> Good points but the same can be said about the stock market. How can you ascertain what news, speculation or any other factor will do (or did) to an equity at any given time?
I would use this logic to also argue against investing in individual stocks.
> Nobody knows interest rate trajectory.
Agreed
> The value doesn't drop as much as you would think.
If the interest rate the market is willing to pay for a particular muni bond rises, that bond will be worth less and that difference is extremely easy to calculate.
> If interest rates rise and the bond price drops, the yield increases and you or others will buy more.
The fact that rate is rising means that investors are not giving as high of a value. The better way to think about this is that investors decide the Muni bond and other fixed income assets are worth less so they pay less so the yield rises. It is kind of opposite of how you are thinking about it.
> There aren't a lot of safe options right now and people are nervous with the election and the market.
Muni bonds are no more 'safe' than other investments.
> I agree on doing bond funds and diversification.
Bond funds can also be highly risky and have large durations which can also mean high interest rate risks.
> I put a good chunk in muni bonds and cash. I max out a 401k but that's it for the market because I think it's highly overvalued and I don't like putting most of my money where I have no control. The rest goes into my own companies and real estate.
It sounds like you are highly exposed to interest rate risk in your portfolio and you should work really hard to understand it more clearly.
9% pre inflation is insane, and 7% is too. If you can do that consistenly, you will be a billionaire hedge fund manager. Ten year treasury bond yields 2.59% per year, anything above it is risky.
Sure, you can stuff 100% of your savings into S&P500, but then you will have to deal with unpredictable 20-40% drawbacks, which take years and years to correct. Last recession S&P500 basically halved.
>For example, if we purchased a 2x bull leveraged S&P 500 ETF such as SSO, we would choose an appropriate weight to cancel out the leverage, 0.5 in this case. If we kept the rest of the money in cash, the return of the portfolio would only be slightly worse than that of the S&P 500, due to the 0.90% expense ratio we pay.
A 2x bull leveraged etf replicates daily moves. your long term return to expense expectations are completely off.
>This is one thing most people don't understand. If someone is selling you a financial instrument with >6-7% annual returns, it's as ridiculous as someone selling you a time machine or the cure to death.
A 2X leverage ETF would have double that rate of return, minus the overhead and interest on the leverage. Of course, it would also have double the losses in down years. With enough leverage, you can "easily" create arbitrary levels of annual returns, just by increasing risk.
Quote: ... A poll of investment experts asked in late 2007 to forecast long-term common stock-market returns likely would have seen them guess, on average, close to the 8.5% actually delivered by the S&P 500,” he said
I fear people may misinterpret what Buffett said esp. for those who don't have memory far back enough. In 2007 I recall one could buy long term CDs at 7%. These were basically relatively riskless guaranteed returns for small investors. Nowadays the comparable returns are a little above 3%.
During the financial crisis many credits of financial companies were selling for a fraction of their face value. For example AIG bonds, or Bank of America subordinated debt. You could buy them for a whopping nominal interest rate north of 15%.
Even as late as 2011, during the muni market scare, one could buy California state taxable bonds and and California school bonds (federal and state tax-exempt) at about 8% interest rate. If one were a little more adventurous (and read up on the laws a little) one could have bought California muni bonds backed by redevelopment tax increments at close to 10% (and insured as well).
All these were safer than stocks at the time and delivered comparable returns. They were not meaningful if you have a portfolio the size of Buffett's, but they were good opportunities for small investors.
> Not sure where you are but you can often check where your money is invested and change funds
I did and I found out they just buy 3 bonds and 2 ETFs.
Very standard stuff. You can learn enough about bonds and ETFs to buy them yourselves and literally save HALF of your savings at retirement time.
> what precise steps should I do to live off of my cash stack while doing absolutely 0 work other than sitting on my couch?
I would put X% in Vanguard 500 Index Fund[1], and in Y% Vanguard Total International Bond Index Fund[2].
X% should represent the amount of money you can afford not to touch during the entire economic downturn.
Y% should represent the amount of money you want to be able to cash out at any point during the economic downturn.
Another alternative to S&P-500 for putting X% in is Nasdaq-100[3]. It has performed much better over the years, but it's significantly more tech-focused:
> The table below and the charts above display historical performance figures for both the Nasdaq-100 TR and the S&P 500 TR between Dec. 31, 2007 and June 30, 2020. Despite recent overall market volatility, the Nasdaq-100 TR Index has maintained cumulative total returns of approximately 2.5 times that of the S&P 500 TR Index.
> It is thus to your advantage if the ETF is really low for a really long time.
As long as you don't start retirement at the beginning of one of those decade-long periods where the market is flat. It would hurt to have to start selling shares at 50 when you bought them for 100.
> don't have as much faith in the market delivering 6% returns over the long term
A 6% return is not equivalent, because a 6% return would still leave you with $1m at the end of the day (or your life). An equivalent return for a 25 year period would be about 4%, and I defy you to find a diversified portfolio that can't return 4% over 25 years...
> I hate the idea of sitting in cash with a guaranteed negative real rate of return of about -10% per year, even if it’s for a short period of time.
I would not be surprised to see equities doing worse than -10%. Sometimes there are no good investments, only loss mitigation, and cash is not necessarily a bad idea.
> to get the other 5%, you're going to need exponentially more money
Yeah, but you're going to be making exponentially more money in the markets you have already entered. Investors will be able to do the math rather than envision dreams. If the math adds up, they will be willing to deploy a truly staggering amount of capital to secure the growth.
> If you save that $3k/m over 20 years and put it into Vanguard ETFs (at 7% over 20 years), you’ll be 38 and have $1.5 million in the bank! Save $6k/m, and you’ll have $3 million at 38. Yes, I said that correctly. Save $1k/m and you’ll have $500k by 38.
Simply, no. No. That's not how it work. You can't find index returning 7% avg on 20 year interval. Plus that gains are taxable in many contries, sometimes heavily.
Until the black swan event comes and you lose your shirt.
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