Can cash be your friend?

[frommi]

If one of my goals is to fund my (very frugal) living costs, over a fixed period of time, in the most reliable manner possible, then cash seems like a pretty good tool to achieve that goal.

If I want to have exposure to long-term market up-side to fund a frugal lifestyle over a longer and indefinite period of time in the future, an index fund seems like a good tool to achieve that goal.

It all depends on valuation. If cash yields negative real returns than its a bad store of value even for short periods of time. If indices are expensive, they have bad future returns (look @ japan from 1990 on). If houses are expensive relative to rents houses are very likely bad investments (look 2005->2008). As a frugal soul you will never buy a good at the supermarket when its horrible overpriced, but in the markets/investments you think it doesnt matter, why?

[steveo73]

If we know that there is a certain % of probability that our planned withdrawal rate isn't safe, and some reasonable measures can be taken to make it more safe, then it seems rational to taken those measures.

The problem with this line of thinking is that no WR is completely safe. You can't plan for so many events that can occur outside your financial assets getting to some level.

You also have to recognize that there is a cost to increased financial security and that cost is working longer.

How do you handle unforeseen expenses ? How do you handle divorce ?

We need to be rational. That is essential. That means we need to look at both sides of the coin.

Risky Robert hates his job and wants to quit as soon as he has a decent chance of his money lasting 30 odd years. Once he is at that level where there is as much chance of making it within his realistic expenses then he intends to quit he gets to a 6% WR. He works for 15 years.

Pessimistic Pete hates his job but is paranoid about his money running. He gets to a 3% WR on his realistic expenses. He works for 50 years.

Who wins ?

Holding some cash outside of our portfolio, assuming our portfolio is already large enough to meet our planned living expenses at our planned withdrawal rate after inflation, is one such measure.

This is a false premise. It's just increasing your portfolio size with cash as an asset. It's part of your portfolio. You can state it isn't but it really is.

[steveo73]

That whole problem of WR% is just that you guys know just one hammer for the problem and that is to buy indices.

I don't understand. Why is this a problem ? I think this is an idea that you've mad up in your head. Can you please provide the links to this approach.

I don't believe WR's have anything at all to do with indices.

If my portfolio is 1 million dollars with 100% stock indices and my expected expenses are 30k then my WR is 3%
If my portfolio is 1 million dollars with dividend growth stocks and my expected expenses are 30k then my WR is 3%

=> There is a valid argument that the person with the dividend growth stocks really needs a WR significantly lower than the person with the stock indexes because stock pickers tend to underperform the index.

Buy dividend growth stocks where the initial yield is 2.5-4% and that has growth of >5%, where the dividend is safely covered by earnings and just retire on dividends alone. Or buy rentals and retire on rents - maintenance costs. I dont know a lot of early retirees that do something else.

You have to look at each individual asset but it's good to recognize that there is no free lunch.

So for instance the dividend growth stock option is inherently more risky than the index option. You should therefore increase your portfolio size to cater for the additional risk that you are taking on. Therefore you need to save more and therefore you need to work longer. It's cool but there is a cost.

I have no idea about the rentals but the rental yield on property where I live is terrible. My index funds returned about a 3% payout last year. That kills the yield on property where I live.

There are three key issues here though:-

1. WR's are different to your portfolio.
2. Portfolio construction has limited free lunches. I can only think of diversification as the free lunch. Note that this is pro index and pro asset diversification and not the other way around. Does anyone else know of any other free lunch ?
3. If you construct your portfolio with assets that are not diversified there is a cost. The cost is increased risk of under performance. Sure you might over perform but you have to look at this rationally. How much do you over perform rationally ? The only person who over performs is the one who isn't data driven and is extremely confident (you could call it arrogant) in their ability ?

[steveo73]

We should think of financial assets as tools, trying to understand their individual characteristics, and then applying them as appropriate.

No single tool rules them all; it all depends on your situation and your goals.

Cash is a tool, just as indices are a tool.

If one of my goals is to fund my (very frugal) living costs, over a fixed period of time, in the most reliable manner possible, then cash seems like a pretty good tool to achieve that goal.

If I want to have exposure to long-term market up-side to fund a frugal lifestyle over a longer and indefinite period of time in the future, an index fund seems like a good tool to achieve that goal.

Perfect.

All of these instruments are just tools. These tools have pros and cons. There isn't some right way to invest. There are just good guiding principles and they are good principles because we've analyzed the data and seen what has worked over time.

There is no guarantee historical performance will lead to ongoing future based performance however if you understand the tools at your disposal and you understand portfolio construction you should be able to use those tools to create a decent portfolio.

[steveo73]

It all depends on valuation. If cash yields negative real returns than its a bad store of value even for short periods of time. If indices are expensive, they have bad future returns (look @ japan from 1990 on). If houses are expensive relative to rents houses are very likely bad investments (look 2005->2008). As a frugal soul you will never buy a good at the supermarket when its horrible overpriced, but in the markets/investments you think it doesnt matter, why?

I understand your premise but the premise doesn't hold up to much scrutiny.

I'll try and explain this. You state stocks are expensive. Forget indexes. Indexes just give you fantastic diversification at an extremely low cost. They are fantastic tools.

The issue for you is that stocks are expensive. There are multiple problems with this outlook:-

1. Expensive is subjective in relation to stocks. It might be expensive but it might keep going up and up and up and up. The real question is are they expensive in the course of your investing life cycle and it's really hard to tell. I bought my house for 700k about 10 years ago. It might be worth now about 2 million. I was so concerned when I bought my house it was overvalued. I suppose it was. It's been a fantastic investment. I've bough stock indexes for a while but they've always been relatively expensive. They've been fantastic investments. I'd add that unless you are putting in a whole chunk in one hit which is unlikely then how expensive stocks are is probably not that big a deal.
2. Expensive is subjective in relation to stocks compared to other assets. If stocks are expensive but so are other assets than what does it matter.

=> The kicker is that you don't know today if stocks are really expensive in the course of your investing lifecycle.

=> All of these ideas can also be easily managed via portfolio construction. If you are really worried about stocks then pick a portfolio that is low in stocks. It's your choice.

[frommi]

Looks like the more i hit your base, the more posts you write.
That stock pickers underperform is true, but that is because most of stock pickers dont buy stocks like they would buy socks.
Just to upset you a little more:
YTD (all in usd):
S&P 500 -13.86%
Cash 0.2%
my portfolio of value stocks: +7%
my long run return 5y+ (just stocks >+15%).

If you put together a portfolio of overpriced assets you will get bad future returns, too. Houses are also as expensive as 2005 if you think you got a good return, than yeah its because valuations are super high now. But as Warren Buffet said, if the tide goes out, you will see whos swimming naked. And you steve73 are swimming so naked, its already funny.

[steveo73]

Looks like the more i hit your base, the more posts you write.

I couldn't care less. Do what you want. It's ideas that are under scrutiny. If you can improve my knowledge I'm ecstatic.

Rational logical discussion.

That stock pickers underperform is true, but that is because most of stock pickers dont buy stocks like they would buy socks.
Just to upset you a little more:
YTD (all in usd):
S&P 500 -13.86%
Cash 0.2%
my portfolio of value stocks: +7%
my long run return 5y+ (just stocks >+15%).

If you put together a portfolio of overpriced assets you will get bad future returns, too. Houses are also as expensive as 2005 if you think you got a good return, than yeah its because valuations are super high now. But as Warren Buffet said, if the tide goes out, you will see whos swimming naked. And you steve73 are swimming so naked, its already funny.

My returns are 5000% yoy. I use a combination of value stock dividend investing and I'm one of the best and smartest investors of all time. You can say whatever you want but you can't change reality. If you are picking stocks cool. You'll probably under perform and you are taking on individual stock risk. Guess what I also have individual stocks. It's not smart but these things happen.

I don't understand the emotive comments. It's like you think I'm in some sort of financial difficulty. I'm retired. I'm not working. I retired a couple of years ago at a 5% WR. My WR rate will probably be about 4% - 4.5% this and next year.

Then look at my buffers :-

1. 20 years to get to social security which will cover 100% expenses.
2. A house that is not included in my financial assets that I can easily downsize. I have 3 kids. The oldest 2 are 18 and 20. The youngest is 11. I don't need the house although I don't intend to sell it.
3. I'll inherit realistically 5-10 times my current financial assets.
4. I can go back to work. My boss recently contacted me about going back to work.

I'm sweet brah. I ain't swimming naked. I'll be in the top 1% no problems at all.

I'll add that I live frugally and well below the average consumer. I don't even need a lot of money. I fully expect to give away far more money than I spend. My portfolio is not an issue at all.

So now we've cleared up who has the bigger donga how about we try and discuss these issues rationally and logically with good data not made up stories.