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April 12, 2010


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What's the disclosure...? 'Past Performance is no guarantee of future results'

10-12% average returns- you absolutely must include what period of time you are using. These numbers are worthless if you don't give us a yearly range/context.

So glad you brought up the CPI change in Calc... many dont realize this when doing their analysis. This is so important. (one reason they made the change is so the govt doesnt have to pay out as much on inflation adjusted benefits and debt. Which was a brilliant political move.)

Had I started investing the same amount every year for the last 5 years, I lost 3.14% every single year.
$100 investment every year compounding (account balance after cf)
CF0 100
cf1 204.9
cf2 337.27
cf3 455.82
cf4 387.17
ending 489.77

Total investment $500 less returns = $10.23 loss before inflation

If you move the -37% into cf1, you have positive returns.

What really matters with saving, and people fail to miss, is when positive and negative return occur in one's life. quoting averages fails to describe what can happen if major outliers occur at the beginning or end of one's life. I understand that is why you and everyone else recommends a shift from volatile asset classes to less volatile assets classes as one approaches retirement.

But what happens if, at 65, I have a 25/75 allocation and we have another "2008"?

Would that have been good advice?

I think that as you approach 65, after a lifetime of saving and investing, you have to be very careful. I'm pretty sure I would not be comfortable with that type of allocation, regardless of fees.

Just a note-I would be very much against having the capital gains tax at zero, seeing as the people who make money on capital gains are generally billionaires.
Why wouldn't we just have all income taxed at the same level? That seems like the least distorting technique in the broader economy, and it would help simplify an overly complex tax code.

StL Pastor --

What? I make money on capital gains and I'm nowhere near being a billionaire. And I'm guessing that most people who make money on capital gains are not billionaires.

That said, I do like the flat tax idea.

FMF, you are right, I was imprecise in my language. My apologies. Obviously, most people who pay capital gains taxes are not tremendously wealthy.

What I meant was nearly all capital gains accrue to people who have a massive amount of money already.
See this chart from Business Insider-
the top 1% wealthiest people own half the stocks and bonds in this country, and the top 10% own 90%,

Or this study, suggesting that nearly all (83%) of capital gains taxes are paid by people making more than 200,000$ per year,

Presuming revenue neutrality (a big presumption, I know), I'd much rather have a cut in income tax rates than capital gains tax rates, which would help people across more of the economic spectrum.

Thanks for keeping me honest.

StL Pastor --

That's what I thought you meant. ;-)

However I'd still not say that someone in the top 10% of wealth or someone who makes $200k per year is a person who has "a massive amount of money already." I couldn't find the net worth of someone at the 90th percentile of wealth (maybe you can point me in the right direction to get the info), but I'm guessing it's in the $1 million range or less -- certainly not a "massive" amount of money.

And, as we've learned here time and again, a high income doesn't translate to a high net worth (yes, there's more chance to be wealthy with more income, but it doesn't translate in many cases as people spend all they earn.)

To me, a "massive amount of money" is $1 billion. How do your statements bear out with that number? ;-)

Ok, so I'm being picky. I think we can agree that "most capital gains accrue to people who have a good net worth and/or a high income already."


Fair enough-
and thanks, you've inspired me to research!

Anyway, here's what I've found: Top 10% isn't massively wealth-you are absolutely right. It seems that it requires somewhere in the realm of 300,000$ to be in the top 10% of Americans in wealth (, which is not a lot of money (since the top 10% of income earners make 120,000$ per year, and I hope to hit this number before I hit 40.

On the other hand, interestingly, the top 1% of households,(who own 50% of the stocks and bonds) average about 15 million dollars per family, which I think we can all agree is a lot of money (

It is always a little mind blowing to be reminded of how different the top 1% is from the rest of the country.

StL Pastor --

Yes, it is. I'm trying to get to that top 1% myself. ;-)

BTW, GREAT info!!! I may use it for an upcoming post.

Cool-I would be honored!

The fellow that has been saving and investing according to your recommendation for thae last 20 years lost 40 to 50 percent of his nestegg in 2007. He stared at 25 now he's 45. So not only has he lost his money he's lost at leat 10 to 15 years of his earning yeras. Of course the conventional wisdom says he should buy more , average down, when the market craters. Unfortunately, he doesn't have the funds.
In todays world investing 75 % of one's retirement in equities is a ridiculus idea.

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