savings rate

Apache is functioning normally

Let’s chat about the stock market. Specifically, let’s think about average investors like me and you. And let’s ask: how much money do we need to invest to become a millionaire?

First, we need to set some ground rules. It’d be easy to say, “If you invested in Apple stock in 2002, you could have 1000x‘d your money…boom, you’re a millionaire.”

But that’s not how reality pans out. In fact, we need to apply logical rules to our investing framework. The rules that I espouse on The Best Interest (and that matter for today’s article) include…

  • Dollar-cost averaging. It’s too hard to determine when the market is overvalued or undervalued. Instead, the long-term investor should commit to a consistent investing schedule (e.g. $300 every month, or 10% of every paycheck, or $10,000 yearly). In fact, waiting to “buy the dip” is demonstrably dumb.
  • Investing (in stocks) for decades. Simply put, stocks are not a short-term investment. They’re decades-plus. The data shows why.
  • Diversifying, a.k.a. buying the whole market. History proves how challenging it is to find the “needle in the haystack” in the stock market. This article dives into further detail.
  • Buy-and-Hold’ing. We don’t sell our investments when the headlines get scary. We hold. The past month has provided a terrific real-life example of why that is, as did the transition from 2022 to 2023.
  • We reinvest our dividends. This rule is a bit in the weeds but a complete no-brainer.

Make sense? Let’s now put these rules to work. I went back to 1950 and grabbed all the S&P 500 data (which will act as our proxy for “the stock market”) through today.

Then I asked, “If an investor followed our rules, how much would they have needed to save and invest to become a millionaire?”

***Important note: I’m also inflation-adjusting all this data to 2023 values. Being a millionaire in 1950 was drastically different than being a millionaire today. Hence, everything you see below is adjusted to modern terms to make our understanding easier.

We know compound interest is a powerful tool, so we expect millionaire status to get progressively easier over longer investing periods. But we also know the market can be volatile. Two 20-year periods can provide drastically different investment returns.

So let’s compare 10-year periods against 20-, 30-, and 40-year periods. And we’ll look at all 10-year periods from 1950 to today (same for 20-, 30-, and 40-year periods) to show how much variability/volatility exists.

The Data: Becoming a Millionaire in the Stock Market

This chart shows every 10-year period from 1950 to today.

  • We label each period by its first year; the X-axis shows that.
  • We then look at the stock market returns for each period to ask, “What annual investment would have gotten us to $1 million over this period?” The Y-axis shows that dollar amount.
  • e.g. the left-most bar represents the period from 1950 to 1959. Over that period, a $42,463 annual investment would have grown to a $1M portfolio.

For these 10-year periods, the average investor (the dotted red line) needed to invest $71,595 yearly to reach $1 million.

But the data that sticks out to me is the number of periods with a required investment above $100,000 annually. The 1965 and 1999 starting years are prime examples.

This is a glaring problem! If you’re investing ~$150,000 for 10 years (for a $1.5M total investment) and only end up with $1 million, you lost significant capital. Not good.

My takeaway: even over 10 years, the stock market can be volatile. We need to zoom out further. Let’s look at the 20-year data.

The average investor (in red) must commit $27,203 annually to become a millionaire. For those keeping track, that’s a $544,069 outlay over 20 years that grows into $1,000,000.

This data shows a few periods at or above the $50,000-per-year mark ($50K times 20 years = $1M). In other words, these periods showed near-zero, outright zero, or negative returns over 20 years. Examples include the period starting 1955, ’58-’60, ’62

But most periods provided legitimate, absolute returns. That’s great.

But can the average person save $27,203 per year? Then repeat that for 20 years? And this begs a bigger question that we won’t chase down today: is $1M the right goal in the first place. This is good food for thought.

Let’s move on to the 30-year chart.

The average investor (in red) must commit $11,347 annually to become a millionaire. That’s a $340,432 outlay over 30 years that grows into $1,000,000.

None of these periods flirt with zero or negative returns. The “worst” period was 1952 – 1981, which required a ~$23K annual investment (or ~$695K total) to grow into $1M.

And finally, the 40-year data…

The average investor (in red) must commit $4725 annually to become a millionaire. That’s a $189K outlay over 40 years that grows into $1,000,000.

Again, none of these periods flirt with zero or negative returns. The “worst” period was 1969 – 2008, which required a $7500 annual investment (or $299K total) to grow into $1M.

The Power of Long-Term Investing

The 30-year and 40-year charts are particularly encouraging if you break them down into monthly terms.

$1000 per month is powerful.

  • For most 30-year periods, $1000-per-month made you a millionaire.
  • For all but three 40-year periods, $1000-per-month made you a multi-millionaire.

“But $1000 per month is a lot!”

I hear you. But between 401(k) contributions, employer matching, IRA contributions, after-tax investing, etc…$1000 per month is a reasonable goal.

If you’re in your 20s or 30s, set your baseline investing goal at $1000 per month. You’ll be setting yourself up for terrific long-term success.

What If You Don’t Have 3+ Decades?

If you’re reading this at age 50, you might not have 3 or 4 decades to wait for the stock market’s compound magic. What to do?

Let’s consult our trusty bucket method. Think about your current assets and savings based on when you’ll need them in the future…

  • The money you need in your 50s –> Avoid the stock market. Too risky.
  • The money you’ll need from age 60-65 –> you can introduce some stocks, but as we’ve seen today, positive returns aren’t guaranteed.
  • The money you’ll need from age 66-70 –> stocks are becoming increasingly enticing…
  • The money you’ll need from age 70+ –> 100% stocks is reasonable.

In summary, a fair portion of this 50-year-old’s assets should not be exposed to the stock market. Bonds, for example, are more appropriate.

Despite that, some of their money still has a 20-30+ year timeline. That money should be exposed to a risk asset like stocks.

Financial planning provides the backbone for these types of allocation decisions.

Just Start…

My investing journey started at age 22 with my first employer’s 401(k). Unsure what I was doing, I decided to learn.

11 years later, here I am.

There’s no guarantee the stock market will make me a millionaire. But history is on my side, and I’m controlling what I can (e.g. my monthly savings rate) to make it happen.

I encourage you to do the same.

Thank you for reading! If you enjoyed this article, join 7000+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.

-Jesse

Want to learn more about The Best Interest’s back story? Read here.

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Source: bestinterest.blog

Apache is functioning normally

Apache is functioning normally

This article originally appeared on Radical FIRE and has been republished here with permission.

When you’re planning on moving in with your partner, there are important money conversations you need to have before moving in with your partner. 

I’m planning to move in with my partner after we complete our four-month mini-retirement, where we travel to Central America together. I assume that after we’ve spent so much time together abroad, we should be fine with moving in together. Just one thing that should be discussed is our finances. 

Money Conversations with Partner

Moving in with someone requires some financial logistics to be arranged. You need to discuss who is paying which bills, who is responsible for what, and more. 

You know I love having money conversations, with my friends or with my family. I love to talk about money, that’s why I write on the blog. When no one wants to hear me talk about money for the gazillionth time, I’m just writing a blog post about my money thoughts.  

Now onto the money conversations that you need to have before moving in with your partner. I’ve had all these conversations over the past weekend just to know we’re on the same page. I recommend you also have them when you’re planning to move in with your partner!

Money Conversation #1: Do We Share Our Stuff?

I mean, is everything that was once mine now ours? Is everything that was once yours now ours? It’s about the tangible things that are in the house, not including money. This is something to think about before moving in together. 

If you have things that your partner also has, should you bring it? Or can you use one and get rid of the other one? If there are things that you don’t have yet but you know you need? Will you buy it together or will one of you buy it? 

In relation to that, we get to the next point.

Money Conversation #2: What Will We Do If … ?

You don’t go living together with your partner unless things are serious between you. You need to consider the possibility of the relationship ending sometime very far in the future (OMG!). Breakups and divorces are a possibility that needs to be considered. 

If you’re sharing things, what will happen after you stop being together? This is important for things like furniture and electronics, following the previous point. Will you share everything together, yes or no? 

Related read: 10 Ways Divorce can Affect your Credit

Money Conversation #3: Is The Money Going to Be Ours, Too?

It’s important to think about if you’re going to join finances or not. It’s a very personal thing to think about and it will differ for everyone depending on their situation. If your partner makes a lot less, you can decide to pay more towards the fixed monthly payments. Or vice versa. 

Just keep in mind that you should do something that makes you comfortable!

For me and my partner, we will not join finances. We’re having separate financial goals at the moment. I’m working towards my goal of financial independence and keeping a savings rate of over 80% consistently until we go on our travels. Meaning we’re not on the same page concerning money goals. 

That’s okay for now. He will look for a job after we return and we will decide how we will go from there. 

For our expenses, we will be splitting everything equally. I currently make more than my partner. The rent will be low enough for him to comfortably be covering half. If in any given month he cannot pay his portion of the rent or there are any other difficulties that won’t allow him to pay half of the rent, I will of course help him. 

Related read: How Renting Can Impact Your Credit

Money Conversation #4: How Will You Deal with Changes?

What if I lose my job? Or my partner can’t find a job after graduation? What if we need to move for work or someone can get a promotion abroad? All scenarios can happen. It’s extremely difficult to think about what you want to do when you’re not yet in the situation. It’s a good thing to discuss these matters a little in advance.

If you don’t know now how you will deal with these kinds of changes, think about how you’re both dealing with changes until now? When you’re both quite relaxed under changes, it’s unlikely that those changes will put stress on your relationship. If you’re both sensitive to changes, it might lead to stressful situations and it might be good to address those things at this moment.  

Money Conversation #5: What Do You Value Spending Your Money On?

Before you’re moving in with your partner, it’s important to talk about what you value spending money on? It can significantly differ among people. One person loves to go on big holidays, the other likes to drive their dream car, wants to have a big space to live in, or likes to have the latest tech gadgets. It’s good to know what they value. 

Before you’re moving in together, it’s important to understand what they value and what is important to them. The habits they have around the things they value may have an impact on your joint life together. 

My partner loves playing games and spends a great deal of time playing games both online and offline. He used to spend a good amount of money on getting new games, getting new consoles, or updating his computer. Currently, he doesn’t spend too much money on those types of things, but it’s still something to keep in mind when you’re going to live together. 

I used to buy a lot of clothes, but since getting on my clothing ban I haven’t bought any clothes. On the contrary, I’ve sold a lot of stuff around the house when I decided decluttering was the way I wanted to go. I won’t say I’m exactly a minimalist, but I’ve gotten rid of certain habits and I’m starting with a clean slate when I’m moving in with my partner. 

When we’ve talked about this point, he also asked me to give away/throw out all of the stuff I don’t use anymore. That way, we can start fresh when we’re moving in together, instead of just moving all my stuff simply from one place to another. 

It’s good to know what are the things that you might want to spend more money on, that you want to treat yourself on. For me and my partner that’s both the same thing: traveling. It’s important to know when money gets saved towards that goal and how much money will go towards that specific goal. 

Money Conversation #6: Where Do You Want to Go?

It’s important to discuss where you want to go in life? I would like to know how temporary our living situation will be. Are you or your partner already planning for a different job, relocation, or promotion? Do you want to have a family? Do you want to live in your city apartment with one bedroom, or do you want a big house in the countryside with a huge garden and two dogs?

You can address many questions in order to address where you both want to go. 

When we started dating, I told him I would go to the USA for five months shortly after. I am a dreamer, I love to think about what I want to do in my life and imagine where my life might be going. I already have some of my dreams about starting my own business, traveling, working abroad, and financial independence / early retirement. When I noticed our goals are compatible, even a few years down the line, that gives a huge boost to your relationship up until that point. 

Relationships require a serious amount of honesty, openness, and communication. You’re a team that will figure everything out that will be thrown at you, you’re in this together. 

Source: credit.com

Apache is functioning normally

Since 2015, my forecasting models have predicted the 10-year Treasury yield would stay in the range of 1.60% to -3%. Tangential to this, the next recession treasury yields, and thus mortgage rates, would drop because lower growth would drive yields and rates lower. The four-decade prolonged downturn in the rate of growth in the economy and inflation mirrors falling bond yields and mortgage rates.

Before the pandemic, it was hard work trying to convince other economists that we would see a 30-year fixed mortgage rate drop below 3%. In 2018, a crafty photographer caught the bemused look on my face when one of my colleagues chastised me for predicting rates would go lower instead of higher. 

Evangelizing a consistent thesis for years on end is a bit boring, but I would rather be dull and steady than the alternative. I admit I am a big fan of sticking to economic models that allow for reliable predictions, repetitive as they may be, until different variables change the course of the economy. 

Today, in the middle of a world pandemic, my bond market model is allowing for a 30-year fixed mortgage rate to drop as low as 1.875%  – but the questions remain, will it, and what will it take to get there?

Earlier this year, before the 10-year yield broke under 1%, I wrote about the one thing that could drive yields lower. In an article for HousingWire published on Feb. 3, I invoked chaos theory and the butterfly effect to explain how a virus outbreak in a faraway country could drive stocks, bonds, and GDP down in the US.

For Bankrate.com, before the 10-year yield broke under 1%, I predicted that recessionary yields would be in the range of  -0.21% – 0.62%. Yes, that is a negative 10-year yield. 

In the previous economic cycle, GDP went negative three times, and each time the dip was quickly reversed.  It took a pandemic, the most significant health and financial crisis in recent history, to put the U.S. into a recession. It wasn’t systemic problems but an outside force that led to the collapse of the economy. 

On Monday, March 9, the morning print for the 10-year yield was 0.34%.  Then a massive stock market sell-off created margin selling of the bonds, which took the yield back above 1%. Since then, bond yields retreated lower to 0.53% as of last Friday. For the most part, it has been trading above 0.62% until recently as the market waits for another disaster relief package. 

Even with these historically low yields, we still have fixed mortgage rates drop below 3% but not below 2%. The question remains: What would it take to get the 10-year low enough to get a 1.875% mortgage rate on a 30-year fixed?

First and foremost, we would need to see negative yields stick with duration. The spread between the 10-year and mortgage rates has been wider during this crisis, as banks were dealing with their own mortgage market meltdown in March and April and needed time to rebalance their books. Only recently, mortgage rates have been getting better but still should be lower today. 

Can we expect to see negative yields with duration? The short answer is not likely, and here’s why. The U.S. economic data is getting better, and I am not just talking about the V-shaped recovery in housing. Control retail sales showed one of the best year-over-year growth prints since the year 2000. Manufacturing survey data is positive (be skeptical about PMI data for now), and the St. Louis Financial Stress index just hit a new Covid19 low at a – 0.4612%, zero is considered normal stress.  

Additionally, while we still have high unemployment, we also have a savings glut due to the CARES Act and a lack of spending options early in the crisis. As retail sales grow, the personal savings rate has fallen. 

Other economic data lines are also showing improvement to the extent that we are likely seeing a rebound in the GDP in the next quarter. Also, the government, both on the fiscal and monetary side, is well embedded into the economy now in August. This is much different than what happened in March. Also, the initial fear of having a virus pandemic and not knowing what was going on in March and April is slowly leaving us. 

For us to see mortgage rates drop below 2%, we would need to see a retracement of many data lines that are showing the first glimmers of economic recovery.  These are the factors that could drive this to happen:

1. The U.S. government stops or significantly reduces fiscal stimulus. 

2. A stock market sell-off again. Since the market is near all-time highs, a pullback is not unlikely. 

3. Credit stress rises again. This is a certainty if the government does not continue with its fiscal stimulus programs.

4. A terrible winter that increases infection rates and deaths. This is the wild card for America right now. We made good progress on flattening the curve initially, and then we got sloppy. We are trying to reopen schools, have an election, and will be dealing with the natural uptick in cases due to winter sickness. Coping with the second wave of infections this winter could seriously dampen our economic progress. (I am holding out hope that by Sept. 1 the new-case growth should be down noticeably from recent highs) From this level, we have a better footing to deal with the winter. However, we need to be mindful that winter is really coming, and this isn’t a show about dragons we can choose not to watch. 

It would take a lot of bad news to push mortgage rates below 2%, and that is why I am rooting against this from happening. The AB (America is Back) economic model states that we want to see the 10-year yield above 1%. In time with more consistent growth, we will get there. 

So mask up and be smart.  Let’s all help this recovery take off again and hope we don’t see a 30-year fix at 1.875%.

Source: housingwire.com

Apache is functioning normally

I’ve seen a number of articles lately predicting that mortgage rates will rise in 2021, a couple even from other HousingWire contributors. The rationale for these predictions have been erudite, multifactorial and complex. I am, on the other hand, a simple man. Most days I don’t even wear shoes. When I think about the direction of mortgage rates there is only one factor I consider – and that is economic growth.

Over the years I have professed that the rate of economic growth pretty much explains the whole lasagna so that should be the entire focus. When the economy gets better, bond yields rise and mortgage rates follow. When the economy slows, bond yields drop and mortgage rates follow. I expect mortgage rates in 2021 to stick to the same pattern.

The trick is to find a respectable range within each economic cycle. I started to incorporate bond yield forecasts for my yearly prediction articles and every year since 2015 I had said the same range. The 10-year yield would range between 1.60%-3%. In 2020, that range broke but continued a long-term downtrend in yields which started in 1981.

Before the 10-year yield broke below 1% this year, I wrote this year that if the U.S. went into a recession the 10-year would trade between -0.21% – 0.62%. On the morning of March 9, the 10-year traded at 0.34%. Since that low point the 10-year yield has been above 0.62% for most of the time during the COVID recession. This has been a consistent strong indicator for me, that, despite all the drama in various sectors, the bond market expected the economy to improve.

When the COVID recession hit the U.S., I proposed an economic model to track the progress of the economy. I called this model the AB Model for America is Back. The last variable that needs to be realized for this model to predict that the American economy is growing again is for the 10-year yield to break over 1% and stay in the range of 1.33% to 1.60%

Time is running out for this last variable to be checked off in 2020, but it remains within the realm of possibility. Here are the factors that can either drive yields to break above 1% this year or prevent this from happening.  

1. COVID infection rates

Presently, the number of COVID-19 cases in the U.S. is rising again. If this trend continues, as I expect it will as we go into the winter months, we will reach new daily highs in the number of cases. The risk to the economy is that if new cases lead to such high levels of hospitalization rates, the government will be forced with much harder restriction nationally to combat the spread of the virus. Without that, the risk to the economy isn’t as great as some might think now.

Our country has learned how to continue to consume goods and services even with a virus that is infecting and killing Americans every day, the ups and downs of infection rates haven’t impacted the bond market or economic data too much recently.

Take the recent retail sales data as a case in point. Following the drastic dip at the beginning of the crisis, retail sales have now gone above the pre-COVID numbers. We need to credit the disaster relief package for some of these gains. Secondly, the fear of COVID-19 has faded away from American behavior, which means we went from hoarding toilet paper to buying homes, cars, driving more and purchasing more stuff on-line.

But, even with disaster relief, it’s impossible for the U.S. economy to run anywhere near full capacity with this virus still active in our society. Even though we have seen V-shaped recovery data in multiple sectors, certain parts of the economy are still at best treading water. Energy prices for one, prove this on a daily basis.

Eventually we will have a vaccine and multiple effective treatments to fight the virus and these will be the missing links to get our economy back to its traditional slow and steady growth like we had in the previous expansion — the longest economic and job expansion in history. 

2. The election and more disaster relief

The disaster relief aid distributed to distressed Americans this year actually did what it was intended to do. Due to the fiscal aid, real disposable income and the personal savings rate have increased this year to levels above those of pre-COVID times. Even though the effects of the initial boost from the $1,200 check and enhanced unemployment benefits are fading as our politicians continue to argue about what to do next, personal savings and disposable income remain higher than 2019 levels. 

If we had not implemented the massive fiscal disaster relief, and monetary actions from the Federal Reserve, I believe the bond market would still be in the recessionary range of – 0.21% – 0.62%. In my opinion, we need to continue distributing disaster relief to the economically distressed until the unemployment picture dramatically improves. I don’t expect the U.S. to run near full economic capacity until either the treatment for COVID improves to the point that only a very small percentage of cases require hospitalization and/or an effective vaccine becomes widely available. 

I have to wonder why Republicans have been so resolute in their refusal to give President Trump months ago the trillions of dollars needed to juice the economy going into the election. Taking the uncertain state of the disaster relief away would have been a much-needed feather in Trump’s cap. After all, when it comes to winning elections, “it’s the economy stupid.” 

I suspect that certain Republicans simply don’t believe Trump can win this election and they don’t want to pass anything that could help the economy during a Biden presidency. Also, Democrats have a 1.8 trillion disaster relief bill offered from Republicans ready to go, and trying to play your political hand too much just means a lack of disaster relief right away.

I know some would say that some Senate Republicans won’t accept the $1.8 trillion disaster relief package that the president wants now. However, I believe President Trump would get them back in line if the Democrats accepted the $1.8 trillion disaster relief package that the White House has offered. Maybe there’s a quiet agreement among politicians that something will get done before the election that is not known to the public. I know a deadline has been issued by the Democrats to get something done this week, so hopefully something gets done. For me, politics is the same always, Poly, Ticks. I regret my cynicism, but can’t shake it either. 

In any case, the bond market, and thus mortgage rates in 2021, could rise if we get a sweep for either party. If Biden wins the presidency and the Democrats get the Senate, we can expect a lot more fiscal disaster relief will be forthcoming. If President Trump wins the presidency and the Republicans hold the Senate, I likewise expect a disaster relief package will be passed right away to support the president and the American people. 

However, if Biden wins the presidency and the Republicans hold the Senate, then we can expect the Republicans to reprise their favorite “We are broke” song and dance – and hold back additional disaster relief as much and for as long as they can. This third scenario would be a factor in keeping bond market yields from rising. However, I believe a proven, effective COVID-19 vaccine and treatment can offset a smaller-than-anticipated disaster relief package. 

GDP growth will be comparatively high in Q3 because we are working from the mother of all low bars. It will be what happens in Q4 of 2020 and the first three quarters of next year that will guide the bond market. Don’t expect the 10-year yield over 2% or mortgage rates over 4% in 2021 until we get a vaccine, approved treatments and more disaster relief. Remember, we have near 17 trillion in negative yields around the world as the world is dealing with the economic ramifications of COVID-19. As we can see with the recent jobs report, we have a lot of work to do here in America to get us back to the employment level before COVID-19.

To say that we have a lot of drama events that are about to occur from now to the end of the year would be an understatement between the election, rising COVID-19 cases and the dispute on more disaster relief. It’s a lot on the plate for the last 11 weeks of the year. Plus, the family talks at Thanksgiving this year! Even if it’s a zoom event, there might be a lot of intense family discussions.

Just remember, the bond market will get ahead of consistent economic growth, even if it’s between 1% -2.5%. We want to see higher bond yields and higher mortgage rates as that would indicate the last few economic sectors damaged by COVID-19 are healing. Once we can get the 10-year yield above 1%, then I can check my last variable in the America is Back economic model.

However, don’t forget: higher or lower mortgage rates in 2021 will be about the level of economic growth, positive or negative. What I discussed above are some factors that can play into that for the rest of the year.

Source: housingwire.com