What safe return would you take to forego stocks?

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I'd be willing to not invest in stocks if I could earn __% in safer investments such as CDs instead

at least 1%
0
No votes
1% - 2%
1
1%
2% - 3%
0
No votes
3% - 4%
5
6%
4% - 5%
10
12%
5% - 6%
18
22%
6% - 7%
18
22%
7% - 8%
11
13%
more than 8%
19
23%
 
Total votes: 82

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Lbill
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What safe return would you take to forego stocks?

Post by Lbill » Wed May 02, 2012 9:19 am

How much would you have to earn from low-risk investments (nominal), such as CDs, these days in order to invest in them rather than stocks?
Last edited by Lbill on Wed May 02, 2012 6:08 pm, edited 1 time in total.
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yobria
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Re: What safe return would you take to forego stocks?

Post by yobria » Wed May 02, 2012 9:27 am

Stocks are more tax friendly, offer TLH opps, have some degree of inflation protection, and offer unlimited upside. So you'd have to offer a high rate of return for me to hold a 0% stock portfolio, since I have a long time horizon.

NoVa Lurker
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Re: What safe return would you take to forego stocks?

Post by NoVa Lurker » Wed May 02, 2012 9:35 am

If the instrument did not track inflation to some extent, I'd probably need at least a 10% annual return to move ALL money over into it -- and maybe 10% wouldn't even be good enough. Investing completely in fixed rate bonds will leave you heavily exposed if there is serious inflation. I don't see that as a medium-term risk, but it's certainly a risk if you expect/hope to live another 50 years.

I would completely skip stocks if I could invest in a "Real + 3%" instrument with no transaction costs -- in other words, an instrument that would return inflation plus at least 3% -- that was guaranteed by a AAA-rated entity. I'd also need to look into the specific inflation index that was being used.

If it was Real+2%, I'd probably move a lot of money into that but keep a small amount in stocks.

wriggly
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Re: What safe return would you take to forego stocks?

Post by wriggly » Wed May 02, 2012 9:36 am

I remember reading an article about 2 years ago which asked institutional investment managers what guaranteed return they would take as a swap for their current portfolio.

Although there was some variety, the answer that I remember was 1% real return after tax.

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G-Money
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Re: What safe return would you take to forego stocks?

Post by G-Money » Wed May 02, 2012 9:47 am

For how long?

Interest rates right now are very low. I expect stock returns over the near term to be modest, as well. But in the future, especially decades from now, I have no idea what kind of investing environment we'll be in.

Intermediate investment-grade corporates are yielding 2-3%. LT investment grade corporates are yielding 4-5%. HY corporates are yielding 5-6%. As a rule of thumb I just made up and has no statistical support, maybe I'd want a guaranteed return that doubled the spread between investment-grade corporates and Treasuries for whatever period I had to be out of stocks.

So, if I only need to commit to staying out of stocks for ~5 years, I guess I'd require a guaranteed return of between 4 and 5%. If I had to be out of stocks for 20 years, I'd require 6-7%. If I was forced to be out of stocks forever, I'd require >8%.
Don't assume I know what I'm talking about.

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nisiprius
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Re: What safe return would you take to forego stocks?

Post by nisiprius » Wed May 02, 2012 10:10 am

Unfortunately you didn't say whether that was nominal or real returns. I'd take 5% real, since that would allow 4%-initial COLAed withdrawals, not only preserving capital but allowing it to grow 1% real per year which would be a reasonable safety margin both for income and for occasionally dipping into capital.

Nominal, it's pretty hard to say. I would not want to lock myself irrevocably into a investment yielding a fixed nominal rate of interest for more than about five years.

And if you're talking specifically about "these days," well, I can't tell you how rational or irrational this is. Part of me just does not believe in mean reversion as anything to be counted on, so I'm tempted to assume that there's no a priori reason for stocks to be any better or worse now than at any other time. But we've had such a lousy decade, I'd hate to be totally out of stocks, just my luck if they came roaring back.

The availability of 5% real guaranteed fixed income would truly change the investment landscape and I think I could justify changing my asset allocation accordingly. I guess, given that I'm already semiretired, if I had a 12-15% nominal fixed income investment that paid out interest every year, I might consider foregoing stocks and using interest from that investment to buy small SPIAs every two or three years with the interest.

To put it another way, "staying the course" means it takes something pretty big to justify changing it, or you'd be changing it all the time.

So, "more than 8% it is."

If you claim to have such an investment, please don't contact me about it, though, I'm busy with Mr. Ponzi on the other line.
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Leesbro63
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Re: What safe return would you take to forego stocks?

Post by Leesbro63 » Wed May 02, 2012 10:13 am

My answer would be two percent after inflation and taxes

natureexplorer
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Re: What safe return would you take to forego stocks?

Post by natureexplorer » Wed May 02, 2012 10:16 am

This is really a question about inflation risk.

The answer is a lot easier if it is about real return.

By the way, what investment vehicles would you consider safe? Hopefully not annuities.

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Cut-Throat
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Re: What safe return would you take to forego stocks?

Post by Cut-Throat » Wed May 02, 2012 10:29 am

I voted 1.5%.......But in Real returns

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Re: What safe return would you take to forego stocks?

Post by psteinx » Wed May 02, 2012 10:33 am

I interpret the question as not being permanent (i.e. You're not foregoing stocks for the rest of your life, but rather, for a year or 3 or 5), and as being something of a question about one's expectations for equity returns and risk tolerance.

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Midpack
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Re: What safe return would you take to forego stocks?

Post by Midpack » Wed May 02, 2012 10:36 am

As others have suggested, real returns are all that matters. I also voted 8% since asking about returns (or inflation) independently doesn't mean much. My plan succeeds if we have real returns of 1-2%, though obviously I hope for better than that, but no bets... :?
You only live once...

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Frugal Al
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Re: What safe return would you take to forego stocks?

Post by Frugal Al » Wed May 02, 2012 10:54 am

3.5% for inflation + 2% real = 5.5%; round up to 6% and I'd be a happy camper.

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Re: What safe return would you take to forego stocks?

Post by TheEternalVortex » Wed May 02, 2012 11:39 am

5% real

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neurosphere
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Re: What safe return would you take to forego stocks?

Post by neurosphere » Wed May 02, 2012 11:45 am

Assuming no catastrophes in life for my wife and me which disability insurance won't cover, we will meet our retirement goals with 2% real over the next 30 years with our current income and spending.

I would easily trade half my portfolio in stocks for 2% real, guaranteed.

If nominal, hmmm, that's a lot harder question as many have pointed out. One for which I don't have an answer.

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Re: What safe return would you take to forego stocks?

Post by tetractys » Wed May 02, 2012 12:02 pm

Since the beginning of written global history, I believe real returns have averaged about 4% (not positive though and would like verification if anyone here has that). So with inflation averaging about 3%, I would look for a return of about 7% before ditching stocks. That's pretty high. -- Tet

555
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Re: What safe return would you take to forego stocks?

Post by 555 » Wed May 02, 2012 1:29 pm

I'm 80% stocks. If I get 0% real I won't starve. I'd be more comfotable getting 2% real or 3% real.

But I've heard tell that stocks don't just go up down up down up down, but instead that in some past aeons they actually went up up up. So I'm holding out for that to happen again. I want that risk premium to show up.

So I'd want guaranteed 5% real to forego stocks. You hold stocks to get some serious upside, otherwise why bother.

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Re: What safe return would you take to forego stocks?

Post by SWP » Wed May 02, 2012 1:59 pm

I don't know what methodology people are using to answer this question, but it's interesting that the results are all over the place. I use Excel's RATE function to calculate my answer. The formula goes like this: =RATE(number of years in your expected lifetime, spending per year, present value of investment assets, 0 [assuming zero value at death], 0, 1% [guess]). This formula gives you the real return over inflation that you personally need, given the amount of investment assets you have and how much you expect to spend.

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HomerJ
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Re: What safe return would you take to forego stocks?

Post by HomerJ » Wed May 02, 2012 2:24 pm

natureexplorer wrote:This is really a question about inflation risk.

The answer is a lot easier if it is about real return.
This.

I'd take 5% real forever, but if you're talking nominal, it would have to be in the 10% range, and probably not even then...

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Re: What safe return would you take to forego stocks?

Post by bucksfan2 » Wed May 02, 2012 2:32 pm

If I could get 5% on a CD I would begin to move my money that way and a little more out of stocks. I don't think I would ever really exit stocks.

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LH
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Re: What safe return would you take to forego stocks?

Post by LH » Wed May 02, 2012 2:40 pm

real or nominal, as others have mentioned, is the key here. Historically real=nominal-3 as a rough estimate, so that would throw off the poll significantly, with people answering different ways.

Also, "safe" is an interesting word.

To forgo all stocks, would be quite the chore, in return for whatever "safe" means.

I would stick with my asset allocation. I do not think there are any "safe" free lunches available.

A priori, seems undefined and a dubious premise "safe" its hard for me to answer, especially with the nominal/real left out as well.

It is an interesting question.
Last edited by LH on Wed May 02, 2012 2:44 pm, edited 3 times in total.

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GregLee
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Re: What safe return would you take to forego stocks?

Post by GregLee » Wed May 02, 2012 2:40 pm

5% nominal would do it for me, provided I did not expect a further appreciable rise in rates or in inflation. I only expect a 5%/year rise in stocks (say about 2.5% real), so naturally if I could get that with more safety in fixed income, I'd switch. (I was startled to see how many risk lovers there are here.)
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Re: What safe return would you take to forego stocks?

Post by Derek Tinnin » Wed May 02, 2012 2:55 pm

Financial security is driven by total wealth, not current income or avoidance of volatility. Since there's no free lunch out there, always holding some portion in stocks makes sense on many levels, if not for yourself, then for family, charities, or just the public good at large.

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Lbill
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Re: What safe return would you take to forego stocks?

Post by Lbill » Wed May 02, 2012 3:57 pm

Looks like most respondents so far wouldn't be willing to give up their high-risk stocks for less than a minimum 5%-6%% low-risk return. Given that the expected return from stocks going forward from many experts is in the same neighborhood, I guess that proves the "lottery effect" is alive and well.
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Re: What safe return would you take to forego stocks?

Post by zapper » Wed May 02, 2012 4:04 pm

I'd settle for 0% real, after taxes. Anybody know where i can get that in a truly safe investment?

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Leif
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Re: What safe return would you take to forego stocks?

Post by Leif » Wed May 02, 2012 4:06 pm

LBill - Nominal or real? You don't say, so I don't know how to respond. Looks like a blown poll.
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Re: What safe return would you take to forego stocks?

Post by KyleAAA » Wed May 02, 2012 4:08 pm

If TIPS were yielding 6% real I would almost certainly take that. With nominal numbers, I'm not sure I could choose.

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Re: What safe return would you take to forego stocks?

Post by yobria » Wed May 02, 2012 4:11 pm

GregLee wrote:5% nominal would do it for me, provided I did not expect a further appreciable rise in rates or in inflation. I only expect a 5%/year rise in stocks (say about 2.5% real), so naturally if I could get that with more safety in fixed income, I'd switch. (I was startled to see how many risk lovers there are here.)
With a 50 year time horizon, locking in 5% nominal would be my risk loving strategy.

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Re: What safe return would you take to forego stocks?

Post by CaliJim » Wed May 02, 2012 4:13 pm

I answered: > 8%, but the question is fallacious.

Real yields on low risk assets don't vary that much. You'd never get 8% real on low risk. So 8% implies inflation, which implies... 10,000 things.

The yield on low risk assets should not be driving AA decisions.

AA planning and decision has more to do with other things: planned or actual savings rates, withdrawal rates, labor capital risk, nest egg size, windfalls, pensions, spending and legacy goals, etc.
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Re: What safe return would you take to forego stocks?

Post by dmcmahon » Wed May 02, 2012 5:35 pm

I'd need 4% real with full deferral of taxes on any inflation "gain".

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Lbill
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Re: What safe return would you take to forego stocks?

Post by Lbill » Wed May 02, 2012 6:07 pm

Leif Eriksen wrote:LBill - Nominal or real? You don't say, so I don't know how to respond. Looks like a blown poll.
Nominal
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