# Lump Sum providing a 7% inflation-adjusted return



## monagt (25 Mar 2011)

Call it a 7% solution. 
Assume a 7% inflation-adjusted return from a portfolio of U.S. and international stocks, bonds and cash — not overly aggressive, but an expected return that requires taking some risk.

How would I go about investing a sum to get the above?


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## jpd (26 Mar 2011)

Never never land - that's far too high a return to expect without taking on substantial risk


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## monagt (26 Mar 2011)

Link I based my query on.

http://www.marketwatch.com/story/start-with-10000-and-retire-a-millionaire-2011-03-25


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## jpd (26 Mar 2011)

If he's that good at investing, why is he writing articles and not making money?


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## monagt (26 Mar 2011)

I'm trying to figure a way of getting income and protection from inflation at the same time. (and protecting against capital loss as well)


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## jpd (27 Mar 2011)

UK, France and Germany sell inflation linked government bonds where the capital amount and the interest are indexed to a consumer price index. The interest rate on these bonds is quite low - around 1.5% I think. Of course, the UK bonds are subject to exchange rate risk.

The French government have a web site with lots of info


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## Jim2007 (27 Mar 2011)

jpd said:


> Never never land - that's far too high a return to expect without taking on substantial risk



On the contrary, by using a solid value investment strategy and saving regularly this is definitely achievable.  I know several people including myself who have been doing this for years!  In fact if I keep it up for a couple more years I should be able to retire at 55.

Now admittedly, I've had the advantage here in Switzerland that we pay no taxes on investment gains, but then the IRR on my portfolio over the past 23 years has been about 12.31%.  So 7% or 8% after taxes should be doable as well.

Jim.


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## Jim2007 (27 Mar 2011)

monagt said:


> Call it a 7% solution.
> Assume a 7% inflation-adjusted return from a portfolio of U.S. and international stocks, bonds and cash — not overly aggressive, but an expected return that requires taking some risk.
> 
> How would I go about investing a sum to get the above?



While this is definitely possible, it will require a lot of work on your part to achieve it.  There is no fund or similar instrument that you can simply invest in and forget about it.

The low risk approach to achieving this type of return is to adapt a value based approach to investing.  This calls for a lot of effort on your part to acquire the skills needed and putting in time to find suitable investments.

The other side is to save up the cash to invest, this means being frugal and living well within your means.

Good luck with that,

Jim.


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## monagt (27 Mar 2011)

I was referring to the nett income after inflation, tax, market ups/downs, TER of providers, commissions............................


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## Chris (28 Mar 2011)

I find myself agreeing with jpd and Jim2007. 
I agree with Jim that 7% after all deductions is definitely achievable, and I have exceeded this amount for many years now. But I would also agree with jpd that this would not be a low risk investment in the eyes of the general public. 
I follow the value investing approach too, and was introduced to it by my father who has used it for many successfully. It took a lot of time to learn and understand it, and also some costly mistakes along the way. To this day I spend a lot of time every week on investment research as I am always looking for new opportunities. 
Bottom line is that there is no easy way to achieve the envisioned returns, it will take a lot of time and certain level of risk.


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## PMU (28 Mar 2011)

Chris said:


> I find myself agreeing with jpd and Jim2007.
> I agree with Jim that 7% after all deductions is definitely achievable


I would expect a 7% real return over the long term is achievable in a diversified portfolio with an emphasis on equities, with dividends re-invested, implemented via index trackers and ETFs, and with re-balancing.  [This is what I do with my investments with satisfactory results.]  Prof Jeremy Siegel of the University   of Pennsylvania estimates stocks have had an average long term return of 6.5 - 7 % pa after inflation. He expects returns to be somewhat lower in the next couple of decades as does John Hussman http://www.hussmanfunds.com/html/longterm.htm.  But you should not do it using only USD denominated investments. If you do this you will be exposed to excessive currency risk.  While this may be attenuated in the very long term, if you are overexposed to foreign denominated assets, over short periods, the relative price movement of the EUR to the USD/GBP/JPY may significantly influence your returns.  



monagt said:


> Link I based my query on.
> 
> http://www.marketwatch.com/story/start-with-10000-and-retire-a-millionaire-2011-03-25


Also this article isn’t investment advice; it’s just some guy playing about with a compound interest calculator. His premise is that  if you invest 10 grand and then 320 per month (where did he get this figure?) and get the average stock market return of 7%, year in year out, you end  up with million in 40 years time.  He could just have easily said start with 1 dollar or euro, invest 320 per month and increase this amount by say 4% pa to look after inflation and you may also get a million in about 40 years.   If you get a spreadsheet and play around with the figures you’ll come up with something equivalent.


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## Firefly (29 Mar 2011)

Chris said:


> I find myself agreeing with jpd and Jim2007.
> I agree with Jim that 7% after all deductions is definitely achievable, and I have exceeded this amount for many years now. But I would also agree with jpd that this would not be a low risk investment in the eyes of the general public.
> I follow the value investing approach too, and was introduced to it by my father who has used it for many successfully. It took a lot of time to learn and understand it, and also some costly mistakes along the way. To this day I spend a lot of time every week on investment research as I am always looking for new opportunities.
> Bottom line is that there is no easy way to achieve the envisioned returns, it will take a lot of time and certain level of risk.




Hi Chris,

Only last night I've taken Benjamin Graham's "The Intelligent Investor" out of the book shelf having meant to read this ages ago. What other books/courses would you recommend as I too see myself being a value investor. Steady as she goes fits my style. Also, do you buy stocks outright or go with certain ETFs or similiar?

I know I've asked you heaps of questions already and am dreading the day your invoice lands in my post box! 

Thanks,
Firefly.


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## Chris (29 Mar 2011)

Hey Firefly, I'm quite happy to offer info on my experiences over the years.

The Intelligent Investor is an excellent book and one that my father introduced me to years ago. Once you are familiar with its content I would suggest getting the classic 1934 edition of "Security Analysis" by Graham/Dodd. It is not for beginners and you should take the approach of studying it and taking notes, rather than just reading it. I don't think it is still in print but I have found bookfinder.com very good for finding somewhat rare books. There are probably endless amounts of other books on value investing, but I think if you get to the point of understanding the above 2 you won't really need any others, it could just end up being confusing and possibly even wrong information. What I have found beneficial over the years is to simply pick up one of the books and re-read a couple of chapters, which reminds me that I haven't done this in a while. You are better off spending more time reading annual and quarterly reports than reading possibly too much about value investing.

Applying these techniques to funds and ETFs can be very tricky and time consuming as you would need to analyse the underlying companies individually. That doesn't mean that ETFs are not a good way to invest, their obvious benefit is the fees and purchase costs, and quite importantly the diversification they offer if you have a limited starting capital. Personally I mainly invest directly in equities after applying some basic value investing techniques. If I am not mistaken, it is mentioned in one of the books that tracker funds are useful to those that are not willing or able to put in the time and effort necessary to perform the research and analysis.

Best thing you can do is read the two books and then start analyising and keeping track of your findings in a spreadsheet.


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## Firefly (29 Mar 2011)

Chris said:


> Hey Firefly, I'm quite happy to offer info on my experiences over the years.
> 
> The Intelligent Investor is an excellent book and one that my father introduced me to years ago. Once you are familiar with its content I would suggest getting the classic 1934 edition of "Security Analysis" by Graham/Dodd. It is not for beginners and you should take the approach of studying it and taking notes, rather than just reading it. I don't think it is still in print but I have found bookfinder.com very good for finding somewhat rare books. There are probably endless amounts of other books on value investing, but I think if you get to the point of understanding the above 2 you won't really need any others, it could just end up being confusing and possibly even wrong information. What I have found beneficial over the years is to simply pick up one of the books and re-read a couple of chapters, which reminds me that I haven't done this in a while. You are better off spending more time reading annual and quarterly reports than reading possibly too much about value investing.
> 
> ...



Thanks Chris, will do. Just as a matter of interest, when you do buy shares, do you buy outright or put in place a sell order should they fall below a certain price?  I know individual shares are not to be discussed, but I am thinking of purchasing some shares in a well-known holding company associated with the "Intelligent Investor" book. I see this as one way to easily diversify some of my holdings. They're humble "B" shares by the way!


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## monagt (29 Mar 2011)

I normally start with a 25% stop loss & tighten up as the shares increase in value


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## Marc (29 Mar 2011)

So the real return on the "Market" over the very long term has been about 6%pa.

In order to get 7% real return you need to take more risk than the Market.

Financial economics tells us that if we buy small companies we are taking more risk than the Market and so have a higher expected return as compensation. Equally if we buy distressed or value stocks we can also expect a higher expected return.

The landmark study into the size and value premiums was published in the journal of finance in 1992 by economists Fama and French. They estimate the size premium to be on the order of 2%pa above the Market and the value premium to be around 4%pa.

The highest expected return comes from buying stocks which are both small and value.

We can test this hypothesis by comparing a measure of the global Market such as the msci world index with a global small value index.

Over the period January 1999 to December 2010 the MSCI returned 3.1%pa in US dollars

Whereas the Global Small Value index returned 12.7%pa over the same period.

Inflation as measured by german retail price inflation was 1.6%pa.

The conclusions I reach are that:

It is and has been perfectly possible to achieve an average real return of 7%pa.
You don't need to pick stocks as an index approach is available which will achieve the same effect but with less risk. The annual management charge is 0.5%pa.
A Market portfolio probably won't achieve this real return.
There is no guarantee this will be repeated but these returns were actually achieved through some of the worst Market conditions in Market history.
That said beware of averages ie BOD and myself have an average of 50 caps for Ireland.

Between 1901 and 1921 the real return on us stocks was 0.2%pa if this risk didn't exist you wouldn't be able to expect 10%pa returns at all.

[broken link removed]


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## monagt (29 Mar 2011)

Marc said:


> It is and has been perfectly possible to achieve an average real return of 7%pa.
> You don't need to pick stocks as an index approach is available which will achieve the same effect but with less risk.
> The annual management charge is 0.5%pa.



Can the Index Approach @ 0.5% be clarified???


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## Marc (29 Mar 2011)

Sure we offer Irish investors access to portfolios of institutional class investment funds from three major US fund managers who between them manage around $5trillion.

I just picked one index we use to illustrate a point. If I had picked Emerging Market small value stocks the return was 20.9%pa over the same period. This is why one should never focus on past performance or make decisions based on limited information. How many people looked at the 12% return and decided that was the investment for them I wonder without even being aware of the emerging Markets return?

These indexes are not available for direct investment and are therefore not suitable for the DIY investor.

However we work with a select group of affluent investors in ireland and assist them in making smart decisions with their money. We also work with a network of advisers across Ireland who can offer these portfolio solutions to investors and pension funds from as little as €50,000.

None of the funds we recommend pay any commission and therefore these portfolios are only available through fee-based advisers.

[broken link removed]


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## Chris (30 Mar 2011)

Firefly said:


> Thanks Chris, will do. Just as a matter of interest, when you do buy shares, do you buy outright or put in place a sell order should they fall below a certain price?  I know individual shares are not to be discussed, but I am thinking of purchasing some shares in a well-known holding company associated with the "Intelligent Investor" book. I see this as one way to easily diversify some of my holdings. They're humble "B" shares by the way!



I never use stop losses for my investments and I only check share prices of my portfolio on a weekly basis, sometimes less often. In my opinion stop losses can be quite counter productive in value investing, but others may disagree. 
At each quarterly reporting period of a company I check how the share price has performed and search for any bad news or rumors. Should my analysis still be the same as when I originally invested, then a lower price in the short term is actually quite welcomed, as it allows me to buy more at a lower price. This proved very profitable in the last 3 years, especially if you generally avoided companies with very high levels of debt, e.g. banks. This is one rule my dad always preaches, and one that I broke in the last couple of years; needless to say that my dad had a good old laugh at my mistake.
Just remember the currency risk with that company that won't be named.



Marc said:


> The highest expected return comes from buying stocks which are both small and value.



Thanks for sharing your findings Marc, some very interesting info. Just on the above statement, I have heard Buffett and other value investors mention that they would be able to achieve much higher percentage returns if they were small scale investors, as a lot of small and even mid cap companies are simply not suitable for the large amounts of money that they invest. These comments would certainly back up you analysis.


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## Firefly (30 Mar 2011)

Chris said:


> Just remember the currency risk with that company that won't be named.


Thanks Chris,

That's very true although they have been making strides recently to invest outside of the US. A purchase of this stock and also an index on the S&P 500 is what I'm leaning to - this should cover my defensive (new word from The Intelligent Investor!) investment requirements from the US persective. I'm certainly not chasing high returns...something in the 5-7% PA over the next 20 years will do nicely if I can keep adding to it every few months. Steady as she goes. 

I've promised myself not to invest a penny though until I have read the book above and the one you recommended and have a good understanding of both.


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## Chris (31 Mar 2011)

Firefly said:


> I've promised myself not to invest a penny though until I have read the book above and the one you recommended and have a good understanding of both.



A very wise decision. I have met more people who have lost money by rushing into investments, than those that have made money. In my experience a lot of people believe that successful investing is easy if you are willing to take the risk, but this simply isn't true. It may stem from the fact that it has become incredibly easy to buy and sell funds or equities or other investment products, but that would be simply akin to arguing that cardiac surgery is easy simply because the drive to and from the hospital is simple.

Just as an aside to my earlier comment about taking levels of debt into account when researching companies, I have now also applied this to the countries that I invest in. This has meant that I no longer hold investments in the US, UK (except for two mining companies), Spain and Italy. In my opinion sovereign debt is going to be a major problem for economies and their currencies.


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## Jim2007 (31 Mar 2011)

Firefly said:


> I've promised myself not to invest a penny though until I have read the book above and the one you recommended and have a good understanding of both.



It is also very important to understand yourself - how you handle risk, your confidence in your own analysis and so.  As someone once said value investing is all about arguing with the market!

Lets for example say that you have done your home work and concluded that a certain company is under valued and well worth investing in.  So you make a small initial investment of say 5K and within days the price falls by 50%, what will you do? 

Good luck with that,

Jim.


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## txirimiri (1 Apr 2011)

Chris, as a matter of interest, how do you make a judgement on governance issues within companies when analysing a company for investment? I ask because some time ago I invested a small amount of money in a small company having done an analysis based on a good understanding of the industry they were in, their comparative advantage in same and their medium term strategy. The same company was picked up on by some analysts and the strong consensus was that they represented an excellent investment.

The share price plummted over the following six months and has never recovered. I found out subsequently through someone who had worked with, but not in, the company that there were major governance issues, problems between CEO and Chair of the Board, resulting in paralysis in relation to decision making. 

How do you deal with this type of potential problem?


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## Firefly (1 Apr 2011)

Interesting article on Vanity Fair about WB..
[broken link removed]


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## jpd (1 Apr 2011)

Another article on Warren Buffet - not so clean as he claims

http://moneywatch.bnet.com/economic...-resignation-is-warren-buffett-losing-it/957/

oops - wandering off topic


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## Chris (4 Apr 2011)

txirimiri said:


> Chris, as a matter of interest, how do you make a judgement on governance issues within companies when analysing a company for investment? I ask because some time ago I invested a small amount of money in a small company having done an analysis based on a good understanding of the industry they were in, their comparative advantage in same and their medium term strategy. The same company was picked up on by some analysts and the strong consensus was that they represented an excellent investment.
> 
> The share price plummted over the following six months and has never recovered. I found out subsequently through someone who had worked with, but not in, the company that there were major governance issues, problems between CEO and Chair of the Board, resulting in paralysis in relation to decision making.
> 
> How do you deal with this type of potential problem?



This is actually a very difficult one. As a small scale investor it is pretty much impossible to find these things out. The likes of Buffett or industry journalists can very easily get access to senior managers and members of the board and interview them personally. But even then they may not pick up on internal issues. 

Some things I would look at are: 
- how long has the CEO been in place and is there a history of frequent changes in CEO
- the same question for the board of directors; frequent changes can be an indication of difficulties at management level

Unfortunately these things can happen, and the best you can hope for is that new management is put in place and that the overall business is not affected in the long term.


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