A tale of the worlds worst market timer: https://awealthofcommonsense.com/2014/02/worlds-worst-market...
I see this posted from time to time, but the assumptions are kind of silly. A huge portion of the "miraculous" returns come from the fact that this fictional person was able to put an entire year's worth of salary into the market in one go, 50 years ago. In 1970 the average salary was about $6,000, but he managed to save one third each year to invest?
So, sure it demonstrates the power of compounding. But, to me, an alternative lesson is that you can be an incredibly diligent saver and, through sheer bad luck, have barely enough to retire. I mean, it's not like $1MM in retirement money means "set for life" anymore.
There was also a study done by Vanguard which showed that historically, dollar-cost averaging underperforms lump-sum investments which was just as interesting to me.
I'd be very interested to read the study, but the only text I've found so far is this: https://investor.vanguard.com/investing/online-trading/inves...
It seems logical to me that lump sum investing > dollar-cost averaging (which is why I do the former), but I'd be curious to see empirical research.
You're saying that $1MM in retirement isn't as much as you'd like...so...it'd be better to have nothing and have saved zero?
If this is what you got from my comment, it's probably pointless to engage with you.
In the off-chance you're sincere: the thought experiment in the article is interesting, I get that. But it's trotted out as evidence that you can be the worst investor in the world and still make money. Okay.
Now examine the assumptions. This fictional person started with $2,000 at age 22 (about $15,000 today. No student loans, nice windfall. Sound like the 22-year-olds of today?), and assuming they were making the average salary in 1970 (unlikely as a young person), they managed to save a substantial proportion of their salary every year. This gets invested, instantly cut in half, but then compounds for 45 years, with more dollars added along the way.
Yes, you can be the worst investor ever and get reasonable results over 45 years if you're a really good saver. So what? This person managed to 6x their money over half a century. In my opinion that's a devastating result. Now imagine if you're one of those people in between the best/worst saver/investor? Without some luck your results will be similar, ie not great. And this doesn't account for the fact that past results != future results.
It also doesn't account for when you need to disinvest. This article was written in 2014, with stocks near record highs at that time. Pretty convenient for this calculation. What happened if retirement came a few years earlier, in early 2009?
So to answer your question, of course something is better than nothing. But the other lesson I see there: saving what you can and investing it blindly in an index fund isn't a guarantee of a cushy retirement, even though that's what the population is being sold. This is a crisis in the making.
And you missed the point that this is the worst you could do. If “Bob” had simply invested every year, his end result is likely 2-3x.
He started with $2,000 and was saving $2,000 per year...in 1970. That is a lot. If you are able to do that as a 22-year-old entering the job market, good for you. It's unrealistic for the vast majority of people.
The average savings rate in the US is about 7%. "Bob" managed 30%+ in the most important (read: earliest) years, allowing it to compound for a long time. His savings was front-loaded. This is not normal. Most people don't start saving anything of significance until they are into their 40s.
>And you missed the point that this is the worst you could do.
You missed my point that this isn't nearly "the worst you could do". This fictional person started with incredibly privileged circumstances: A substantial windfall, apparently no debt, apparently a great job straight out of college, that allowed them to invest significant funds very early in their career.
The unrealistic investing scenario is countered by the unrealistic saving ability. Not a particularly valuable thought experiment.
And, once again, I don't disagree with the premise: save what you can and invest it in a diversified portfolio and allow it to compound over your life. This is the best option for 99.9% of the population. But, it also doesn't guarantee a comfortable retirement for that 99.9%, which is scary.
It absolutely does, unless you are planning on living in a mansion eating nothing but caviar.
HN needs to live in the real world and learn what most people retire with
Most people retire with barely anything, I don't think that's disputed. Doesn't mean that $1M is a lot of money to retire on.
People can live 30 years from retirement. A million doesn't go far like that. There's no safe returns on that money anymore.
I just mean on a world scale I’m hot feeling pity for someone that “only” retires with a million and will have to try so so hard to make ends meet.
You won’t struggle to live on a million dollars (in the real meaning of the word struggle).
3% of 1M is $30,000, before taxes on any investment gains. That's basically a little less or a little more than a minimum wage job, depending on where you live. Most likely both you and your spouse will need to live off of that.
I don't think 1M is enough to retire in any manner of comfort. 2-3M would be a lot safer. And that's if you move to a cheaper locale and avoid any of the first-tier cities.
Also you've ignored everything else I said just to harp on one thing - which is rude considering the time I took to reply to you.
Further, if you believe the historical data enough to rely on that, you should also believe the same data which says when CAPE ratios are high, the safe withdrawal rate goes to 3% or less.
And if you can perpetually have the type of holiday most people only dream of, I would say you are doing ok!
https://www.investopedia.com/articles/retirement/101416/how-...
So to fit that budget you'd be constantly hustling for last-minute cruise deals, and for a cheap place to stay when you can't find a cheap cruise ready to go at your current port. That's not exactly what I'd call "set for life."
Also note their estimate is "per person." Cruise lines price rooms for at least double occupancy so they're actually saying you'll need $200/day, unless you're splitting with someone who has their own money.
On top of cruise fees, you'll need some budget to just buy stuff now and then. You might even want health insurance.
I think you misread the article - it assumes you have a one person cabin and then says you could do it cheaper if two of you are together.
And yes, you will have to look for a good deal. This is the reality of cruising too, there are always heavy discounts which long term cruisers will take advantage of. My parents are avid cruisers and have enough money to not need to be frugal, and even they do this - because what buys them a stateroom without a discount can sometimes buy them a suite with one.
I just mean for the vast majority of the world, retiring with that sort of wealth is an unattainable goal. I’m sure most people can arrange their life to live incredibly comfortably with $1m.
That's not to say you can live any life in any location, but assuming you use money wisely you can live with an amazing standard of living!
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
If you know when the peak and the trough will be, then you can jump in an out. The thing is by missing the worst days you tend to miss the best days:
* https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-...
Play stupid games, win stupid prizes.
But purchased on their own as a stand-alone bet, all options and futures contracts are by definition zero-sum games.
So 99.999% of the retail investors (robinhood et al.) trading options are playing a zero sum game. Hence why I didn’t feel the need to elaborate.
Maybe you're confusing options and "binary options"?
I think you might be confused by the name "binary options."
The word "binary" doesn't refer to the fact that they are specifically zero sum. This doesn't need to be called out, because again, all options and futures are zero sum.
The "binary" qualifier refers to the fact that they result in "yes/no" outcome. Did the thing you bet on happen? Yes? You win. No? you lose everything.
It's not true that no value is created or destroyed on transfer. Transferring or obtaining the asset might be extremely valuable to someone. Market conditions change. And so on.
The simple fact that you can create value for others without stealing that value from someone else means the economy is positive sum.
If all economic transactions were zero sum, then growth would be impossible.
Things like GDP, the stock market, etc grow every single year on average because they are positive sum.
That’s why it’s most smart to just buy-and-hold boring index funds. You’re taking advantage of the positive sum nature of all business in aggregate, instead of playing the zero-sum game of short term trading against other market participants.
> No value is created or destroyed (outside of trading fees), just transferred between parties.
That transfer is the value. In fact, that's pretty much the point of finance in its entirety - moving around capital/risk is valuable in and of itself.
> in late 1997, as the S&P 500 passed its previous 1929 peak of 21x earnings, we rapidly sold down our discretionary U.S. equity positions then watched in horror as the market went to 35x on rising earnings. We lost half our Asset Allocation book of business but in the ensuing decline we much more than made up our losses.
For the average investor it might be overly bold to step out of the stock market entirely in times like these. However, there's nothing wrong with moving to a more conservative allocation that will do better in crashes, but still perform reasonably well if you hold it that way forever. A great place to start is the sample portfolios at portfoliocharts.com.
If you're 25 and saving to retire at 65 then maybe don't worry about it, but if you're 50 that's another matter.
Rates of return are not the only reason to hold an particular type of asset, which is why bonds may be worth having even if yields are low:
* https://awealthofcommonsense.com/2020/08/why-would-anyone-ow...
A 7% average annual return over 24 years is not necessarily bad. On an absolute average basis that trails the market by 3%. [3] That return could still be legitimately superior to investing in SPY, depending on risk goals, if its volatility and beta exposure is sufficiently low that it beats SPY on a risk-adjusted basis. Then you may even be able to beat the S&P on a total basis, safely, with leverage, depending on the volatility ratio.
Therefore the point you're trying to make would be better construed with an analysis of the beta, volatility and Sharpe of GMWAX. By definition the beta of SPY is 1, and the historical Sharpe is around 0.72. It's correlation with the market is about 1 and it has (again, almost by definition), 0 alpha.
GMWAX has close to total correlation with the market, with a beta of 1.02 and negative alpha less than that of SPY. It has a Sharpe ratio of only 0.34. That means this GMO asset allocation fund is not beating the market, even on a risk adjusted basis. Moreover the explicit mandate of the fund, to avoid market downturns but otherwise track the market's upswings, is not being met. It is both underperforming the market and highly correlated with the market.
1. https://www.schwab.com/public/schwab/investing/investment_he...
But I also don't think their predictions have sufficiently precise timing to beat the market. I agree with the thrust of your point, and I probably wouldn't invest my money with them. I think of GMO a lot like AQR in that sense.
nitpick: the price went up 15%, but not necessarily the return, which can be much higher due to distributions.