Inflation

Elle, the point that you are making is excellent and one that I think a lot about.

So I will start going on a tangent, and hopefully will come back to address your comment.

The question, is where is risk (of losing money) and how one can avoid it. One can lose money due to investing in bad stocks/businesses, stockmarket slumps, due to inflation, devaluation of currency, legal problems, fraud etc.

Exotics aside, the risks in stock investing come from either paying too much (buying a lot of stocks, but for too much money), or not diversifying and being unlucky to make bad stock picks.

So, as far as stocks go, I have four choices:

1) do not invest in stocks at all 2) invest most stock money in Berkshire 3) Invest most stock money into an index 4) Make my own stock picks

My experience of a few years, convinced me that I am not a great stock picker (no surprises here). I never lost all that much money, did not lose anything around 2001, etc, and even made money, but I did not achieve any spectacular returns on my "personal ideas". So 4) is out.

Warren Buffett's record, considering just the last few years, is much better than mine, a little better than S&P (even though he pays taxes and S&P does not), and he accomplishes that while carrying a considerably lesser risk than than of an index fund.

I also like his thinking about risks, rewards etc, and the idea that "to finish first, you must first finish". The main point of which is that if there is a significant chance of a money manager losing everything, then high average returns mean nothing, as in the end all money will be lost one year.

So I think that having him maintain a diverse set of businesses and stocks, is better than me trying to do same.

They are not, it is not that simple. Inflation is basically a tax on cash, accounts receivable etc and rewards accounts payable. So some companies will lose more than others, depending on their business model, but on average they will lose money (real economic value) from inflation, just as private people would.

Yes, the TIPS idea is definitely one worth studying.

I have Bs, but they are the same as A's, sans the multiplier.

The above is roughly correct, I have slightly more money in it, but not by much.

i

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Good point, but moderate inflation means gradual loss of money. So if one notices it half a year late and takes measures, it is still worthwhile to take them.

How costly is it for a "little guy" to have a manager?

i

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"Ignoramus29035" wrote On allocating 30% of one's portfolio to Berkhire Hathaway stock:

That BH is less risky than the S&P 500 is not clear to me. Maybe Will Trice or someone else can post some meaningful numbers to compare the two. Either way, you heard out the exchange on the subject here; you sound at least a little grounded in the concept of diversification; you selected BH partly because it is conglomerate-like; you say you have another 30% or so in 401(k)s, which I imagine is in mutual funds; and it sounds like you are happy with BH as opposed to an index fund. I would not choose a 30% allocation to any one stock (even BH), but others would be comfortable with it and, like you, can justify the decision. BH may very well go on beating the S&P 500 for the long run.

We disagree, but no big deal.

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It is worth noting that, to retire on a middle-class income, say $40K a year, you need a $1M in earning assets or the equivalent in annuities, such as pensions or social security. This by our 4% withdrawal rule of thumb.

So $1M is not what it used to be. But it is way out front for a 37 y/o.

-- Doug

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Just to continue the discussion, none of those are inflationary except for the Fed stimulus. Further, we are in a recession or close to it. That is a strong deflationary force. -- Doug

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Anywhere from around 7% to 15% of the gross rents depending on the location and type of property. I think it is worth the cost unless your property is close to where you live and you have the time to handle it yourself.

Whether you are a "little guy" or a big guy is not really an issue. Having a manager is a good idea whether your rental property is a small condo or a 30-unit apartment building. For a larger investment, the manager costs more, but also there is more rental income to pay those expenses.

Do the calculations and just make sure you will have enough rental income to pay the mortgage, if any, and pay all the expenses. You need to have enough cash in reserve to allow for vacancies of a month or two if a tenant leaves, and to pay unexpected expenses like fixing a roof or getting a new furnace. Good luck.

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Perhaps as a small part of a portfolio, but note a few things about them. (a) they are *highly* tax-inefficient - do NOT hold them in a taxable account. And (b) the "real" rate they are paying is very low. They may beat inflation, but not by much, and if in a taxable account, probably not at all.

They may be suitable for a part of the fixed income portion of a more diversified portfolio. But TIPS alone would make for a retirement which would be very difficult to save for.

As the flight to quality proceeded recently and credit spreads widened, yields on Treasuries went way down and "real" yields on TIPS got to be tiny. When a recovery takes place, that is likely to reverse somewhat (and it already has - a little - yield on a 10yr TIPs in March dipped below 1%. It's back to around 1.6 now and got as high as 1.8 earlier this month. During most of their history, these have yielded between 1.6 or so and

2.3 or so.). Point being that TIPs yields - and returns - may protect somewhat against inflation, but not perfectly. They still have term structure and interest rate risk, and can get ahead of themselves in times of fear. Vanguard's Inflation Protected Securities fund - which is more than 90% TIPs - has had annual *nominal* returns as high as 16% (ie. in times of fear - 2002) and as low as 0.4% (in times of not so much fear - 2006).

Anyway, all I'm saying is that while TIPs may have a place in a portfolio, they should only be a piece of one, not the whole thing and one needs to be aware of their problems.

Precisely. We've discussed it here before, but the basic jist is that he acknowledges that the ability and expertise to pick stocks is not very common, and that even those who can do it spend a lot of time doing it. Folks who have neither the expertise, ability or time for it should just buy the whole market. No need to pick stocks.

He's even put his money where his mouth is - he recently made a bet with some hedge fund managers that an index fund will beat their fund of hedge funds over a ten year period. See or any of the articles easily found on Google such as

Note that Buffett does not recommend index funds for everyone. Just for many, perhaps most.

This is a good short article on Buffett's comments - do look at the note attached at the bottom, though, from Jeff Ptak at Morningstar:

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6% is pretty aggressive, and if it's 6% + inflation adjustments, it's highly likely to fail (where "fail" means you run out of money before you're ready to).

Note that a 100% equity portfolio over much of the last century returned only about 7% after inflation. And that was with a lot of volatility along the way. A balanced portfolio, to temper the volatility, paid less. But such a balanced portfolio may be steady enough to support those payouts. Pulling a fixed (plus inflation) percentage out each year can get you in a lot of trouble if you have a few big down years early on. Timing matters a lot in when there is volatility. Starting at 6% right when the market takes off may look conservative. Starting at 6%, say, in 1973 or in 2002, not so much. Since I don't know if we're poised for another 2002 (well, we're on our way) or if we're poised for another 1975/6, I'd weigh out carefully what the consequences of being wrong are.

If you use a more flexible plan - pull out a fixed percentage of your portfolio - and thereby pull out *less* in/after down years - you might be able to sustain a slightly higher extraction rate and still be reasonably certain that you will be able to pull out enough on an ongoing basis to sustain your cost of living.

Note that all such "rules" of how to do this need to be able to be adjusted along the way, since they all are based on projections and estimates into the future.

I wouldn't dare try to come up with a number that would describe risk to your satisfaction... :)

-Will

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Like a lot of things in retirement planning, it depends on how long you are going to live. But 6% is definitely on the high side. Take a look at:

for an overview and referencesto more detailed studies. In particular, look at the Trinity Study.

-- Doug

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OK then how about a more global perspective? The 2007 Capgemini/Merrill Lynch Worldwide Wealth Report estimates that there were only 9.5 million millionaires on the entire planet in 2006. They define this as $1M excluding principal residence so you're not quite there yet, but you're well on your way given that you're only 37.

Or put another way, 99.99985% of the earth's population has less than $1M and somehow they are able to scrape by. And if high inflation is going to threaten your lifestyle, think of the effect it's going to have on those with so much less.

In that context, the contention that one needs substantially more than $1M in today's dollars to retire, or even lead an enjoyable lifestyle during one's working life, is absurd. It means one has overly pessimistic views of the long-term value of financial assets, or extremely high expectations for consumption. Figuring out which one is the issue might help point to a solution...but some appreciation for one's financial status is a good start.

-Tad

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This may be going off topic, forgive me, but to this point, there is a web site

which tells you where you stand on a worldwide scale. $48000 is median in the US, right? On a world scale it's the top 1%. Half the world's population lives on less than $850/yr. This may not be relevant to how we plan our finances here, but it does offer one an interesting perspective. Joe

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It would be just as interesting to figure the cost of government in each of these places, and the cost to wake up in the morning. For example, if I went down to city hall and proped up two sheets of plywood and tied a sheet of corrugated steel to the top to build a typical 3rd world house, I'd be arrested in short order and hauled off to jail. Dittos if I went to use the gutter as a bathroom.

Just to wake up in the morning, in the US, I have to have running water, hot water, electricity to make the water, I have to pay a sewer connection fee, pay for expensive plumbing, I have to have walls and roofs that meet exoitc building codes, and I have to pay taxes on each of these items, plus pay a general property tax just for occupying a spot on the planet. It probably costs me $750 a month just to wake up, and kick in another $750 because I choose to live in a nice house.

Then there is food. I live in a condo, so no garden, and I live in a city where farm animals are not allowed. It isn't legal to collect firewood, and there is no cattle dung within walking distance. That forces me to buy corporate food, and use electric appliances to heat it up. Yet more costs, and more taxes on the power, plus I have to pay to have the trash hauled away.

There is a river between my city and where I work. All the bridges are freeway bridges and do not allow people to walk or use scooters. Public transit mostly goes to the downtowns, and goes nowhere near the industrial district where I work. As a result, if I want that income, I have to have a car, pay taxes on the car, buy fuel, pay all kinds of fuel taxes, license fees, and more environmental fees on the repairs. When I do get my pay check, more than 50% is deducted for taxes, medicare, welfare, social security, union dues, and all kinds of silly fees. I max out my retirement, so what starts as a nice paycheck ends up being a drib or a drab of money.

Bottom line after all this rambling is that comparing median incomes is bogus. Net profit is what counts. If I spend all my money on modern living, and put nothing away, I am far worse off than a 3rd world goat hearder who lives a semi-nomadic life, but is able to feed their family and increase the size of their heard by a few goats each year. And if our goat hearder gets health care as a human right, and I cannot afford health coverage, then tell me who is better off in the long run?

-john-

Comment: a friend of mine, who resides in Virginia, lives without electricity and running water. She lives on a communal farm and there are others similarly unencumbered. She has a job, she does drive a car, they use propane for cooking. She has chosen to live thusly for over 16 years. We're not talking about a homeless person, or someone others might call down on their luck. I'm simply pointing out that running hot water and electricity are not required living accoutrements in the US (though living like that would not be my choice!).

Elizabeth Richardson

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"Elizabeth Richardson" wrote

For many folks I think much is to be said for the simple life. I think it can give one an appreciation of what is really meaningful for filling one's time. Unencumbered is a good way to put it. No (or fewer) chains, and less worries about inflation etc., if only because one knows how to survive at the most immediate level, as opposed to tarrying over one's portfolio and counting on investments to survive.

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