Replies to post #38581 on A.I.M. Users Bulletin Board (AIMUSERS)

[ls7550]

One of the best inflation hedges are stocks

I should have emphasised that's over the longer term, and when cost averaged rather than lumped all in (out) at just single time points.

My personal investment structure is to hold sufficient bonds to cover (as an example) 30 years of living expenses (drawdown). The rest in stocks for growth (accumulation/dividends reinvested).

Simply, I constructed a 30 year ladder of projected income streams, private pension when that comes online, state pension later. Then I added sufficient bonds to that ladder to provide my required yearly income. Provided pensions and bonds pace inflation and spending remains aligned to projected then income is nigh on guaranteed/safe. I have sufficient stocks for growth to replenish and more the decline (drawdown) of those bonds. So after 30 years I'll still have as much or likely more in inflation adjusted terms as at the start. Historically the worst 30 year real return from stocks has been around 2% real. With cost averaging and diversification that rises to 3%. 3% over 30 years = 2.4 gain factor. So around 40% initial stock, 60% bonds at the start of 30 years, drawing down bonds 2%/year to zero after 30 years, whilst 40 initial stock grows 2.4 times to around 100 (typically worst historic case). Likely quicker/more such that stocks can be profit taken periodically to top up income/spending if required.

I differ from TooFuzzy who doesn't like holding individual stocks. For me individual stocks with not too much invested in any one and holding a diverse range of such stocks is the more cost/tax efficient choice. If you're investing $1M in stocks that grows 2.4 times over 30 years in real terms, averaging $1.7M, and you're paying even just 0.1%/year fees to hold stock exposure = $1700/year x 30 years = $50K. With individual stocks the ongoing cost after purchase can be zero.

For a low cost DIY index tracker, assuming you weren't adverse to tracking error (some years gaining more, other years lagging), then buying the largest stock in each of the 40 sectors http://www1.nyse.com/about/listed/lc_all_industry.html in equal amounts, and then just sitting back and doing nothing other than accumulating the dividends to periodically add another stock to the set (excepting takeovers and other forced returns of capital) is about the cheapest index tracker you can get. 40 odd stocks equally initially weighted = 2.5% risk per individual stock (acceptable risk). Its concentration/adding to decliners that makes single stock risk excessive.