What if we get a Japan scenario?

[SustainableHappiness]

Doesn't the ever present threat of a Japan scenario, or more broadly a long-term shit market just push the idea of creating other scalable income streams all the more important? I agree we want to optimize our investment strategy to hedge for this kind of thing, but isn't the ultimate thing we are hedging for income?

I ask because my first instinct when proposed with a future of crappy investment returns is a non-investment based solution. That is, turning to other income sources that cause me the least amount of pain. Kinda reminds me of the arguments made in the ERE book for tech-based problems not necessarily needing tech-based solutions.

That being said, a super portfolio that weathers all storms and returns high would be great and I always look forward to suggestions.

[brighteye]

At least I know that I am a little boat , so back to learning and studying it is.
And also, working on creating other income streams.

[vexed87]

I ask because my first instinct when proposed with a future of crappy investment returns is a non-investment based solution. That is, turning to other income sources that cause me the least amount of pain. Kinda reminds me of the arguments made in the ERE book for tech-based problems not necessarily needing tech-based solutions.

This is something I have spent many hours pondering myself. This is why ERE works so well. Someone practicing ERE hard mode is likely already living the renaissance man/simple living lifestyle. Not needing vast sums of money to meet your everyday needs in the market economy is a viable strategy for reaching FI sooner, but it also helps prepare that individual, making them already well adapted to an economic collapse end game. Those clinging on to the status quo, and someday banking that state welfare and/or generous pensions based on the myths of perpetual growth and bubble economics will take care of them might go down with it's smouldering wreckage. If you are already living a life with a small footprint, chances are you not too dependant on the returns of perpetually growing economy with hard limits on energy supplies, industrial agriculture, municipal water, vehicular transport, vast quantities of energy and tech... chances are, your needs could quite be met quite nicely by a dark age level of society, which is where civilisation is heading, whether any of us will be around to see it or not. I know what some are thinking, many of us make use of those things today. Yes, but that's different than being dependent.

Learning to meet your needs outside the monetary economy will still pay dividends should poor growth mean we are faced with drawing down our portfolios, if not simply faced with relying on a more conservative 2, 1 or .5% Safe withdrawal rates. If the economy is mismanaged to the point it enters some kind of death spiral thanks to demand destruction in response to energy deficits circa 2020-30's, we all have to remember that money after all is just a medium of exchange, a token used to redeem social capital. Our assets are only going to support us as long as the people believe the economy is working for them. (I suppose this is what Jacob means about the perma-unemployed realising that all is not well in the world...)

I know that it's cliche as hell, but if SHTF in a big way, relying solely on a globalised market economy to meet your needs might leave you deficient in certain forms of capital, sometimes I think some in this forum forget that side of the picture. So it would make sense to work towards being sufficient in your most basic needs in ways that don't rely on vast societal infrastructure projects and market economies. Hedging your portfolio is prudent, but it's just one form of many in sourcing the things you need from your immediate vicinity and the people around you at the time, this is what our income buys us. Having a strong network of peers with varied skills and meaningful skills, (where not talking SEO, C+ or web-dev here) is very underrated IMO.

[Sclass]

Maybe we won't hit SHTF. We might just end up like Mexico.

[Seppia]

@vexed87
What often goes missing in the rationale for minutiously preparing for truly apocalyptic scenarios is the fact that your time is finite and the event unlikely.
In my opinion, acquiring skills that can be both useful today and in shtf scenarios makes a lot of sense (cooking, hunting, being able to recognize edible local plants, owning a rifle...), but I would not allocate too much time specifically for a SHTF situation (think extreme preppers), as you would be giving up optimizing for the much more likely scenario that life goes on more or less unchanged.

[vexed87]

Maybe we won't hit SHTF. We might just end up like Mexico.

I totally agree, ending with much smaller economies like Mexico is the most likely scenario, but from the perspective of a typical urban middle class westernised consumer, this is the equivalent of SHTF! Mexican society supports a much smaller proportion of middle class consumers than most would expect of developed countries. The the few that remain have a reduced standard of living, whilst everyone else is likely thrust closer towards financial insecurity and the poverty line.

[Sclass]

I guess what I was thinking was the big divide between rich and poor in Mexico.

I know some wealthy Mexicans and they live in a completely different world there from the rest of the citizens who didn’t rebel against these rich guys. Not only do these people live differently they look 100% Spaniard. Easy targets for social unrest. I just don’t get it.

But then I wonder if people just took it in Mexico and got ground down gradually. Kind of like the hollowing out we see here of the middle class. Marginalized slowly till there were only a few lords and mostly peasants. Perhaps that will happen in the US after two generations and nobody will remember their grandparents life? We seem to be on that course.

Life seems to go in in Mexico. Not quite SHTF.

[jacob]

Not at all like SHTF.

It all depends on what kind of income you have had---how you acquired your money. Japan has had almost no inflation over the past 15-20 years. There's even been periods with actual deflation.

If you've been smart, you would have invested in US long bonds (the exchange rate has also been near constant) and enjoyed (and still enjoy) a very stable 3-4% real return. Good times! So even in Japan, aiming for 3% real has been quite possible. However, it requires that the FIRE candidate be flexible and willing to change strategy to match changing circumstances. I award the ERE book another point

Conversely, blindly copying a US total return strategy with a 4% SWR would have sunk that ship.

[Gilberto de Piento]

How would someone in Japan have known what strategy to use?

I am not a student of Mexican history so I could be wrong but I was not under the impression that it was ever a place with a strong middle class.

[jacob]

Is this a trick question?

[Stahlmann]

Is this a trick question?

I will take GdP question and make it more clear or "reshape" it.

Was it possible for 'better than the horde' (but not top10% investor) to know this tactic (described in last jacob post in this topic) to gain 3-4% yearly?

I would make it even more clear and put this in following way: we assume there is guy in 60-75 percentile in every 4 investing qualities (knowledge measured as IQ, emotional intelligence measured as having balls of steels to hold position when you are loosing, wisdom measured as sum of gained experience of difficult situations, I forgot the 4th one ... There is excellent post where you described what it takes to be good investor, cant find it using mobile, it was more elaborated than this

viewtopic.php?t=3893#p54891

Edit: nope, this is this post!)


I mean when we read now historical performance it's no brainer that bond yielded such results in given area. It's obviously connected with the fact that nobody read about this particular on some specific internet circle.

My questions stems from that I can't still go through that there are people who are making money with money (average aspiring middle class problem).

[vexed87]

Life seems to go on in Mexico. Not quite SHTF.

What I mean is, if you used to be a wealthy middle class consumer, and you get relegated to the Precariat class, well that is the equivalent of a personal apocalypse. Of course life will go on. Eventually, previously well off individuals would be ruined financially and will have to scale back their expectations of spending power, and thus consumption. You're quite right, it's already happening, perhaps just a little too slow for most to notice. It will affect different areas and different peoples at differing rates.

[Ego]

Things have changed fast in Mexico. During previous economic crises they were more resilient. Today they are more like us. Far more fragile.
https://www.ceicdata.com/en/indicator/m ... ehold-debt

[jacob]

@Stahlman, GdP - Maybe ask yourselves, how someone in the US would have known that "a dollar cost averaged asset balanced portfolio of index fund heavily weighed towards equities"-strategy(*) would have had a ~2-3% real return over the past two decades in the US?

You just follow the herd.

This is what most people are really doing even if they like to rationalize to themselves that they've done a careful analysis of how their strategy is historically optimized with math, best for them according to an app, based on advanced AI written by phds, written in purple font for safety, contains natural edible products, or whatever defines the prevailing epistemology.

3% real is median for the popular strategy for any area and any time. You don't have to be a high percentile genius to find 3% real returns. You just have to find what's popular in the current decade(s). And that's easy if you're average. Probably harder if you're not.

So how do you follow the herd? You identify it by "what people are talking about" and join it.

[ThisDinosaur]

And that's easy if you're average.

Yeah, but *everybody* thinks they're above average. If you know this and are even slightly insightful, you should remember that "the market" consists of billions of other individual investors who are trying to outsmart you.

Japan is an entire country that was once unconcerned with an average stock price of >90x earnings. Just following the herd. Oops.

[vexed87]

Isn't Japan's biggest single holder their own central bank/government? Hasn't the herd moved from domestic markets to international?

[Gilberto de Piento]

Is this a trick question?

No, not a trick question. You said a smart person would have known what to do. I'm asking what specific signals would that smart person have seen in order to determine what strategy to use in this situation?

[bryan]

>> Is this a trick question?
> what specific signals would that smart person have seen in order to determine what strategy to use

I think maybe jacob touched on it in his reply.. "follow the herd." I'm sure he also means 1) to pursue ERE, 2) do some thinking/arithmetic (risk/reward/probability) in anything you plan on investing in, tailored to your life, 3) and that giving short blanket advice about investing is mostly worthless without full qualifications and the whole thing is a system of inter-connected systems.

A "smart" person would have seen the signs and bought equities in 2009, 2010, 2011, 2012, 2013.. and then this thing called Bitcoin in 2013, 2014, 2015, 2016, 2017...

If you want some unqualified advice on what to invest in going forward.. I would say vans.

[jacob]

I shouldn't have said "smart".

When it comes to popularity, an investment-class (like, say, equity, college educations, stamps, ... ) go from "nobody would ever invest in that/what is that anyway" over "everybody knows that this is the best class, now the question is what is the right mix" (e.g. "everybody needs a college education, but which one is best?") or ("I want to start investing: Which stocks(*) should I buy?") and finally topping out with the proverbial taxi-driver giving detailed tips.

(*) Are there any random noobs out there thinking that retirement savings is perhaps best done in cars or machine tools and not some Wall Street product? Have any of you guys ever been asked about anything esoteric? I haven't.

My point is that it doesn't take a genius to figure out what the best class is after the first 1/3 of the trend has played out. At this point it will dominate the previous one which is fading. All you gotta do is to listen to morning TV hosts, standard bank advice, blogs, focus on the best-selling books, ...

This includes ordinary Japanese with little investment education figuring out that they should invest in US long bonds. Just as it's involved Americans figuring out that they should invest in low-fee index funds from Vanguard.---All based on reading a book or two.

It's hard to miss what's being said in the public echo-chamber unless one is deliberately trying to ignore it. And since such trends take a few decades to play out, it's hard to miss the bus too. This is why 3% real return is easy.

The personal risk is settling on a "forever"-strategy and getting personally invested in a certain framework of thinking. As an example of what not to do, consider the original YMOYL strategy of rolling 100% 30 year US treasuries. Joe Dominguez started out in the late 1960s with what by my CPI calculations was 400k of 2017-dollars and invested at 6%, the yield of the time, he had an initial income of 24k in 2017 dollars... but in sticking with the strategy well past its expiration date, real returns were negative, and he ended with much less real income at the end. Much was made in YMOYL2.0 of how inflation doesn't matter. I suspect he learned to be a lot more efficient with his money over the decades as the portfolio lost purchasing power. YMOYL2.0 now recommends low-fee index funds.

Key here is to be in what's popular. Yeah, you would have lost 60% in 2008 if you had been in 100% equity ... but that's not nearly what you would have missed out on if you had been sitting on stamp collection since 1980 because you developed your investment theory of the world in the 1970s and never changed it since.

[jacob]

I suspect I'm still failing to explain myself. The problem is that it's one of these cases where the point becomes obvious after realizing that there are different perspectives.

Group 1: "US investors in US financial products in 2017 (since 2001 really)"
Group 2: "Japanese investors in Japanese financial products since 1988"
Group 3: "Japanese investors in something else since, let's say, 1995"
Group 4: "US investors in gold coins since 1981"

The issue here is that group 1 (you guys/this thread) worry that you'll turn into group 2 and suffer for the next 30 years. However, in reality, many in the Japanese group 2 quickly (a timescale of <10 years) joined group 3 because the cumulating pain after 1988 became too much to bear. It's amazing how quickly buy&hold diehards start questioning themselves and change their mind after even less than one year of market pain. I recall watching that on the bogleheads forums in 2009. It's also clear that nobody in group 1 is thinking that they're investment geniuses just because they're not in group 4. In fact, it's probably those in group 4 who require increasing amounts of genius level rationalizations as to why they're still ... bugged. Whereas the majority in group 1 and 3 probably just read one or three "simple" books and a countable number of articles/posts.

PS: Not to pick on gold. I could have picked any other number of "minority"-strategies.