Inflation averaged 7.66%. The SP 500 began the decade at 92.06 and ended at 107.94. Average dividend yield on the SP 500 during that decade was well below the rate of inflation too.
And on top of that, you had tax bracket creep, meaning as inflation increases you suddenly find yourself in a higher tax bracket even though your real purchasing power has actually eroded! (For a REAL WORLD example of tax bracket creep just read my book where I discuss over and again how taxes on your Social Security benefits are calculated. Let’s put it this way, you remember watching Dallas? Well, the Social Security tax brackets haven’t changed since JR was shot. Literally)
So, high inflation. Anemic stock returns. Average dividend payouts. Is it any wonder that going into the 80s some people would have taken the “safe” route and simply bought government bonds? Ironically, if you did do that you made the investment of a lifetime. Government bonds actually returned MORE over the next 30 years than stocks..without the risk!
Those days are behind us now though. As I sit here on a cloudy Saturday morning in May 2019, the 10 year Treasury is yielding 2.531%. In 1980 it was yielding 11.43%. Thus, all you had to do to earn double digit, GUARANTEED returns for the decade to come was buy a 10 year Treasury bond. That’s it. If you bought a 30 year Treasury you were getting nearly 15%, a year, for each of the next 30 years, with NO RISK.
Right now 30 year Treasury’s are yielding 2.92.
“That’s great, Josh. But what’s the point?”
1. Just as John Bogle said, you should not extrapolate PAST returns into future expectations, for bonds in particularly. Historical returns for bonds are absolutely meaningless because we know with 95% certainty what future returns will be… all based on the current yield of when you bought the bond.
2. If you can survive the 70s you can most likely survive ANYTHING. Obviously, that’s a loaded statement because situations change, quickly too. But the 70s were a very interesting time to investigate in order to see how one could have done using various retirement planning strategies.
So, I’ve begun a video series called Barbell Investing for Retirement.
In this series we examine a bunch of different scenarios on retirement planning. We start by having a portfolio divided into two simple parts, a cash plate to cover 5 years of expenses and a stock plate for growth.
How much you put on each plate is contingent on your annual income needs. If you need $35k, a 7% distribution, and have a $500k portfolio we take 5 years of that distribution amount, ($175k), and put it into the cash plate. Then we’d have $325k left to put into the stock plate.
If you need $30k of cash, a 6% distribution, we’d take $150k and put it into the cash plate, leaving $350k in the stock plate, and so on.
It’ll be interesting to see how long the money lasts given the horrendous investment environment of the 1970s. Now, I do start the scenarios in 1963, and the reason for that is because that was the further back I could go for data without really digging too deep. Secondly, the time period of 1966-1982 really was a bad time to be an investor.
I’m also going to try a couple other strategies for the barbell approach. As stated above, we start with 5 years of “cash”. What if we do 3 years of cash instead? What if we do 3 years of cash and only pull from the account that grew the most the previous year?
Lots of fun “what ifs” to study, no?
Ironically, we can back test this all day long and still it won’t matter. Why? Because as stated above the past is NOT indicative at all of the future. We have no idea the course of the action future human beings will take that determines the fate of your investments.
What if Nixon didn’t sweat on live TV in his debate with Kennedy? What if a crazed rabbit never came upon Jimmy Carter on a lake? What if Hillary never uttered the term “deplorables”? And these are just actions that affected our political leaders at that time. Did these specifically cause the course of the world to change? Who knows?
Maybe more importantly though, what if you took that job in Duluth as opposed to Des Moines. How did that affect YOUR course of events? Again, who knows? And again, it’s irrelevant now because what’s done is done, never to be lived again.
But…the curious nature in me still holds out a suspicion that IF X did successfully happen during a tumultuous past does that at least give me something to use as a guide for future uncertainty? I think so. I hope.
Certainly better than to rely on a famous TV lady saying “you need $10 million dollars to retire!” Or a “fiduciary” investment advisor who has every incentive to keep you invested and thus tells you a mortgage is good because you can deduct the interest. And also you’re certainly going to get a better rate of return on your investments than the mortgage interest you’re paying. Really? And if that doesn’t happen, can I get my fees back???
Anyway, again, the playlist is here. I’ve got 3 videos in there so far. I’ll add a 4th today where we take a 6% distribution yield and reduce expenditures by 10% in year 10. I’ll be adding various scenarios as we go forward as well.
So stay tuned!