Author Topic: Question re FIRE future returns  (Read 148 times)


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Question re FIRE future returns
« on: December 01, 2019, 09:04:14 am »
Hi Patrick,

I'd like to get your opinion on this.... Martin Luther King once said that, "Communism forgets that life is individual. Capitalism forgets that life is social, and the kingdom of brotherhood is found... in a higher synthesis that combines the truths of both."

Unbridled capitalism has enabled market returns on average over the last several decades of around 10-15%. However, the world is realising that this is not only inequitable but also unsustainable. We are seeing the emergence of active investors and ESG and impact investors who are advocating for a fairer world, perhaps leading towards the synthesis mentioned in the quote above. Investors now realise that correcting wage and social inequality, helping protect the environment etc. all involve higher costs that were never previously considered by the rampant, greed driven capitalism.

The world is also struggling with the limits to growth, with negative rates abounding, even as central banks try to stimulate inflation and growth by conjuring up new cash. The problem is that there is not enough real-world growth to "absorb" this new cash and it has found its way into markets, dangerously overheating them, at least from a value-investors perspective.

Thus, I believe that low stock market returns are here to stay for the foreseeable future, of around 3-7% per year if we're lucky. There is also the ever-present risk of a serious market correction if prices trend too high above value. ESG and impact investors seem happy with this sort of return, as the world starts to consider measuring returns in more than just monetary terms.

The question is, what does this type of return do to the FIRE movement? What is the minimum annual return required to keep withdrawing (4%) of your capital and not run out of money?

In a way this whole trend change is making intuitive sense to me.... It's only possible to be a passive investor, adding no productive value to the world (e.g. indulging in travel), when we do not properly value the real factors (i.e. the workers and environment) that help that investment to make outsized returns. The days of rocking up with capital, facilitating an investment in a factory, paying slave wages, not accounting for environmental resources properly (cost of water or cleaning up pollution), and then taking the bulk of profits out, are nearing an end....
« Last Edit: December 01, 2019, 09:09:40 am by Bevan »


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Re: Question re FIRE future returns
« Reply #1 on: December 02, 2019, 08:17:46 am »
Hey Bevan,

I'm not terribly concerned. I think the world is making a lot of progress in addressing poverty, and still managing lots of growth. My bigger concern is that the growth has been higher than the fundamentals would indicate it should be.

Just FYI, the world as a whole has been making amazing progress on ending poverty over the last few years, and I expect it'll continue to improve over time:

As to the main question, what sort of growth do we need to maintain a withdrawal of 4%? A quick excel should show that the simple answer would be inflation + 4% growth:

The more complex answer would be inflation + 4% + enough to take care of taxes, fees, costs and more taxes! It's hard to figure out how much that would be, but I imagine adding another 1% would be enough, so my guess is inflation + 5%!

The other problem is that growth isn't linear and predictable. I wish it was, it would make life so much simpler to predict, so on top of the growth number I also fee you've got to build in some flexibility, kind of in the way I spoke about in my 5% drawdown without fail blog post: