The Elusive 7%-10% long term average...



jiM has a long time frame (18-38 yrs.) and there should be little market risk over that time frame.
It's not much of a science if planners can't quantify risk or know where to go to get those risks.
A relative took early retirement a few years ago when family medical insurance was $10,000 a year, but know it's running $20,000 a year. She didn't have anyway of predicting those insurance costs.

I don't think that financial planners can be expected to know the best way for an individual to invest. A financial planner has to educate the client as to the risks and alternatives and help the client exercise those alternatives.
My point is that real estate and corporations are the major components of the tangible wealth of a country and those seeking to only invest in bonds, CDs, and immediate annuities may find themselves in trouble.
-- Ron
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Agreed (I didn't recall jIM's timeframe), time is a mitigator of market risk. I was just citing a general example and I now think you were giving a specific response. Hence the confusion. Had jIM's timeframe been shorter, his risk exposure would have been greater.

Sure it is. Anyone who thinks financial planning eliminates risk is going to be sorely disappointed. Financial planning attempts to MITIGATE risk. You proved it yourself with your opening statement. We don't need to exactly know the volatility of jIM's investment portfolio to mitigate against market risk nor do we need to know exactly what inflation will be to counter inflationary risk. We just need rough estimates. Of course, the better the estimate, the better the output (in theory).

I can't tell if you're agreeing with me or if I just did a terrible job of conveying my thoughts earlier. All the same, this is what I was also saying.
When most of my clients approach me for the first time, they have a specific and obvious problem in mind. For a VERY loose example, suppose a 35 year old inherits a large amount of money (enough that he wants to retire now, but not enough that he's buying a Ferrari). He comes to me for help. Well on the surface, his biggest risk seems apparent; longevity risk (the risk he'll outlive his money). One counter to that is an immediate annuity. Of course, that then gives rise to inflationary risk (the risk that he'll lose his purchasing power over time). So maybe only some in an immediate annuity and the rest in equities intended to beat inflation. But now he also has market risk. This goes on and on. Hopefully, I've eventually addressed most of the risks out there and the client ends up with a nice we'll rounded financial plan that doesn't eliminate all his risks, but minimizes and balances them against each other. Looking back after the plan is done, it seems pretty obvious that the plan came to fruition primarily by simply knowing and managing the risks my client was exposed to. The asset allocation percentages, annuities, insurance, etc... all took care of themselves throughout the process.
Now specific product selection is another matter.

Again, agreed. I didn't intend to counter that point. I was more or less trying to tie the need to quatify risk vs the need to know risk into your other post.
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Maybe I'm just feeling cantankerous today, but few of us have any idea how long we might live, and most of us have some idea regarding future inflation.
I expect to live to 100 or beyond because I'm mitigating my risk of heart disease by exercising and eating a healthy diet, wearing my seat belt, and keeping my mind active. But there are people in my situation who have dropped dead 100 yards from the finish line of a marathon. I'll make my plan based on the 100 year number rather than the 100 yard number and will likely die somewhere in between, when my heirs will have something to argue over.
At the same time, I suspect we all have some idea what inflation will be, at least close enough to include a reasonable number in our financial plans. Without that expectation, none of us would ever be able to retire.
Elizabeth Richardson
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Andrew Koenig wrote:

I read the article referenced here, and would ask, even if we throw aside the definition of risk we seemed to be comfortable with, how do you suggest one changes one's approach to investing with this new insight? Right now, if one seeks a 3% real return, there is no way to get that return with no risk. The last TIPs auction (4/30/08) shows a yield of .745% just enough to pay the tax on the 3% inflation rate, for a net real return of 0%. Joe
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Absolutely incorrect. Stocks are indeed the way to go.

Look into any kind of portfolio tools on the web. You'll get some advice, depending on your own risk tolerance, on some combination of stocks, bonds, and cash. And within the stocks category, you'll get some combination of big cap, small cap, and international stocks.

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JACK-UK wrote:

I would recommend some solid research before you go too much further. One thing you don't want to do is take advice (even the great advice here) without really understanding it.
There are some books that you might want to read. I recommend starting with "The Four Pillars of Investing" by William Bernstein. This is targeted at the non-mathematical sort, but is useful to anyone. Another friendly book is "The Bogleheads' Guide to Investing" by Taylor Larimore and others.
I also found "The Only Guide to a Winning Investment Strategy You'll Ever Need" by Larry Swedroe to be useful. Bernstein's other book, "The Intelligent Asset Allocator" is more technical, but worthwhile. He also has some articles on his web site:
<http://www.efficientfrontier.com/
Some or all of these books might be available at your local public library.
Brian
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I usually recommend Personal Finance for Dummies by Eric Tyson as the first book a new saver/investor should read. Before one worries about asset allocation, one needs a handle on the broader financial picture, as well as some general advice as to what kinds of accounts and investing one may do.
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snipped-for-privacy@fractious.net wrote:

Sounds like good advice. I definitely think the OP is getting way ahead of himself by trying to figure out what to invest in.
Brian
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For a 7-10% annual gain over time I would consider investing in:
1) stocks (large cap, small cap, mid cap, international, growth and value) 2) bonds 3) Real estate and REITs 4) commodities, especially gold and silver
I listed the investments in the order I would consider them for a growth oriented portfolio.
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"Guessing" a few recent years results is VERY DANGEROUS. Actual statistics prove you quite wrong.
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