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He unfortunately kept one of the biggest contributors to the success of his lifestyle a secret. How can you get consistent 10% return on your investment? Assu

He unfortunately kept one of the biggest contributors to the success of his lifestyle a secret. How can you get consistent 10% return on your investment? Assuming a more realistic 6% nominal return - 2% inflation gives us a more realistic 4% real return. Running the numbers that way ends up with a measly $10,000 in interest after 20 years not a whopping $47,000.

czbond 11y ago
You're using that as an excuse..
- msandford 11y ago
  Okay, so I'll make a spreadsheet where I assume a 50% annual return and then show it's so easy to retire in less than 10 years! For ANYBODY! On only $50 per month of savings! YOU'RE AN IDIOT FOR NOT DOING THIS! The point is that eventually a quantitative difference becomes a qualitative difference. Few people can make a 10% annual return and many, many fewer still can make a 50% annual return. But if you just buy index funds, it's fairly straightforward for just about anyone to make a 4% annual (real) return. Given the gigantic difference in how these curves grow over time, it's entirely fair to point this out.
  - tunesmith 11y ago
    Even then... which index funds? At what allocation? And how often to rebalance? It's still way too easy to try and get into timing the market even if you just stick to index funds.
    - fmorel 11y ago
      Vanguard's Target Retirement funds are great for this. I make automatic monthly contributions and never worry about rebalancing.
  - czbond 11y ago
    That wasn't the point of the article, and you can get more than a 10% return. Sitting in the public markets doing what everyone else does wont' get you there. I've been down voted because of everyone's limited thoughts in what it takes to achieve this. Why do I know this? Because I'm in a very similar position as the author.
- sliverstorm 11y ago
  Not knowing how to get 10% return on your investments is not an excuse, it's a critical flaw in any guide. It's like this popular meme: http://i0.kym-cdn.com/photos/images/original/000/572/078/d6d.jpg http://i0.kym-cdn.com/photos/images/original/000/572/078/d6d... Yes the beginning looks easy, yes I like where you got in the end, but you seem to have left out some important details on how you got there...
  - czbond 11y ago
    Untrue, life isn't a set formula of do X then Y then Z. He's laying out a rough guide, not an exact plan. You can get more than 10% in smaller scale investments (eg: not high risk) - but not in traditional methods. You have to think further than "invest in stocks".
ZitchDog 11y ago
Index funds would probably do the trick - they are higher risk, but as long as he's living below his means and has a decent emergency fund he should be OK? Especially since he maintains his employability and could get a 40hr job to pay the bills in a pinch. EDIT: I'm not sure why I'm getting downvoted here, he's talking about investing over a 20 year period - it's not unheard of to value an S&P index fund at 10% over that period!
- Marazan 11y ago
  Name your 20 year periods where the s&p has given an annualised 10% return
  - ZitchDog 11y ago
    https://finance.yahoo.com/echarts?s=VFINX+Interactive#{"customRangeStart":333954000,"customRangeEnd":965106000,"range":"custom","allowChartStacking":true} https://finance.yahoo.com/echarts?s=VFINX+Interactive#{"cust...
    - Marazan 11y ago
      Ah well, if you can just time the largest bull market in history from 20 years out you'll be fine then.
  - pinewood74 11y ago
    A whole lot of them. Since inception the median 20 year annualized return is 11.92%. Back out 2% inflation (on average) and you'll see the median 20 year annualized return is 10%.
    - forgetsusername 11y ago
      >Back out 2% inflation (on average) The average annual inflation rate from 1970 is over 4%.
    - Marazan 11y ago
      I don't have the figures to hand but there is no way inflation has been 2% over the period.
tunesmith 11y ago
Every time I read one of these articles, they seem to have a briefly mentioned assumption of an unrealistic investment return. I have a script I like to run that receives as input my retirement-contribution history - amounts and dates. It pretends I simply bought VFINX every time (using adjusted-close history to account for dividends) and tells me the resultant APY. As of today, over a 20-year history, that would be 8% nominal. Factor in inflation over that time and it's below 6%. And if you were to graph that out, probably 90% of those monthly data points are much lower. People in general aren't going to have the discipline to stay in the S&P-500 since it is so volatile, but any other approach is in effect trying to "beat the market" which doesn't work. I didn't stay in S&P-500 and my personal APY is lower. The fact of the matter is, people tend to have more money to invest when times are good (and market is high), and less money to invest when times are bad (and market is low). So they're by definition not going to be able to match "historical stock market averages". So any advice from these many articles and blog posts basically come down to "in investment performance, be an outlier." Well, sure.
- mleonhard 11y ago
  Here's a great chart that shows return on investing in the S&P 500 over the last 90 years. "In Investing, It’s When You Start And When You Finish" http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html http://www.nytimes.com/interactive/2011/01/02/business/20110...
  - tunesmith 11y ago
    That's a spectacular graph. I want to put that on my wall. 7% real (or more) is such a "rule of thumb", and that picture shows that it is bunk. Median was 4.1% real, then that means a real return at 90% or 95% confidence was even lower.
    - koonsolo 11y ago
      The picture shows 'after inflation', and the rule of thumb is indeed a 4% redraw rate, so the graph seems about right. At 4%, you will keep your capital. At lower rates, you will burn some capital, but not enough to go bankrupt, unless you are really unlucky (last part was also calculated). So in my opinion, the graph confirms the rule of thumb.
zrail 11y ago
10% was an example to simplify the model. Achieving the same goal at a reduced return involves either putting more money in or waiting longer. It doesn't invalidate the model.
- mkozlows 11y ago
  Saving for longer than 20 years already has a name, and it's called "saving for retirement."
- pc86 11y ago
  > 10% was an example to simplify the model. It also just so happened to quintuple his returns. Not exactly comparing apples to oranges when you have a 4% (realistic) v. 10% (unrealistic) return built into the model.
- reitzensteinm 11y ago
  Assuming 10% risk free return is more like designing a tank and assuming the armor is an order of magnitude stronger than it is. First, let's cover the tank in 10mm of it, which will give us all the protection we need. Freeing up that much room gives us more space to put a bigger gun on it. After vastly reducing the weight, even more so because we don't need to carry as much fuel, we don't need tracks, because an 8 wheel variant gives sufficient traction. Oh, and since our new highly mobile and effective vehicle now costs a tenth as much, all the other expensive and slow vehicles taking on other roles in the army can be deprecated. In fact, let's design a variant that carries fuel. In this way, instead of having 50 tanks advancing 100km per day, we can have 500 of our new vehicles advancing 500km per day, with the same firepower and effective armor, completely overwhelming any opposition. Why has nobody figured this out before? OK, so, after we've taken the base assumption and followed the chain to its logical conclusion without error... we have nonsense. After realizing our mistake, and factoring in the real value for armor, our design and plans for reworking the army are absurd. "Waiting longer" at 6% means 82 years to achieve the same returns as 50 years at 10%. But if we include 2% inflation as well, 6% takes 97 years to match 50 years at 10%. One of those is planning for your retirement if you're young... the other is planning for that of your grandchildren.
Kluny 11y ago
I agree about the 10% return being unrealistic, but I don't think $10,000 per year is right either. His spreadsheet shows $474,000 after 20 years. A 4% withdrawal rate on that is $18,960, which is still not exactly lavish, but more than enough to live on where I come from. Especially if your house is paid for, your healthcare is covered and your car doesn't break down very often. That's actually pretty close to my annual expenditure, and I rent, have to pay for health insurance, and my car breaks down all the damn time.
- JamesBarney 11y ago
  A large part of the $474,000 was accumulated interest, and interest on that interest. At 4% interest the accumulate capital is about $252,000 instead.
  - ryandrake 11y ago
    A consistent 4% interest rate is an incredible return. A more realistic risk-free rate nowadays is 1/10th that.
    - Kluny 11y ago
      You can't usually count on consistent returns, no, but as an average return that's pretty safe (assuming a mix of equity and bond index funds). My mutual fund have averaged that much in the past ten years, despite two major stock market dips when they went negative.
    - IkmoIkmo 11y ago
      Kinda depends I guess... The 10 year US bond is often used as a risk free rate and it's about 2.2% right now if I remember correctly, and it's been as high as 3% in the past five years. And of course you can sell bonds too so it's not like they're illiquid, it's generally known as one of the most liquid markets on the planet. But there's a bit more risk than than a 3 month bill of course which is also used as a risk free rate indicator quite a lot, and that's really low with inflation being so low right now. Anyway I wouldn't call 4% incredible but it's definitely good and something many would be quite happy with.
a_c_s 11y ago
The general rule of thumb for stock market returns is a 7% real return. Here's a nice little tool if you want to play with the numbers yourself over particular periods of time: http://www.moneychimp.com/features/market_cagr.htm http://www.moneychimp.com/features/market_cagr.htm
- Retric 11y ago
  From 1960-2010 the S&P's inflation adjusted return was well under 7%. Granted, the 1950's had great returns, but the trend has been lower returns / year over time and both the 1970's and 2000's had negative real returns.
- psykotic 11y ago
  > The general rule of thumb for stock market returns is a 7% real return. Over the 15-year period from 1966 to 1981, the real annualized rate of return in the stock market was -0.4% because of high inflation. You need to look at 20 to 30 year periods to get into the range of 7% real annualized returns across the 20th century. And there is the general issue with using the past as a statistical predictor of the future when the time window's length is a large fraction of the 20th century. Not to mention extreme outlier events whose level of impact isn't represented at all in the historical data. A good book to read is Siegel's Stocks for the Long Run.
ryandrake 11y ago
Yea, he pretty much lost me at "Go invest your money at 10%, you figure out how to do that!" He's assuming no variability (constant N%) so he somehow has found a consistent, risk-free 10% return! Incredible! For comparison, 1-year US Treasuries are around 0.36%, which when plugged into his chart would add up to $175K after 20 years, not $475K. Big difference.
IkmoIkmo 11y ago
I'd think 6% is more reasonable, 7% is very often touted as the long-term inflation adjusted figure for e.g. S&P500 returns but as others have pointed out, there's reasons to believe it won't be quite as sunny down the road. 10% inflation adjusted I'd think is pretty ridiculous, either it's short-term, not inflation adjusted or he's a one in a million financial miracle worker, but you can't not have any of them. Actually the S&P500 return since inception is about 10%, maybe he's referencing it. But the real return of 1950 to 2010 or so has averaged about 7%. And that uses CPI numbers which may underestimate price increases, particularly in some areas. (e.g. you probably want a better ROI than the national average in hotspots like San Fran considering you need to keep up with things like housing price increases if you're investing in stocks and living off of the returns). But even there you need a strong stomach as these are just long-term figures in what in reality is a volatile market. It's pretty trivial to talk about a 'the real returns of 12% in the 1980s offset the 0% real returns of the 1970s' and conclude 'oh the average return ended up pretty good around 6%', but it's another thing to actually live through the 1970s, experience ridiculous inflation and stock returns that can't keep up, and sticking with your 'live off of capital' strategy, when nobody promised the 1980s would be different and you have a kid who's going to college by then, a spouse etc.
- svachalek 11y ago
  The "long-term" averages you often see quoted are dangerous to go by. 1. They usually cover about 100 years. If you're starting out your career you've probably got about 40-50 years of saving followed by say 20 years of retirement, i.e. your training data is not much more than the period you're trying to predict. 2. That history is primarily over the period of world history that can be summed up as "cheap oil". Personally I wouldn't use it to predict any other time period. 3. If you look at the returns over time, they're pretty much generational. Some generations get fantastic returns from the stock market, while others at best are keeping up with inflation. If you started investing in say 2000 you probably know which category you're in.

czbond 11y ago

You're using that as an excuse..

msandford 11y ago
Okay, so I'll make a spreadsheet where I assume a 50% annual return and then show it's so easy to retire in less than 10 years! For ANYBODY! On only $50 per month of savings! YOU'RE AN IDIOT FOR NOT DOING THIS! The point is that eventually a quantitative difference becomes a qualitative difference. Few people can make a 10% annual return and many, many fewer still can make a 50% annual return. But if you just buy index funds, it's fairly straightforward for just about anyone to make a 4% annual (real) return. Given the gigantic difference in how these curves grow over time, it's entirely fair to point this out.
- tunesmith 11y ago
  Even then... which index funds? At what allocation? And how often to rebalance? It's still way too easy to try and get into timing the market even if you just stick to index funds.
  - fmorel 11y ago
    Vanguard's Target Retirement funds are great for this. I make automatic monthly contributions and never worry about rebalancing.
- czbond 11y ago
  That wasn't the point of the article, and you can get more than a 10% return. Sitting in the public markets doing what everyone else does wont' get you there. I've been down voted because of everyone's limited thoughts in what it takes to achieve this. Why do I know this? Because I'm in a very similar position as the author.
sliverstorm 11y ago
Not knowing how to get 10% return on your investments is not an excuse, it's a critical flaw in any guide. It's like this popular meme: http://i0.kym-cdn.com/photos/images/original/000/572/078/d6d.jpg http://i0.kym-cdn.com/photos/images/original/000/572/078/d6d... Yes the beginning looks easy, yes I like where you got in the end, but you seem to have left out some important details on how you got there...
- czbond 11y ago
  Untrue, life isn't a set formula of do X then Y then Z. He's laying out a rough guide, not an exact plan. You can get more than 10% in smaller scale investments (eg: not high risk) - but not in traditional methods. You have to think further than "invest in stocks".

ZitchDog 11y ago

Index funds would probably do the trick - they are higher risk, but as long as he's living below his means and has a decent emergency fund he should be OK? Especially since he maintains his employability and could get a 40hr job to pay the bills in a pinch. EDIT: I'm not sure why I'm getting downvoted here, he's talking about investing over a 20 year period - it's not unheard of to value an S&P index fund at 10% over that period!

Marazan 11y ago
Name your 20 year periods where the s&p has given an annualised 10% return
- ZitchDog 11y ago
  https://finance.yahoo.com/echarts?s=VFINX+Interactive#{"customRangeStart":333954000,"customRangeEnd":965106000,"range":"custom","allowChartStacking":true} https://finance.yahoo.com/echarts?s=VFINX+Interactive#{"cust...
  - Marazan 11y ago
    Ah well, if you can just time the largest bull market in history from 20 years out you'll be fine then.
- pinewood74 11y ago
  A whole lot of them. Since inception the median 20 year annualized return is 11.92%. Back out 2% inflation (on average) and you'll see the median 20 year annualized return is 10%.
  - forgetsusername 11y ago
    >Back out 2% inflation (on average) The average annual inflation rate from 1970 is over 4%.
  - Marazan 11y ago
    I don't have the figures to hand but there is no way inflation has been 2% over the period.

tunesmith 11y ago

Every time I read one of these articles, they seem to have a briefly mentioned assumption of an unrealistic investment return. I have a script I like to run that receives as input my retirement-contribution history - amounts and dates. It pretends I simply bought VFINX every time (using adjusted-close history to account for dividends) and tells me the resultant APY. As of today, over a 20-year history, that would be 8% nominal. Factor in inflation over that time and it's below 6%. And if you were to graph that out, probably 90% of those monthly data points are much lower. People in general aren't going to have the discipline to stay in the S&P-500 since it is so volatile, but any other approach is in effect trying to "beat the market" which doesn't work. I didn't stay in S&P-500 and my personal APY is lower. The fact of the matter is, people tend to have more money to invest when times are good (and market is high), and less money to invest when times are bad (and market is low). So they're by definition not going to be able to match "historical stock market averages". So any advice from these many articles and blog posts basically come down to "in investment performance, be an outlier." Well, sure.

mleonhard 11y ago
Here's a great chart that shows return on investing in the S&P 500 over the last 90 years. "In Investing, It’s When You Start And When You Finish" http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html http://www.nytimes.com/interactive/2011/01/02/business/20110...
- tunesmith 11y ago
  That's a spectacular graph. I want to put that on my wall. 7% real (or more) is such a "rule of thumb", and that picture shows that it is bunk. Median was 4.1% real, then that means a real return at 90% or 95% confidence was even lower.
  - koonsolo 11y ago
    The picture shows 'after inflation', and the rule of thumb is indeed a 4% redraw rate, so the graph seems about right. At 4%, you will keep your capital. At lower rates, you will burn some capital, but not enough to go bankrupt, unless you are really unlucky (last part was also calculated). So in my opinion, the graph confirms the rule of thumb.

zrail 11y ago

10% was an example to simplify the model. Achieving the same goal at a reduced return involves either putting more money in or waiting longer. It doesn't invalidate the model.

mkozlows 11y ago
Saving for longer than 20 years already has a name, and it's called "saving for retirement."
pc86 11y ago
> 10% was an example to simplify the model. It also just so happened to quintuple his returns. Not exactly comparing apples to oranges when you have a 4% (realistic) v. 10% (unrealistic) return built into the model.
reitzensteinm 11y ago
Assuming 10% risk free return is more like designing a tank and assuming the armor is an order of magnitude stronger than it is. First, let's cover the tank in 10mm of it, which will give us all the protection we need. Freeing up that much room gives us more space to put a bigger gun on it. After vastly reducing the weight, even more so because we don't need to carry as much fuel, we don't need tracks, because an 8 wheel variant gives sufficient traction. Oh, and since our new highly mobile and effective vehicle now costs a tenth as much, all the other expensive and slow vehicles taking on other roles in the army can be deprecated. In fact, let's design a variant that carries fuel. In this way, instead of having 50 tanks advancing 100km per day, we can have 500 of our new vehicles advancing 500km per day, with the same firepower and effective armor, completely overwhelming any opposition. Why has nobody figured this out before? OK, so, after we've taken the base assumption and followed the chain to its logical conclusion without error... we have nonsense. After realizing our mistake, and factoring in the real value for armor, our design and plans for reworking the army are absurd. "Waiting longer" at 6% means 82 years to achieve the same returns as 50 years at 10%. But if we include 2% inflation as well, 6% takes 97 years to match 50 years at 10%. One of those is planning for your retirement if you're young... the other is planning for that of your grandchildren.

Kluny 11y ago

I agree about the 10% return being unrealistic, but I don't think $10,000 per year is right either. His spreadsheet shows $474,000 after 20 years. A 4% withdrawal rate on that is $18,960, which is still not exactly lavish, but more than enough to live on where I come from. Especially if your house is paid for, your healthcare is covered and your car doesn't break down very often. That's actually pretty close to my annual expenditure, and I rent, have to pay for health insurance, and my car breaks down all the damn time.

JamesBarney 11y ago
A large part of the $474,000 was accumulated interest, and interest on that interest. At 4% interest the accumulate capital is about $252,000 instead.
- ryandrake 11y ago
  A consistent 4% interest rate is an incredible return. A more realistic risk-free rate nowadays is 1/10th that.
  - Kluny 11y ago
    You can't usually count on consistent returns, no, but as an average return that's pretty safe (assuming a mix of equity and bond index funds). My mutual fund have averaged that much in the past ten years, despite two major stock market dips when they went negative.
  - IkmoIkmo 11y ago
    Kinda depends I guess... The 10 year US bond is often used as a risk free rate and it's about 2.2% right now if I remember correctly, and it's been as high as 3% in the past five years. And of course you can sell bonds too so it's not like they're illiquid, it's generally known as one of the most liquid markets on the planet. But there's a bit more risk than than a 3 month bill of course which is also used as a risk free rate indicator quite a lot, and that's really low with inflation being so low right now. Anyway I wouldn't call 4% incredible but it's definitely good and something many would be quite happy with.

a_c_s 11y ago

The general rule of thumb for stock market returns is a 7% real return. Here's a nice little tool if you want to play with the numbers yourself over particular periods of time: http://www.moneychimp.com/features/market_cagr.htm http://www.moneychimp.com/features/market_cagr.htm

Retric 11y ago
From 1960-2010 the S&P's inflation adjusted return was well under 7%. Granted, the 1950's had great returns, but the trend has been lower returns / year over time and both the 1970's and 2000's had negative real returns.
psykotic 11y ago
> The general rule of thumb for stock market returns is a 7% real return. Over the 15-year period from 1966 to 1981, the real annualized rate of return in the stock market was -0.4% because of high inflation. You need to look at 20 to 30 year periods to get into the range of 7% real annualized returns across the 20th century. And there is the general issue with using the past as a statistical predictor of the future when the time window's length is a large fraction of the 20th century. Not to mention extreme outlier events whose level of impact isn't represented at all in the historical data. A good book to read is Siegel's Stocks for the Long Run.

ryandrake 11y ago

Yea, he pretty much lost me at "Go invest your money at 10%, you figure out how to do that!" He's assuming no variability (constant N%) so he somehow has found a consistent, risk-free 10% return! Incredible! For comparison, 1-year US Treasuries are around 0.36%, which when plugged into his chart would add up to $175K after 20 years, not $475K. Big difference.

IkmoIkmo 11y ago

I'd think 6% is more reasonable, 7% is very often touted as the long-term inflation adjusted figure for e.g. S&P500 returns but as others have pointed out, there's reasons to believe it won't be quite as sunny down the road. 10% inflation adjusted I'd think is pretty ridiculous, either it's short-term, not inflation adjusted or he's a one in a million financial miracle worker, but you can't not have any of them. Actually the S&P500 return since inception is about 10%, maybe he's referencing it. But the real return of 1950 to 2010 or so has averaged about 7%. And that uses CPI numbers which may underestimate price increases, particularly in some areas. (e.g. you probably want a better ROI than the national average in hotspots like San Fran considering you need to keep up with things like housing price increases if you're investing in stocks and living off of the returns). But even there you need a strong stomach as these are just long-term figures in what in reality is a volatile market. It's pretty trivial to talk about a 'the real returns of 12% in the 1980s offset the 0% real returns of the 1970s' and conclude 'oh the average return ended up pretty good around 6%', but it's another thing to actually live through the 1970s, experience ridiculous inflation and stock returns that can't keep up, and sticking with your 'live off of capital' strategy, when nobody promised the 1980s would be different and you have a kid who's going to college by then, a spouse etc.

svachalek 11y ago
The "long-term" averages you often see quoted are dangerous to go by. 1. They usually cover about 100 years. If you're starting out your career you've probably got about 40-50 years of saving followed by say 20 years of retirement, i.e. your training data is not much more than the period you're trying to predict. 2. That history is primarily over the period of world history that can be summed up as "cheap oil". Personally I wouldn't use it to predict any other time period. 3. If you look at the returns over time, they're pretty much generational. Some generations get fantastic returns from the stock market, while others at best are keeping up with inflation. If you started investing in say 2000 you probably know which category you're in.