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Investment Comparison Spreadsheet

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coaster
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quote:
Originally posted by Wino
This is not for me. It is for DW. She has the money in a money market because she was spooked during 2008.

OK, here's an idea for a spreadsheet you can do for her: take the money she had in the MMF at the beginniing of 2008, plus any additions since, and "invest" it in equally-spaced and -sized amounts into an S&P Index Fund over the next two years, then bring that forward to today (don't forget reinvested dividends), then show it to her: "This is how much you'd have now IF......" Wink

~Tim~
Post Sat Aug 17, 2013 4:00 pm
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smk
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quote:
OK, here's an idea for a spreadsheet you can do for her: take the money she had in the MMF at the beginniing of 2008, plus any additions since, and "invest" it in equally-spaced and -sized amounts into an S&P Index Fund over the next two years, then bring that forward to today (don't forget reinvested dividends), then show it to her: "This is how much you'd have now IF......" Wink


then you need to run the same analysis starting march 2007, ending march 2009. the problem with risk aversion is she has the wrong measure of risk. she thinks she is lowering risk, but she is actually increasing it. risk needs to be measured vs. her liabilities, not immediate loss. then the zero risk asset provides a positive return and she is much better off. her actual risk is lower and she has a positive return...it's called win-win, and it is done by correcting for the proper risk measure...I really don't know why the financial industry just can't tell this to people in plain English; life would be so much simpler...

Steve Kanney, CFA
http://www.integratedfinancialny.com/index.html
Any comments made are designed to help you make your own decisions and do not consititute investment advice.
Post Sat Aug 17, 2013 9:33 pm
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coaster
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quote:
Originally posted by smk
then you need to run the same analysis starting march 2007, ending march 2009.

Why end on March, 2009? Unless you want to show how much money she'd have today if she'd panicked, sold out, and stayed in cash until now? Ya, I can see running that.....that would be OK for a hypothetical.....*after* you show her the first one with the series carried to the present. She's obviously not ready for the alternate scenario, yet. She first needs to learn what the rewards are for taking the risk and staying with it. I think it's better to demonstrate the rewards *first*, otherwise the psychology is already shifted into the negative zone. You gotta set the right mood....kinda like romance. Laughing

~Tim~
Post Sun Aug 18, 2013 4:37 am
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smk
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the point is not trying to get her to take risk. first, it is not right to show someone the upside of risk without showing them the downside. you need them to be prepared for this type of scenario. if she jumps ship at the bottom because she is nervous (likely for someone with low risk tolerance), that scenario is exactly what she will get. yeah, you did ok in the US if you stuck with your risk positions from 1950 - 2000. what about the Weimar republic, the US in the 1920's japan in the 1990's...maybe not. it does not always work out. so if you jump ship after losing 50% of your assets and lock into tips at the bottom in yields to stem the bleeding in terms of retirement income, you may wind up with a 75% real economic loss in terms of purchasing power in retirement...think about it.

so don't try to persuade her to avoid risk. let her make her own decision. but show her what risk is. cash is extremely risky. stocks are even worse (when you consider that rates often fall when stocks crater as above). gov't inflation protected secs have opportunity cost, but for retirement funds, no real risk. if she is comfortable with the retirement they provide and she does not want to take risk of getting worse, who can tell her she is wrong? but as long as you measure her risk in terms of cash, she will always stick with cash, which is extremely risky for retirement. this is a self defeating approach.

Steve Kanney, CFA
http://www.integratedfinancialny.com/index.html
Any comments made are designed to help you make your own decisions and do not consititute investment advice.
Post Sun Aug 18, 2013 12:12 pm
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Wino
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So, you two think I should show her what her money could have done under different scenarios. I know! I'll write a spreadsheet that allows me to show two different scenarios side by side... (hint, look up earlier in this thread)

By the way, said spreadsheet had some errors. If you downloaded it, I suggest you grab it again and overwrite it. I think it's 100% now.

Any other changes you want to suggest? I think I'll do this again, but monthly, so the truly anal can update it to their heart's content. I already have a spreadsheet that looks up real-time stock information off of Yahoo. I think I might combine that with this, and do an automatic look-up.

Is anyone interested in a stock tracker/mutual fund tracker that's somewhat automated? You'd put in up to about 20 symbols (they must be on yahoo's finance list), and then just run the spreadsheet like all the time in the background. It would look up the symbols and their prices like once a month or so, and then track your investments. I haven't worked out the details.

If anyone has any ideas they'd like to see, let me know.
Post Sun Aug 18, 2013 4:34 pm
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coaster
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Steve, some nice points about risk education, and about inflation risk. However, a slight disagreement over "no real risk" for TIPS; as article from Vanguard points out:

https://personal.vanguard.com/us/insights/article/TIPS-inflation-protection-092012

~Tim~


Last edited by coaster on Sun Aug 18, 2013 5:33 pm; edited 1 time in total
Post Sun Aug 18, 2013 5:31 pm
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coaster
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Don, let us know how you make out!! (The spreadsheets, that is; the romance part you can keep to yourself) Laughing

~Tim~
Post Sun Aug 18, 2013 5:32 pm
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smk
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both of you guys are missing the point. TIPs do not have real economic risk as long as they don't default. real economic risk for someone trying to retire is a reduction in retirement income. if TIPs product $1k in real retirement income in today's dollars, if their market value drops they will still produce the same $1k. therefore, there is no real economic risk. I did say their is opportunity cost. that means if the market value declines, it would be possible to produce more than that $1k in retirement income. this is an opportunity cost, not a loss since the original retirement income is locked in.

wino, if you like writing spreadsheets to show here examples, why don't you try writing one that gives her the information she is actually looking for. the one you have shows her how much money she can expect to have in the bank the day she retires, for example. what good is that? she is going to spend all her days starting at her bank account when she retires? someone who is going to retire wants to know how much they can spend.

so try this...ask her how much she needs in retirement and when she plans to stop working. inflate the spending needs at a certain rate from not to retirement, and show the spending for each year continuing to increase with inflation. look at 2 alternative investments: TIPs & stocks. for TIPs, buy a portfolio with maturities when she needs the money. reinvest the cash flows from the portfolio at inflation plus a small premium. then take stocks - show the historical returns on stocks in high inflation (say 5-7%) periods such as the 1970's and compare it to the TIPs portfolio in its ability to fund the retirement needs. note the TIPs portfolio calculations will precisely match the swings in inflation. stocks will do very poorly and the inflation will increase expenses at the same time. then try a positive period of returns with low inflation and high stock prices such as the 1990's. again, the TIP will not enjoy any benefit whereas stocks will do very well.

if you don't want to write the spreadsheet, it's okay. someone else has already done the work for you. look at http://www.prospercuity.com/

Steve Kanney, CFA
http://www.integratedfinancialny.com/index.html
Any comments made are designed to help you make your own decisions and do not consititute investment advice.
Post Sun Aug 18, 2013 5:52 pm
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smk
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something else you should note. people do not tend to follow the advice of models unless the models tell them what they want to know. if someone wants to be safe in retirement and you show them how much money you think they will have on the first day of retirement, they may not jump in and take the risks you want them to take and hold them through bad markets. if you show them exactly how it will make them safe in retirement, they are much more likely to listen to you, and very importantly hold to the strategy during bad times.

right now, your best approach is to show her that her attempts to be safe are anything but safe. if she understands this, it will get her off the mark. but to demonstrate the point, you need to show her what safety is...that is TIPs compared to cash. once she understands what safety is, she can determine the place for stocks or non-market risk strategies to improve retirement. so basically, you guys are trying the blunt approach to the subject and giving up your best asset in communicating why she should get out of cash...

Steve Kanney, CFA
http://www.integratedfinancialny.com/index.html
Any comments made are designed to help you make your own decisions and do not consititute investment advice.
Post Sun Aug 18, 2013 6:10 pm
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Wino
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quote:
Originally posted by smk
if you don't want to write the spreadsheet, it's okay. someone else has already done the work for you. look at http://www.prospercuity.com/


That spreadsheet is nowhere near what I'm talking about. First off, I don't count social security. No, this is not some wild conspiracy theory. I'm sure some form of SS will still be there when I retire. My problem is that since it is broke and unsustainable, they're going to have to reduce the benefits to folks. As I'm one of the "Rich" as defined by current government whims, I figure I'll be one of those who is screwed out of my "investments" in the Ponzi scheme.

What's the downside if I'm wrong? I get more money than I planned.

My calculator will allow you to run it, and just leave it alone. It will update itself. Your worst problem will be to open it (click on it, as it will need to be open to gather its data), and save it to keep the data on your computer. I guess I could write a C program to save it every week or so, but now I'm getting even more complicated. No... you'll just have to open it, leave it open, and remember to save it once in a while. That way, it'll "track" your investments more closely.

How did I miss your point? Type slowly, because I can't read fast. I can run any scenario I want inside Excel, no matter how complicated. The only problem is putting in "good" data from some trusted source.
Post Sun Aug 18, 2013 8:04 pm
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smk
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quote:
Originally posted by Wino


That spreadsheet is nowhere near what I'm talking about.


the only spreadsheet I saw was https://dl.dropboxusercontent.com/u/104508282/InvestmentComparison.xlsx
so I don't know what spreadsheet you are talking about that can do anything.

but I will type slowly so hopefully you will understand - the output of your spreadsheet that determines success or failure needs to be the portion of the retirement income covered by the investment portfolio and the risk of having too little to live on. this is the objective of the person who retires.

if you determine success or failure by how much money you have at a particular point in time, that objective may not translate into being able to support yourself in retirement.

using the correct measurement will produce less self destructive behavior. dw is probably seeing lost dollars today as her risk measurement, which indicates cash is riskless. but for retirement, investing totally in cash is very risky - you may not be able to pay your bills. if you look at the ability to pay your bills, she will get out of cash and start with TIPs or something like that. then to the extent she is able to bear risk, she can increase it.

I am typing very slowly now - your analysis targets the wrong goals. it doesn't work.

Steve Kanney, CFA
http://www.integratedfinancialny.com/index.html
Any comments made are designed to help you make your own decisions and do not consititute investment advice.
Post Sun Aug 18, 2013 10:21 pm
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coaster
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Steve, I agree with your statements about TIPs *if* they are held by the investor as individual securities, and held to maturity; ... but ... I 100% disagree with your statements if the TIPs are held as a mutual fund, as most individuals will own them. Both the NAV *and* the income from the TIPs fund are sum total of holding the TIPs plus the result of buying and selling them on the open market to meet fund inflows and outflows; thus the NAV is subject to both the capital gains and losses from the selling, as well as the distribution rate (proxy for the TIPs interest), which will be less if those are capital losses. Plus there's the time lag as the portfolio is adjusted.

I think the main reasons that TIPs have been attractive for some years: falling interest rates and tame inflation, won't hold in the future, and the risk that they won't perform as the investor intends them to perfom is a real (and not understood) risk. Thus the risk to the retirement income goals of the retired investor, which is exactly the risk you are (rightfully) concerned about.

~Tim~
Post Mon Aug 19, 2013 4:50 am
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coaster
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My own plan to deal with retirement income that keeps up with inflation is to own dividend-paying stocks. Never mind the market price; it doesn't matter. Do mind the dividend-paying history. For a company that has continuously raised its dividend periodically, and raised it in excess of inflation, the investor's yield on his *basis* will eventually become astronomical, and his *real* yield will also outpace inflation.

I like to tell the story about the guy wearing the Scottrade cap I met in the supermarket one day. He told me about the 100 shares of the utility stock he had bought about 40 years ago. Never having invested another nickel in the position he now owns a couple thousand shares of the stock. When I got home I did a little number crunching. He now has about a 60% yield on his investment. His dividend income grew almost three times faster than inflation. My eyes were opened, to say the least.

~Tim~
Post Mon Aug 19, 2013 5:03 am
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smk
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quote:
the retirement income goals of the retired investor, which is exactly the risk you are (rightfully) concerned about


progress at last...

now TIPs are not a panacea - they are a MODELING TOOL. you understand your objective as retirement income. you need to model this stream of cash flow to figure out which assets will match your needs best. so you use a series of TIPs as a proxy for your retirement income needs. you also know it is physically possible to buy a series of TIPs which will accomplish your goals as you agreed above.

so question - which asset will most closely align with the performance of that strip of TIPs? you will go back historically and figure the tracking error (SD of the difference in returns between series of TIPs and alternative assets you can choose from), as 1 example of a risk measure. there are other alternatives that may do well - series I bonds, longevity annuity if inflation protected, TIPs mutual funds, nominal bonds, cash, high dividend paying stocks, general stocks, etc. (probably in that order)

based upon your preferences for risk and return, you construct a portfolio measuring the risk as deviation from the series of TIPs you are using as a proxy for your retirement income goals. with this approach, you have a much better idea whether your strategy will work or not. the standard methodology using cash as your risk measure is like playing darts in a very dark room.

now we take this to someone with very low risk tolerance. they CAN purchase the series of TIPs if they want. if rates are low, they will likely give up the opportunity to raise their retirement income by simply waiting to purchase them, so they MAY choose to wait. if they decide they want the TIPS to lock in their retirement income because they cannot handle the risk of stocks, they are not necessarily wrong. but if they choose cash as a long term solution because they don't want to take risk, that is a particularly bad idea for the objective of retirement income. the return is very low and this risk is high. TIPs have lower risk and higher return.

by doing this analysis, dw can see in very practical terms to flaw in using cash to reduce risk. then an evaluation of dw's genuine risk tolerance can take place with a more relevant measure of success/failure. this approach would be particularly helpful to someone with low risk tolerance...

Steve Kanney, CFA
http://www.integratedfinancialny.com/index.html
Any comments made are designed to help you make your own decisions and do not consititute investment advice.
Post Mon Aug 19, 2013 10:48 am
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Wino
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quote:
Originally posted by smk
series I bonds, longevity annuity if inflation protected, TIPs mutual funds, nominal bonds, cash, high dividend paying stocks, general stocks, etc. (probably in that order)


I don't see real estate (not REIT's) on your list. That's actually my plan for inflation protection. I figure if inflation rears its head, housing and rental prices must also go up, so my rental income may lag inflation, but it should still track inflation.

To that end, I've found a nice neighborhood with moderately-sized homes (1600 sqft) that are going for about $110K or so, each. Now, I know that if he's reading this, oldguy's going to jump in and say "smaller house at $80K is better," but I'm in Texas, and 1200 sqft homes only do well if in close to the city, and they go for closer to $300K.

Anyway, I've been speaking to DW about it, and we're putting aside a fund to save up 50%, at which point we'll purchase and set up the house rent to pay the remaining mortgage and fees. Then we'll rinse and repeat.

The main difference between my method and oldguy's is I won't be pulling out equity to gamble on the market. I'm more than content to let rising house values gain equity, and to get an income from the rental. If I want more, I still have my mutual funds, and DW still has her MM, that I'm trying to talk her in to abandoning.

Along the lines of having her invest rather than hold, I'm putting quite a bit into "her" funds as well as "my" funds. Even if she "loses" on the investments, she more than makes up for it in the "free money" she gets when I purchase shares.

I still don't see how my sheet can't be used to model TIPs. What other adjustments besides period fees ($), period fees (%), etc., is there with TIPs? Don't say "inflation," because that's a percentage, even if it just says "annual rate." If I break it down monthly, you can do it more precisely, but I still don't see any scenario where one of my variables won't do the trick close enough to allow you to check the outcome.

You keep saying "retirement income." We won't be touching principle at all. Our "income" will be whatever it earned last month, or less. That's the ground rules we set up, and that's what we'll live by. I'll use real estate rental income as a fixed income, and let the funds provide any cushion. If the funds go down, then I'll just take the hit until it reaches our comfort level again. I'm not looking for retirement "income." I'm looking for "reserve assets."
Post Mon Aug 19, 2013 1:17 pm
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