annuities

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Dennisl
Posts: 246
Joined: Sun Jun 09, 2019 1:46 pm

annuities

Post by Dennisl »

https://the-long-view.simplecast.com/ep ... r-d7h6DR00

Interesting interview on the long view podcast. A lot of folks are disappointed by the unavailability of COLA SPIA's. Makes an interesting point on the huge premium insurance companies have to charge to protect itself against hyperinflation, so makes more sense to get a standard SPIA and invest the difference in equity since it serves well as an inflation hedge.
dbr
Posts: 35911
Joined: Sun Mar 04, 2007 9:50 am

Re: annuities

Post by dbr »

Wade Pfau published some work on that, or maybe it was Kitces. You may be able to find it in a search of some kind.

I think the results were that fixed nominal SPIA plus stocks were not a bad idea, probably better than bonds/stocks. But you would have to find the paper/article.
User avatar
Stinky
Posts: 7837
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: annuities

Post by Stinky »

Dennisl wrote: Tue May 11, 2021 10:39 am https://the-long-view.simplecast.com/ep ... r-d7h6DR00

Interesting interview on the long view podcast. A lot of folks are disappointed by the unavailability of COLA SPIA's. Makes an interesting point on the huge premium insurance companies have to charge to protect itself against hyperinflation, so makes more sense to get a standard SPIA and invest the difference in equity since it serves well as an inflation hedge.
I listened to the podcast.

As a confirmed Boglehead, I was somewhat disappointed in the interview. The majority of the time seemed to be spent talking about the kinds of annuities that BHs don’t like, and not much time on the “good” types like SPIAs and MYGAs.

I think that the target audience for the interviewee’s newsletter are those advisors who make big commissions off annuities. Not those who sell mostly “good” annuities.
It's a GREAT day to be alive! - Travis Tritt
Topic Author
Dennisl
Posts: 246
Joined: Sun Jun 09, 2019 1:46 pm

Re: annuities

Post by Dennisl »

Stinky wrote: Tue May 11, 2021 11:08 am
Dennisl wrote: Tue May 11, 2021 10:39 am https://the-long-view.simplecast.com/ep ... r-d7h6DR00

Interesting interview on the long view podcast. A lot of folks are disappointed by the unavailability of COLA SPIA's. Makes an interesting point on the huge premium insurance companies have to charge to protect itself against hyperinflation, so makes more sense to get a standard SPIA and invest the difference in equity since it serves well as an inflation hedge.
I listened to the podcast.

As a confirmed Boglehead, I was somewhat disappointed in the interview. The majority of the time seemed to be spent talking about the kinds of annuities that BHs don’t like, and not much time on the “good” types like SPIAs and MYGAs.

I think that the target audience for the interviewee’s newsletter are those advisors who make big commissions off annuities. Not those who sell mostly “good” annuities.
I agree. It was mostly on indexed, variable annuities, etc. The comment from above was really more of a side note. However, it was eye opening to see things from the insurance side of things and how they have to change their structure due to the low interest environment.
User avatar
bobcat2
Posts: 5565
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Re: annuities

Post by bobcat2 »

Dennisl wrote: Tue May 11, 2021 10:39 am https://the-long-view.simplecast.com/ep ... r-d7h6DR00

Interesting interview on the long view podcast. A lot of folks are disappointed by the unavailability of COLA SPIA's. Makes an interesting point on the huge premium insurance companies have to charge to protect itself against hyperinflation, so makes more sense to get a standard SPIA and invest the difference in equity since it serves well as an inflation hedge.
That's not true. An insurance company simply liability matches the real (inflation adjusted) annuity payouts against TIPS rather than ordinary Treasuries. Inflation-adjusted life annuities went away because real interest rates remained very low for a long period of time and inflation was also very low. Both of those realities make inflation-adjusted life annuities expensive and unattractive to consumers.

With a very small market share, duration matching TIPS just for this very small market share is expensive for insurance companies, because nominal life annuities (probably over 95% of the life annuity market) are duration matched to nominal Treasuries. So setting up this additional duration matching mechanism for only a sliver of their life annuity market is an additional added expense added to real life annuities compared to their nominal counterparts. That additional cost made them even more unattractive to potential buyers. Once the market become so small that duration matching by TIPS added a significant added expense to real life annuities most insurance companies simply threw in the towel on inflation-adjusted life annuities. Because at that point their alternatives would have been duration matching with nominals and making unreliable forecasts of inflation or folding up the real life annuities tent.

By the way, the guy in the podcast is also wrong about equities providing an inflation hedge. They don't. They don't do as badly as nominal bonds, but their correlation with inflation is close to zero. A correlation of zero is not a hedge.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
Topic Author
Dennisl
Posts: 246
Joined: Sun Jun 09, 2019 1:46 pm

Re: annuities

Post by Dennisl »

My understanding was that in the long term, equity is usually able to keep up with inflation. Correct me if I'm wrong. Is the fear that in the low interest environment, people are forced to take on more risk in equities, expected returns are lower and may not keep up with inflation? Or is it simply that there is no correlation between equity and inflation. I thought in an inflationary environment, companies charges more for their services and therefore equity prices are reflective of that in their ability to keep up with inflation. This is all theory of course, won't change what I do at this time.
Broken Man 1999
Posts: 6266
Joined: Wed Apr 08, 2015 11:31 am
Location: West coast of Florida, inland on high ground!

Re: annuities

Post by Broken Man 1999 »

We will continue to let our VA grow. We don't need to annuitize for expenses. I think we can let it ride until we turn 85, another 17 years. We have no LTC insurance, so we can use the VA for that purpose, if needed.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go." - Mark Twain
Wrench
Posts: 305
Joined: Sun Apr 28, 2019 10:21 am

Re: annuities

Post by Wrench »

bobcat2 wrote: Tue May 11, 2021 4:01 pm
Dennisl wrote: Tue May 11, 2021 10:39 am https://the-long-view.simplecast.com/ep ... r-d7h6DR00

Interesting interview on the long view podcast. A lot of folks are disappointed by the unavailability of COLA SPIA's. Makes an interesting point on the huge premium insurance companies have to charge to protect itself against hyperinflation, so makes more sense to get a standard SPIA and invest the difference in equity since it serves well as an inflation hedge.
That's not true. An insurance company simply liability matches the real (inflation adjusted) annuity payouts against TIPS rather than ordinary Treasuries. Inflation-adjusted life annuities went away because real interest rates remained very low for a long period of time and inflation was also very low. Both of those realities make inflation-adjusted life annuities expensive and unattractive to consumers.

With a very small market share, duration matching TIPS just for this very small market share is expensive for insurance companies, because nominal life annuities (probably over 95% of the life annuity market) are duration matched to nominal Treasuries. So setting up this additional duration matching mechanism for only a sliver of their life annuity market is an additional added expense added to real life annuities compared to their nominal counterparts. That additional cost made them even more unattractive to potential buyers. Once the market become so small that duration matching by TIPS added a significant added expense to real life annuities most insurance companies simply threw in the towel on inflation-adjusted life annuities. Because at that point their alternatives would have been duration matching with nominals and making unreliable forecasts of inflation or folding up the real life annuities tent.

By the way, the guy in the podcast is also wrong about equities providing an inflation hedge. They don't. They don't do as badly as nominal bonds, but their correlation with inflation is close to zero. A correlation of zero is not a hedge.

BobK
OMG - Thank you BobK for this explanation! I have been puzzling over this for some time. Once you laid it out, i t seems so obvious that it must be true.

Wrench
User avatar
WoodSpinner
Posts: 1971
Joined: Mon Feb 27, 2017 1:15 pm

Re: annuities

Post by WoodSpinner »

OP,

Glad I saw your post before posting mine ....

I think the Podcast was well worth a listen and pulled out several nuggets:

1. SPIAs and DIAs aren’t selling very well (despite them being the best economic choice for most annuity purchasers) because people do not want to spend their money and potentially loose out on the Mortality Credit bet.

2. Other types of annuities are expensive due to the need for complexity of the product and for paying large commissions to agents so they can specialize and make the sale.

3. When you shop for annuities you need to realize that agents specialize in specific types and you are not likely to be informed about the range of possible products.

4. Insurance companies are really struggling in this low-interest rate world! For short term products focus on return but for longer term products look towards credit quality.

I wish they had done more discussion on the various types of annuities so I could mentally categorize them. Frankly it was confusing to try and follow his insights and figure out which solution would be appropriate for which goal.

Definitely worth a listen.

WoodSpinner
User avatar
vineviz
Posts: 10259
Joined: Tue May 15, 2018 1:55 pm

Re: annuities

Post by vineviz »

Stinky wrote: Tue May 11, 2021 11:08 am As a confirmed Boglehead, I was somewhat disappointed in the interview. The majority of the time seemed to be spent talking about the kinds of annuities that BHs don’t like, and not much time on the “good” types like SPIAs and MYGAs.
Just for the record, insurance companies have started to produce commission-free annuities and some fee-only advisors are beginning to work with these for their clients.

Most investors are still best served by income annuities or MYGAs, IMHO, but it's amazing how much less awful some of the "bad" annuities can be when the commission is removed and the product is repriced accordingly.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
Stinky
Posts: 7837
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: annuities

Post by Stinky »

vineviz wrote: Tue May 11, 2021 8:10 pm
Stinky wrote: Tue May 11, 2021 11:08 am As a confirmed Boglehead, I was somewhat disappointed in the interview. The majority of the time seemed to be spent talking about the kinds of annuities that BHs don’t like, and not much time on the “good” types like SPIAs and MYGAs.
Just for the record, insurance companies have started to produce commission-free annuities and some fee-only advisors are beginning to work with these for their clients.

Most investors are still best served by income annuities or MYGAs, IMHO, but it's amazing how much less awful some of the "bad" annuities can be when the commission is removed and the product is repriced accordingly.
"Commission-free annuities" is an interesting concept. A lot of the "awfulness" in certain annuities could be remedied if the 7-10% commission paid to the agent was redirected to the policyholder's benefit.

I'm just wondering - would a "fee-only" advisor then likely charge an AUM fee on the value of the annuity? If so, that would seem to push the costs incurred by the policyholder from one pocket (annuity loads) to another pocket (AUM fee), with the total fee level substantially unchanged. Is that the case?
It's a GREAT day to be alive! - Travis Tritt
User avatar
vineviz
Posts: 10259
Joined: Tue May 15, 2018 1:55 pm

Re: annuities

Post by vineviz »

Stinky wrote: Wed May 12, 2021 5:32 am "Commission-free annuities" is an interesting concept. A lot of the "awfulness" in certain annuities could be remedied if the 7-10% commission paid to the agent was redirected to the policyholder's benefit.

I'm just wondering - would a "fee-only" advisor then likely charge an AUM fee on the value of the annuity? If so, that would seem to push the costs incurred by the policyholder from one pocket (annuity loads) to another pocket (AUM fee), with the total fee level substantially unchanged. Is that the case?
I don't charge based on AUM so I can't speak for advisors who do that, but my guess is that some will include the value of the annuity in the formula somehow and others won't.

For clients who choose, for whatever reason, to pay an AUM fee the concept of commission-free annuities still serves a very valuable role IMHO of reducing the conflicts of interest that this fee arrangement can create. In the absence of commission-free annuities, fee-only advisors have no incentive to recommend annuities to begin with since they are paid based on how big the AUM is.

Without commission-free annuities a fee-only advisor can be compensated for including a high-cost separately managed bond portfolio in the account (for instance) but not for moving some assets into a low-cost fixed income annuity or even a MYGA/SPIA/DIA combination, even when the latter might be the better outcome for the client.

That said, anyone interested in these should probably seek out a fee-only advisor who works with commission-free annuities on a flat fee or hourly basis unless they really have a strong need for ongoing financial planning otherwise.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
nisiprius
Advisory Board
Posts: 43713
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: annuities

Post by nisiprius »

bobcat2 wrote: Tue May 11, 2021 4:01 pm...By the way, the guy in the podcast is also wrong about equities providing an inflation hedge. They don't. They don't do as badly as nominal bonds, but their correlation with inflation is close to zero. A correlation of zero is not a hedge...
It drives me bananas but the common world of investing seems to be heavily populated by "floating slogans" which never change and at best have only a grain of truth in them. "Stocks as an inflation hedge" is one of them.

I love the following quotations from Benjamin Graham (Warren Buffett's mentor). From The Intelligent Investor, 4th ed., 1973,
Benjamin Graham wrote:[p. 20] On this point we can be categorical. There is no close time connection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvious example is the recent period 1966-1970. The rise in the cost of living was 22%... but both stock earnings and stock prices have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods...

[p. 23] ....if the investor concentrates his portfolio on common stocks he is every likely to be led astray either by exhilarating advances or by distressing declines. This is particularly true if his reasoning is geared closely to expectations of further inflation.
The other point that can be made is that you can make a sales pitch for almost anything as an "inflation hedge," because most assets sorta-kinda-tend-to have a positive real return over long periods of time. Stocks, commodities, salaries, decent interest-earning bank accounts. The stuff that doesn't is the exception. The only stuff that doesn't is literal physical currency, non-interest-bearing bank accounts, and (most) bonds. And they don't tend to talk about the appropriate holding period. For real estate in Herengracht over 400 years, the holding period to be sure to keep up with inflation was about 100 years, for example.

And the other point, of course, is that TIPS do exist. Frequently, and in what I think is a dishonest way, people will make blanket statements about "bonds" and not acknowledge the existence of TIPS, and I think the reason is the desire to avoid complicating a simplistic story. So they tell the truth and nothing but the truth, but not the whole truth.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Wrench
Posts: 305
Joined: Sun Apr 28, 2019 10:21 am

Re: annuities

Post by Wrench »

nisiprius wrote: Wed May 12, 2021 7:45 am
bobcat2 wrote: Tue May 11, 2021 4:01 pm...By the way, the guy in the podcast is also wrong about equities providing an inflation hedge. They don't. They don't do as badly as nominal bonds, but their correlation with inflation is close to zero. A correlation of zero is not a hedge...
It drives me bananas but the common world of investing seems to be heavily populated by "floating slogans" which never change and at best have only a grain of truth in them. "Stocks as an inflation hedge" is one of them.

I love the following quotations from Benjamin Graham (Warren Buffett's mentor). From The Intelligent Investor, 4th ed., 1973,
Benjamin Graham wrote:[p. 20] On this point we can be categorical. There is no close time connection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvious example is the recent period 1966-1970. The rise in the cost of living was 22%... but both stock earnings and stock prices have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods...

[p. 23] ....if the investor concentrates his portfolio on common stocks he is every likely to be led astray either by exhilarating advances or by distressing declines. This is particularly true if his reasoning is geared closely to expectations of further inflation.
The other point that can be made is that you can make a sales pitch for almost anything as an "inflation hedge," because most assets sorta-kinda-tend-to have a positive real return over long periods of time. Stocks, commodities, salaries, decent interest-earning bank accounts. The stuff that doesn't is the exception. The only stuff that doesn't is literal physical currency, non-interest-bearing bank accounts, and (most) bonds. And they don't tend to talk about the appropriate holding period. For real estate in Herengracht over 400 years, the holding period to be sure to keep up with inflation was about 100 years, for example.

And the other point, of course, is that TIPS do exist. Frequently, and in what I think is a dishonest way, people will make blanket statements about "bonds" and not acknowledge the existence of TIPS, and I think the reason is the desire to avoid complicating a simplistic story. So they tell the truth and nothing but the truth, but not the whole truth.
Relative to inflation protection through real estate, a real personal story. We purchased our home in 1987. In 2019, I priced it according to Zillow, and our home was about 10% behind inflation since 1987. With the run up in prices recently (we live in a suburban area outside a large metropolitan area), we are now just about even with inflation, or even slightly ahead. Admittedly, we purchased in a small bubble in RE prices in 1987 due to a booming local economy so this story by no means generalizes to every one or every where. But, RE is certainly no certain thing as a way to beat inflation.

Wrench
ScubaHogg
Posts: 814
Joined: Sun Nov 06, 2011 3:02 pm

Re: annuities

Post by ScubaHogg »

Wrench wrote: Wed May 12, 2021 12:13 pm
nisiprius wrote: Wed May 12, 2021 7:45 am
bobcat2 wrote: Tue May 11, 2021 4:01 pm...By the way, the guy in the podcast is also wrong about equities providing an inflation hedge. They don't. They don't do as badly as nominal bonds, but their correlation with inflation is close to zero. A correlation of zero is not a hedge...
It drives me bananas but the common world of investing seems to be heavily populated by "floating slogans" which never change and at best have only a grain of truth in them. "Stocks as an inflation hedge" is one of them.

I love the following quotations from Benjamin Graham (Warren Buffett's mentor). From The Intelligent Investor, 4th ed., 1973,
Benjamin Graham wrote:[p. 20] On this point we can be categorical. There is no close time connection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvious example is the recent period 1966-1970. The rise in the cost of living was 22%... but both stock earnings and stock prices have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods...

[p. 23] ....if the investor concentrates his portfolio on common stocks he is every likely to be led astray either by exhilarating advances or by distressing declines. This is particularly true if his reasoning is geared closely to expectations of further inflation.
The other point that can be made is that you can make a sales pitch for almost anything as an "inflation hedge," because most assets sorta-kinda-tend-to have a positive real return over long periods of time. Stocks, commodities, salaries, decent interest-earning bank accounts. The stuff that doesn't is the exception. The only stuff that doesn't is literal physical currency, non-interest-bearing bank accounts, and (most) bonds. And they don't tend to talk about the appropriate holding period. For real estate in Herengracht over 400 years, the holding period to be sure to keep up with inflation was about 100 years, for example.

And the other point, of course, is that TIPS do exist. Frequently, and in what I think is a dishonest way, people will make blanket statements about "bonds" and not acknowledge the existence of TIPS, and I think the reason is the desire to avoid complicating a simplistic story. So they tell the truth and nothing but the truth, but not the whole truth.
Relative to inflation protection through real estate, a real personal story. We purchased our home in 1987. In 2019, I priced it according to Zillow, and our home was about 10% behind inflation since 1987. With the run up in prices recently (we live in a suburban area outside a large metropolitan area), we are now just about even with inflation, or even slightly ahead. Admittedly, we purchased in a small bubble in RE prices in 1987 due to a booming local economy so this story by no means generalizes to every one or every where. But, RE is certainly no certain thing as a way to beat inflation.

Wrench
Assuming you took out a loan originally, what is your return on your original investment/down payment?
“Unexpected Returns dominate the Expected Returns” - Ken French
Derpalator
Posts: 79
Joined: Sun Nov 15, 2015 2:52 pm

Re: annuities

Post by Derpalator »

dbr wrote: Tue May 11, 2021 11:03 am Wade Pfau published some work on that, or maybe it was Kitces. You may be able to find it in a search of some kind.

I think the results were that fixed nominal SPIA plus stocks were not a bad idea, probably better than bonds/stocks. But you would have to find the paper/article.
Pfau has stated repeatedly that the optimal mix was SPIAs and stocks, "no place for bonds". I have heard him say so on Financial Mentor, Afford Anything, Rick Ferri's Boglehead podcast, and Morningstar's The Long View. I also believe he does the same getting well into the weeds in his Safety First Retirement Planning book.

His and/or Kitces' math in my opinion is somewhat tortured, especially considering how many uncertainties there are. Or perhaps I just represent the "annuity paradox", the thing where economists/personal finance gurus don't understand why more annuities aren't sold. I can tell them why. It is hard to wave goodbye to 40% of one's life savings even if the "payout" is better rate than bonds with no guarantee against inflation.
Wrench
Posts: 305
Joined: Sun Apr 28, 2019 10:21 am

Re: annuities

Post by Wrench »

ScubaHogg wrote: Thu May 13, 2021 3:35 am
Wrench wrote: Wed May 12, 2021 12:13 pm
nisiprius wrote: Wed May 12, 2021 7:45 am
bobcat2 wrote: Tue May 11, 2021 4:01 pm...By the way, the guy in the podcast is also wrong about equities providing an inflation hedge. They don't. They don't do as badly as nominal bonds, but their correlation with inflation is close to zero. A correlation of zero is not a hedge...
It drives me bananas but the common world of investing seems to be heavily populated by "floating slogans" which never change and at best have only a grain of truth in them. "Stocks as an inflation hedge" is one of them.

I love the following quotations from Benjamin Graham (Warren Buffett's mentor). From The Intelligent Investor, 4th ed., 1973,
Benjamin Graham wrote:[p. 20] On this point we can be categorical. There is no close time connection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvious example is the recent period 1966-1970. The rise in the cost of living was 22%... but both stock earnings and stock prices have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods...

[p. 23] ....if the investor concentrates his portfolio on common stocks he is every likely to be led astray either by exhilarating advances or by distressing declines. This is particularly true if his reasoning is geared closely to expectations of further inflation.
The other point that can be made is that you can make a sales pitch for almost anything as an "inflation hedge," because most assets sorta-kinda-tend-to have a positive real return over long periods of time. Stocks, commodities, salaries, decent interest-earning bank accounts. The stuff that doesn't is the exception. The only stuff that doesn't is literal physical currency, non-interest-bearing bank accounts, and (most) bonds. And they don't tend to talk about the appropriate holding period. For real estate in Herengracht over 400 years, the holding period to be sure to keep up with inflation was about 100 years, for example.

And the other point, of course, is that TIPS do exist. Frequently, and in what I think is a dishonest way, people will make blanket statements about "bonds" and not acknowledge the existence of TIPS, and I think the reason is the desire to avoid complicating a simplistic story. So they tell the truth and nothing but the truth, but not the whole truth.
Relative to inflation protection through real estate, a real personal story. We purchased our home in 1987. In 2019, I priced it according to Zillow, and our home was about 10% behind inflation since 1987. With the run up in prices recently (we live in a suburban area outside a large metropolitan area), we are now just about even with inflation, or even slightly ahead. Admittedly, we purchased in a small bubble in RE prices in 1987 due to a booming local economy so this story by no means generalizes to every one or every where. But, RE is certainly no certain thing as a way to beat inflation.

Wrench
Assuming you took out a loan originally, what is your return on your original investment/down payment?
About 6% CAGR on original down payment. We also refinanced multiple times and several times took equity from the house to pay for college expenses for our three children. So I am not unhappy with the purchase or the return. My only point was Real Estate is not necessarily an inflation hedge. Though like any investment, if you buy low and sell high, it can be.

Wrench
ScubaHogg
Posts: 814
Joined: Sun Nov 06, 2011 3:02 pm

Re: annuities

Post by ScubaHogg »

Wrench wrote: Thu May 13, 2021 6:38 am
ScubaHogg wrote: Thu May 13, 2021 3:35 am
Wrench wrote: Wed May 12, 2021 12:13 pm
nisiprius wrote: Wed May 12, 2021 7:45 am
bobcat2 wrote: Tue May 11, 2021 4:01 pm...By the way, the guy in the podcast is also wrong about equities providing an inflation hedge. They don't. They don't do as badly as nominal bonds, but their correlation with inflation is close to zero. A correlation of zero is not a hedge...
It drives me bananas but the common world of investing seems to be heavily populated by "floating slogans" which never change and at best have only a grain of truth in them. "Stocks as an inflation hedge" is one of them.

I love the following quotations from Benjamin Graham (Warren Buffett's mentor). From The Intelligent Investor, 4th ed., 1973,
Benjamin Graham wrote:[p. 20] On this point we can be categorical. There is no close time connection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvious example is the recent period 1966-1970. The rise in the cost of living was 22%... but both stock earnings and stock prices have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods...

[p. 23] ....if the investor concentrates his portfolio on common stocks he is every likely to be led astray either by exhilarating advances or by distressing declines. This is particularly true if his reasoning is geared closely to expectations of further inflation.
The other point that can be made is that you can make a sales pitch for almost anything as an "inflation hedge," because most assets sorta-kinda-tend-to have a positive real return over long periods of time. Stocks, commodities, salaries, decent interest-earning bank accounts. The stuff that doesn't is the exception. The only stuff that doesn't is literal physical currency, non-interest-bearing bank accounts, and (most) bonds. And they don't tend to talk about the appropriate holding period. For real estate in Herengracht over 400 years, the holding period to be sure to keep up with inflation was about 100 years, for example.

And the other point, of course, is that TIPS do exist. Frequently, and in what I think is a dishonest way, people will make blanket statements about "bonds" and not acknowledge the existence of TIPS, and I think the reason is the desire to avoid complicating a simplistic story. So they tell the truth and nothing but the truth, but not the whole truth.
Relative to inflation protection through real estate, a real personal story. We purchased our home in 1987. In 2019, I priced it according to Zillow, and our home was about 10% behind inflation since 1987. With the run up in prices recently (we live in a suburban area outside a large metropolitan area), we are now just about even with inflation, or even slightly ahead. Admittedly, we purchased in a small bubble in RE prices in 1987 due to a booming local economy so this story by no means generalizes to every one or every where. But, RE is certainly no certain thing as a way to beat inflation.

Wrench
Assuming you took out a loan originally, what is your return on your original investment/down payment?
About 6% CAGR on original down payment. We also refinanced multiple times and several times took equity from the house to pay for college expenses for our three children. So I am not unhappy with the purchase or the return. My only point was Real Estate is not necessarily an inflation hedge. Though like any investment, if you buy low and sell high, it can be.

Wrench
Though it seems like the value of your down payment more than kept up with inflation

(I realize it’s messy with principal payments and refinancing, but judging to a first approximation)
“Unexpected Returns dominate the Expected Returns” - Ken French
AlwaysLearningMore
Posts: 230
Joined: Sun Jul 26, 2020 2:29 pm

Re: annuities

Post by AlwaysLearningMore »

nisiprius wrote: Wed May 12, 2021 7:45 am
bobcat2 wrote: Tue May 11, 2021 4:01 pm...By the way, the guy in the podcast is also wrong about equities providing an inflation hedge. They don't. They don't do as badly as nominal bonds, but their correlation with inflation is close to zero. A correlation of zero is not a hedge...
It drives me bananas but the common world of investing seems to be heavily populated by "floating slogans" which never change and at best have only a grain of truth in them. "Stocks as an inflation hedge" is one of them.

I love the following quotations from Benjamin Graham (Warren Buffett's mentor). From The Intelligent Investor, 4th ed., 1973,
Benjamin Graham wrote:[p. 20] On this point we can be categorical. There is no close time connection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvious example is the recent period 1966-1970. The rise in the cost of living was 22%... but both stock earnings and stock prices have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods...

[p. 23] ....if the investor concentrates his portfolio on common stocks he is every likely to be led astray either by exhilarating advances or by distressing declines. This is particularly true if his reasoning is geared closely to expectations of further inflation.
The other point that can be made is that you can make a sales pitch for almost anything as an "inflation hedge," because most assets sorta-kinda-tend-to have a positive real return over long periods of time. Stocks, commodities, salaries, decent interest-earning bank accounts. The stuff that doesn't is the exception. The only stuff that doesn't is literal physical currency, non-interest-bearing bank accounts, and (most) bonds. And they don't tend to talk about the appropriate holding period. For real estate in Herengracht over 400 years, the holding period to be sure to keep up with inflation was about 100 years, for example.

And the other point, of course, is that TIPS do exist. Frequently, and in what I think is a dishonest way, people will make blanket statements about "bonds" and not acknowledge the existence of TIPS, and I think the reason is the desire to avoid complicating a simplistic story. So they tell the truth and nothing but the truth, but not the whole truth.
Warren Buffet http://www.valueinvesting.de/en/inflati ... uffett.htm
How Inflation Swindles the Equity Investor

It is no longer a secret that stocks, like bonds, do poorly in an inflationary environment. We have been in such an environment for most of the past decade, and it has indeed been a time of troubles for stocks. But the reasons for the stock market's problems in this period are still imperfectly understood.

There is no mystery at all about the problems of bondholders in an era of inflation. When the value of the dollar deteriorates month after month, a security with income and principal payments denominated in those dollars isn't going to be a big winner. You hardly need a Ph.D. in economics to figure that one out.

It was long assumed that stocks were something else. For many years, the conventional wisdom insisted that stocks were a hedge against inflation. The proposition was rooted in the fact that stocks are not claims against dollars, as bonds are, but represent ownership of companies with productive facilities. These, investors believed, would retain their Value in real terms, let the politicians print money as they might.

And why didn't it turn but that way? The main reason, I believe, is that stocks, in economic substance, are really very similar to bonds.
Retirement is best when you have a lot to live on, and a lot to live for.
Post Reply