Only PP or add more risk in VP to shoot for long term goal?

[Jan Van]

My age: 47. My goal: quadruple my money by the time I retire. When to retire: at 60~70...

Say I use the PP exclusively, and I get a 6% return, it would take me ~24 years to quadruple. I'd be 71...
If I add some risk in the VP, and I get an 8% return, it might take me ~18 years to quadruple. I'd be 65...

Obviously not counting the moneys I'll be adding in the mean time. So my conundrum is, do I go PP or VP?

I'm guessing most people have to answer this for themselves. What was your answer?

jan

[craigr]

My age: 47. My goal: quadruple my money by the time I retire. When to retire: at 60~70...

Say I use the PP exclusively, and I get a 6% return, it would take me ~24 years to quadruple. I'd be 71...
If I add some risk in the VP, and I get an 8% return, it might take me ~18 years to quadruple. I'd be 65...

Obviously not counting the moneys I'll be adding in the mean time. So my conundrum is, do I go PP or VP?

I'm guessing most people have to answer this for themselves. What was your answer?

jan

Tough call. The standard advice is to own more stocks. Problem is that was the standard advice over a decade ago and it proved to be not a good idea.

Usually though I tell people that if they want to gamble for higher returns, the odds are that stocks represent the best way to juice the portfolio for a variety of reasons. No guarantees of course. In 2009 this would have been a good idea because we had a fall in the market with prices not seen in over 10 years. Now though the stocks have recovered very sharply so they are not as good of a deal for speculation purposes.

Now going forward it may be that stocks continue to do well as they represent ownership in business growth and prosperity. But really we won't know until the future gets here what the best choice was. As usual, you place your bets and you takes your chances.

Or you can just stick to the basic portfolio and if it manages to get your 8% (which it has done very much so in the past) then you will still be OK and would have done it with a likely more diversified and safer approach.

But consider that you still are saving and growing your money and you need to balance how much you want to risk growing it with how much time you have left to still save.

For instance, I know of people who went very heavy in stocks with their savings attempting to retire earlier or grow money at an unsustainable rate. But the past 10 years in the market have made it certain they can't retire because they concentrated their bets too much on stocks and didn't diversify. They can't go back and re-earn that lost money or makeup the lost time.  :-[

I say this simply because it's easy to focus only on the positives of taking on more risk, but it's also important to look at the potential negatives if they show up.

If you want to own stocks for the VP, I'd suggest you keep it at a reasonable amount that you'd feel comfortable losing some of if the bet goes wrong. I'd also only use index funds for the speculation as it further distributes your risks but still gives you exposure to good gains if they come.

[Wonk]

My age: 47. My goal: quadruple my money by the time I retire. When to retire: at 60~70...

Say I use the PP exclusively, and I get a 6% return, it would take me ~24 years to quadruple. I'd be 71...
If I add some risk in the VP, and I get an 8% return, it might take me ~18 years to quadruple. I'd be 65...

Obviously not counting the moneys I'll be adding in the mean time. So my conundrum is, do I go PP or VP?

I'm guessing most people have to answer this for themselves. What was your answer?

jan

Jan,

I'm assuming you want 400% gain in real terms?  Or nominal?  Could make a big difference.

As craig mentioned, be careful trying to squeeze extra juice out of your investments.  In order to get the higher returns, you'll need to take more risk.  If you take more risk, you'd better be darned sure what you're doing is right because if you're not, your retirement money is shot and you won't get a second chance.

That said, there are a few ways to "maybe" juice returns:

1. Reduce or eliminate the cash component, move close to 33 x 3.
2. Slice and dice equity.  Controversial, but more info here:

http://www.bogleheads.org/forum/viewtopic.php?t=38374

and here:

http://www.bogleheads.org/forum/viewtop ... trix+redux

By far, my recommendation would be to figure out a way to earn more.  Probably not what you want to hear, but I would stick with the PP recipe and spend more time thinking about adding to the pot.  Not sure what you do, but there are a ton of ways to start small businesses, freelance, bartend, etc on your off time.

You didn't state how much you are starting with.  Let's assume a $250,000 portfolio you need to be $1,000,000.  Instead of taking on more risk, you bank on 5% real returns from the portfolio.

2010: Age 47, $250K
2028: Age 65, $600K

If you simply figure out a way to earn an extra $15K annually, you meet your goals:

2010: Age 47, $250K
2028: Age 65, $1,044K

[Pkg Man]

I would suggest using the VP to try to juice your overall return. By using money you can afford to lose (which means if I lose it all it won't effect my retirement decisions, etc), you may be able to get lucky and earn a higher return. 

As an example, I bought 100 shares of Apple stock in 97 and made a ton of money (would have made ten tons more had I held on it).  Emerging markets stock can be quite rewarding as well.  Petrobras or Banco Bradesco stock purchased 7 or so years ago would have increased nearly ten fold. 

I am not suggesting that you should invest in these particular stocks, only that it is possible to get lucky by investing a small amount of money in a few volatile stocks and see out-sized gains.  You can't beat the market by investing in the market.  But to be clear, you should not take chances with money you can't afford to lose.  That money belongs in the PP IMO.  But with the VP you want to swing for the fences. 

One other piece of advice I would give is that a Roth IRA would be the best vehicle to use for the VP.  I wish I had done that myself.

[Jan Van]

Thanks guys!

Wonk: yes, I'm talking real dollars, not after inflation or whatever. The earning more is probably not going to work. And I am adding to my holdings, usually ~$2K per month. But who knows what happens in the future...
PkgMan: I do own some Apple, also 100 shares with an average purchase price of $94 :-) They are in my buyandhold.com taxable account though, so I don't dare to sell them! I did sell some in my IRA to diversify recently...
Craigr: Apart from a few stocks, I only invest in index funds/etfs. On the one hand I like slicing and dicing, a la Ultimate Buy and Hold portfolio from Merriman. On the other hand I'd like to have fewer funds so that re-balancing is easier, a la PP and Swensen. Most my money is at Vanguard, so I'm only paying $2 for trades now, and nothing for the Vanguard ETFs. Nice. So my VP would probably hold some combination of VWO, VSS and VEU, plus VXF. Maybe... But that's already 4 ETFs extra. Decisions, decisions...

[Wonk]

Wonk: yes, I'm talking real dollars, not after inflation or whatever.

Well...I'm not picking on you here but it's important to make a distinction between real and nominal.  If inflation remains at 3% annually for the next 25 years, you should have a good shot at reaching a 400% milestone in nominal terms without additional earnings contributions.  In real (after inflation) terms, it would be difficult at best.  Just be sure to place that into consideration for your planning.  It would be unfortunate to experience a Japanese-style prolonged deflation and proceed to gamble on risky investments just to reach a pre-defined number.

[Jan Van]

Wonk: since I don't know what inflation is going to do, but I do know I'll need a bunch more money before retiring, I'm only looking at real numbers. If I have to factor in inflation and such, it gets way too complicated for me :-) So yes, I'm looking for quadrupling my money in real terms... Hopefully that gets me in the right area where I'll be able to retire...

[KevinW]

I think your personal attitude toward working longer is the biggest factor in a decision like this.  I know people that hate work and would put delaying retirement 6 years in the same boat as a prison sentence.  Then again I know others that could've retired years ago but choose to keep working because they honestly enjoy it.  If you allocate more to stocks you create a chance that you'll hit your crossover point earlier, but there's also a small chance that you'll hit it later.  Does the upside potential outweigh the downside risk?  Are you comfortable with your retirement horizon being variable like that?  No one can answer these questions for you.

Myself, I have a strong desire to avoid situations where I have a lot riding on something I can't control.  I would also like to become financially independent earlier, and my approach has been to focus on things that I have some control over: my income and my savings rate.  I agree with jmourik that you should evaluate increasing your income.

You may also want to evaluate reducing your expenses.  My wife and I just downsized from a two-car lifestyle to running one car.  The total cost of ownership on a car is about $7500 per year, all of which can now go toward building wealth.  Also feeding a $7500/year expense at a 4% withdrawal rate requires about $200k of capital, which we are no longer obligated to earn.  This one change moved us years closer to financial independence.  Surely this isn't for everyone, but my point is that restructuring a few big-ticket items can get you just as far as investing more aggressively.

[Jan Van]

KevinW: I like my job actually, and won't mind doing it for a lot longer. But it's not just me who's in control of that, who knows how long my line of work will be around. Another 20+ years I hope...
So how do you guys do that, "increase your income"? I really don't think there's much more in it for me, unless I take a second job. Don't think I could handle that :-) And our costs are fairly low already, no loans, no debts, no mortgage. We took care of those!

Thanks y'all for your suggestions! Just trying to figure out how PPers think about all this...

[Pkg Man]

This discussion brings one of Harry's comments to mind, which is don't sacrifice the future for the present, but don't sacrifice the present for the future either, or something like that.  His point is to not be too obsessive about money.  Do what you can to save but don't let it run your life.  I think that is good advice.  A lot people go into retirement with next to nothing (not smart) and some people save every dime they can and drop dead a month after they retire (unlucky).

One idea to stretch your retirement savings is to take a part-time job after retiring from your regular career.  Every dollar you can earn post-retirement is a dollar you don't have to pull from your savings, and it can make a big difference in how long your money will last.  I like this approach better than getting a second job now, as I too have more than I can handle at the moment.  It will probably make you live longer as well.

[Jan Van]

One idea to stretch your retirement savings is to take a part-time job after retiring from your regular career.

Yes, PkgMan, I like that idea too. My real goal is to get to the point where I don't *have* to work, and then just work part-time, whenever I want. As I often say in the inevitable "if I won the lottery" conversations, I wouldn't stop working, I'd just work less. I wouldn't be the person who calls in the next day after winning with " I quit!!!!".

[macclary]

There is another option that is twice as good as earning more: spend less each month and put that towards retirement savings. Why is it twice as good? If you spend $5k a month, and decide to earn $500 more a month somehow to put toward retirement savings you will be doing more work while only pulling your retirement age in by about half as much as if you decided to only spend $4.5k a month and put the extra $500 toward savings. The difference is that your lifestyle is less expensive to support in the saving case, so you can retire earlier.  Just a thought...

Someone said "In order to get the higher returns, you'll need to take more risk."  this is false, false, false - except in certain special circumstances. If you know the future and you hold a portfolio that is "efficient" using data from the future, then yes you will need to take more risk to get more reward. If you don't know the future then you don't know if you have an optimal portfolio or not right now: it is very likely the case that you could get more reward for less risk. Anywho...

What I personally do for extra returns is hold 75% of the PP in a very conventional manner: gold, tlt, shy. Then in place of the stock component I use leveraged ETFs to implement a rotation strategy somewhat similar to this one: http://www.mebanefaber.com/2009/06/25/c ... g-systems/