Upside Investing Report

All amounts are in today’s dollars.

Upside investing assumes you spend your risky assets (stocks) only after they are converted to safe assets. Upside Investing treats the stock market like going to the casino. You gamble only what you are prepared to lose, and you spend winnings only after you leave the casino.

The living standard floor assumes your risky assets lose all value.

Your living standard is your discretionary spending per household member (adjusted for economies in shared living and the relative costs of children).

The table also shows you the chances your living standard will be above the floor once you start converting your stocks to safe assets.

The table’s percentile values tell you the fraction of the time your living standard will be at the indicated value or lower. For example, if the 25th percentile value for your living standard is $50,000 in 2030, this means that 25 percent of the time, your 2030 living standard will be $50,000 or less.

The percentile values equal the floor value before you start converting your risky to safe assets. Before converting, you always experience your floor living standard. While converting, you add to your safe assets, permitting higher ongoing spending and the percentile values rise. After converting your living standard is set by the amount that’s been converted and the percentile values are again constant.

In the Assets screen, you were asked to enter the safe rate of return you expect to earn. No asset is perfectly safe, but U.S. Treasury Inflation Protected Securities or TIPS (also referred to as inflation-indexed bonds) are generally viewed as the safest asset in which to invest. Historically, TIPS have yielded have yielded 2.73% after inflation. (This is an annual average real return.) But we recommend a more conservative assumption for the safe real return, namely 2% or lower.

The program assumes your risky assets are invested in a diversified portfolio of large cap stocks. Historically, the S&P 500 has yielded 8.64% after inflation. (This is an annual average real return.)
If, after examining these results, you feel you are wiling to forego some of your upside to have a higher living standard floor, change your share of assets invested in stocks and rerun the program. Also, try different assumptions about how much you will add to your stock holdings as well as when you will begin to convert your stocks to safe assets and when you will be fully converted.

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