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April 28, 2006


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I thought that you kept from answering personal financial questions by making it so that nobody could email you at the address you publish on here? Heheh.

As one of your regular readers, I'll be happy to comment on your policy. I agree completely. In addition to not necessarily having the expertise to answer specific personal finance questions, you are unlikely to have all of the information you would need to answer them.

That isn't to say that you should answer questions. But the sort you absolutely should answer are exactly the sort that you should answer publically, along the lines of: "I've heard about the new Roth 401(k)'s. Where can I get more information?" or "Have you read this book or article and do you have a comment or review?" One of the great things about blogs is that the readers themselves often provide links to additional information. I can't take credit for doing that here.

As for the question about the future real rate of return for various assets, I think it is worth remembering that all sorts of rates of return are stated by various people as benchmarks, estimates and forecasts. Some of them are real and some are nominal. The nominal rate of return is, of course, a raw number. On bonds and interest bearing accounts, it is the stated interest rate. The real rate of return is adjusted downward by the inflation rate. I prefer to do all of my calculations in terms of real rate of return.

Historically in the US, stocks have had a real annualized return of about 7-8%. It is highly variable, year to year. Taken over longer periods, it gets much more predictable. Some people will even quote a number of 7.81%. I'm not buying. My annualized return over the next 20 years on the stocks I hold will not be 7.81%. I'm hoping for better, but I would be shocked to hit that number dead on.

When I'm doing my planning, I try to plan pessimistically. I assume that my return will be on the low side. I assume that I will have lean years in which I won't be able to save as much. Every year that turns out better than my forecast provides an additional cushion when things go wrong. My forecasts aren't based on a 3-4% real return, but I do consider whether I can reach my goals if I average 6% annually over the next 20 years because I have several years that are below par.

I just want to let you know how beneficial your blog has been to me personally, and, I'm sure, to your other readers. The level of security I will have in my retirement (in 20 or so years) will reflect in large part what I've learned from you. Thanks for this valuable service.

Thank you, Beloml. That was very kind of you to say.

That's why I do what I do here at FMF -- to help all of us manage our finances better. I appreciate the fact that you let me know it's working. :-)

this was touched on by another commentor, but that was 3-4% *real* returns, adjusted for inflation and fees. The 8%-10% range would be before adjusting for these factors.

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