visualguy wrote: ↑
Wed Oct 09, 2019 5:03 pm
rich126 wrote: ↑
Wed Oct 09, 2019 4:00 pm
owenmia wrote: ↑
Wed Oct 09, 2019 3:16 pm
Why risk your life savings for 1%?
In many cases, people have no choice and are hoping for something better than 1%. And 1% real is better than 0% or negative real returns.
If I knew it was going to be just 1% real for the stock market, I would invest more in rental real estate. None of us really know, unfortunately, so all we can do is diversify and hope that at least one type of asset will do well-enough...
If it is decisive that we are going to get 1% real for the next decade, if we truly believed that with enough conviction to act upon it, strategize upon it, I would say boglehead philosophy would look very different.
First I probably would indeed put more money into real estate. Second, because the rewards would be so low, I would argue a major strategy would be to purchase ahead of time, possibly in real estate, any assets you desired to posses for the future.
After all, inflation is computed based on a basket of goods (toilet paper, food, utilities, education costs. etc). We know that such basket computation is a vast generalization of the economy at large, and has little to do with your expected future personal expenditures. I would invest in non-perishable assets today that I would expect to keep up with inflation to better ensure my needs for tomorrow.
In other words, it's not enough to beat a general CPI or PCE computation of inflation in stocks and say "all is well". If the margin of growth is so small, why chance it with respect to a generalized computation? Instead I might say, when I retire these are the assets I want to possess. I'll look at what it is I want and make it a priority to purchase those things ahead of time. Beating a generalized basket of goods wouldn't be my goal. Obtaining things very pertinent to my needs that will keep up with inflation would be my goal.
But as for the lack of certainty, it is for sure apparent that none of us can know what is going to happen in the future.
But I would argue this is where we are taking a chance.
We say we don't know, but the boglehead portfolio is designed with stocks as the central engine guiding the growth of our portfolios. If we knew with 100% certainty that stocks would grow at 1% real for the next decade, I would contend that stocks would not be the central engine of our portfolio growth---boglehead strategy itself would have to be reworked to possibly look like something I hypothesized above.
So many things would change. TIPS for instance would be competitive with stocks at a considerably lower volatility.
Stocks would not necessarily be the driving engine of the boglehead portfolio growth.
and finally, merely matching inflation would yield a return "competitive" with stockss.
A person who sits on a house and does nothing would not be far behind the stock investor who may have had to endure considerably more volatility.
Someone else said savings rates would be higher. I would be in complete agreement. Savings would play an ever larger role.
Moreover, it would demand and also incentivize investing in oneself more. Retirement would be arguably less of an option because one's present ability to generate wealth would be so important in a market place that did not adequately reward investing.
Finally, investments in general simply wouldn't be as useful.
That's an odd abstraction to think about, but...if the rewards aren't there why even bother with stocks? Why teach young people about stocks? Why even think about investing? It would cease to be an important question, as again, one can simply buy TIPs and be done with it. The rest of one's vitality should then and would then be spent on savings, and of course keeping one's personal income high.