Student Comment: Why Do We Not Avoid Bubble Risk? Will Inflation Make Our Retirement Money Insufficient?

[Student comment] Why do we not avoid bubble risk? If there is inflation in the future, will our retirement money be enough? Easy Investment Chat CLEC Investment Channel. Post date: May 28, 2020

Question 1:

Teacher, if we could predict a crash like 2008 and buy back at the low point, would that not be 40% more than not selling? Why is the current advice to buy and not sell?

Answer 1:

We might have a chance to avoid a 40% bear-market decline. But there is usually about a 10-year gap between two bubbles. Before a real bubble arrives, if I predict a bubble almost every year and trade once, each loss averages about 10%-20%. The accumulated loss is very large, and it is still worse than buying and holding for ten years and then encountering a bubble that falls 40%. The calculation is as follows:

In a bull market, the average annualized return is 20%.

After 10 years, it grows 6.2 times. $1 million becomes $6.2 million. Even if it falls 40%, there is still $3.72 million.

If you lose 10% each year, annualized return becomes 10%. In ten years, it grows 2.6 times, and $1 million becomes $2.6 million. Even if you avoid the bear market's 40% decline, the final total assets of $2.6 million still lose to buy-and-hold's $3.72 million.

Question 2:

The government is printing a lot of money. I worry that inflation may cause us to underestimate the needed retirement money. Originally I estimated $3 million would be enough to retire, but maybe it needs to be raised. Thank you.

Answer 2:

For $3 million in retirement money, if $90,000 ($3 million x 3%) is enough for one year of expenses now, then in 10 years our funds will roughly double to around $6 million. Even with inflation, $6 million can support $180,000 per year. The funds will still be enough then.