Re:Bill Ackman: give every American cash at birth so they ca...
by notacoward on Thursday December 10, 2020 @05:06PM
(#25379414)
I saw Stephen Punwasi pull exactly this same trick wrt diamond engagement rings recently. Claimed that if you put $6000 into the market instead (instead of a ring) and got 11% per year you'd have over $1M at your 50th anniversary. Absolutely sure that he picked the unrealistic 11% only because it got the number over a psychologically meaningful threshold (which isn't even that meaningful because he ignored inflation). A more realistic outcome would have been around $69K BTW. This kind of dishonesty is everywhere, which is why we have to stay on our toes.
But back to the case at hand. Yes, the numbers are a bit off, but that doesn't invalidate the basic idea. That's another too-common fallacy. $160K is nothing to sneeze at, and your $43K is just as much a fiction as Ackman's $1M. S&P grew 168% over 20 years despite volatility. It's already factored in. It looks like you're doing the same thing with double-adjusting for inflation too. The fact is that the bond would yield enough to make a significant difference for the people it's meant to help. Your numerology doesn't change that.
Re:Bill Ackman: give every American cash at birth so they ca...
by RhysU on Thursday December 10, 2020 @06:32AM
(#25372536)
Per https://dqydj.com/sp-500-return-calculator/ the trailing 20 years of SPY returns, critically including dividend reinvestment, is something like 7% outright or 5% adjusted for inflation.
Did your calculations refer to the real total return?
The whole premise is deeply wrong. 20 years ago the S&P500 index was $1380.2 and it closed yesterday at $3702.25. That's a growth of 168%, or compounded annual 5% (more precisely 5.06%, but Ackman likes round numbers). Very, very far from 8%. So far that the investment outcome at the age of 65 will be $160k instead of $1MM.
But wait, this return is not deterministic. The annual volatility was 20% (the precise value being 19.8%). Even if the annualized return were 8% as Ackman postulates, your median investment outcome at 65 will be less than $275k. In other words in 50% of the cases you'll get less than that.
If you use the realistic growth rate of 5% and volatility of 20%, then you have a 50% chance to get less than $43k at 65 (starting with the $6750 at birth). If we see an inflation rate of 2% (this is much less volatile, it's quite deterministic actually, being the Fed long term inflation target), that's about $12k in 2020 dollars. Which is slightly below the official poverty level. For an annual income, that is. If you want to make that work for the rest of your life (today's life expectancy at 65 is about 18 years, in 65 years from now it's going to be higher), then you end up with less than $1k per year. That's in 50% of the cases.