DVC buy-in and amortization (a math snooze-fest)

[iluvthsgam]

It is pretty standard, fundamental advice to not invest money that you need for near-term use in volatile instruments, which includes stocks and stock mutual funds. So this isn't necessarily the best assumption to use for the return on your "vacation fund", unless you also understand that risk that a big market drop could wipe that out as well.

Just a side tangent for anyone interested in being able to get in on the market for the short term, take a look at betterment.com - as long as you contribute $100 a month it is a .35% fee (very reasonable). You can take your money out any time and set the allocation percentage between stocks and bonds. Another option if you want to get something better than .01% on your short-term cash.

 

[crisi]

I understand and agree with all this. But then your point isn't that you can't save money, or nobody saves money, etc. with DVC. But rather, it is to understand that there are risks involved, and understanding those risks and how you could manage them if these scenarios arise. This is also true for other parts of the assumptions, though, and it is just as important. For example, some want to assume guaranteed 8% returns on your money that you set aside for cash reservations instead of buying DVC. Over the very long term, it is not unreasonable to believe that can be achieved. But annual fluctuations are also going to be normal for that kind of return, and also the point at which you invest the money makes all the difference in the world. If you are regularly making contributions to savings then you mitigate this risk because you will be buying at multiple time and price points. But if you are looking at the alternative to buying DVC points, that is investing your money at a set point in time, and if that is at a relative high point in the market, your returns could be far, far worse even in a rising market. It is pretty standard, fundamental advice to not invest money that you need for near-term use in volatile instruments, which includes stocks and stock mutual funds. So this isn't necessarily the best assumption to use for the return on your "vacation fund", unless you also understand that risk that a big market drop could wipe that out as well.

The point is, there are risks no matter what you do. It is a mistake to believe that DVC is a risk-free opportunity as you astutely point out, but it is also a mistake to assume that about alternatives that will bring you 8% (and even less than that) annual returns as some (not you) also assume.

Actually, I do sort of assume 8% over the long term. I've gotten 18% over 30 years, so I figure assuming 8% for the total when I only 30 I have left to save before I die is pretty safe. I'd have to spend a lot of time at negative returns to lose money right now

 

[bighoo93]

Actually, I do sort of assume 8% over the long term. I've gotten 18% over 30 years, so I figure assuming 8% for the total when I only 30 I have left to save before I die is pretty safe. I'd have to spend a lot of time at negative returns to lose money right now

Well, that is fantastic. That puts you in a class with some of the greatest investors of all time. Nevertheless, over the near-term, that kind of return cannot be taken for granted, even if you are Warren Buffett.

 

[iluvthsgam]

Actually, I do sort of assume 8% over the long term. I've gotten 18% over 30 years, so I figure assuming 8% for the total when I only 30 I have left to save before I die is pretty safe. I'd have to spend a lot of time at negative returns to lose money right now

Can you provide me with verified returns for 18% per year for 30 years? And then after I check them out, can I send you money to invest for me?? I'm not being facetious, I'm serious. That is really great work over a long period of time.

 

[crisi]

Can you provide me with verified returns for 18% per year for 30 years? And then after I check them out, can I send you money to invest for me?? I'm not being facetious, I'm serious. That is really great work over a long period of time.

No, I'm not going to verify. But I got mostly out of the market in 1999 and 2008 and back in in 2009 and 2003.

(I thought 1999 was going to be a y2k issue and didn't get back in because after that the it business was starting to tank already, I was a consultant and needed the cash if I lost my job. 2008 there were a lot if signs)

I'm not interested in being responsible for anyone else's money.


And I own Berkshire Hathaway, so warren invests for me .

 

[ImagineerTHAT]

Just a side tangent for anyone interested in being able to get in on the market for the short term, take a look at betterment.com - as long as you contribute $100 a month it is a .35% fee (very reasonable). You can take your money out any time and set the allocation percentage between stocks and bonds. Another option if you want to get something better than .01% on your short-term cash.

I'll check it out. I got out of the market a year ago and haven't really been itching to get back in (outside of 401k). Have you used betterment before? Any info you can provide?

Thanks!

 

[iluvthsgam]

I'll check it out. I got out of the market a year ago and haven't really been itching to get back in (outside of 401k). Have you used betterment before? Any info you can provide?

Thanks!

I have used them before. What they do is buy a few low-cost index ETF's (more info) - they have 6 market ETF's and 2 bond ETF's.

All you select is your balance between the bond ETF's and stock ETF's. Most of the stock portion will track the market and they also have some international and emerging market exposure.

The thing that I liked was that it "felt" like a normal savings account because you could add and withdraw money as you pleased (as long as you deposited a minimum of $100 per month. But that money was getting exposure to the market. For a "safer" mix you could have the bonds dialed up to 50% or more, I guess. It makes it easy. You could save the annual .35% fee by just buying the ETF's yourself, but not all of them can easily be obtained commission free.

It was easy to deposit and withdraw my money. No issues. I put a small amount in, left for about a year. I was doing good, no issues, but needed the money for something else, so just withdrew it. Satisfied with them and would put money back in in the future.

 

[ImagineerTHAT]

Just signed up...I have been looking for something like this. THANKS!

I like how you can basically "direct deposit" a monthly sum and you can pick your stock to bond allocation. Better than my crappy savings account that gives me a fraction of a percent.

The fees aren't bad either. 0.35-0.25% is tough to beat.

 

[nabi]

And I own Berkshire Hathaway, so warren invests for me .

A or B stock? I bought when I met him at my career training facility.... THIS paid for our DVC!!

 

[Dean]

Well, that is fantastic. That puts you in a class with some of the greatest investors of all time. Nevertheless, over the near-term, that kind of return cannot be taken for granted, even if you are Warren Buffett.

there is no long term period where the market hasn't averaged 12% or more from what I understand. Shorter term is more risky for the market. That's why I use 8% because you have a mix of short and long term if you're using the model of starting with a lump sump, using the amount you'd pay on MF and pulling out the rest for a periodic vacation. This is just for comparison. Truthfully, one paying cash for vacation should just pay cash and not use savings which makes investing the lump sum up front open for long term investing on the total.

 

[bighoo93]

there is no long term period where the market hasn't averaged 12% or more from what I understand.

That is absolutely not even remotely true. There have been plenty of long-term periods during which 8% was not even achieved. If this holding is going to be the fund used for vacation lodging (as the alternative to DVC), then near-term returns are even more significant, because a relatively short-lived downturn can completely ruin your projections.

I think it is a good idea to be cautious and conservative about the likely benefits of DVC, but the same holds for looking at the alternatives. It is generally not advised to invest money that is planned to be used in the near-term (e.g., within 5 years) in stocks. It is your personal decision, but that is considered a risky proposition and you won't find many financial professionals who would say that's a good idea.

 

[dmunsil]

there is no long term period where the market hasn't averaged 12% or more from what I understand. Shorter term is more risky for the market. That's why I use 8% because you have a mix of short and long term if you're using the model of starting with a lump sump, using the amount you'd pay on MF and pulling out the rest for a periodic vacation. This is just for comparison.

I think this is an important point, and one reason why it's hard to compare DVC directly to a financial investment. If you invest in volatile assets like stocks, if the market goes down significantly you'll naturally tend to "hunker down" and go on fewer vacations. This is a rational and natural reaction, and is going to improve the long-term return of your investments by limiting the amount of money you take out when the market is down. But it means you will not being having the kind of regular vacations you will have with a timeshare.

So if you want to compare a timeshare purchase to an investment purely as a financial matter, you should compare against investment classes that are approximately as risk free as the timeshare itself. That's going to be something like AAA bonds or government bonds. And even some of those are going to have more volatility than a DVC membership's dues changes and so forth.

But to return to Crisi's point, why limit yourself to a completely financial analysis? If ultimately you will do better long term by investing your money in higher-return assets and just taking fewer or cheaper vacations when those assets are down, shouldn't we compare to that scenario? If your bottom-line time value of money is 12% or more in that scenario, DVC doesn't look so good.

 

[iluvthsgam]

That is absolutely not even remotely true.

That really depends on how you define "long term period."

Take a look at the Ibbotson® SBBI® Classic Yearbook (published by Morningstar). They study returns from 1926-present. You will see that over a long term horizon (say any 25 year rolling period) if you were to put your money into a low cost index fund (S&P 500), dollar cost averaged in over that time, and reinvested the dividends, you would get around 10% return compounded.

So yes, it is remotely true.

 

[crisi]

A or B stock? I bought when I met him at my career training facility.... THIS paid for our DVC!!

B. Which since the split has been completely affordable to the average investor, if anyone wants to buy in. Of course, Warren isn't investing for BH much anymore. Ted and Todd are investing.

(Have you been to the annual meeting? We love the annual meeting).

 

[crisi]

That really depends on how you define "long term period."

Take a look at the Ibbotson® SBBI® Classic Yearbook (published by Morningstar). They study returns from 1926-present. You will see that over a long term horizon (say any 25 year rolling period) if you were to put your money into a low cost index fund (S&P 500), dollar cost averaged in over that time, and reinvested the dividends, you would get around 10% return compounded.

So yes, it is remotely true.

And I consider long term to be 40+ years. Basically my retirement horizon from when I started. Or 10 years shorter than a DVC commitment if you buy a new resort at opening

 

[bighoo93]

That really depends on how you define "long term period."

Take a look at the Ibbotson® SBBI® Classic Yearbook (published by Morningstar). They study returns from 1926-present. You will see that over a long term horizon (say any 25 year rolling period) if you were to put your money into a low cost index fund (S&P 500), dollar cost averaged in over that time, and reinvested the dividends, you would get around 10% return compounded.

So yes, it is remotely true.

First of all, you added several qualifications that were not specified in the post I was responding to. This includes dollar-cost averaging, which is actually a contrary assumption to the scenario of an alternative to purchasing DVC points.

Also, "around 10%" is not "at least 12%", and really isn't even all that close. You don't get to falsify my statement by changing the question.

Take a look at this article (which I found near the top when I googled Ibottson long term stock market returns). It looks at 10 year rolling averages since 1926. A mere 35% exceed 12%. So yeah, 35% is not remotely 100%. 43% are less than 8%. If 10 years is too short to qualify as "long-term", then the assumption of 8% annual return on investment in the DVC purchase scenario isn't valid either (again, unless someone is simply using DVC as part of their investment portfolio, which is not what we're talking about).

Here's another article, citing Oppenheimer research, showing the average rolling returns over 20 year periods of 7.2%. The MAXIMUM return was 14.2 (minimum 2.4%). If you're going to argue that 20 years doesn't qualify as "long-term", then we're done here.

So my original statement holds. There are a lot of long term periods (try 10 years, 20 years, others in between) where returns were less than 12%.

Even moving the goalposts by changing the statement I was responding to doesn't work against what I said. If someone assumes that they will get 12% annual returns no matter when they invest because they think that's what the market has always returned, they are either ignorant or being deceived. I'm a long-term stock market investor and I think everyone should be. But they should also have a realistic expectation. Unrealistic expectations lead to people making poor investment decisions buying high (because they think they can't lose) and selling low (because they were led to believe they couldn't lose and get scared), which is exactly what they should not do. I'm glad that there are a lot of people here who are very concerned about ignoring the risks of DVC. But I'm surprised that in some cases the same people dramatically understate the risk (and overstate of the return) of alternative investments.

 

[Dean]

That is absolutely not even remotely true. There have been plenty of long-term periods during which 8% was not even achieved. If this holding is going to be the fund used for vacation lodging (as the alternative to DVC), then near-term returns are even more significant, because a relatively short-lived downturn can completely ruin your projections.

I think it is a good idea to be cautious and conservative about the likely benefits of DVC, but the same holds for looking at the alternatives. It is generally not advised to invest money that is planned to be used in the near-term (e.g., within 5 years) in stocks. It is your personal decision, but that is considered a risky proposition and you won't find many financial professionals who would say that's a good idea.

I'll defer to your financial expertise rather than do a lot of research, I know the S&P has historically been around 12% total (11.84 through 2010). Is there a 10 year period where the S&P hasn't averaged at least 8%? We agree that short term monies should not be invested in the market, my definition of short term is 5 years or less.

 

[dmunsil]

So my original statement holds. There are a lot of long term periods (try 10 years, 20 years, others in between) where returns were less than 12%.

This is absolutely true. The very long term annualized average of the S&P 500 or the total market is just under 12%, but that's a far cry from saying that you can get that return in any specific window, including as long as 25 years.

If we just look at stock investments since 1890, and look at rolling 25-year periods, there are periods where the annualized returns of stocks are negative (all of these are periods that include the 1929 crash, naturally). There are even more 25-year periods where stocks don't beat government bonds, and not all of them are in the 1920's. There were periods in the 50's and the 70's when stock investors took a bath and bonds did much better.

So no, folks can't even count on 25-year annualized returns of 5%, much less 8% or 12%, at least on lump-sum investments. Dollar-cost averaging helps quite a bit, but even then bonds can beat stocks for long periods of time.

 

[bighoo93]

Is there a 10 year period where the S&P hasn't averaged at least 8%? We agree that short term monies should not be invested in the market, my definition of short term is 5 years or less.

Oh yeah, absolutely. And I'll admit that I keep my "vacation fund" in something riskier than would be advised. On the other hand, it isn't my retirement fund, college fund, or mortgage payment fund, so if something devastating happens, missing a vacation isn't exactly going to qualify as real hardship that will win me sympathy points.

In no way would I ever give anyone any specific financial advice, like what they should invest their money in or when or whatever. I would hope that everyone who reads an internet message board knows better than to just follow what someone on a message board says. With that said, I use a fund like the one in this article. It is about 2/3 bonds, 1/3 stocks, so it has lower volatility than the stock market, but still significant returns above inflation over time, historically. In fact, historically speaking, this fund has tracked pretty much with your 8% annual return assumption.

But if this were money that I absolutely needed within the next 5 years (e.g., to make a balloon payment on mortgage, finance college, early retirement), there is no way that I would have that money in this kind of fund. Even though it will be less volatile than the overall stock market, there is still potential for real loss over that short time period.

 

[iluvthsgam]

This is absolutely true. The very long term annualized average of the S&P 500 or the total market is just under 12%, but that's a far cry from saying that you can get that return in any specific window, including as long as 25 years.

If we just look at stock investments since 1890, and look at rolling 25-year periods, there are periods where the annualized returns of stocks are negative (all of these are periods that include the 1929 crash, naturally). There are even more 25-year periods where stocks don't beat government bonds, and not all of them are in the 1920's. There were periods in the 50's and the 70's when stock investors took a bath and bonds did much better.

So no, folks can't even count on 25-year annualized returns of 5%, much less 8% or 12%, at least on lump-sum investments. Dollar-cost averaging helps quite a bit, but even then bonds can beat stocks for long periods of time.

I was simply stating my disagreement with the characterization of the statement that it was "That is absolutely not even remotely true." I guess my definition of "absolutely not even remotely true" may be different than others, which is fine.

I disagree with you that I cannot count on a 25-year annualized return of 5%. If that were true, I should not be putting money into my 401k every other week which goes into a Vanguard Target Retirement Fund (made up of VTSMX, VGTSX, & VTBIX). It is only because I am counting on returns higher than 5% that I am putting my money into that fund. And the reason I am comfortable doing that and the reason I can count on returns being higher than 5% is because that is what has happened historically.

I assume that since you can't count on returns of 5% over a 25-year period, you are not invested in the market right now?