Tuesday, July 6, 2010

The Sarcasm Report v.53

The Millionaire's Retirement Plan

For these calculations, assume an average annual return of 8%, adjusted for inflation at 3% - a reasonable estimate of average market returns.

Great assumption!

Never mind that...

1. The 3-Month Treasury bill only yields 0.17%.
2. 30-Year Treasury bond only yields 3.89%.
3. The stock market has gone nowhere in the last decade.
4. Real estate crashed and is struggling to recover.
5. Unemployment is 9.5% and is expected to stay high.
6. Europe is now facing enormous financial difficulties.
7. Japan's been stuck in deflation for decades.
8. China is attempting to slowly deflate their housing bubble.
9. Precious metals have risen 400% in the last decade and future returns of that magnitude look somewhat suspect to say the least.


The key is diversification. No one thing can probably get us to 8% but if we bundle them together in some sort of structured investment vehicle then the sky is the limit.

I think I know just the company to package them.

Structured investment vehicle

Invented by Citigroup in 1988, SIV's were popular until the market crash of 2008.

...

When the entire spectrum of bundled loans from sub prime to premium AAA start to under-perform against statistical expectations, the valuation of assets held by SIVs became suspect. SIVs suddenly found it difficult to sell commercial paper while their previously sold commercial paper neared maturity. Moreover, their supposedly prime rated assets could be sold only at a heavy discount. In effect, this was a run on the bank.


An uncomfortable old age

In a world in which all the consumers and savers are rational, savvy and knowledgeable about calculating present and future value (a theoretical world that exists only in the fevered minds of economists ) they will react already now to the decline in yields and behave accordingly.

Fortunately, there aren't that many of us who behave accordingly. It's especially difficult to behave accordingly when we're continually told to expect 8% returns.

That isn't how it works in real life. The vast majority of savers and investors are totally unaware of the concept "yield to maturity" or the future value of deposits. They do not react to the predicted decline in yields on their future investments in real time. They react late, sometimes far too late.

Ignorance is bliss!

They will only react after realizing that over time, the value of their savings doesn't increase at the rate they anticipated. Only then, after the initial feeling of disappointment, will the reaction be: "We don't have enough accumulated wealth: we must increase our current savings."

The Church of 8% Returns continues to attract followers though. And why is that? The idea of saving a million dollars in order to actually have a million dollars is just too horrific for the average person to contemplate!


In London there is a man who screams when the church bells ring. - H.P. Lovecraft

3 comments:

G.H. said...

"H.P. Lovecraft"

Now why didn't I think of turning to this man earlier for investment advice?

"It is unknown whether the younger Lovecraft was ever aware of the actual nature of his father's illness or its cause (syphilis), although his mother likely was..."

There must be a message here...

"Syphilis - False shame and fear may destroy your future"

I'll admit, I do feel a certain amount of shame when I lose. However...

After the dotcom debacle I spent some three years developing a strategy to try to remove the fear from the process of investing.

I'm comfortable with my investment strategy as can be verified from my TIP and UUP investments documented on this board. I've tried to remove all traces of fear, shame (lol), and more importantly IMO, emotion.

Mr. Lovecraft does, despite his atheist inclination, have a track record of safely quoting scripture. For example: "Another recurring theme in Lovecraft's stories is the idea that descendants in a bloodline can never escape the stain of crimes committed by their forebears..."

Let's consider Deuteronomy 5:9: "I lay the sins of the parents upon their children; the entire family is affected--even children in the third and fourth generations..."

One has to wonder if the descendants of Richard Severin "Dick" Fuld, Jr. will ever escape the stain of a father/grandfather/great grandfather/great great grandfather who couldn't see the clear signs of a flagging commercial real estate market staring them straight in the face and yet still sitting idly aside while the man he himself assigned to acquire CRE assets, Mark Walsh, who had personal authority to commit company capital anyway he saw fit, spending Lehman's money like a drunken sailor on CRE at the top of the market, leading the U.S. not into temptation but, rather, leading the U.S. into a financial armageddon.

Could Lovecraft, with his peerless imagination, have ever imagined?!?!

Stagflationary Mark said...

G.H.,

Could Lovecraft, with his peerless imagination, have ever imagined?!?!

"From a private hospital for the insane near Providence, Rhode Island, there recently disappeared an exceedingly singular person. He bore the name of Charles Dexter Ward, and was placed under restraint most reluctantly by the grieving father who had watched his aberration grow from a mere eccentricity to a dark mania involving both a possibility of murderous tendencies and a profound and peculiar change in the apparent contents of his mind. Doctors confess themselves quite baffled by his case, since it presented oddities of a general physiological as well as psychological character."

Doctors? Economists? It's all good.

G.H. said...

"Doctors confess themselves quite baffled by his case"

Incompetency can be found in every endeavor upon which man embarks.