ok sounds like you are talking simple return without reinvesting.
agip I think you are working too hard to dismiss an important concept at first blush.
well we're talking about bonds here, right? I think that's how we got into this discussion.
most of the return from bonds is from coupon payments.
So disregarding the effect of reinvestment rates of those coupon payments on overall bond returns seems academic and not real world. So yeah I'd push back on that.
But if we are talking about stocks, where the majority of return comes from capital appreciation (not dividends) then reinvestment risk is less important.
curious about the volatility idea...I'm not a great source on these things since I'm not very mathematical...but seems like volatility in bonds might be a help on returns since most of your return comes from regular interest payments.
If there is volatility, your regular interest payments would buy more reinvested bond 'shares' when bond prices are lower and fewer 'shares' when bond prices are higher.
If that is the major factor - and lord knows it probably isn't - then volatility in bond prices might increase return. Because you buy more when bonds are cheap and less when they are expensive.
If you spend the coupon payments and own actual bonds (and not funds) then I don't see how volatility matters.
The biggest risk for new retiree is sequence of return risk. One glaringly ignored by Flagpole and Sally, or anyone that believes equity indexing is all empowering. If you are near fully invested in equities at a top, and retire at that period, not the exact day, month, or even year, you could have financial plan failure. It becomes the opposite of compounding returns, withdrawals at the same time of large portfolio losses.
I don't ignore that at all. Why do you think I have now MORE than 3 YEARS of expenses saved in cash? Technically though, that's just a philosophy I embraced more than 15 years ago when I couldn't have imagined I would have now what I do in my retirement accounts. I now have so much in retirement accounts, that I could take less than 1% from that pile annually and still live comfortably. I have more than I need.
agip I think you are working too hard to dismiss an important concept at first blush.
well we're talking about bonds here, right? I think that's how we got into this discussion.
most of the return from bonds is from coupon payments.
So disregarding the effect of reinvestment rates of those coupon payments on overall bond returns seems academic and not real world. So yeah I'd push back on that.
But if we are talking about stocks, where the majority of return comes from capital appreciation (not dividends) then reinvestment risk is less important.
You are right that the "majority of return" comes from capital appreciation but it is a slim majority. Over the last 100 years the total return has been 60% capital appreciation and 40% dividends.
So friend Flagpole's returns are not great compared to the SP500.
(either are mine!)
Flagpole's returns are ALWAYS greater than the Dow. Well almost all. He had 1 bad year out of 34 so he has beaten the Dow 33 out of 34 years. Quite an impressive performance.
So friend Flagpole's returns are not great compared to the SP500.
(neither are mine!)
The Dow doesn't include NVDA which is up about 150%. Flagpole is tech-avoider so he probably has no NVDA. If you don't have NVDA you are screwed. The S & P DOES have NVDA.
So friend Flagpole's returns are not great compared to the SP500.
(neither are mine!)
Yep. I'm super diversified, so because of that I won't do as well as one of the BEST indices in any given year.
My goal for at least 15 years now has been to be very diversified so that I can attain GOOD annual returns without risking super BAD ones. It has worked out for me very well.
So friend Flagpole's returns are not great compared to the SP500.
(either are mine!)
Flagpole's returns are ALWAYS greater than the Dow. Well almost all. He had 1 bad year out of 34 so he has beaten the Dow 33 out of 34 years. Quite an impressive performance.
So friend Flagpole's returns are not great compared to the SP500.
(neither are mine!)
The Dow doesn't include NVDA which is up about 150%. Flagpole is tech-avoider so he probably has no NVDA. If you don't have NVDA you are screwed. The S & P DOES have NVDA.
Are you lonely today, Sally? Go spend some time with your wife (try not to berate her for being Chinese), or go talk to some Trumper friends of yours or something.
I believe you are lonely today, so I will help you by responding. I'm no tech avoider. I own a TON of tech stocks, all in mutual funds, of course. It's pretty hard NOT to these days. I have holdings in just about any index you can mention.
agip I think you are working too hard to dismiss an important concept at first blush.
well we're talking about bonds here, right? I think that's how we got into this discussion.
most of the return from bonds is from coupon payments.
So disregarding the effect of reinvestment rates of those coupon payments on overall bond returns seems academic and not real world. So yeah I'd push back on that.
But if we are talking about stocks, where the majority of return comes from capital appreciation (not dividends) then reinvestment risk is less important.
Bonds were the entry point into a discussion of the importance of volatility. I’ll try again. I’m going to use made up numbers for illustration purposes.
A 60/40 portfolio might have average annual returns (including dividends Sally) over a 30 year period of about 7% per year, say, but with significant variability (say a worst year of -20% and best year of +25%). The expected return of that portfolio will be around the same as steady returns of 5% per year. The actual return of the 60/40 portfolio be either significantly more more less than that, depending on the sequence of those returns over 30 years.
You can check this for a 100% equity portfolio using past data. Choose 20 random dates more than 20 years ago from the beginning of either the Dow or SP500 and work out total return over time. While the average annual returns may be something like 10%, you will find that the actual total 20 year returns vary significantly, and the average of your 20 randomly picked time periods will have the equivalent of something like 7 or 8% annually compounded.
The biggest risk for new retiree is sequence of return risk.
You know, it occurred to me that this whole long thread can be boiled down to an argument about sequence of return risk, with the permabears taking one end of the spectrum, overstating the risk, and the Pollyannas taking the other, ignoring it. Igy (and K5/GC/Newname/etc) thinks the sky is guaranteed to fall, while Sally (and to a much lesser degree agip, SP, …) are confident of 10% returns, year in, year out, from now until eternity. Neither POV is likely (IMHO) to look very smart 25 years from now, but these opposite points of view give us something to argue (and yell) about, anyway. 🙂
The biggest risk for new retiree is sequence of return risk.
You know, it occurred to me that this whole long thread can be boiled down to an argument about sequence of return risk, with the permabears taking one end of the spectrum, overstating the risk, and the Pollyannas taking the other, ignoring it. Igy (and K5/GC/Newname/etc) thinks the sky is guaranteed to fall, while Sally (and to a much lesser degree agip, SP, …) are confident of 10% returns, year in, year out, from now until eternity. Neither POV is likely (IMHO) to look very smart 25 years from now, but these opposite points of view give us something to argue (and yell) about, anyway. 🙂
I don't feel confident of 10% returns, year in and year out, but I do feel confident in being able to withstand market fluctuations within historical precedents.
You know, it occurred to me that this whole long thread can be boiled down to an argument about sequence of return risk, with the permabears taking one end of the spectrum, overstating the risk, and the Pollyannas taking the other, ignoring it. Igy (and K5/GC/Newname/etc) thinks the sky is guaranteed to fall, while Sally (and to a much lesser degree agip, SP, …) are confident of 10% returns, year in, year out, from now until eternity. Neither POV is likely (IMHO) to look very smart 25 years from now, but these opposite points of view give us something to argue (and yell) about, anyway. 🙂
I don't feel confident of 10% returns, year in and year out, but I do feel confident in being able to withstand market fluctuations within historical precedents.
Appreciate your insight Comfortably retired. Over the last 100 years the returns HAVE been around 12 or 13% annually when figuring in dividends. When that stops I might change my investing strategy. But until then I will stay on track.
I don't feel confident of 10% returns, year in and year out, but I do feel confident in being able to withstand market fluctuations within historical precedents.
Appreciate your insight Comfortably retired. Over the last 100 years the returns HAVE been around 12 or 13% annually when figuring in dividends. When that stops I might change my investing strategy. But until then I will stay on track.
Refresher Econ 101 from Mises: “Inflation is a policy. And a policy can be changed. Therefore, there is no reason to give in to inflation. If one regards inflation as an evil, then one has to stop inflating. One has to balance the budget…”
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