Originally posted by @Collin Hays:
Originally posted by @Tim Schroeder:
With all due respect, that idea is so preposterous that it's hard to even know how to respond. You cannot invest in an S&P index fund, or any mutual fund for that matter, and plan on an 8 percent annual withdrawal. You will go broke. Please re-read this a few times.
There are chunks of time - decades - where the S&P 500 has lost tremendous value. In March 2000, the S&P 500 index reached a high of 2266. Over the next 9 years, it fell until finally bottoming in Feb. 2009 to 893. It would be another 6 years before it would reach 2266 again. So that is 15 lost years there of ZERO growth whatsoever. So let's use your theory and assume I had $400,000 in an S&P index fund in 2000 fund and started withdrawing $32,000 per year, I would have been completely broke by around 2007.
Using my mother's home as an example of 8 percent (she's actually receiving 11%), she would be not only receiving 8 percent, but leaving the value of the asset intact, which over time is likely appreciating. When you are withdrawing from a mutual fund, you are eating away at the asset. In a bear market, you either quit eating away at it and wait for it to rebound, or you continue eating way at it until there's nothing left.
Umm, no, not preposterous. First of all I didn't mean she had to withdraw 8% per year, I was just saying that "earning" 8-11% per year just doesn't sound like a lot considering the work that goes into managing an STR, and that you can make that a lot easier with less risk in an index fund. Secondly, the S&P was in the 1500's not 2266 in March of 2000 when the market tanked. I checked this in three places (I suspect you were looking at an inflation-adjusted chart because I also found one that said 2266 but it was adjusted for inflation). Yes, it bottomed in 2009 (at 676). It had recovered completely by March of 2013, only 4 years later. It closed yesterday at 3386, 125% higher than the peak in 2009. I could also cherry-pick dates when you could get much MORE than 10% per year, but that's not fair just as cherry-picking a theoretical investment the day before a market crash isn't. The point is, the S&P hits 10% over the long haul even including the really bad times. And if we start adding in compounding, well, it goes through the roof. For anyone with a long-term view, it is one of the best ways to build wealth, and it survives recessions. I looked all the way back to the 1930's and all the drops recovered in 1-2 years, and at the most 7. Not "decades".
I'll admit though that the allure of the S&P is in leaving the money there for 10-20 years and the compounding. Taking 8-10% out per year is a bad idea, like you said. Experts say that to survive downturns and mitigate inflation, you should only withdraw 4% from an index fund if you want it to provide income indefinitely. And if you continued to withdraw in a 1-2 year downturn, you would earn less in future years because you lost some capital. Sometimes, people need that 10% income (I certainly do), in which case I can't just stick it in a fund and not touch it. Plus, we may get huge appreciation in the value of the property which you don't get in an index fund. Or, we could lose it all to foreclosure. So these are two very different investing models.
But at the end of the day, for young investors anyway, a compounded index fund is the way to go. Me, I was spending my extra money on concerts, weed, and beer when I was in my 20's not investing it, which is why I have to hustle harder in RE now that I'm in my 50's -- I don't have time to wait 20 years!!! :)
