The continued viability of the 4% rule in the US in the 21st century

[zbigi]

In any highly random environment (and, for simplification, we can assume life is hugely random) a single outcome does not really validate or invalidate a strategy.

Anyway, why do you want more money? Having a quarter of your net worth in a single stock is essentially gambling. Even if the play has positive expected value (i.e. Nvidia should, on average, go up), if you weight it by utility of money you stand to gain or lose, the play may have negative expected value for you.

[Henry]

(1) I think that selling a stock that is in the early-middle or middle stage of a bull run, especially one that is foundational to a historical shift in industry, comparable to owning US Steel in the 19th century, is foolish no matter what the personal situation is of the individual investor holding the stock.

(2) I think there is a false equivalence of diversification being tantamount to non-risky. Why should I be in non-US companies when every MAG7 company has orginated in the US? Does investing in China or Europe really expose me to less risk? Investing in non-tech SIC codes will be less volatile but the risk is that they remain flat for decades and do not exceed erosion caused by inflation. Why should I invest in Index funds that are heavy in Mag7 but just own other companies that do not perform as well. Who shops like that in other areas of life, buying the low shelf to hedge against the risk of top shelf? Not to mention NVDA, like GOOGL, META, MSFT, pays a dividend so it's not excluded from dividend funds.

(3) NVDA is a pick and shovel play in the AI ecosystem that has a ways to go. I think the case could be made that it's the least risky stock to purchase today and it would be a top recommendation by a conservative investor.

(4) It's not about wanting more money although more money is nice. It's about better options. And I don't see any. And with AI turning the world inside out, what is conservative today is non-existent tomorrow. NVDA is the engine behind all the disruption. Why would I sell the disruptor to buy into the disruption.

[Laura Ingalls]

In any highly random environment (and, for simplification, we can assume life is hugely random) a single outcome does not really validate or invalidate a strategy.

Anyway, why do you want more money? Having a quarter of your net worth in a single stock is essentially gambling. Even if the play has positive expected value (i.e. Nvidia should, on average, go up), if you weight it by utility of money you stand to gain or lose, the play may have negative expected value for you.

I am with Henry on this one. If your house appreciates 500% are you gambling?

DH told elder offspring that he would put 100% of the earnings from his first crappy fast food job in a Roth for him. He did and the two stocks elder son wanted to invest in were Nvidia and some probably now defunct cannabis company. Elder offspring want to buy a chip for a gaming computer but couldn’t afford not even find a Nvidia chip. Anyway fast forward ~8 years it’s a nice chunk of change.

[Henry]

The 4% rule is obviously not a rule. Let's call it the 4% rule of thumb. But it can't be atomized historically. If there are three things I think we all agree on is (1) as technology advances, technology advances at a higher rate of speed (2) people are living longer and (3) 1 and 2 are not mutually exclusive. My opinion is that 2025-2030 is going to be the technological equivalency of what was previously a much longer time expanse. I don't think it's wise to let the heuristic of the 4% rule (of thumb) and its corollary of age appropriate investing strategies override my belief of near term unprecedented technological advancement. I think everyone, no matter what stage of life they are in, needs to stare directly into this reality. The times they are a-changing a-fucking fast. I was fortunate to blindly stumble into an S-Curve. Some hipster gaming company stock that was all the rage on a stock board transitioned into a new technological development and became the most valuable company in the world. I would be stupid not to pause and think about what that means. Yeah, I hit the lottery but I didn't have to hand over my ticket to get the money and I still don't. It's a manufacturer that is selling a product that people are buying hand over fist and using in a manner that impacts our daily lives. If I live to Warren's age, the growth will most likely slow downed and it will transition into IBMish territory and my nephew and niece will say look at idiotic Uncle Henry holding on to this old ass shit like its still 2035.

[zbigi]

I am with Henry on this one. If your house appreciates 500% are you gambling?

Some people argue that yes, if your house is significant part of your NW, then you're gambling (by putting too many eggs into one basket) and you should either move to a cheaper house or rent instead of owning. If your country/state/city/neighborhood'a real estate market goes to the toilet (see: Detroit), you stand to lose a lot. Long-term money management is about survival (avoiding ruin) as much as about anything else, so eliminating high-impact risks like that is fairly important.

[zbigi]

@Henry

You seem to assume you can predict the future with a high degree of certainty. Under such assumption, your strategy makes sense. However, pro money managers (hedge fund people), who spend 40+ hours a day just thinking about stocks, don't tend to have more than 5% of their portfolio in a single position, as they're aware that their prediction abilities have limits and they can be dead wrong about a particular stock even if they think they're dead right. From what I've heard, in most funds, if you allocate 25% of your portfolio into a single position, you can get a stern talking to from your boss for recklesness.

[Laura Ingalls]

Well if I owned a house that had appreciated 500%. I probably would sell.

It would be like Yogi Beara said, “Nobody goes there anymore too popular.” I also have suffered PTSD from having a house that took years to sell and eventually sold for less than we bought it for 13 years earlier.

I wouldn’t think that someone that didn’t sell was gambling I would just think they like it and wanted to live there presumably because they bought it in the first place.

[Sclass]

- Hypothetically, the move for someone my age now is to sell a portion of my NVDA which has ballooned to 27% of my non-house net worth. But is that really a smart move? Let's say I live to 90 and I wake up in a moment of rare clarity in some white boxed hell hole and check the ticker and see it at $1000 per share and I sold 30 years before at $160 to buy the Vanguard US Corporate Dividend Bullshit Index Fund there's going to be a torrent of motherfuckers echoing throughout the anti-septic halls.

But this is only 6% annual return. Am I missing something?

[7Wannabe5]

I think there is a false equivalence of diversification being tantamount to non-risky.

No. The common misunderstanding is Risk=Bad. OTOH, to the extent that investment opportunities are truly independent diversification will limit catastrophic loss. If you bet all your money on 1 coin flip, 50% likelihood (1 out of 2 possible outcomes)you will wind up broke. If you split your money over 4 independent coin flips, the likelihood that you will still have some money at game end is around 94% (15 out of the 16 possible outcomes.) OTOOH, if you know (or believe that you know) that one of the 4 coins to be flipped is 2X biased towards heads rather than tails, you might choose to bet your entire lot on the outcome of that coin, because your expected outcome would certainly be greater (33% return expectation) than if you divided your bets over the 4 coins (8% return expectation ), but your risk of catastrophic outcome by choosing not to diversify would still be much greater (33%) vs. (6.25%.)

IOW, "no risk, no reward" is to a large extent just math. However, it is often boundary conditions that determine the outcome of the game(s) over the long run. For example, if you can afford to constantly double down on a game with 50/50 odds, according to math you should eventually win, but only in a casino that never closes. So, it's also important to understand what kind of casino you are in and who has the power to shut it down.

[Henry]

@Zbigli - As an individual investor, I don't have to play by the OPM rules of the games that the funds do. Same with Warren. He didn't have to trade in and out based off allocation within a fund. He let his winners win as long as he felt they would win. I held on to NVDA longer than the funds because I didn't have those rules and/or concerns.

@Sclass - I didn't calculate the return. I'm on my fucking deathbed at that point so call it $100K a share. Who gives a shit. My point was to be taken seriously, not literally. That being said, I do believe it, like most growth stocks before it, will age into a stable blue chippy emeritus type of position before it falls into the dustbin of history.

@7 - Stock picking is not gambling in the coin flipping sense. Maybe more like in the horse racing sense. And if I winning the Triple Crown with Secretariat in his prime, I'm not selling him for nine lesser horses so I increase my chances of having a lot of second and third placing finishes, while watching five or six of them stumble out of the gate.

[delay]

So, it's also important to understand what kind of casino you are in and who has the power to shut it down.

Exactly. Jacob mentioned earlier in this thread to look at middle class pension funds. I tried to do so. Institutional investors account for less than 31% of "global assets under management". Environmental, social, and governance (ESG) investments are 75% held by institutional investors. And it says that global assets under management are growing by 12% a year.

A doubling casino cannot go on for forever, but a 12% a year casino is not far behind. I wonder how it will end...

[7Wannabe5]

@IlliniDave:

I have very few dogs in this race, but I like to read economics. I happened upon the initial note about the growth of index funds in an economics podcast I follow, and here is the paper:

This paper (2019) examines the large, steady, and continuing growth of the Big Three index fund
managers—BlackRock, Vanguard, and State Street Global Advisors...

Among other things, we document that the Big Three have almost quadrupled
their collective ownership stake in S&P 500 companies over the past two decades; that they have
captured the overwhelming majority of the inflows into the asset management industry over the
past decade; that each of them now manages 5% or more of the shares in a vast number of public
companies; and that they collectively cast an average of about 25% of the votes at S&P 500
companies.
We then extrapolate from past trends to estimate the future growth of the Big Three. We estimate
that the Big Three could well cast as much as 40% of the votes in S&P 500 companies within two
decades. Policymakers and others must recognize—and must take seriously—the prospect of a
Giant Three scenario. The plausibility of this scenario makes it important to understand the
incentives of index fund managers, a topic that we study in other work.

(my emphasis)

https://www.nber.org/system/files/worki ... w25914.pdf

[chenda]

Stock markets date back to the early 17th century, but it wasn't until the 1970s that trackers were invented. Why did it take so long ? Or was it just a lack of demand due to the absence of retail investing until then ?

[zbigi]

Stock markets date back to the early 17th century, but it wasn't until the 1970s that trackers were invented. Why did it take so long ? Or was it just a lack of demand due to the absence of retail investing until then ?

That is an interesting question!

Retail investment was definitely a thing from the very beginning (note how Newton lost a lot of money by buying near the top of a bubble). Also, some researchers belive that the rule that inherited fortune is squandered in on average three generations no longer applies, because the heirs now just invest into index funds instead of listening to shady investment advisors or following their own asinine ideas.

Exchange-traded funds (ETFs), including index ETFs, would probably not be possible before the invention of computers. With an ETF, the price needs to be updated in real time to reflect the value of the assets held in fund. If it were not, it would open possiblities to all kinds of arbitragers taking advantage of the lag. But, I think you could have had a non-exchange traded index fund before the computer era.

[7Wannabe5]

There have always been more conservative investment choices. Historically, government bonds were so steady in their rates the affluent did not distinguish between wealth and income. From this perspective, one might suggest that the downside of the growth of index funds, combined with other issues related to corporate governance, is that it is having the effect of turning the largest corporations into nation states and wealthiest investors into thuggish feudal lords and/or mincing courtiers, and these "nation-states" are funded by their "passive followers" to arm themselves with robots, advanced AI, sophisticated satellite surveillance, and rockets. Looking to the pensioned middle-class in the U.S. is useless, because it no longer exists (hat tip to A.Greenspan.)

ETA: Okay, maybe a bit hyperbolic...I just get on a roll sometimes.

[Henry]

The AI arms race in the US is now Musk/Altman/Zuck with GOOGL in contention. Billionaires fighting to be crowned the first trillionaire. The path to winning the Game of Drones is job elimination. I don't like the analogy, but the only one I can think of is the Holocaust. Was the initial plan elimination? Probably not, but that's how it turned out and the thought "it won't happen here" left people unprepared when things went in that direction. Make no bones about it, self-driving will eliminate truck drivers. It's a when not if proposition. An industry dominated by male workers. No one wants to walk into their local titty bar the day that happens. I see three options for those truck drivers and overall, a wide swath of the population: start plowing their money into TSLA, join this board, or start lobbying for universal income. That's my point about the 4% rule. There is a chance, not sure exactly what the percentage is, but a chance nonetheless, that's it like the crew of the Titanic focusing on a diagram of the main room's seating arrangements when there was an AI-ceberg waiting to destroy their asses in the not so remote future.

[7Wannabe5]

I see three options for those truck drivers and overall, a wide swath of the population: start plowing their money into TSLA, join this board, or start lobbying for universal income.

Well, we all hedge in our own fashion. I am enrolled in an AI Agent Design and Vibe Coding course led by a young Gen Z college dropout who appears to be about 16. It's actually pretty fun and easy to create AI replacements for entry level white collar workers. However, most interesting note would be that it's even easier to create than to replace. Nothing to stop any reasonably bright kid with maybe $1000 in his pocket from spinning up giant hierarchy of his own specialized AI workforce with no need to dismantle stodgy infrastructure. AI does not need to be as generally intelligent as the typical human to replace humans at their work, because most jobs currently held by humans are specialized to the extent that they do not require general human intelligence. IOW, general human intelligence is only needed when you don't know what your "job" is going to be today, because you are free and life is surprising. IOW, focus/specialization/hierarchy is innately towards automation with only limited agency AKA independent ability to fuck things up royally.

[IlliniDave]

@IlliniDave:

I have very few dogs in this race, but I like to read economics. I happened upon the initial note about the growth of index funds in an economics podcast I follow, and here is the paper:


(my emphasis)

https://www.nber.org/system/files/worki ... w25914.pdf

I don't know much about State Street, but Vanguard and BlackRock are both fiduciaries which means they are legally bound to act in the best interests of their clients. I don't know if those laws have any teeth. As far as mutual funds (of which index-style funds are a portion), they work very simply. The fund manager collects a percentage of the total assets under management as a fee for managing the fund.

Index fund managers grow their fee base by having very low fees compared to other types of management, and accurately tracking the index they purport to track. It's hard to see them having any incentive to pick winners and losers. I'd be much more worried about active fund managers, who place bets on smaller numbers of issues, and who are incentivized to "beat the market" because they'll lose shareholders and AUM if they don't) being tempted to engage in malfeasance. But the slice of the pie they manage is shrinking.

Shareholders actually voting shares is another topic entirely. 70%-80% of shares held by individuals are never voted, which means they default to the board of directors' recommendations. Of those that do vote I'm guessing the majority just vote per the boards' recommendations anyway (because that's usually the easiest choice, and saves the shareholder reading through a few pages of proposals that if they are like me, they don't have any meaningful opinion on anyway). That means probably something north of 90% of all votes outside of managed funds go with the board, which is approximately how fund managers vote (they vote at a much higher rate than individuals).

I don't disagree that there are issues with corporate governance, but I don't think mutual funds, or the majority subset of them that are indexed, are to blame, nor are investment management firms. I suppose there's all kinds of ways corruption could evolve in the future, but the only thing I can see that has happened so far is that a few firms have gotten ahead of the curve and anticipated investors' appetites for low management fees and tax efficiency, which has resulted in their success.

[Henry]

I am enrolled in an AI Agent Design and Vibe Coding course led by a young Gen Z college dropout who appears to be about 16.

This is either the guy, or the type of guy, that Mark Cuban thinks will be the first trillionaire. Maybe vibe code that polyamorous thing you got going on.

[chenda]

Also, some researchers belive that the rule that inherited fortune is squandered in on average three generations no longer applies, because the heirs now just invest into index funds instead of listening to shady investment advisors or following their own asinine ideas.

Historically inherited fortunes I imagine could last a lot longer as money was tied to land, which in a stable climate would continue to give a perpetual yield. The main risk is that you might be invaded by a neighbouring kingdom and your lands confiscated.