I trust my investments in toilet paper and chlorine-making companies more than I trust government's ability to repay and properly inflate my payouts.
Financial markets agree with you. Credit default swaps on blue-chip consumer staples companies (MCD, PG, KO) trade lower than they do for US Treasuries. Which is to say markets believe the US government is more likely to default than Coca-Cola and McDonalds are.
For those with access to a Bloomberg terminal, the relevant function is GCDS, for example KO [Equity] GCDS for Coke or T [Gvt] GCDS for Treasuries.
From a long-term historical perspective, it's unusual for government debt to be considered less risky than the strongest [trans]national corporations or trading houses. The idea that government debt can even be considered "risk-free" is rather modern to say the least.
From a long-term historical perspective, it's unusual for government debt to be considered less risky than the strongest [trans]national corporations or trading houses. The idea that government debt can even be considered "risk-free" is rather modern to say the least.
This was true before the currency itself was "backed by the full faith and credit..."
It's hard to imagine US corporate promises to pay US currency being worth much if the currency-issuer itself defaults.
ceiling= 1 year of living expenses* estimated number of years left.
Stated in terms of SWR it is likely that even a relatively young person would cross this threshold between a 1-2% safe withdrawal rate.
Is it easier/faster to save every consumption dollar you will ever need? Or to purchase cash flows at an expected future yield? It's usually more time efficient to do the second one. That's the only concievable reason to risk in-hand capital.
From my perspective, a Perpetual Withdrawal Rate and an Income Investor are doing the same thing. Just different forms of speculating that their investment will yield more *eventually* than they put into it in their lifetime.
A Safe Withdrawal Rate is the same as an income investor who plans to spend down principle as they approach their actuarial expiration date.
This was true before the currency itself was "backed by the full faith and credit..."
It's hard to imagine US corporate promises to pay US currency being worth much if the currency-issuer itself defaults.
Correct, but that's not a default. If you need euros to buy a Big Mac or a bar of silver to buy a box of Pampers it becomes much easier to repay corporate debt denominated in now-worthless dollars. And the companies will still be around, now issuing debt in a form of payment and/or at a rate that will still clear the market, backed by their continued ability to sell hamburgers or diapers at whatever price.
Is it easier/faster to save every consumption dollar you will ever need? Or to purchase cash flows at an expected future yield? It's usually more time efficient to do the second one. That's the only concievable reason to risk in-hand capital.
That's not quite what I'm talking about. I'm saying what if you've set out to purchase future cash flows but accidentally end up with every consumption dollar you need because of a conservative withdrawal rate and an insane 9 year long bull market, hypothetically speaking.
I think at some point you have to stop pretending that what you own, or hold dominion over, is well represented by "just" liquid net worth. For instance, there is a very real qualitative and practical difference between owning a woodlot next to your tiny home vs. holding a 10 year treasury note vs. shares of index fund vs. little velvet bag full of gold coins hidden in your sock drawer vs. rental property located 100 miles from your home vs. an inventory of rare books held in the warehouses of your soon-to-be-arch-nemesis J. Bozo. IOW, at some point control mechanism and maintenance cost/time becomes relevant and individualized.
Another way to think about the boundaries would be that except in the case of desire for perfect freedom (likely unobtainable), at some point it is going to make sense to go sideways towards investment in current environment vs. saving for future you. However, or obviously if you don't instantly convert to $$ in your excel sheets, when you invest in equities, you are investing in the current environment rather than saving for future you. Really no different than lending your neighbor the cash receipts from the sale of 1 acre of your corn so he can buy a new tractor vs. putting that corn up in the crib to eat for your dinner 5 years from now. There is the possibility of rats at every level, some might be little and have long tails and some might be larger and uglier and sometimes wear suits.
@JG
If this is a problem you are facing then you should be in the "wealth preservation" strategy space. I would say diversification is just as important here as when trying to maximize return. Some cash, some gold, some alpha strategy. Something stashed away overseas. Very little in equity and paper promises.
This is not a personal problem as I am no where near this level of savings, it's more of a thought experiment. Isn't the ultimate wealth saving strategy cash or cash equivalents? I.E. you are now only fighting someone devaluing or seizing your assets, but you no longer need to grow them, so why take on extra risk?
Jacob's answer to this question, if I'm interpreting it correctly, is that he feels safer with his $$ stashed in well chosen stocks than any other place.
@7w5: Your posts always have me questioning why I'm wasting my time trying to learn about stocks and bonds and not just seizing maximum freedom now. My best answer is I feel like the information might be useful later and that I have a pretty high amount of freedom currently. Your post also highlights that "investment" is a game we are all more or less forced to play, whether we think about it or not.
Well, please take into consideration the fact that I am already too old to gain much more free time through the miracle of compound interest. Every individual has their own preferences for how they want to spend their lives, and their own equations for determining whether money, time, society, attention or vigor is the limiting factor to achievement. I am definitely in the f*ck money as security/f*ck general society zone because I am running out of time and vigor to do what I want to do. MMV.
@7w5: If there's one thing this forum has convinced me it's that the magic of compound interest is far from guaranteed. How do you plan to operate once you are too old to work? Or do you not believe this problem is real?
I plan to soft-compost myself when I am too old to work the approximately 12.5 hrs./week I currently must to support myself. I have already informed my children of this plan, although I haven't worked out all the details. Of course, if the S.S. system doesn't collapse, I will be living LARGE on my estimated $1100/month distribution! Of course, there is a pretty clear limit to how much money maximum a person can even spend towards acquiring all the candy, books, and male sexual partners she might want on a monthly basis = $150 for 15 lbs. decent chocolate+$160 for as many brand-spanking new pages as I can read+ maybe $10 for box of hair color and new lipstick or super-push-up bra=$320. So, all I need is permaculture acreage and something resembling code-compliant housing, and I am set.
This is not a personal problem as I am no where near this level of savings, it's more of a thought experiment. Isn't the ultimate wealth saving strategy cash or cash equivalents? I.E. you are now only fighting someone devaluing or seizing your assets, but you no longer need to grow them, so why take on extra risk?
I would not call all cash a wealth preservation strategy, no. Inflation will inevitably eat away at your real wealth, not to mention hyperinflation. Gold is how most people deal with concerns about fiat currency, but there is historical precedent for confiscation and such. And of course stock investing is nearly synonymous with risk. Alpha strategy is in some ways appropriate, but puts you at risk for spoilage, depreciation, natural disasters, storage space cost, and theft.
As a thought experiment, it reminds me of the phrase "yields and flows" on the ERE Wheaton scale. ERE is supposed to be all about feeding outputs back into inputs, like a semi closed loop biosphere. "Saving" [for future consumption] and "investing" are related but different concepts. Is that about what you're asking? How to compare the two?
God damn it, now you have me thinking about quitting my job and working at the library for $10/ hour again.
@TheDinosaur:
Perhaps a better question is what would you consider a wealth preservation strategy and at what SWR rate would you switch to a 100% wealth preservation strategy? That is what I'm asking.
If I have all the purchasing power I will ever need, there is no reason to risk it for a positive return. I'd just need to avoid a negative return. Cash is nearly guaranteed a negative return. I'd have some just for short term obligations. I'd buy property somewhere I want to live for several decades. Wherever else possible, I would convert savings to commodities and usable real assets.
