I'm curious to hear your thoughts on this: What is the future value of money, currently, in your mind? What discount rate do you personally use when making finance/investment decisions?
Personal Discount Rate
I've only been actively investing for almost 3 years...But so far so good. I'll give myself like 9-10% in a dryer market and expect 12% or so in a bull market. Dividends plus trying to buy smart/undervalued for some capital appreciation. AFL at 33, WAG at 31, MCD in the 80s...When I started, PM in the 40s, MO at 18, more MCD at 71...Those are some of my best picks. VFC at 80 was nice too.
So for me I'd say long run around 10%. But I'm a dividend growth investor so I mainly look to accumulate a portfolio to live off of.
That's a good question. I'd imagine it depends on what your personal strengths are. I am very comfortable with stocks and the stock market and a batch of about 50-60 stocks, that is my universe. Others may find real estate or bonds a better bet, or PP.
Going back to the 10% mark, market has done around 8-10% historically anyway...So I'm pretty comfortable with predicting about 10% long run, dividends and capital gains (total return). Maybe the next decade will prove me wrong, but so far so good.
So for me I'd say long run around 10%. But I'm a dividend growth investor so I mainly look to accumulate a portfolio to live off of.
That's a good question. I'd imagine it depends on what your personal strengths are. I am very comfortable with stocks and the stock market and a batch of about 50-60 stocks, that is my universe. Others may find real estate or bonds a better bet, or PP.
Going back to the 10% mark, market has done around 8-10% historically anyway...So I'm pretty comfortable with predicting about 10% long run, dividends and capital gains (total return). Maybe the next decade will prove me wrong, but so far so good.
I operate on the assumption that I'll have a negative 10% return over time.
That's not because I'm particularly pessimistic or because I believe I'm a terrible investor but because it keeps me hungry and sets my future-self up for happiness rather than disappointment.
If I were to assume a particular growth rate, say 7%, then set a future date where I plan to live entirely off my investments, then I'm a failure if I have to do any work in the future, even something I am passionate about.
On the other hand if I assume I will always have to contribute to the life-fund rather than withdraw from it, then I'll keep an eagle-eye for opportunities to make a little money and enjoy myself in the process.
Also, the ability to function in the real world is use-it-or-lose-it. Those naturally inclined to avoid others will likely choose to do so when they've earned financial freedom. It is far more healthy to keep a toe in the water and remain functional.
That's not because I'm particularly pessimistic or because I believe I'm a terrible investor but because it keeps me hungry and sets my future-self up for happiness rather than disappointment.
If I were to assume a particular growth rate, say 7%, then set a future date where I plan to live entirely off my investments, then I'm a failure if I have to do any work in the future, even something I am passionate about.
On the other hand if I assume I will always have to contribute to the life-fund rather than withdraw from it, then I'll keep an eagle-eye for opportunities to make a little money and enjoy myself in the process.
Also, the ability to function in the real world is use-it-or-lose-it. Those naturally inclined to avoid others will likely choose to do so when they've earned financial freedom. It is far more healthy to keep a toe in the water and remain functional.
This thread shows what I love about this forum. Most people I know aren't even familiar with discounted cashflow analysis (other than that they have to look at the NPV10% box when justifying projects). It's nice to hear from people that even think of things like personal discount rates.
I was talking to a recent MBA grad last summer and he was telling me that companies should (but usually don't) discount at their weighted average cost of capital. Eg: If you are half funded by debt at 5% and half by shareholders who expect a 10% return they you'd discount at 7.5%. To me this makes sense because if your NPV isn't positive then you'd probably be better off paying off debt or giving shareholders their money to invest elsewhere than doing the project. (Side note: I'm far from being an expert on this kind of thing). You could extend that same idea for personal stuff too.
When I've played around with personal DCA, I've just used 5% for no good reason. I like Maus's idea of discounting at the safest guaranteed rate though.
I was talking to a recent MBA grad last summer and he was telling me that companies should (but usually don't) discount at their weighted average cost of capital. Eg: If you are half funded by debt at 5% and half by shareholders who expect a 10% return they you'd discount at 7.5%. To me this makes sense because if your NPV isn't positive then you'd probably be better off paying off debt or giving shareholders their money to invest elsewhere than doing the project. (Side note: I'm far from being an expert on this kind of thing). You could extend that same idea for personal stuff too.
When I've played around with personal DCA, I've just used 5% for no good reason. I like Maus's idea of discounting at the safest guaranteed rate though.