4 ms·

Well managed mutual funds / etfs yield 8 - 12% per year long term.

cdjk 13y ago
A 5% withdrawal rate is a lot more comfortable, as it allows for some capital appreciation to handle inflation, and gives you more runway to weather market downturns. A quote about the efficient market hypothesis is relevant here - markets may be rational in the long term, but they can remane irrational longer than you can remain solvent.
beagle3 13y ago
They don't. They yield that in good years, and negative that in bad years. I worked at a fund that managed $2bn with no leverage, and our limited partners were extatic that we were able to get 15% net of fees in 2008. The long term 7% average often quoted isn't if you average the last 15 years rather than the last 150.
- gpjt 13y ago
  To be fair, 2008 was the year the current financial meltdown started, and stocks were doing pretty poorly even in the run-up to that. From a quick check of Yahoo Finance, it looks like the Dow dropped from 14k in July 2007 to 8k in January 2009. Sure, a fund is meant to outperform the market as a whole, and sure, most of them don't manage that for obvious reasons, but when the market plunges like that no-one's going to be safe.
  - beagle3 13y ago
    > To be fair, 2008 was the year the current financial meltdown started No, that's not being fair at all. That's being irresponsibly optimistic. Let's say it is now 2005, you have a $1,000,000. You follow cpursley's advice, and put it in a well managed ETF/mutual fund, expecting to get 8%-12%. You get that for the first year and second year - and then you get -50% (which, if you look at your starting sum is "just" -40%). Now, you need 8 good years just to go back to where you started. 2005 is unfair? Go back to 1999, and check yourself at the end of 2001. 1999 is unfair? Go back to 1986. My point being, the "common knowledge" 150 years long term average of 7%/year is irrelevant, for two reasons: a) market dynamics have changed significantly in the last 10 years or so; the 140 years before that aren't as informative as the last 10 - and the last 10 are abysmal. b) even if the 150 year statistics were relevant - what you care about is your 10-30 year horizon. There are just too many unlucky events during those 150 years that you are very likely to have a 30-50% loss in one of the years of your 10-30 year horizon -- which might take you 50 years (that you don't have) to average out and come out on top. Anyone who really believes the 8%-12% numbers can borrow at <6%, invest at >8%, leverage ad absurdum and basically print money. Which, incidentally, is the empirical proof that 8% is not attainable. (P.S - CALPERS assumed a modest 8% return. That's why they're now only 50% or so funded http://www.calwatchdog.com/2012/03/22/calpers-funding-might-be-only-40-percent/ http://www.calwatchdog.com/2012/03/22/calpers-funding-might-... . If you can get them 8%, they'll give you $20M/year in salary. Really.)
gw666 13y ago
Yes, but with risk. Index stock and bond funds yield in that range, with much less volatility. I've been using them since 2008 and have gotten an average of over 10% annually. I suggest the book I used, _The Only Guide to a Winning Investment Strategy You'll Ever Need_, by Larry Swedroe (endorsed by John C. Bogle, founder of the Vanguard Group). Cheesy title, but it's ideas are supported by lots of data.

cdjk 13y ago

A 5% withdrawal rate is a lot more comfortable, as it allows for some capital appreciation to handle inflation, and gives you more runway to weather market downturns. A quote about the efficient market hypothesis is relevant here - markets may be rational in the long term, but they can remane irrational longer than you can remain solvent.

beagle3 13y ago

They don't. They yield that in good years, and negative that in bad years. I worked at a fund that managed $2bn with no leverage, and our limited partners were extatic that we were able to get 15% net of fees in 2008. The long term 7% average often quoted isn't if you average the last 15 years rather than the last 150.

gpjt 13y ago
To be fair, 2008 was the year the current financial meltdown started, and stocks were doing pretty poorly even in the run-up to that. From a quick check of Yahoo Finance, it looks like the Dow dropped from 14k in July 2007 to 8k in January 2009. Sure, a fund is meant to outperform the market as a whole, and sure, most of them don't manage that for obvious reasons, but when the market plunges like that no-one's going to be safe.
- beagle3 13y ago
  > To be fair, 2008 was the year the current financial meltdown started No, that's not being fair at all. That's being irresponsibly optimistic. Let's say it is now 2005, you have a $1,000,000. You follow cpursley's advice, and put it in a well managed ETF/mutual fund, expecting to get 8%-12%. You get that for the first year and second year - and then you get -50% (which, if you look at your starting sum is "just" -40%). Now, you need 8 good years just to go back to where you started. 2005 is unfair? Go back to 1999, and check yourself at the end of 2001. 1999 is unfair? Go back to 1986. My point being, the "common knowledge" 150 years long term average of 7%/year is irrelevant, for two reasons: a) market dynamics have changed significantly in the last 10 years or so; the 140 years before that aren't as informative as the last 10 - and the last 10 are abysmal. b) even if the 150 year statistics were relevant - what you care about is your 10-30 year horizon. There are just too many unlucky events during those 150 years that you are very likely to have a 30-50% loss in one of the years of your 10-30 year horizon -- which might take you 50 years (that you don't have) to average out and come out on top. Anyone who really believes the 8%-12% numbers can borrow at <6%, invest at >8%, leverage ad absurdum and basically print money. Which, incidentally, is the empirical proof that 8% is not attainable. (P.S - CALPERS assumed a modest 8% return. That's why they're now only 50% or so funded http://www.calwatchdog.com/2012/03/22/calpers-funding-might-be-only-40-percent/ http://www.calwatchdog.com/2012/03/22/calpers-funding-might-... . If you can get them 8%, they'll give you $20M/year in salary. Really.)

gw666 13y ago

Yes, but with risk. Index stock and bond funds yield in that range, with much less volatility. I've been using them since 2008 and have gotten an average of over 10% annually. I suggest the book I used, _The Only Guide to a Winning Investment Strategy You'll Ever Need_, by Larry Swedroe (endorsed by John C. Bogle, founder of the Vanguard Group). Cheesy title, but it's ideas are supported by lots of data.