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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 th

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.

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.