where to get 3% real with the least amount of risk?

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gips
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where to get 3% real with the least amount of risk?

Post by gips »

I'd be thrilled with 3% real returns for the next 10 years. what investment(s) do you think have the best chance of returning 3% real with the least amount of risk?
am
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Re: where to get 3% real with the least amount of risk?

Post by am »

Prepaid debit cards like mango, netspend, etc. can get about 60k in if married. This assumes rates continue and inflation remains tame and you don't have too much money. Otherwise no guarantees that I know of.
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gips
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Re: where to get 3% real with the least amount of risk?

Post by gips »

not looking for guarantee, just the least amount of risk.
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Re: where to get 3% real with the least amount of risk?

Post by livesoft »

Something like TIAA Traditional Annuity is doing that for me. But I have the right "vintages." I suspect an intermediate-term bond fund is probably good enough, but you could add in 20% total US stock market to give it an extra kick.

Or maybe even TIAA Real Estate account?
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lee1026
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Re: where to get 3% real with the least amount of risk?

Post by lee1026 »

No reasonably safe bond is going to yield 3% right now. 10 year TIPS are trading at 0.5%.
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Re: where to get 3% real with the least amount of risk?

Post by lack_ey »

Really, "best chance" and "least amount of risk" are at odds and perhaps you're not asking what you think you are. Generally, you will increase the chance of returning 3% real by taking more risk. Thus, to maximize the chance you need to take a lot of risk. If you try to reduce risk, you will increase the probability of not quite meeting 3% real. A literal interpretation of your question is perhaps to find the investments that have the least amount of risk out of all of the possibilities that achieve maximum likelihood of returning 3% real (this may be one strategy or multiple ones). In other words, this throws the risk/reward trade-off out of the window.

I presume you mean at least 3% real and would be okay with 4%. Also you didn't specify pre-tax or after-tax.


Prepaid debit/rewards checking is one idea, though that has limited capacity and may fall a little short with inflation, depending on how that goes. To be honest, at the moment I think the best strategy would be P2P lending. If you get enough ahead after about say 5 years or so, say by earning 6% real during that time, you can turtle it out for the remainder of the period in TIPS and/or rewards checking and end up at 3% real after 10 years. Of course there may be some considerable downside; these platforms are relatively new. They handled far fewer loans in say 2008-2010 as compared to now. But I'd wager the chances are better than in stocks.

I mean, stocks have a very good chance of returning less than 3% real in any 10-year period, and the coming 10 years doesn't particularly look like an amazing starting point. Adding most bonds is not much help as you'd just be diluting the chance of getting to 3% as bonds overall (think total bond market and similar) have a pretty low chance of earning 3% real in the next 10 years. If for example stocks return 4% real and bonds return 0.5%, oops, you may have wasted your shot by going 50/50 stocks and bonds.

Stepping back, the way to maximize the chances are probably to concoct with some derivatives some way to get 3% real or thereabouts most all the time and lose all or a lot of your money otherwise. If corporate bonds offered real returns then a single 10-year bond would do the trick, where you get exactly 3% real if your one bond doesn't default.

If you're not intending to play perverse games with probability, in general the best balance of risk/return looks like most actual portfolios recommended.
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Re: where to get 3% real with the least amount of risk?

Post by gips »

this statement about p2p lending "Of course there may be some considerable downside; these platforms are relatively new." seems to be at odds with the idea of achieving a 3% real return with the least amount of risk since. as you point out, the platforms are new and I'd guess no one really understands the risk all that well.
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Re: where to get 3% real with the least amount of risk?

Post by randomguy »

lee1026 wrote:No reasonably safe bond is going to yield 3% right now. 10 year TIPS are trading at 0.5%.
Well if you buy a 2% bond and we get -1% inflation, you end up with 3% real. Yeah I wouldn't bet on it. 5% nominal (a reasonable guess of what you would need to get 3% real) is either going to be high yield bonds or some chunk of stocks. Both a pretty high risk.

At some point you need to decide what is more important: getting 3% real or least risk. You can get ~.5% risk free. Pretty much everything else requires taking on risk of sometype. You can choose if you want inflation, market, or interest rate risks among others.
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Re: where to get 3% real with the least amount of risk?

Post by cheese_breath »

Do you have any loans you're paying more than 3% interest on?
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Re: where to get 3% real with the least amount of risk?

Post by gips »

no, I'm debt free.
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Re: where to get 3% real with the least amount of risk?

Post by lack_ey »

gips wrote:this statement about p2p lending "Of course there may be some considerable downside; these platforms are relatively new." seems to be at odds with the idea of achieving a 3% real return with the least amount of risk since. as you point out, the platforms are new and I'd guess no one really understands the risk all that well.
You've changed the wording since the first post, in which you called for the "best chance of returning 3% real with the least amount of risk."

What are you actually looking for?
1. Maximize the probability of returning 3% real (and then over these options, obviously picking the one with least risk)
2. Take the least amount of risk possible while aiming for an expected return of 3% real (many outcomes may fall short of the 3% target)
3. Return 3% real or higher with high probability (how high?) while minimizing risk
4. Something else, you tell me
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gips
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Re: where to get 3% real with the least amount of risk?

Post by gips »

lack_ey wrote:
gips wrote:this statement about p2p lending "Of course there may be some considerable downside; these platforms are relatively new." seems to be at odds with the idea of achieving a 3% real return with the least amount of risk since. as you point out, the platforms are new and I'd guess no one really understands the risk all that well.
You've changed the wording since the first post, in which you called for the "best chance of returning 3% real with the least amount of risk."

What are you actually looking for?
1. Maximize the probability of returning 3% real (and then over these options, obviously picking the one with least risk)
2. Take the least amount of risk possible while aiming for an expected return of 3% real (many outcomes may fall short of the 3% target)
3. Return 3% real or higher with high probability (how high?) while minimizing risk
4. Something else, you tell me
sorry, I guess I'm not a very nuanced reader, 1 and 3 seems to be pretty much the same thing and 2 just reverses the order of risk and return. However, it is hard to understand, with any of the definitions, how p2p lending makes sense since, from my perspective, it is hard to understand the risk. If you have the time and can point me to risk analysis, I'd appreciate it as it seems worth investigating.
Last edited by gips on Tue Feb 23, 2016 12:54 am, edited 1 time in total.
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Re: where to get 3% real with the least amount of risk?

Post by itstoomuch »

I'm doing some individual utilities, XLU, VPU (~3.5% div yield, current). Last year, the yields were +4% on expectation of a FRB rate hike. I do a little timing and hopefully get another 2% yield.

Warning: Market for utilities may be peaking. I am not always successful in my selection and trading. I can afford to lose the entire lot and will not affect our retirement income. Currently, looking for an exit pricing. 65/68. :?
YMMV
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Re: where to get 3% real with the least amount of risk?

Post by saltycaper »

How to get 3% real with the least amount of risk? The answer is simple. Find out where you can get 2.999...999% real with the least amount of risk, and then take an "infinitesimally" small amount of additional risk. How to get 2.999...999% real? The answer is simple. Find out where you can get 2.999...998% real with the least amount of risk, and then take an "infinitesimally" small amount of additional risk. How to get...

Follow this chain of thought back to the "risk-free" rate. Then you will see, even from the very first link, the range of options are startling, and it is impossible to rank the risks of each option with absolute precision, as risk levels are not forever fixed. Perhaps the answer to your 3% question lies in how you would answer the question from the very first step away from the risk-free rate. This would help identify what type of risks suit you. That, IMO, is more helpful than identifying what has the least risk given the same return, as that is only easy to identify looking backward. (I assume you are not interested merely in what past portfolio has produced 3% real with the least amount of risk.)
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Re: where to get 3% real with the least amount of risk?

Post by Jebediah »

P2P lending is the answer. You'll get very few defaults at a 5% return target.
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Re: where to get 3% real with the least amount of risk?

Post by Bfwolf »

I'd say your best bet is probably a high yield bond fund. The Vanguard High Yield Corporate Fund has an SEC yield of 6.7%. There's a good chance it will return 3% real. Of course, there is significant credit risk when dealing with junk bonds. Vanguard lists this fund as a 3 on its 1 to 5 risk scale.

Or maybe the best approach is just a typical Boglehead portfolio of 40% Total Stock Market Index, 30% Total International Stock Market Index, and 30% Total Bond Market Index. That's got a decent shot at 3% real, though clearly lots of stock risk.
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Re: where to get 3% real with the least amount of risk?

Post by Valuethinker »

gips wrote:I'd be thrilled with 3% real returns for the next 10 years. what investment(s) do you think have the best chance of returning 3% real with the least amount of risk?

Nothing is certain.

You increase risk if you do not diversify. Chasing HY or Peer to Peer lending is going to boost your risk.

60% stocks and 40% bonds is probably a good shot, or 70/30. *I* would put c. 50% in international stocks. I would also think of up to 20% Small Cap Value, ideally split 50/50 domestic and international.
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Re: where to get 3% real with the least amount of risk?

Post by Bustoff »

gips wrote:I'd be thrilled with 3% real returns for the next 10 years. what investment(s) do you think have the best chance of returning 3% real with the least amount of risk?
What, no love for the 3% CD?
There may not be any currently, but they do seem to pop up occasionally and without much fanfare (except here).

PenFed offered a 5-year CD paying 3% in Decenber 2013 and last October, Northwest FCU had a 3-year Add-On CD paying 3.04%.
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Re: where to get 3% real with the least amount of risk?

Post by rkhusky »

Bustoff wrote:
gips wrote:I'd be thrilled with 3% real returns for the next 10 years. what investment(s) do you think have the best chance of returning 3% real with the least amount of risk?
What, no love for the 3% CD?
There may not be any currently, but they do seem to pop up occasionally and without much fanfare (except here).

PenFed offered a 5-year CD paying 3% in Decenber 2013 and last October, Northwest FCU had a 3-year Add-On CD paying 3.04%.
CD rate of 3% is 3% real only if inflation is zero.

OP could ask - Of all investments which have a 50%+ chance of earning 3%+ real, which has least risk?
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Re: where to get 3% real with the least amount of risk?

Post by cherijoh »

Bustoff wrote:
gips wrote:I'd be thrilled with 3% real returns for the next 10 years. what investment(s) do you think have the best chance of returning 3% real with the least amount of risk?
What, no love for the 3% CD?
There may not be any currently, but they do seem to pop up occasionally and without much fanfare (except here).

PenFed offered a 5-year CD paying 3% in Decenber 2013 and last October, Northwest FCU had a 3-year Add-On CD paying 3.04%.
OP was asking about 3% REAL not 3% nominal return.

I was going to suggest inventing a time machine and going back to Nov 2008 and loading up on TIPs that were yielding 3%.
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Re: where to get 3% real with the least amount of risk?

Post by Sconie »

If any one of us could consistently achieve a 3% "real" return----with virtually no risk-----we'd be investors on par with the likes of Warren Buffett, John Templeton and Benjamin Graham.
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Re: where to get 3% real with the least amount of risk?

Post by gips »

Again, it's a given we can't achieve a riskless 3% real in this environment.
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Re: where to get 3% real with the least amount of risk?

Post by joebh »

There are very few 10-year periods in history where a well-diversified portfolio of stocks and bonds didn't return 3%.
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Re: where to get 3% real with the least amount of risk?

Post by midareff »

Bustoff wrote:
gips wrote:I'd be thrilled with 3% real returns for the next 10 years. what investment(s) do you think have the best chance of returning 3% real with the least amount of risk?
What, no love for the 3% CD?
There may not be any currently, but they do seem to pop up occasionally and without much fanfare (except here).

PenFed offered a 5-year CD paying 3% in December 2013 and last October, Northwest FCU had a 3-year Add-On CD paying 3.04%.

That's 3% with negligible risk for sure, but not 3% real. To be a bit on the pessimistic side... if many of the pundits are right and stocks yields will be in the 5-7% range, bonds in the 0-1% range and inflation at 2%, 3% real may not be achievable with a 60/40 or even 70/30 portfolio over the coming decade. I think I would avoid the P2P and other exotics and simply accept what the market gives. I suspect anything that produces 3% real with low risk will be arbitraged away quickly. I know I'd want a piece of it right now. FWIW, VG HY isn't as junky as most HY so a little shouldn't hurt you and could make the bond portion (maybe 10% of) perform a smidgen better. Other opinions will vary.
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Re: where to get 3% real with the least amount of risk?

Post by Toons »

Vanguard Intermediate Term Tax Exempt-Admiral :happy
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Re: where to get 3% real with the least amount of risk?

Post by Blues »

livesoft wrote:I suspect an intermediate-term bond fund is probably good enough, but you could add in 20% total US stock market to give it an extra kick.
Sounds a lot like the underlying strategy of VASIX, Vanguard Life Strategy Income Fund, if one doesn't mind the international exposure baked into it.

https://personal.vanguard.com/us/funds/ ... IntExt=INT
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Re: where to get 3% real with the least amount of risk?

Post by longinvest »

gips wrote:I'd be thrilled with 3% real returns for the next 10 years. what investment(s) do you think have the best chance of returning 3% real with the least amount of risk?
Gips,

You're looking for the holy grail of investments. To say it bluntly: it does not exist.

In order to select the best portfolio for the next 10 years, you would need to predict future 10-year returns. But for practical purpose, predicting future returns is futile.

For a 10-year horizon, I agree with the suggestion of LifeStrategy Income (20% stocks) or TargetRetirement Income (30% stocks). That should be good enough, but it does not offer guarantees.
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Re: where to get 3% real with the least amount of risk?

Post by Bustoff »

cherijoh wrote:
Bustoff wrote: What, no love for the 3% CD?
OP was asking about 3% REAL not 3% nominal return.
Oops ... better drink my coffee before posting.
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Re: where to get 3% real with the least amount of risk?

Post by DR »

You can backtest some portfolios, but, for example, 100% in intermediate term bond fund like FBIDX (passive AGG index fund) returned 3.7% inflation adjusted return from 1991-present with a standard deviation of 3.56%. If you juice that up a bit with an S&P index fund like FUSEX and use 20% stock and 80% bond, you get a real return of 4.61% with a standard deviation of 4.15%.

Somebody above mentioned a 60/40 portfolio of stocks/bonds. Since 1991 that portfolio using the two index funds I just mentioned would be 6% (inflation adjusted) but the the standard deviation there is 8.77% and thus over double the risk.

I like the question you ask. You said least amount of risk, not no risk. I don't know what else you could do other than to backtest portfolio combinations. I'd keep it simple using investment options you really have and would really consider and use a standard metric like standard deviation to compare. I think back testing with a S&P index or a total market index and an intermediate term bond fund is the way to start. And of course there's no promise that the next 25 years will be anything like the last 25. Probably won't of course, but at least you have some data to look at. I'm a fan of the 20/80 (intermediate term bond/S&P index) portfolio because of the risk adjusted return it provides--but who knows about the next 25 years.
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Re: where to get 3% real with the least amount of risk?

Post by flah »

gips wrote:I'd be thrilled with 3% real returns for the next 10 years. what investment(s) do you think have the best chance of returning 3% real with the least amount of risk?
EE bonds held for 20 years are guaranteed to reach full face value (you purchase at half face value). Therefore, the interest rate is 3.5%. Purchase limit $10k/year.

https://www.treasurydirect.gov/indiv/re ... r.htm#full
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Re: where to get 3% real with the least amount of risk?

Post by mickroark »

I have a 5yr deferred annuity that is earning 3% compounded. But to get the real return you need to defer for 5 years.
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Re: where to get 3% real with the least amount of risk?

Post by psteinx »

Lotta reading comprehension probs here it seems.

OP didn't ask for 3% real with NO risk.
OP didn't ask for 3% real guaranteed.

OP made a reasonable ask for "the best chance of returning 3% real with the least amount of risk".

While there are plenty of exotics out there that folks might advocate, and some of them might even be good, I think the OP's request can be met with a fairly standard portfolio of diversified equity tempered with some bonds.

i.e. I think the expected return for world equities over the next 10 years is >3% real. Temper the equities with safer assets (likely bonds/bond index) to dial back the risk to OP's desired target. Basically a 60/40 equity/bond portfolio should probably be at least in the ballpark of a 3% real target, depending on the specific components. Maybe a little higher on the equity side, if the chosen bond instrument is especially low yield, as I suspect most are now.

Is that no risk? Of course not. Is it low risk? Depends on how you'd define low risk. But it should have close to a 3% real EXPECTED return (not necessarily what the portfolio could achieve - actual returns could be much better or worse), at a tolerable (for many folks) level of risk.
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Re: where to get 3% real with the least amount of risk?

Post by mickroark »

stocks and bonds are hi risk.
annuities are low risk.

This is why over a long period stocks and bonds are supposed to earn a higher rate of return.
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Re: where to get 3% real with the least amount of risk?

Post by Youngblood »

psteinx wrote:Lotta reading comprehension probs here it seems.

OP didn't ask for 3% real with NO risk.
OP didn't ask for 3% real guaranteed.
.
Thanks psteinx for reminding me of all those years of teaching reading to LD kids and making me laugh. Sometimes, on this forum, I find myself wondering about my own reading comprehension too. Not this time, however. I thought OP asked a very clearly written question.

:D
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Re: where to get 3% real with the least amount of risk?

Post by lack_ey »

gips wrote:
lack_ey wrote:
gips wrote:this statement about p2p lending "Of course there may be some considerable downside; these platforms are relatively new." seems to be at odds with the idea of achieving a 3% real return with the least amount of risk since. as you point out, the platforms are new and I'd guess no one really understands the risk all that well.
You've changed the wording since the first post, in which you called for the "best chance of returning 3% real with the least amount of risk."

What are you actually looking for?
1. Maximize the probability of returning 3% real (and then over these options, obviously picking the one with least risk)
2. Take the least amount of risk possible while aiming for an expected return of 3% real (many outcomes may fall short of the 3% target)
3. Return 3% real or higher with high probability (how high?) while minimizing risk
4. Something else, you tell me
sorry, I guess I'm not a very nuanced reader, 1 and 3 seems to be pretty much the same thing and 2 just reverses the order of risk and return. However, it is hard to understand, with any of the definitions, how p2p lending makes sense since, from my perspective, it is hard to understand the risk. If you have the time and can point me to risk analysis, I'd appreciate it as it seems worth investigating.
Okay, imagine there exist investment strategies labeled A, B, C, etc. with the following properties:
A - 75% chance of at least 3% real, extremely high risk
B - 75% chance of at least 3% real, very high risk,
C - 70% chance of at least 3% real, high risk
D - 60% chance of at least 3% real, medium risk
E - 65% chance of at least 3% real, medium-high risk
F - 55% chance of at least 3% real, medium-low risk
G - 55% chance of at least 3% real, low risk
H - 45% chance of at least 3% real, very low risk
with the expected return of A > B > C > D > E > F > G > H and the expected return of F is 3% real (A through E are higher, G and H are lower).

And other options are worse than all of these. So to maximize the probability (chance) of returning 3% real, you would pick A or B. To get the "best chance of returning 3% real with the least amount of risk" you would pick B over A because that has the least amount of risk between the two of them. Sure, some other option might be more sensible or attractive, but they all have lower chances of returning 3% real. To take the least amount of risk possible while aiming for an expected return of 3% real, you pick F, even though there's a 45% chance of falling short of 3%. If you want the lowest risk possible with at least a 65% chance of 3% real, you pick E. If you decide that safety or good risk/return is actually the most important thing, maybe you give up and pick H. If you want a high chance of at least 3% real but aren't willing to really push your luck getting there, maybe you go for C.

Of course, in practice nobody knows what the actual probabilities and properties are.

To answer your question, I think P2P lending has a good chance of returning 3% real, certainly more than stocks over a 10-year stretch, though with less potential upside and hard-to-quantify agency risks. To examine the risks more closely you may need to check more carefully into the legal structures, financial backing, etc. with respect to the platform and then compile statistics about individual loan defaults of this nature in general across a range of conditions. But this is moot to answer the question as you asked it (interpreted most directly, in the way that would result in picking B above) unless something else actually has the same chance of returning 3% real. If you mean to ask something else, which it seems like you do, then something else might be better.

edit: you might also mean the highest chance to get around 3% rather than at least 3% (I interpreted the latter as IMHO 2% doesn't count as 3%), which would imply trying to go for relatively low risk in of itself. Or maybe that outcomes significantly worse than 3% are bad, with worse losses being increasingly undesirable. That is closer to what most people want. If there were an investment that had an 80% probability of returning 2% real and a 20% probability of returning 8% real over the next 10 years, this would be effectively riskless in most peoples' eyes and amazing. But it would fall short of 3% most of the time.
Last edited by lack_ey on Tue Feb 23, 2016 11:59 am, edited 1 time in total.
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Re: where to get 3% real with the least amount of risk?

Post by Peter Foley »

Toons wrote:
Vanguard Intermediate Term Tax Exempt-Admiral :happy
At 2.92% yield, I think that is close enough!

My other choice would be rental real estate. Been there, done that . . . the return is fine but there is work involved. To keep costs down I always did most of the maintenance and repairs.
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Re: where to get 3% real with the least amount of risk?

Post by DR »

psteinx wrote:Lotta reading comprehension probs here it seems.

OP didn't ask for 3% real with NO risk.
OP didn't ask for 3% real guaranteed.

OP made a reasonable ask for "the best chance of returning 3% real with the least amount of risk".
+1

That said, it seems that in these kinds of discussions--in these forums and all over the internet--the bias is always towards the return rather than the risk (allow me to simply use variance or standard deviation as what we mean by "risk"). So in this thread, the focus is on the 3% real return instead of the amount of variance around that return. How to get the 3% real return and let the risk fall where it may. Instead, what if the OP had asked: What's the most reliable way to see returns between -5% and +5% real return? The answer may well be something like 100% AGG index fund such as FBIDX or something like that where since 1991 the real returns have ranged from -5% to +15%. with a lower SD than you'd get mixing in stocks.

Maybe I'm not saying quite what I mean. But it seems that targeting variance or risk (let return fall where it may) is just as valid as targeting return (let risk fall where it may). When the bias is high a return the latter approach prevails; when the bias is low standard deviation, the former thinking prevails. I know it's not an either/or choice, which is why I said "bias."
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Re: where to get 3% real with the least amount of risk?

Post by Jebediah »

Do half the bogleheads not know the difference between real and nominal? Someone should do a poll...
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Re: where to get 3% real with the least amount of risk?

Post by Jeff P »

you can loan atDev the money to pay down his/her house

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Re: where to get 3% real with the least amount of risk?

Post by nisiprius »

(Shrug) I think that by and large the market is efficient enough that there just aren't going to be huge differences in return for the same risk, or risk for the same return. So I think it is dangerous to look for investments that seem to offer much less risk for the same return, because the chances are pretty good that it's an illusion and that you are overlooking some risk.

A good example of this might be the now-almost-forgotten "auction rate securities" that were briefly popular in the years before 2008. The people who bought them believed these were essentially cash like vehicles that paid higher rates than cash; they weren't.

In the year 2016 you just aren't going to see a return of 3% real without substantial risk... including risk of earning 0% real, some risk of a loss in real terms, and even some risk of a loss in nominal, number-of-dollar terms.

That said, I will now proceed to make you feel envious by stating the simple fact that I personally own some series I savings bonds purchased around 2000 that actually do earn >3% real, with virtually no risk (the redemption value, as each month passes, never decreases, for example). The odd thing is that at the time I worried about what seemed to be an insanely conservative and ridiculously low-yielding investment--at the time most people thought that it was positively foolish to buy something with a guaranteed rate of 3% real when it was felt that stock market investments were virtually certain to give you 7% real.
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Re: where to get 3% real with the least amount of risk?

Post by Kevin M »

OP is asking for investment with narrowest probability distribution of annualized 10 year returns with expected value of 3% real. Problem is that we don't know what that is.

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Re: where to get 3% real with the least amount of risk?

Post by grayfox »

gips wrote:I'd be thrilled with 3% real returns for the next 10 years. what investment(s) do you think have the best chance of returning 3% real with the least amount of risk?
  • 1. Make a list of all the investment choices. For simplicity, only consider VG funds and ETFs.
    2. Forecast the 10-YR expected real return and variance of real return using some theory and methodology
    3. Eliminate all funds with expected return < 3% real.
    4. Of the remaining, choose the fund with the lowest variance.
Note: I did not do any calculations or make actual forecasts. I'm just gave a quick look and am guessing.

None of the MM funds meet the criterion of 3%, after subtracting the forecast inflation of about 2%.
No CD's are yielding 3% real.
10-YR TIPS have real YTM = 0.35%
None of the VG bond funds meet the criterion.
Some of the stock funds may meet the criterion of 3% or higher expected real return.

So it would be a stock fund with low variance of outcome. I will guess some of the possibilities might be:
  • 1 Global Minimum Volatility VMVFX
    2 Consumer Staples VDC
    3 Dividend Appreciation Index VDADX
    4 Dividend Growth VDIGX
    5 Equity Income VEIPX
    6 High-Yield Dividend VHDYX
I would probably place my bet on 1 or 2. Global Minimum Volatility Fund is designed to minimize variance. And consumer staples stocks like P&G have less price volatility because they are generally recession proof businesses.
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Re: where to get 3% real with the least amount of risk?

Post by itsmeagain »

gips wrote:I'd be thrilled with 3% real returns for the next 10 years. what investment(s) do you think have the best chance of returning 3% real with the least amount of risk?
With all the caveats mentioned above that there are no guarantees, etc, I would suggest that Vanguard's Wellesley fund (VWINX and, for admiral shares, VWIAX) is something to consider.
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Re: where to get 3% real with the least amount of risk?

Post by Rx 4 investing »

Gips asked: “ I'd be thrilled with 3% real returns for the next 10 years. what investment(s) do you think have the best chance of returning 3% real with the least amount of risk?”
In the US since the 1870’s, the 30- year treasury bond (not the 10 year) “real” rate of return has averaged two percent. (2%). The real rate of return bounces all over the place on a short-term basis, and is so volatile, it is difficult to predict. But we don’t need to predict it because it is mean- reverting. In a low inflation, or de-flationary world, two percent (2%) “real” might be the best a risk-averse investor can do.

When inflation is slowly squeezed out of an economy, the return on “risk assets “ starts to compress towards zero. Corporations have an extremely difficult time generating earnings when they lose their earnings power. For this reason, and the already high valuation level, stocks are not likely to deliver 3 % real or higher in the next 10 years.

Two of the world’s major economies, both of which have accumulated large amounts of debt, now face demographic challenges too. These conditions are de-flationary. They are likely to "export" their de-flation to the rest of the world as they struggle to stimulate economic growth. Japan has already gone over the young/old demographic hump, and China's is peaking and nearing the tipping point.

IMO: Long-duration US treasury bonds are worth considering given the current global macro-economic outlook.

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Re: where to get 3% real with the least amount of risk?

Post by john94549 »

A 3% "real return" (i.e., over inflation) would imply a nominal return of from 4.3% to 5.2% (depending on which BLS statistic you choose). When I find such a low-risk vehicle, trust me, I will keep it a secret.
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Re: where to get 3% real with the least amount of risk?

Post by whodidntante »

While there is no way to know what inflation will be for the next 10 years, the federal reserve targets 2% inflation. So your question could be interpreted as how to get 5% returns with the least amount of risk? I think a 5% return is going to require stock-like risks, and stocks are a pretty good investment. So you should buy stocks.
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Re: where to get 3% real with the least amount of risk?

Post by john94549 »

I, for one, am less sanguine about "stocks". Seriously, when the world leader in Sharpee pens and infant car-seats (Newell Rubbermaid) has a P/E of 30 (seriously, 30), I tend to add up my IRA CDs and thank my lucky stars. As one once said: "we lose money on every sale, but make it up in volume".
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Re: where to get 3% real with the least amount of risk?

Post by whodidntante »

john94549 wrote:I, for one, am less sanguine about "stocks". Seriously, when the world leader in Sharpee pens and infant car-seats (Newell Rubbermaid) has a P/E of 30 (seriously, 30), I tend to add up my IRA CDs and thank my lucky stars. As one once said: "we lose money on every sale, but make it up in volume".
I keep my 5% CDs purchased in 2016 next to my unicorn and pet dragon.
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Re: where to get 3% real with the least amount of risk?

Post by White Coat Investor »

gips wrote:I'd be thrilled with 3% real returns for the next 10 years. what investment(s) do you think have the best chance of returning 3% real with the least amount of risk?
I love the way you worded the title question. It reflects a great deal of maturity and understanding.

My vote is a handful of paid-off, direct real estate properties in your home town coupled with TIPS. The TIPS will underperform your market but the real estate should beat it. Maybe a 50/50 mix.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: where to get 3% real with the least amount of risk?

Post by White Coat Investor »

livesoft wrote: I suspect an intermediate-term bond fund is probably good enough,
You've got a lot of faith in bonds. Current yields on Vanguard intermediate bond funds are:

Treasuries: 1.14%
Corporates 3.58%
High yield 6.58%
Munis 1.34%

And those are nominal numbers. Basically, you're saying you expect rates to rise 4-6% and to do it quickly enough that you can make up for it with the higher yields in less than 10 years. Or else you're going for 1/2 corporates and half junk and praying for low default rates. Lots of faith either way.
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