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

[iluvthsgam]

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.

It was my interpretation that we were talking about long term investments and not short term. I would agree with your statement regarding short term funds. My assumption was we were discussing options for long term (i.e. the time period you own DVC - 30-50 years).

 

[iluvthsgam]

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.

Vanguard Wellesley Fund (since inception 7/1/1970) has returned 10.2% per year. It is certainly not 12%, but IMHO it ain't that far off either (source)

 

[bighoo93]

Vanguard Wellesley Fund (since inception 7/1/1970) has returned 10.2% per year. It is certainly not 12%, but IMHO it ain't that far off either (source)

All I'm saying is...it has a nice risk/return profile, historically. But I would never even begin to hint at suggesting specific financial advice for anyone. Even that fund hit a rough patch in 2008, just not nearly as rough as the broad stock market. In turn, the returns on that fund severely lag behind the returns from the stock market so far this year. That's the volatility tradeoff. I realize that keeping money in a fund like this, that I intend to use at least a portion of within the next five years is a risky proposition. It might not be there for me. But it is a risk that I understand and am willing to take, eyes wide open. If it were money that I absolutely needed within five years, it would be a relatively foolish gamble.

 

[dmunsil]

I was simply stating my disagreement.

Whoops, sorry, I wasn't disagreeing with you. I'm sorry you took it that way. I was agreeing with the idea that you can't count on returns of 12%, even over long periods, in the stock market. I'm pretty sure you'd agree with that.

I disagree with you that I cannot count on a 25-year annualized return of 5%.

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?

No, I'm entirely in Vanguard as well. My 401K is a mix of Total Market, Total International, and Small-Cap Value. 100% stocks. I think it's the odds bet. There is a chance that I will earn less over that time in stocks than in bonds, but the historical evidence says that I'm more likely to earn a higher return in stocks. That's not the same as that I can "count on" a higher return, which to me implies that it's a sure thing. Odds are very, very good that long term stocks will return more than bonds or money markets.

And I have to walk back what I said about 25 year returns being negative across the 1929 crash. I was going from memory, but I can't find the spreadsheet where I worked that out, and I can't corroborate it. I think I'm wrong about them being negative, but they certainly weren't good. I know there are 10 year periods where stock returns have been negative. In fact the 10 years from 1999-2008 were negative (-1.15%), as were 2000-2009 (-0.54%).

I was able to find my 1960-2012 data, and according to that, the worst 25-year period since 1960 for the total market has been +8.37%, for the period from 1960-1984. The returns across 1929, though, were much worse. So I agree, the best odds are in the market. That's not to say you can count on those returns as a sure thing.

 

[bighoo93]

I was able to find my 1960-2012 data, and according to that, the worst 25-year period since 1960 for the total market has been +8.37%, for the period from 1960-1984. The returns across 1929, though, were much worse. So I agree, the best odds are in the market. That's not to say you can count on those returns as a sure thing.

I just want to reiterate a couple of important points, and both are related to what I think is the scenario we are discussing here. That is, when considering your choice of either buying DVC points with a lump sum payment, OR, setting that money aside in a particular investment, and spending it annually (or however often you go on vacation). If there is another scenario, then we are talking about something different, which is fine, but assuming this scenario, keep in mind the following:

1) We are talking about an initial investment at a point in time. I don't know if those rolling periods are done on a daily basis, or if they take an average of the stock market value during the year, or a specific date in the year, or whatever. But unless they are going on a daily basis (so there would be ~250 data points per year, not one), then it doesn't effectively capture the range of possibilities. If you start your investment on the highest market day of the year, your returns at any time point later are going to be worse than if you happened to invest from the lowest price point of the year. Also, this scenario does not include periodic investment or dollar cost averaging, which helps smooth things out.

2) Because the money will be used on an annual (or whatever) basis in the near term for vacations, a simple long-term value (whether that is 15, 25, or 40 years) is not appropriate. You are going to be withdrawing at least a portion of that money over the short term, and if the market does poorly in the near term, you will never achieve the long-term return hoped for because you are withdrawing your base.

This again is just for the scenario of comparing buying DVC points vs. saving/investing that money and using it annually to pay for vacations. If you are thinking of buying DVC as part of an investment portfolio (which I explicitly do NOT advise), then comparing long-term rates of return makes perfect sense.

 

[iluvthsgam]

No, I'm entirely in Vanguard as well. My 401K is a mix of Total Market, Total International, and Small-Cap Value. 100% stocks. I think it's the odds bet. There is a chance that I will earn less over that time in stocks than in bonds, but the historical evidence says that I'm more likely to earn a higher return in stocks. That's not the same as that I can "count on" a higher return, which to me implies that it's a sure thing. Odds are very, very good that long term stocks will return more than bonds or money markets.

Just the internet message board language curse here - when I read you type "count on" I assume "expect" - I guess when you type "count on" you are saying "guarantee." Obviously the market does not guarantee and it is not a sure thing. But I expect greater than 5% over time. I decide where to put my money and I "count on" the fact that historically it has been around 8%-10% per year. So that is why I was saying that I can "count on" greater than 5% because I expect to get greater than 5% based on historical returns, not that I am "sure" I will get 5%.

 

[dmunsil]

So that is why I was saying that I can "count on" greater than 5% because I expect to get greater than 5% based on historical returns, not that I am "sure" I will get 5%.

Sure, I get it. Language is not precise. I guess I don't "expect" anything per se - I'm playing the odds. I'm trying to maximize my chances of getting to retirement with more money than average, and trying to minimize my chances of getting to retirement with less money than I started with. For long periods of time, like 15+ years, 100% stocks seems like the most likely to achieve both of those objectives. For shorter periods of time, the highest odds of getting more than the average is still pretty much always stocks, but the highest odds of not getting less than I started with is a mix of bonds and stock.

I'm intrigued by Nassim Taleb's strategy of putting most of his money in the closest to risk free investments as possible (probably TIPS), and putting smaller chunks into highly leveraged derivatives that only pay off when the market moves a very large amount. His thesis is that people consistently and systematically underestimate the likelihood of large moves, so betting that a large move will happen more often than the market is implicitly counting on is a good bet. I'm not entirely convinced (hence the index funds), but it's the only strategy I've encountered thus far that I can't prove to my own satisfaction is fatally flawed.

 

[crisi]

I use a variety. I like a researched version of Dogs of the Dow - and tend to hold them much longer than when their dividends are high. I figure that I'm still getting 8-10% on the original principal on some of those investments, even if the stock has appreciated so that the overall current dividend rate is under 4%.

I like a well researched stock buyback strategy. The idea being that CEOs know when their stock is underpriced.

And you can usually do well short term buying when splits are announced.

Biggest - I don't buy what I can't afford to lose, I have a good portion of my money in cash, and "attempt to be fearful when others are greedy and to be greedy only when others are fearful."