 70 is your estimate of inflation. So that's nominal growth of 2% and real growth of 0% after age 50. The 2% nominal growth is an estimate, whereas the 0% real growth is what you are actual...

MONTHLY PLANNING + BLOCK SAMPLING Two features have been added to the online planner : 1. Monthly planning The granularity of age and dates has been increased from annual to monthly. This will make it easier to enter income and expenses that start or stop in the middle of the year. e.g. a mortgage payment that ends in August. It also provides clearer guidance about monthly tasks in the Tasks panel. Figuring out that your mortgage payment ends at precisely age 58 years and 2 months may be a hassle. This will eventually be made easier by a calendar input where you can enter that your mortgage payments ends in August 2032 instead of at age 58 years and 2 months. That will be added in the next few weeks. 2. Block sampling for the Monte Carlo s...

I believe my investment horizon, as defined in past threads, is 25 years, suggesting an average bond duration of 25 years. However, if I allocated to that duration, I wouldn't know how to handle liquidity for withdrawals at times when both stocks and bonds are down. I could maintain an allocation to cash alongside an allocation to 30 year bonds but it seems I'd need 25 spending-years worth of cash in order to wait out a recovery of fallen stocks and bonds. But I only have 20 spending-years worth of bonds in the first place, not to mention so much cash would bring average duration way down. Hence my confusion. I think you're talking about two ideas here—duration matching and a guaranteed spending floor. While a guaranteed spending floor req...

The good news is an inflation-adjusted annuity can really help. The bad news is basically the only inflation-adjusted annuity available these days is Social Security. I keep seeing this type of comment (two people so far in this thread), but I have some minor quibbles with the reasoning. Yes, SS is truly indexed to CPI, and it is also true that you can't buy a CPI-indexed annuity. However, you can buy an annuity with a fixed increase each year. If the rate of the increase is somewhat greater than the rate of inflation while you're alive, then the annuity provides a form of inflation adjustment -- assuming inflation is relatively consistent over that time (SOR matters). For example, you could look at the historical record and then choose an...

The good news is an inflation-adjusted annuity can really help. The bad news is basically the only inflation-adjusted annuity available these days is Social Security. I keep seeing this type of comment (two people so far in this thread), but I have some minor quibbles with the reasoning. Yes, SS is truly indexed to CPI, and it is also true that you can't buy a CPI-indexed annuity. However, you can buy an annuity with a fixed increase each year. If the rate of the increase is somewhat greater than the rate of inflation while you're alive, then the annuity provides a form of inflation adjustment -- assuming inflation is relatively consistent over that time (SOR matters). For example, you could look at the historical record and then choose an...

andyandyandy wrote: ↑Fri Feb 10, 2023 2:08 pm All,

Any recommendations on fee-based financial advisors in Northern VA/DC Metro?
Thanks and appreciate it!

Regards
Andy

"Fee-based" does not mean no commissions. It means you pay fees plus they take commissions. One of the dirty tricks in the dirty world of financial planning/wealth management.

You are probably looking for "fee only" which means no commissions.

The only way to be sure of providing for the long-life case is to be so conservative in spending that the likelihood is that you will die knowing that you could have spent more. Great post on the need to be conservative in the face of uncertainty (precautionary savings). There's a 50% chance that you will live longer than expected. It's necessary to plan for a longer-than-expected life, and update that higher as you grow older and life expectancy increases. That means dying with some money in the bank. Annuities provide longevity insurance and can reduce some of the need to be very conservative with spending. The cheapest (and now the only) way to buy an inflation adjusted annuity is to delay Social Security. Something to strongly consider.

Delaying SS and increasing the monthly benefit is the only way to obtain an inflation adjusted annuity in the US. It's valuable insurance against longevity risk. As stated on the OSS website, and reiterated by jeffyscott and Obliviousinvestor (Mike Piper) here, this benefit is not factored into the present value (PV) calculations. Put differently, only a risk neutral person should go solely on the basis of the the PV calculations. If you're risk averse, there's there's the added benefit from longevity risk reduction that's not being factored in. Go for the larger monthly benefit if the PV cost is small. Only a large reduction in PV should persuade you otherwise. Defining "small" and "large" of course is the hard part. Bu...

bobcat2 wrote: ↑Wed Feb 01, 2023 6:19 pm

Dry-Drink wrote: ↑Wed Feb 01, 2023 5:46 pm You are OK with someone leveraging by buying a call option but not OK with someone buying stock and either longing or shorting the risk-free asset via margin to get the same performance as that call option? What am I missing?

If you want to replicate a one year LEAPS option by continuously trading every few seconds for the next year a stock and a one year Tbill, then I say have at it, Dry-Drink.

BobK

So, to be clear, your problem with margin is that you would have to trade too frequently (every few seconds!) to manage the risk properly. Is that right?

PotashDoggerd wrote: ↑Wed Feb 01, 2023 6:14 pm Edited to add: If the issue was heart surgery instead of investing, and you wrote that something Dr. DeBakey wrote or said showed he "didn't understand" something about heart surgery as well as you did, I would have to go with Dr. DeBakey. If we were discussing chimpanzees and Ben Mathews posted that Dr. Jane Goodall wrote or said something that Ben Mathews claims showed she "didn't understand" something about chimps as well as Ben Mathews, I would still believe Dr. Jane Goodall. If the issue was French cooking and you claimed that you understood how to make a souflee better than Julia Child, I'd think most people (not just me) would buy her cookbook before yours.

The logic is even clearer now. Thanks.

It is frustrating that posters at Bogleheads continue to insist that Samuelson and Merton don't mean what they clearly state. Namely, don't leverage using margin. Samuelson in 2008 said "People who leverage heavily when they are very young do not realize that the sky is the limit of what they could lose and from that point on, they would be knocked out of the game." That's a statement against leverage in general, not about leveraging on margin vs leveraging with call options. Between this and his statement that Ayres & Nalebuff misapplied the Law of Large Numbers, it's clear that Samuelson misunderstood what Ayres and Nalebuff were saying. You are trying to reconcile the unreconcilable. It's far more likely that you don't und...

It is frustrating that posters at Bogleheads continue to insist that Samuelson and Merton don't mean what they clearly state. Namely, don't leverage using margin. Samuelson in 2008 said "People who leverage heavily when they are very young do not realize that the sky is the limit of what they could lose and from that point on, they would be knocked out of the game." That's a statement against leverage in general, not about leveraging on margin vs leveraging with call options. Between this and his statement that Ayres & Nalebuff misapplied the Law of Large Numbers, it's clear that Samuelson misunderstood what Ayres and Nalebuff were saying. You are trying to reconcile the unreconcilable. It's far more likely that you don't und...

Dry-Drink wrote: ↑Wed Feb 01, 2023 5:11 pm

Ben Mathew wrote: ↑Wed Feb 01, 2023 2:15 pm

I read once that a continuously-rebalanced stock portfolio can be made to mimic the performance of an option contract. That is, rebalancing is akin to shorting volatility so if you do it in a specific amount, the portfolio is identical to a call option.

Is this true? And if so, it would make this distinction about "OK to buy call options, NOT ok to buy stocks on margin" pretty silly yes? Since one can be made to mimic the other.

Thanks

Sounds like this should be true. Not an expert, so can't confirm.

Also, I find it curious that, after all these years and so many comments you've made on this topic, you've only now—after Merton's recent interview—started trying to make a distinction between leveraging with call options (OK) vs leveraging on margin (not OK). You've warned against leverage in general, not just against leveraging on margin. Now that Merton stated that it's okay for young people to leverage with call options, you're twisting yourself into a new position. Why didn't you say this all this earlier? That's simply not true. What I have consistently said is because of all the contraindications this investing technique only applies to a tiny fraction of investors. For example, here is a post I made nearly four years ago. Lifecycle...

It is frustrating that posters at Bogleheads continue to insist that Samuelson and Merton don't mean what they clearly state. Namely, don't leverage using margin. Samuelson in 2008 said "People who leverage heavily when they are very young do not realize that the sky is the limit of what they could lose and from that point on, they would be knocked out of the game." That's a statement against leverage in general, not about leveraging on margin vs leveraging with call options. Between this and his statement that Ayres & Nalebuff misapplied the Law of Large Numbers, it's clear that Samuelson misunderstood what Ayres and Nalebuff were saying. You are trying to reconcile the unreconcilable. You have just quoted Samuelson out of c...

bobcat2 wrote: ↑Wed Feb 01, 2023 1:25 pm It is frustrating that posters at Bogleheads continue to insist that Samuelson and Merton don't mean what they clearly state. Namely, don't leverage using margin.

Samuelson in 2008 said "People who leverage heavily when they are very young do not realize that the sky is the limit of what they could lose and from that point on, they would be knocked out of the game."

That's a statement against leverage in general, not about leveraging on margin vs leveraging with call options.

Between this and his statement that Ayres & Nalebuff misapplied the Law of Large Numbers, it's clear that Samuelson misunderstood what Ayres and Nalebuff were saying.

You are trying to reconcile the unreconcilable.

You said: "No one's suggesting ignoring the basic principles of lifecycle finance." Not: "I'm not suggesting ignoring the basic principles of lifecycle finance." Most folks would consider those two statements, within this thread, as equivalent. Not really. Especially when you're responding to my response to someone else's post. There are plenty of posts in this and other threads which don't take into account lifecycle principles." Fair enough. Not every one of my posts addresses life cycle. I do post about other issues,and even within life cycle's ambit, for example, I've paid attention to the expected returns of the asset classes one buys. Like long bonds and long TIPS in 2019. I also have the curious habit of wri...

I'm glad. Because sometimes it certainly seems that way. Please elaborate, I'm teachable :wink: My last several dozen posts have emphasized two points: 1) Long-dated nominal vehicles expose retirees to unnecessary risks in an fiat money world. Zvi Bodie emphatically agrees with that. 2) Leveraged products are unwise at any stage, and one has to twist oneself into a pretzel to get Samuelson disagreeing with that. That's all. You said: "No one's suggesting ignoring the basic principles of lifecycle finance." Not: "I'm not suggesting ignoring the basic principles of lifecycle finance." So what I'm saying is: "You could have fooled me. There are plenty of posts in this and other threads which don't take into account li...

Bill Bernstein wrote: ↑Mon Jan 30, 2023 2:04 pm No one's suggesting ignoring the basic principles of lifecycle finance.

I'm glad. Because sometimes it certainly seems that way.

Bill Bernstein wrote: ↑Mon Jan 30, 2023 11:13 am But I still don't know of any other way to interpret "out of the game."

It makes sense if Samuelson thought they were making the fallacious argument for time diversification.

The fallacious argument would be that young people have a longer time horizon than older people, stocks will almost certainly beat bonds over that horizon, and so they should make a leveraged investment in stocks and hold it their entire lives, without any reference to future earnings.

If a young person did that, they would be taking on a lot of risk, can get "knocked out of the game" at some point in their lives, and end with zero.

AlohaBill wrote: ↑Mon Jan 30, 2023 11:37 am What happens when you are young, just bought a house and car, had twins, wife no longer working as she is sacrificing by raising those kids and you’ve decided that Steven Reading is THE guru and you’ve invested everything else his way and the market tanks?

The flip side of too little risk when young is too much risk when old.

So what happens when you are just retired, your retirement accounts hold your entire lifetime savings with no future contributions coming in, you have the same allocation to stocks as you did when you were 25 because you never took the time to understand the principles of lifecycle investing, and the market tanks? What do you do then?

My apologies for missing the previous discussion of the Samuelson quote. It's interesting to see how Samuelson seems to have changed his mind, though; I don't think he misinterpreted anything. We're all familiar with how investors are overconfident about their ability to pick securities and pick money managers, but those overconfidences pale into insignificance compared to overconfidence about how well they think they can bear risk when that risk actually appears. Of the 11 screens listed, #7 is the critical one. Just because you *think* you don't worry about losing money doesn't mean that in a bad state of the world you won't panic. I agree with bobcat2's assertion that bear markets don't occur in a vacuum; I imagine that in a 1929-32 sce...

My guess is that Samuelson would agree with this - in particular do not leverage using margin. You don't have to guess. Here's what Samuelson said in a talk at BU (BTW, the same series of lectures in which Bodie labeled nominal annuities "a speculation on inflation" (pretty sure it's this one: https://www.youtube.com/watch?v=Cy6vstYFuig&ab_channel=BostonUniversity Sameulson was introduced by Bodie.) Just recently as I was preparing this manuscript, I got one of those innumerable abstracts from the National Bureau of Economic Research and I will name no names but a Yale economist [Nalebuff] and a Yale law school professor [Ayres] have advised the world that when you are young and you have many years horizon ahead of you, you s...