Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
Overview: I'm currently continuing my "research" to determine if I should move monies out of my Long Term CDs and into the Stock/Bond Markets through Balanced Funds tied to US and International Indexes.
Age/Background: I'm 32 and don't plan on pulling any of these monies out for usage until age 65, which gives the Fund 33 years to grow. I'm a pretty disciplined person, so I have the ability to continue to contribute to the Fund every year and just let it do its "thing" without interrupting it, trying to time the market, etc.
Current Status
I previously tried to find information on prospective trends for a Fund in particular, as everything that you find is based on previous performance. I'm still looking for said information as I'm confused on a variety of things in terms of the appreciation of the Fund considering that previous performance doesn't guarantee how it will perform going forward. But to update my status here, I like how Vanguard operates and if I were going to move monies from my Long Term CDs into the Stock/Bond Markets, I would use one of the following Balanced Index Funds below:
But here's my question, all three of these have been around since late 1994 and their collective average return has been about 7.15%. Now this is the "average" collective return, not the compounding rate of return which is what I'm really focused on and also is what truly matters. I'm not finding information on the compounding rate of return for these funds, but I think I could "assume" that rate is about 5%? Would you agree?
Now, assuming you agree the compounding rate of return on these funds are 5% over the period of time, this takes me to my next question seeing as though I'm currently in Long Term CDs. When I say Long Term CDs, I'm talking about CDs that are 5 - 10 year terms.
The average of the 5 year CD from this time period was 5.12% and this is the compounding rate of return. Now, 10 year CDs on average have always been about 0.35% higher per year than 5 year CDs, so it's safe to add 0.35% to this number for a total of 5.47% average compounding rate of return over this time period.
Now, with that being said, we all know that Long Term CDs from 2013 - today are only so low due to the Federal Reserve taking the Fed Rate down to zero, period. During the 1993 - 2012 time frame, you didn't have a consistent Fed Rate at zero throughout that entire time period and this is why you didn't have Long Term CD rates so low as they are today, which on average they are 2.3% - 3.15% today. Once the Fed rate returns to a more efficient standing, which should be in total by at least 2018 I predict, it's only assumable that the Long Term CDs and Long Term Brokered CD rates for 5 - 10 years will go to 3.5% - 4.5%, or an average of 4% compounding.
So my question at this point is this, considering the compounding (not average return, but compounding rate of return) of the Balanced Vanguard Funds since 1994 being at about 5%, do you guys think it's worth it for me to move my monies into those Funds when Long Term CD compounding rate of returns will be averaging about about 4%? Is it worth the additional potential 1% compounding rate of return over 30 years to deal with the "headaches" and "uncertainties" of being in the market? Plus you have to factor in expenses that will also come out of that 5% compounding rate of the Vanguard funds, which takes the potential to under 1% based on previous performance data.
I await your suggestions, also if I'm totally off base in terms of the average returns and compounding returns, please let me know. Again, my goal is to learn here and try to make the best decisions for the next 33 years for my passive investment portfolio.
Thanks a lot.
Last edited by jotucker99; 08-21-2015 at 04:02 AM..
you don't know what th differences are going to be. you picked a time frame to compare that had 2 back to back recessions and an almost total collape of the financial system.
looking at fidelity balanced fund i see 15 year 7.04% 10 year 7.02 and life of fund 9.44% and that is including the worst time frame since the great depression .
you are making an assumption about everything that may be way off base . no one can answer your question .
back in 1987 stocks sucked for years leading up to it . then we had 17 years of almost 14% average returns from 1987 until 2003 . now i am not saying that will happen again but i am not saying it won't . we just don't know but if you are going to cherry pick time frames why not compare to potentially what you could give up instead of comparing it to what may have been a once in a lifetime period of time of way below normal returns .
they both can be just as much a guess as to what will be . you have to figure in the mix that interest is taxed at regular tax rates if held outside a retirement account , dividends and capital gains may have as little as zero taxes due if you make the zero capital gains tax bracket s or else you will have the lower capital gain tax brackets applied instead if held long enough ..
that alone can make a big difference even if the same return,
with market returns below average the last 15 years at some point there is typically a regression back to the mean and that could mean at some point higher than normal returns .
Last edited by mathjak107; 08-21-2015 at 04:30 AM..
Got it. The reason I'm going based on late 1994 is because the three funds I have picked out in Vanguard only go back to late 1994, their inception was on 9/30/1994. So I can't go back prior than that with those funds that I selected.
Now Wellington goes back to July 1st, 1929 which is 86 years ago, but I can't use a metric like that because I'm not going to be around for 86 more years. I have to really use a metric of 15 - 30 years if we are using past performance as the metric, to do my estimation of where the fund will grow over the next 15 - 30 years.
So with Wellington, I can't find anything beyond a 15 year track record other than going way back to 1929. This is also doing a collective average return of just over 7% at about 7.55% Vanguard Wellington
But again, this is the collective average return, not the compounding rate, in which can't we assume the compounding rate is likely to be about 5.25% for this fund give or take over this same 15 year period?
Again, we are back to the question of considering the Long Term CD rates are going to HAVE to come back up when the Fed increases the rate, when those 5 - 10 year CD rates are back to 4% on average (compounding) is it worth it to go through the Market for 30 years dealing with the headaches for an additional 1%? Wellington's expenses are .26% so again we are taking either slightly less than 1% or just at 1%, based on this previous performance data.
jot keep in mind once we get past the initial fed increase , rate increases and inflation usually are in lock step so if you increase one usually you have to increase the other and that is the killer . real returns end up all over the place ranging from negative to positive .
here are historical real return comparisons .
looking at how t-bills tracked you can see a huge difference in real returns after inflation . 3 and 5 year cd's have not paid more than corporate bonds so that can be a guide . you would be somewhere between t-bill and corporate bonds . again , these are after inflation adjusted returns not nominal .
for an excellent education on the subject you can read this study . page 7 has some interesting result compilations .
Both investments have to deal with Inflation (Balanced Fund and the CD Portfolio). When you look at the research I've done and the links provided, in combination with the Balanced Funds I would choose based on a combination of Stock/Bond US and International Indexes, you see the 7% average rate of return over the previous 15 - 20 years give or take. But when you calculate the compounding rate, which is the rate that's IMPORTANT, you are getting about 5% over that period of time.
Long Term CDs of 5 - 10 years had about the same compounding rate until the Fed significantly lowered the Fed Rate causing CDs returns to crash to the floor and also helping to create the current over-valued Stock Prices that we have right now.
The Fed is going to increase the rates back, when that happens there will be a contraction of the Stock Market in general as the "air" is let out of the bubble. Peter Schiff also covers this pretty extensively.
As the Stock Prices go down, Long Term CD rates will go back up, creating the balancing effect.
So if we are right back to over the next 15 - 30 years, Long Term CD rates averaging 4.5% compounding for example, while Balanced Funds average 5.25% compounding for example, do you think it's worth it that I move monies out of my Long Term CD Portfolios into these Balanced Funds for no more than a 1% additional per year return?
I have provided research and links to show you guys my analysis on this. In terms of beating Inflation, both the Balanced Funds and the Long Term CD Portfolios beat Inflation, even if Inflation is going to average 3% going forward which I don't think it will, I think it will average about 2% if that much over the next 20 - 30 years.
"there will be a correction when the fed raises rates "
and you know this because ?
\
actually when the fed raised rates in the past the markets did well because if rates go up it means the economy is doing better .
it also matters where rates are when the increases happen
again ,you are making a statement with no actual basis .
real returns will likely not be close at all between 3 or 5 year cd's and equity's or even a balanced fund . just as there has been a huge spread historically . returns without inflation adjusting are meaningless .
Last edited by mathjak107; 08-21-2015 at 10:25 AM..
Okay, at this point I'm confused over some of the things you are talking about?
- What do you mean how do I know Stocks will take a decrease once the Fed Rate increases? Everybody knows this is going to happen it's basic Economics? Stocks are over-valued right now because the Fed Rate has driven money out of Bank related investments (like CDs and general Savings Accounts) into the market. You like Peter Schiff I'm sure, well Peter Schiff talks about this constantly.
- I showed you 3 different Vanguard Life Strategy Balanced Funds, then I showed you Vanguard Wellington. You can see the average returns over a 15 - 20 year period has been just over 7%. But that's not the compounding rate of return, I don't have the actual compounding rate of return for these but you can assume it's around 5% give or take. The S&P for example has had a 12% average rate of return over a long period of time, but that's not the compounding rate, the compounding rate of the S&P has been 8% - 9%.
- The only way the Balanced Funds make sense, is if Long Term CDs do not go back over 4% once the Fed Rate increases, which I think is highly unlikely because they are running at around 3% right now even with the Fed Rate at the bottom of the floor.
MathJak I just want you (seeing as though you have 30 plus years experience in passive investing than I do) to look at this data and give me an honest assessment of do you think it makes sense to go through the roller coaster for an additional 1% compounding rate of return over the other option?
The Balanced Fund would have to give me at least 3% in compounding average rate of return over the Long Term CDs or it's not worth it to me. I'm not doing this for an additional 1%, that makes no sense.
that is where you are wrong . for rates to increase more than a click the economy has to be humming , people working and inflation showing signs .
all that is traditionally good for stocks . rates rising to fast is not good . rates rising slowly are just fine and stocks respond well usually .
the returns for the funds are expressed as compounded total returns .
you can play with compounding returns vs average here to see the difference .
that is where you are wrong . for rates to increase more than a click the economy has to be humming , people working and inflation showing signs .
all that is traditionally good for stocks . rates rising to fast is not good . rates rising slowly are just fine and stocks respond well usually .
I agree, but I don't think Yellen is going to increase the Fed rates "fast" but they are going to increase them gradually. My prediction is that by 2018 the Rates would have risen to the point where Long Term CDs are back over 4%.
You always mention that you can't go based on short term analysis, but long term, which is at least 15 years. The analysis I'm looking at that I've posted, shows without the Fed dropping rate to the Floor, Long Term CD compounding rate of return has been just about the same as a Balanced Fund's compounding rate of return, so that begs the question why even do the Balanced Fund at all?
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
