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Old 05-27-2015, 07:42 AM
 
6,294 posts, read 4,740,348 times
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I am looking at this separately to predict the risks and returns. I do not have separate accounts for this money.

In terms of my overall withdrawals, I am well under a 4% withdrawal rate and I did not increase that due to my mortgage. I have a hard time even knowing what my expenses are. When I traveled for 2 years I did not own a house and my expenses were very low. Then I bought a house and did some extensive, one time remodeling and maintenance. I still need a new roof within 5 years. We are investigating adding solar. I am turning a big detached garage into a work area and studio. I am also overdue to buy a new car. We are hoping for a trip to Hawaii and a trip to Europe next year. In addition I do not budget, never have, never will. And I do not track individual expenses or expense categories. With all the confusion I still seem to be under 4% almost every month and I am well under for the year.

Back to the important issue. Last year I spent big bucks on my printer. Counting the printer, paper, spare cartridges, 3rd party ink, papers, matboard, frames, cleaning cartridges, and cleaning solution, I must have spent $4-5K. I do have my frames, lots of different papers, full cartridges and more ink being shipped. but that is a pretty hefty expense in relation to what I printed last year----maybe a 100 8.5x11 proofs, 25 13x19 prints and 35 17x25 prints.
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Old 05-27-2015, 09:14 AM
 
12,708 posts, read 9,981,349 times
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Quote:
Originally Posted by jrkliny View Post
I am not sure what I did wrong, but firecalc now seems to work. I tried a scenario with a $300K mortgage and $15K annual payments. After setting the inflation to zero, the success rate was 98.3%. Results were all over the place when it comes to the final portfolio amount but average seemed to be about $1.5M. So a mil in profit which is about what I guessed at for my case.

Also firecalc calculations are based on historical scenarios started at 1871. I don't know about you but going back that far seems ridiculous and only likely to give improbable results. I set the date at 1946, my DOB.
Keep in mind, though, that the low interest rate current environment does two things - 1) it gave/gives you a cheap mortgage; and 2) Reduces the return you expect on your fixed income holdings going forward (not what you have made so far, rather, what will happen.)

After entering the inputs to Firecalc, the benefits you get from (1) the cheap mortgage, have already been fully accounted for because that's how you set your spending level to begin with.

This leaves (2) the reduced expected return going forward, that needs to be considered. In this case, due to historically low current interest rates, you are likely to do poorly compared to most of the Firecalc runs.

Thus, I would argue that 1946-present is actually a sample that would be biased towards a lower "portfolio crash risk" than is really the case (again going forward).

Quote:
Originally Posted by jrkliny View Post
Wow, 100% success and an average final portfolio of around $2-3M. Since I have started off with a good sequence of returns, it is becoming more likely that I will pocket several million in returns.
Yes, the first 2 years do contribute to the end result, I won't argue with you there.

Quote:
Originally Posted by jrkliny View Post
The other factor is the overall risk. If your overall portfolio falls to zero well before you die, that could be an extremely unpleasant outcome. If all the cards fall wrong for the mortgage, the risk is still very minor. Absolute worst case, you could run out of money before the end of the 30 years and you would have to pay the remainder out of your main portfolio or other income. At that point there would be little left to pay and inflation would have made that payment trivial. The risk of failure is very minimal. The consequences of failure are minimal. The potential returns on a $300K mortgage are likely to be well over $1M, and most likely $2-3M. Seems worth it to me, but I then I am not expecting the sky to fall.
With other assets and income plentiful, sure. Another way of putting it is that having a lower debt/equity ratio makes one's risk tolerance higher.

Of course the same would be true if you simply sold an amount of fixed income securities equal to the mortgage balance and paid it off right away, without changing the dollar amount of your equity (stock) holdings. I still suspect this will work better for you than keeping the loan, but of course there are a few ways for this to turn out not so.
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Old 05-27-2015, 09:22 AM
 
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Quote:
Originally Posted by ncole1 View Post
.....
This leaves (2) the reduced expected return going forward, that needs to be considered. In this case, due to historically low current interest rates, you are likely to do poorly compared to most of the Firecalc runs.

........
Interest rates have been very low for the past several years and my overall returns have done just fine: 8-10%. Eventually the stock market will slow down. It is also very likely that we will see rising interest rates and rising bond returns. I am not expecting low returns for the next 30 years. You and Mathjak need to start a pessimists club. The main activity would be to look for the worst possible scenarios in life.
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Old 05-27-2015, 09:35 AM
 
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Originally Posted by jrkliny View Post
Interest rates have been very low for the past several years and my overall returns have done just fine: 8-10%.
I said "going forward".

Let me ask you this: Over the past 50 years, what is the average deviation of bond returns from the corresponding YTM's?

It'll be very close to zero.

Yes the past few years may have had higher returns due to falling YTM's, but this trend cannot continue into the future - because it only happens when YTM's are falling. When they rise, your total return will be lower than the YTM's, not higher. And this is not pessimism - it's just math.

Quote:
Originally Posted by jrkliny View Post
Eventually the stock market will slow down. It is also very likely that we will see rising interest rates and rising bond returns. I am not expecting low returns for the next 30 years. You and Mathjak need to start a pessimists club. The main activity would be to look for the worst possible scenarios in life.
Well, the issue depends on the duration of the bonds. If your bonds, taken together, have the same Macaulay duration as your mortgage, then the increase in returns will be precisely nullified (neglecting tax effects) by the fact that your NAV would have fallen when the yields rose.

If you have more in short and medium term bonds, this is not the case, because the shorter duration means you need less time to make up for the loss in NAV. However, as long as the yield curve is normal, this also means that returns are lower.
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Old 05-27-2015, 10:39 AM
 
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Here is how the club would work. You come up with the worst scenario you can think of. Then someone else, like Mathjak, takes a turn and tops it. Then the next club member gets a try.

In the meantime I have no idea what worst case scenario you are trying to describe.
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Old 05-27-2015, 11:17 AM
 
71,700 posts, read 71,801,099 times
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Quote:
Originally Posted by jrkliny View Post
Interest rates have been very low for the past several years and my overall returns have done just fine: 8-10%. Eventually the stock market will slow down. It is also very likely that we will see rising interest rates and rising bond returns. I am not expecting low returns for the next 30 years. You and Mathjak need to start a pessimists club. The main activity would be to look for the worst possible scenarios in life.
not pessimistic but realistic- trees don't grow to the sky and since the retracement things have been tough sledding as they say. low rates and high valuations are some tough head winds and I believe that will give us below average returns for a while.. if they are better great but I am not planning around it.
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Old 05-27-2015, 11:35 AM
 
12,708 posts, read 9,981,349 times
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Quote:
Originally Posted by jrkliny View Post
Here is how the club would work. You come up with the worst scenario you can think of. Then someone else, like Mathjak, takes a turn and tops it. Then the next club member gets a try.

In the meantime I have no idea what worst case scenario you are trying to describe.
I can't speak for MJ, but I am not discussing worst-case scenarios at all. It is a simple matter of math that you cannot have bond returns consistently above the same bonds' YTM long-term. If the returns are higher, that requires a falling yield environment.

Over long periods, we should expect yields to rise just as often as they fall, or close to it. When this happens, the total return will be less than the YTM of the bonds. Certainly if you factor in both the direction and amount of changes in bond yields, it has to have an average change of close to zero - because barring hyperinflation, rates are constrained to stay within a relatively narrow range.

Your response earlier that your bonds have returned 8-10% is off the mark, because it either (A) assumes that this was only a single occassion, or one out of a few, in which case it is irrelevant to what to expect going forward; or (B) assumes that one can generalize from the last few years to the coming years, in which case it is simply wrong because it ignores the basic reality of the inverse relation between changes in yield and changes in NAV.

Once again, it is not worst-case - it is just how the bond market works.
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Old 05-27-2015, 12:01 PM
 
6,294 posts, read 4,740,348 times
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Originally Posted by ncole1 View Post
.

Your response earlier that your bonds have returned 8-10% is off the mark.......
I never said 8-10% for bonds. I said overall returns have been in that range. My bond funds have been in the 4-5% range and stock funds at 12-14%. I expect to see a bit less than that for the next couple of years. Then I think a lot will depend on the Presidential election and party platforms.
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Old 05-27-2015, 12:09 PM
 
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ncole1, I realized how this would all make sense. I have excellent collateral. Would you consider it a good deal to loan me a few hundred thousand for 30 years at a fixed 3.75% interest rate? You could get a nice, safe return with no worries about the future bond and stock yields.
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Old 05-27-2015, 12:27 PM
 
Location: SF Bay & Diamond Head
1,779 posts, read 1,420,368 times
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Quote:
Originally Posted by jrkliny View Post
ncole1, I realized how this would all make sense. I have excellent collateral. Would you consider it a good deal to loan me a few hundred thousand for 30 years at a fixed 3.75% interest rate? You could get a nice, safe return with no worries about the future bond and stock yields.
You beat me to it. I was going to ask them them which they preferred. $500,000 cash or 360 payments of $2684 (5%). It's one thing to do "what if " figgering and quite another to put your money where your mouth is. I can take it in $100,000 increments.
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