Retirement and the Stock Market

[UCLAseetoK]

This question stems after listening to Robert Kiyosaki's Rich Dad CD audio collection.

He stresses in his CD that he finds it "risky" that the majority of middle class U.S. workers have retirements that are completely dependent on mutual funds (or various other equities) and thus are dependent on the performance of the stock market by the time they retire.

This may be a basic question, but it made me wonder about what is the underlying idea behind why we would expect the market to provide positive, and by positive I suppose I mean beyond the 5% you could get risk free in a savings account/cd/etc, returns for us in the "long-run" by the time most of us would retire? (probably 10-40 years for the people in this forum)

[PokerFox]

[ QUOTE ]
This question stems after listening to Robert Kiyosaki's Rich Dad CD audio collection.

He stresses in his CD that he finds it "risky" that the majority of middle class U.S. workers have retirements that are completely dependent on mutual funds (or various other equities) and thus are dependent on the performance of the stock market by the time they retire.

This may be a basic question, but it made me wonder about what is the underlying idea behind why we would expect the market to provide positive, and by positive I suppose I mean beyond the 5% you could get risk free in a savings account/cd/etc, returns for us in the "long-run" by the time most of us would retire? (probably 10-40 years for the people in this forum)

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It simply is because the stock market has provided positive long term yields across its entire history.

http://www.finfacts.ie/stockperf.htm

11% average annual return for nearly 80 years.

[Objectothis]

Stocks are riskier than bonds or cash and as such generally price in a higher expected return to compensate for the risk assumed. In the long run stocks provide that return. For a non stock market professional, with 10+ years until retirement, their best bet is a low-cost mutual fund such as those provided by Vanguard.

[gull]

That's an extremely good question. History is not the answer, but it does help us to characterize the future. Essentially, companies create value (earn money) and there's a risk premium from the uncertainty of those future earnings.

Here are some papers that answer it:
http://altruistfa.com/readingroomart...#EquityPremium

[UCLAseetoK]

[ QUOTE ]
[ QUOTE ]
This question stems after listening to Robert Kiyosaki's Rich Dad CD audio collection.

He stresses in his CD that he finds it "risky" that the majority of middle class U.S. workers have retirements that are completely dependent on mutual funds (or various other equities) and thus are dependent on the performance of the stock market by the time they retire.

This may be a basic question, but it made me wonder about what is the underlying idea behind why we would expect the market to provide positive, and by positive I suppose I mean beyond the 5% you could get risk free in a savings account/cd/etc, returns for us in the "long-run" by the time most of us would retire? (probably 10-40 years for the people in this forum)

[/ QUOTE ]

It simply is because the stock market has provided positive long term yields across its entire history.

http://www.finfacts.ie/stockperf.htm

11% average annual return for nearly 80 years.

[/ QUOTE ]

I am aware of this, but I wasn't satisfied with it. Probably because that common idea that past results do not guarantee future performance line that we've all come to know.

I was wondering if it would bring up some ideas like the strength of our economy or something.... unsure [img]/images/graemlins/confused.gif[/img]

[UCLAseetoK]

[ QUOTE ]
That's an extremely good question. History is not the answer, but it does help us to characterize the future. Essentially, companies create value (earn money) and there's a risk premium from the uncertainty of those future earnings.

Here are some papers that answer it:
http://altruistfa.com/readingroomart...#EquityPremium

[/ QUOTE ]

Thank you for the link, I should probably read all responses before I start quoting the first one I see next time

[DesertCat]

[ QUOTE ]
This question stems after listening to Robert Kiyosaki's Rich Dad CD audio collection.

He stresses in his CD that he finds it "risky" that the majority of middle class U.S. workers have retirements that are completely dependent on mutual funds (or various other equities) and thus are dependent on the performance of the stock market by the time they retire.

[/ QUOTE ]

Kiyosaki tells people they should own businesses, but not businesses that sell shares in the public stock markets. This of course ignores IPOs, and other stock market investments he's recommended in the past.

Most public companies earn between 10 and 15% per year on their equity value (essentially their "book value") or net worth. Essentially if the stock market shut down they could pay you their earnings as dividends and you'd get a greater than 5% return, as long as you didn't pay too much above book value for them. Assuming you paid 1.5x book on average you'd earn around 8-9% each year.

Or they could reinvest your share of the profits to increase future profits at that 10-15% rate. But then you need a market so you can sell your share of the business to someone since you aren't accumulating the dividends, they are being used to increase the business's value.

The risk to stocks is volatility, which you manage by decreasing portfolio exposure to stocks by gradually replacing them with bonds or some other interest generating instruments as you get close to retirement.

Kiyosaki likes to make lots of glib statements to shock and entertain and sound unique. But if you look closely, he's usually way short on any details or intelligent thought.

[PokerFox]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
This question stems after listening to Robert Kiyosaki's Rich Dad CD audio collection.

He stresses in his CD that he finds it "risky" that the majority of middle class U.S. workers have retirements that are completely dependent on mutual funds (or various other equities) and thus are dependent on the performance of the stock market by the time they retire.

This may be a basic question, but it made me wonder about what is the underlying idea behind why we would expect the market to provide positive, and by positive I suppose I mean beyond the 5% you could get risk free in a savings account/cd/etc, returns for us in the "long-run" by the time most of us would retire? (probably 10-40 years for the people in this forum)

[/ QUOTE ]

It simply is because the stock market has provided positive long term yields across its entire history.

http://www.finfacts.ie/stockperf.htm

11% average annual return for nearly 80 years.

[/ QUOTE ]

I am aware of this, but I wasn't satisfied with it. Probably because that common idea that past results do not guarantee future performance line that we've all come to know.


[/ QUOTE ]

OK, but here's the deal. Let's say you made that statement in 1927. Or 1940. Or 1965. Or 1970, or 1985, or 1995, or 2000. Everytime you'd say 'just because the stock market has done well in the past doesn't mean it will in the future!' But every time, the stock market has proved that wrong.

The fact remains it has passed through numerous and immense technological, economic, financial, social, and global changes for 8 decades and has continued to be profitable.

[DcifrThs]

[ QUOTE ]
Stocks are riskier than bonds or cash and as such generally price in a higher expected return to compensate for the risk assumed. In the long run stocks provide that return. For a non stock market professional, with 10+ years until retirement, their best bet is a low-cost mutual fund such as those provided by Vanguard.

[/ QUOTE ]

i know it.

i sound like a broken record.

but i have to just break this falacy down until it is widely understood.

so again, sorry for being a broken record:

listen, risk and return are inexorably linked. return is DEFINED by risk. many major hedge funds allow investors to set a risk target. by that i mean that they can aim for 4% total annual volatility (measured by st.dev of realized returns...yea we know, not the best measure, but it is what everybody relates to), or they can aim at 18%, or 2%. if your information ratio (risk adjusted return for actively managed investments) is 1.0, then for every unit of risk you take, you generate 1 unit of return.

so a target 4% risk level will, in expectation, generate a 4% annual total gross return.

similarly, the MIX of your investments is either optimal or it isn't. the concept of moving more towards bonds or cash as you age is not optimal. what would be optimal is reducing your risk target of your passive portfolio.

you can aim at whatever you like, but ideally, you should have a well diversified portfolio that has a sharpe ratio of between .4-.6 depending how much money is invested, how much work you are willing to do, and how well you understand portfolio structuring (or can pay somebody to do it for you).

while you are y ounger, you can take that .4-.6 sharpe ratio and aim it at a risk targer of, say, 18%. that will give you a target gross total return of between 7.2 and 10.8% per year. then, as you age, you can keep the same mix of assets, but reduce the leverage and add cash to the allocations thus aiming your risk target at say 10% annual volatility which would give you between 4 and 6% annual gross total return.

your MIX of assets shouldn't change as you age. just your risk tolerance.

Barron

[DcifrThs]

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[ QUOTE ]
This question stems after listening to Robert Kiyosaki's Rich Dad CD audio collection.

He stresses in his CD that he finds it "risky" that the majority of middle class U.S. workers have retirements that are completely dependent on mutual funds (or various other equities) and thus are dependent on the performance of the stock market by the time they retire.

This may be a basic question, but it made me wonder about what is the underlying idea behind why we would expect the market to provide positive, and by positive I suppose I mean beyond the 5% you could get risk free in a savings account/cd/etc, returns for us in the "long-run" by the time most of us would retire? (probably 10-40 years for the people in this forum)

[/ QUOTE ]

It simply is because the stock market has provided positive long term yields across its entire history.

http://www.finfacts.ie/stockperf.htm

11% average annual return for nearly 80 years.

[/ QUOTE ]

I am aware of this, but I wasn't satisfied with it. Probably because that common idea that past results do not guarantee future performance line that we've all come to know.


[/ QUOTE ]

OK, but here's the deal. Let's say you made that statement in 1927. Or 1940. Or 1965. Or 1970, or 1985, or 1995, or 2000. Everytime you'd say 'just because the stock market has done well in the past doesn't mean it will in the future!' But every time, the stock market has proved that wrong.

The fact remains it has passed through numerous and immense technological, economic, financial, social, and global changes for 8 decades and has continued to be profitable. [


[/ QUOTE ]

correct.

the stock market is profitable and is expected to be profitable into the future because otherwise, people would put their money in tbills.

the thing is, stocks (and all other asset classes-again except commodities) pay a risk premium for their profitability. their return is defined by the risk as all those asset classes' sharpe ratios are between .2-.3

that is both historically and in expectation (except commodities again blah blah blah). by using leverage and diversification you can construct a portfolio that generates a sharpe ratio of between .4-.6...far better than just an equity allocation, or predominately equity allocation and one in which you don't need to shift towards bonds as you age.

you can just reduce the risk target.

your portfolio efficiency is still the key. maintaining it is crucial.

Barron