No. of Recommendations: 12
I am looking for a place to invest some money that came in when my wife and I recently moved to an area with somewhat lower housing prices. My inclination is to put it in ibonds, but I am not thrilled with the 2 percent real rate of return now being paid. I would like to be able to expect a real return of 3 percent or higher. However, I can't afford to take much risk of a long-term loss of capital as I need most of the capital I now possess for my FIRE plan to remain viable.

Short-term losses of 20 or 25 percent are acceptable for a portion of my investment portfolio, but losses of greater than 15 percent that remain in place for longer than 8 years or so are problematic (these numbers are my rough estimates of the loss percentages and durations that might cause me to rethink an investment choice and move out of it, causing me to lose out on any future upside). So I have been trying to assess what the risk is of a loss of that size if I were to invest a portion of my money in stocks today.

I've considered moving a small amount of my total portfolio (about 10 percent) into stocks. As regular readers of my posts know, I am concerned with the high prices prevailing for many stocks today. My hope, however, is that I might be able to pick individual stocks that are not overvalued and thereby limit my risk of a long-term diminishment of capital. Still, I worry that, when most stocks are overvalued, all are probably at least somewhat overvalued. I don't want to fool myself into thinking that I am so great at picking stocks that by superior selection skills I can completely overcome the risks that have caused some investors in earlier high-value markets to end up with losses from stock market investing rather than gains.

So I spent a little time playing with the numbers in the Safe Withdrawal Rate studies on RetireEarlyHomePage.com. I used the study put together by Dory36 because it did not require use of an Excel spreadsheet and I was just looking for some quick and dirty estimates of how things might turn out under different scenarios.

The assumptions I plugged in to get the calculator to run was that I was investing $800,000, with 80 percent in stocks and with the remainder in TIPS at a 3.5 percent real return, and withdrawing $32,000 per year to live on. None of these numbers are valid for my personal circumstances. I was just trying to plug in numbers to get the calculator to run.

The data that turned up for 1969 concerned me. As I read the data, it appeared to me that had I made an 80 percent stock allocation in 1969, I would now (31 years later) have lost all of my investment and be bankrupt. Is that true? It's possible that I don't understand how the calculator works, but that result was disturbing to me. The actual portflio figure that the calculator gave was that I would now have a negative $31,035. I don't understand the concept of a negative portfolio value. That's what makes me a little uncertain as to whether I am reading the results correctly.

Presuming that I am reading the results correctly, they make me uneasy about committing even a small amount of capital to stocks at the current prices. My understanding is that most historical valuation indicators show the stock market to be more overvalued today than it was in 1969. But I would like to have tools to use to determine when it is a good time to move into stocks (as I am persuaded by the historical evidence that in the long run stocks purchased at reasonable prices provide a better return than most other investment classes).

So I tried to think of a way to make the historical return data more relevant to the circumstances which people with money to invest today need to take into consideration. It seems to me that the big problem for people investing today is the high prices (in historical terms) attached to stock purchases today. So I think it would be a plus to have a calculator which allowed an adjustment in the safe withdrawal rate for people investing at time periods in which different price levels prevail.

What I am thinking would be useful is a calculator that allowed you to choose three options: (a) a purchase at a time period in which stocks were priced low, using the conventional valuation criteria; (b) a purchase at a time-period in which stocks were priced about average; and (c) a purchase at a time-period in which stocks were priced high. After entering your choice of (a), (b), or (c), the calculator would tell you what sort of long-term safe withdrawal rates were provided to other investors investing at similar price levels obtained in earlier historical periods.

My guess is that such a calculator would show an investor investing during a time when low stock prices prevail would be likely to obtain a safe withdrawal rate higher than the 4 percent return that the conventional calculators (those using all investment price levels in their data set) suggest. Presuming that we see such prices again in the future, that would allow people with money to invest at that time to retire with confidence of obtaining a long-term safe withdrawal rate greater than the safe withdrawal rates suggested by the conventional calculators (higher than the 4 percent figure we often hear cited on this board, that is).

On the other hand, it would show a lower safe withdrawal rate for investors putting money into stocks today. Personally, I would be willing to accept a safe withdrawal rate assumption of less than 4 percent, given the low rates paid by safe investments like ibonds today. However, if the modified calculator showed asafe wtthdrawal rate for stock investments made at today 's prices of less than 2 percent, my inclination would be to go with ibonds or some similar investment.

If anyone has seen any data of this type, I'd appreciate seeing a link. It may be possible for me to come up with rough numnbers myself using the data that Dory36 and intercst used in putting together their calculators, but I am less than comfortable with the use of spreadsheets, and I would have more confidence in the numbers put together by someone more math proficient than I.
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