you focuses on losing? not me..

i look at it like this, i have going to invest X amount and turn it into Y. at this point i will cash out and move on to the next investment.

stop focusing on lose and start to focus on winning and see how it plays out for you!!!

When you start to apply this concept to relationships it can really mess with your head. In a way this concept makes you realize that being married to a model or super model may not give you the level of satisfaction you may have expected!

-Mike

While the argument about CPI can be made 300,000,000 different ways as it is different for each person, it is generally OVERSTATED for the basket of goods it measures. For me, it’s been much higher than CPI thanks to increasing health insurance premiums and out of pocket costs as well as consistent price hikes at the golf courses I play. Either way, in lieu of an asset that can track my specific inflation rate, TIPS certainly cannot be dismissed simply because CPI doesn’t track each person’s inflation experience.

Marginal utility is one thing I have always wondered about when it comes to the ultra-rich. We see people like Bill Gates and Warren Buffet giving away a vast majority of their fortunes, but why not others? Why don’t we see every ultra-rich person doing the same – because, really, what is the utility of money past a certain level (say, $500 million)?

I just wanted to point out that while the market is going through a tough period, it isn’t unusual at all and long-term returns remain intact. We saw similar markets during the Great Depression, from 1968 to 1982 (the Dow gained zero during that period), and others. However, over a 25 year period, the returns are in a very narrow range that are all well in excess of inflation.

My point is that while the last decade hasn’t been fun, it has certainly been normal. Something that is a good exercise is to go to Yahoo! Finance and pull up an interactive chart of the Dow for the maximum time available. If you take that chart and draw horizontal lines from each major peak, you’ll see that times like these are both normal and recurring.

As we continue to go through this deleveraging cycle, the market won’t make large, sustained gains. However, the market remains the best place to be for the long haul. If you want to sprinkle in some bonds to create rebalancing opportunities or to dial down risk, nothing wrong there, but take care not to develop a distaste for the stock market.

This is one of the lessons from the Great Depression as folks shunned the market and ended up with very poor real returns for decades afterwards.

I’ve been working and investing for the past 12 years since college. In that time I have had very little return on my investments, almost nil, thanks to the repeated market drops, and I know most people in my age group are the same way. Sure when I first started 11 years ago I was racking up some nice gains, and once again feeling good three years ago, but now, I sure would love to say I’ve achieved 6% a year in returns over the past 12. And I’ve invested in a wide mix of mutual funds, primarily index, domestic and international, plus some aggressive growth and conservative funds, nothing exotic or risky, primarily through USAA and Fidelity. Maybe the next 12 years will be less chaotic in the markets, but for my saving career the risks have predominated. Maybe that will switch over the next 12 years, and I’m definitely going to keep a risk component in there, but from my experience the risks in assuming the next decades will replicate the average 10% annual return of the US stock market over the 20th century seems to outweigh the rewards. I’m going to have to research these TIPS and maybe start adding them over time.

Regarding the discussion on retirement: in France, there is an on going discussion to increase the legal retirement age from 60 to 62… And the general public is horrified by this proposal! Without this change (which I find insufficient)our retirement system will collapse. Time will tell if the french government will do the right thing, or fold under public pressure.

Maybe it’s just because I read these PF blogs or just because I’m still young, but it seems like everything needs money, and money comes in so slowly, that I can’t imagine ever saving up enough that I can live any portion of my life without working.

Also, to achieve a 6% average annual rate of return, you could invest in a ‘minimal risk portfolio’ which would have far outpaced the market over the last decade plus.

@Mike – Nice post! Marginal utility is a GREAT topic even if it’s something most of us do unwittingly everyday (I’m always amazed at how well we all do with making choices without knowing anything about the economic theory behind it). I have a post scheduled for Friday that will take a slightly different angle in explaining the subject.

Not true!!

Try paying for a full-time nanny or private school on $250k and you will see what a huge difference ANOTHER $100k of income make.

Same if you make $500k. Making another $100k on top of that allows you to bail out more financially inept relatives (being sarcastic)

Or if you make $1M. Still short of fractional jet ownership … another $1M would help (being really sarcastic)

Its only diminishing returns if your expectation of what to do with money stays the same.

Bill Gates would probably like to make more money so that he could push his foundation further and cure Malaria faster. He wasn’t thinking that when he made his 1st million. But his horizon (and spending expectation / desire) increased as his income did.

I’ll tell you guys this datapoint, once you make over around $250,000…. it doesn’t matter too much how much more you make again, your lifestyle doesn’t really change.

I totally agree! I get so sick of people complaining about not being able to retire at 60 like every other person in history has been able to. Some people can, but it’s due to good planning, not because it’s a universal human right. But that is how many people think of it, and like the rest of us should support everyone over 60 until they die if they haven’t saved enough on their own.

At the same time, if that’s what a person is shooting for, I try my best to help them achieve it.

I really think it helps the contentment quotient if we remember that the notion of early retirement, and our picture of it as necessarily including travel, a vacation home, or expensive leisure activities like golf, is extremely recent.

Before Social Security, most working Americans never owned a home, worked until they physically could not work any more, and then moved in with a relative. After Social Security and into the 1970s, most people did not live 20+ years after retiring.

The percentage of workers who have EVER been able to “retire” early and never work again must be vanishingly small. Our generation is not facing a unique challenge.

I’d rather think of it as an opportunity, anyway – to be able to leave a certain line of work and do something completely different and still have time to get good at the new profession.

But I guess that’s kind of off topic. Sorry! Liked the marginal utility explanation!

It’s just an exponential graph. There are a number of ways to do it but one is: y = 1-1/e^x for y > 0.

Or in Excel ‘=1-1/exp(Ax)’. Where column A is some arbitrary steps such as 0.01, 0.02,… .

It sounds like what you’re doing is actually very much in line with what I was suggesting. You’re looking at how much risk you need to take and investing accordingly — as opposed to the common approach of just taking on as much risk as you think you can take.

I’m in complete agreement that most investors can’t get away with a zero-risk portfolio.

I agree; I’m in the same situation.

What about the rest of us?

I have been saving since I started working (in my 20′s), and without a minimum 6% return on my retirement investments, I have little chance of meeting my goal of retiring early and living on my savings for the rest of my life. Even if I extend my working life, I think that just investing in bonds won’t cut it.

I like the article, and I get the point, but think that it might not be practical advice for a large portion of the population.

Imagine you’re on the edge of spending less than you earn.

If you’re spending even $10 more than you make each month, you’re actively going into debt, effectively imprisoning your future self.

On the other hand, if you can cut corners or sell something to scrape up an additional twenty bucks during the course of the month, you’re now well on your way to savings and freedom.

We usually don’t think of a $20 bill as so powerful, but in that case, it is. That’s marginal utility.

Great concept!