Many financial advisers claim that young people should set up their
portfolios such that it is most risky e.g. 100% stocks. As the
individual ages and relies on income into retirement, he or she should
start moving money away from volatile stocks and into safe income
assets like government bonds.
I am in my mid 20s and I am thinking of doing the opposite. Firstly I
will aim for a safe income from dividends, rents, and interest, and
then once I have a safe income I will start investing in risky assets.
My aim is to save up $220,000 as fast as possible and invest this in
government bonds. This will pay me about $300 per week, which I
believe is enough to live off.
Once I can secure this basic income, I can then increase risk
infinitely. Any additional income from labor will be directed towards
asset classes like emerging markets, frontier markets, small caps,
Is this a good idea or should I follow the conventional advice?
So, what happens when you get this $300 a week, and a Big Mac
costs $24 by then? I see inflation as the big issue in this
plan. Doing "safe" investing has a hard time keeping ahead of
inflation, so you say even or even lose buying power over time.
You need the gains from better returning investments to outpace
inflation so you get some real growth over time. Once you have
this growth, then you can back off and go into maintenance mode.
John A. Weeks III 612-720-2854 email@example.com
How can you have a safe income from dividends, without owning stocks or
It is not a bad idea. As you have more and more money, you can relax
your cash requirement. The exact amount of cash that you need to save
depends on your monthly expenses.
At this point I feel certain economic statistics parallel those circa
the Great Depression. I think it is a good lesson to review what
happened to dividends back then. Just as something to consider and
maybe help round out one's finance education. Using Robert Shiller's
S&P 500 data, in 1930 dividends were at a historical high. In the next
five years they declined by about 50%. They did not return to their
previous high until 1949.
I understand the S&P 500's dividend is down about 10% from a year ago.
This is mostly due to financials cutting dividends. The net reports
that many non-financials are so far doing fine and expect to increase
dividends in 2009. But I have my doubts based on other economic
parameters (unemployment; the necessity of revamping the financial
system leading to the slowing down of lending leading to less growth
blah blah). I personally am planning for a rough few years, maybe
more, for dividends. The one advantage we have today over the 1930s is
that presumably our elected officials know something about what seemed
to worked in the 1930s. Yet I am not optimistic. The U.S. economy is
particularly sick in my estimation because of an out-of-control health
care system, fueled by consumers' know-nothing mentality on same.
By contrast, in the 1970s, dividends rose rather steadily, despite the
flat market. IMO this will not be the 1970s.
I have an elderly neighbor friend who has been investing for decades
and who proposes that history does not repeat itself the way we are
all anticipating. Or as one of the regulars here often says, that
which is well-anticipated in financial markets rarely actually ends up
happening. Yet I continue to have doubts. The decline in stocks was
fairly rationally based on a perception that the buildup was a house
of cards, due to all the leveraging present in various markets. Demand
is falling. These are key to what drove the Depression.
Otherwise, ditto what John said. By failing to invest in the economy
via stocks now, you miss years of compounding growth. Investing early
in stocks is key, assuming things normalize some in the coming years.
Still, I would not say you or Ignoramus are way off. Consider either
1. Splitting the baby: about 50-50 stocks and high grade bonds/CDs/CD
2. Accumulate about seven years of living expenses in cash and a CD
ladder. Add to this as your living expenses rise (for whatever
reason). Invest the rest in stocks and maybe some bonds.
My first impression was $300/week was a high return, and I calculated
a yield of 7.1% needed. Exactly which bonds will generate this 7%
over a long period of time?
The premise of the original post is accurate based on my experience.
I have found that once I accumulated a substantial amount (200k) I was
willing to take risks I had not considered with a PORTION of what I
was invested. For me that was about 10% of total assets and 25% of
new money. Ironically my wife's Roth was 10% of our portfolio at one
point and it's also 25% of our new contributions each year.
At same time I increased the risk profile in wife's Roth, I also
lowered the risk profile in some other accounts (shifted from 100%
equity to 90-10 for example, and moving to 80-20 or 60-40 once the
market gives us some profits).
I would suggest that even though I'd not predict the next 1yr, nor 5,
that stocks will exceed cash/bonds over the next 20 years. We don't know
your current balance nor rate of savings, but given the choice between
(A) saving nearly 100% in stocks* for the next 20 years, then paring
down, so a crisis as we are in today will only have you with maybe
40-50% stocks at age 45-50.
(B) starting with cash only today, and simply not investing in stocks
till age 35 or 40.
I'd pick (A). The *note in (A) is to be clear that you still need to
choose wisely, this thread not addressing actual investments within that
universe, and that an emergency fund is still suggested, separate from
I am mid-40s and despite the present scenario, I have no regrets about
being full up in stocks, having done so since I starting working. (now,
my 80yr old client who is less than 50% stocks thinks me a genius with
her friends down 35-40% and she, only down about 15% in 2008.)
US Government bonds pay little interest, you need something else in
You need investing experience so the earlier you start, the better.
You just need to be diversified.
You might want to keep your tax deferred accounts small at first so
that you will have funds available for a home down payment, education,
or other urgent expenditures.
That assumes a yield of a bit over 7%. Government bonds
right now are paying about 2.3% (on a ten-year note).
You can't get 7% right now without assuming substantial risk.
There's an investment-grade corporate bond ETF - with an
average bond maturity of about 12 yrs (and a 7yr duration -
therefore substantial interest-rate risk, though really
no more interest rate risk than those 10 year treasuries),
paying about 6% right now. Of course, about 30% of that
ETF is invested in banks. But banks' debt is a much safer
bet than their equity right now and the dividends on that
debt is vastly safer than the dividends on their stock.
So there you go - 6% yield and, while not save as, say,
TIPS, a lot safer than equities.
Factor in that you have long-term needs and will need to
reinvest some substantial portion of those dividends in
order for your portfolio to keep up with inflation and
you still come nowhere near generating the 7% spendable
cash you assume you need to live on. More like, after
inflation, 2%. A $16000/yr living, in perpetuity and
accounting for inflation, requires a good bit more
capital than $220,000.
You may have it upside down. Your best hope - over the next
40 years (since you are in your 20s) - to build up that core
capital that you'll need for a sustainable income - is probably
to take a bit more risk now. Eventually, if you have a big
enough capital base that you want to use to guarantee your
basic income (probably about 2-3x the size of that $220k),
you can invest that capital base conservatively (or even buy
an immediate annuity with it) and use any additional capital
you accumulate as aggressively as you want. But the question
is how long it'll take you to build up that capital base?
How much are you putting away each month? And how is that
money currently invested? If you're concerned about the
volatility and risks, you can certainly construct a fairly
conservative portfolio in which to accumulate that core
capital base. But going into government bonds and only
government bonds is probably not a great idea. It'll
take you that much longer (and/or that much more risk,
especially if you use slightly higher yielding but much
longer-term treasury bonds) to build up that core nest egg.
And if you do take very little risk and it takes most
of that 40 years to build up that core, you're losing out
on one of the most valuable things you have at your disposal
for dealing with risk - time.
Plain Bread alone for e-mail, thanks. The rest gets trashed.
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That is a good point. The way to fix this problem is to invest not
just in government bonds but also in shares, but to bias shares
towards those that produce reliable income from dividends.
Exactly what to invest in is uncertain, but my main thesis is that an
individual should aim to be safe first before increasing risk. The
conventional advice by financial advisers that you should decreasing
risk as you age exposes you to negative shocks that can hit when you
are young, e.g. an economic depression, unemployment, etc. Whether you
should take risk or not depends on whether you can afford it.
Someone who earns $10,000 a year should put his wealth into
necessities like food and accommodation because he or she cannot
afford to put half that money into risky investments. If the
investment performs poorly, the poor individual may not have enough to
pay for necessities. On the other hand, a wealthy person who earns
$100,000 a year can afford to put half his wealth into risky
investments. Even if the investments do poorly, he or she should have
enough leftover money to eat.
The same logic applies to differences between people of different
ages. Someone who is young and starting out in life is poor since he
had little time to convert his labor hours into cash. An old man, on
the other hand, assuming he has saved up or invested over time, is
wealthy and should be able to afford the risk. It makes sense then to
increase risk as you age.
Of course, if it takes a long time to save up that $220,000 then this
may not be a good idea. I am assuming that you aggressively save up
How much income is needed to cover the necessities is subjective since
everyone has a different idea of what is a necessity versus a luxury.
But I estimate about $300 to $400 per week. I assume investments can
yield between 5 to 10 per cent. It's not perfect, but you shouldn't
perform surgery in the sewers just because it's impossible to achieve
perfect sterility in the operating room.
Yet, people tend to have more trouble saving in the early years.
When getting started, even on good income, the first decade tends toward
spending more than saving, and increasing one's lifestyle. As one gets
established and enjoys a few raises over the years, the ability to bump
savings improves. There's something about your logic which does make
sense, from a very conservative viewpoint, but it also assumes that one
has that second period in life to invest with more risk. By lowering the
risk up front, you've lowered the average rate of return on can expect,
and for the percent one can save, that point of safety may extend well
past retirement age.
Your idea reminds me of Bodie's thesis, investing mostly in TIPS. The
is barely 2%, real rate of
return. Enter that into any savings calculator or spreadsheet, and see
Again, to throw off that $300/wk, you need to earn a steady
(and inflation adjusted!) 7% if all you've saved is $220k.
The closest you can come to a risk-free inflation adjusted
yield is TIPS, currently throwing off about 2% real yield.
If you know of a place to get 5-10% real return without
substantial risk, I, for one, would love to hear about it.
Plain Bread alone for e-mail, thanks. The rest gets trashed.
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Rents and dividends are hardly safe income sources. Tenants can leave and
dividends can be cut. Bank of America did it yesterday.
As others have pointed out, this is too much income to expect from too little
money. Think 4% annual withdrawal. Even that needs about 75% stocks to work
for a long time.
If you have good marketable skills, you have a secure basic income. This is one
reason for the conventional wisdom. When you're young, you can take more risk
because you have this income to fall back on.
Municipal bonds work for those in the higher tax brackets.
Delaying SS gives a high return (7%) for the first year after reaching
full retirement age.
Purchasing a lifetime annuity after age 70 gives a good return if you
live long enough.
Buying GLD ETF stock and selling calls against it will also give you a
return over 10%.
Paying off credit card debt gives a very high rate of return, but in
this newsgroup, I don't think anybody has credit card debt.
Insulating a house and other energy conservation measures can give
high returns on investment.
Your other suggestions were reasonable, but this one is unfounded. The
returns to your GLD covered call suggestion depend crucially on
(1) GLD returns
(2) the implied volatility of GLD calls being sold
I don't see how you come up with a return forecast of greater than 10%
for this strategy. In general, a covered call stategy compared to
simply being long should result in lower volatility, at the expense of
lower returns, if options are price fairly.
"Ron Peterson" wrote
If you live to or long past full retirement age. I evaluated my health and
when I would break even. Of course, you can only guess at the COLA. For 2009
it was a 5.8% increase. Not to mention that full retirement age is
I opted to retire at 62 and my checks for the first year amounted to
$15,396.00 and this year I will get $16,284.00 so before assuming a higher
return at full retirement age you have to do the catch up math first. It was
a while ago so forgive me if I'm off a little. It would take about 20 years
to catch up with someone who retired at 62 if you were both still collecting
20 years after you reached full retirement age. I've always been a big big
fan of the bird in the hand.