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Yesterday I was thinking about this:

Assume you have around 600.000€, and get around 10% to 25% annual return on a fairly aggressive fund investment. Now assume that each year you take out 80.000€ yearly to finance your life and readjust portfolio accordingly to maintain our expected yearly return.

I have tested this and ran 10.000 simulations and I end up with around 1.200.000€ after 10 years. I have multiple questions:

First, is my thinking flawed in any sense?

Second, I suspect that my expected return is close to unmaintainable, I was just wondering because I recently read about Vanguard Small Caps that managed to yield over 35% yearly interest.

Third, assuming that I live in Germany and only adjust the portfolio once a year, I could thereby bypass the tax laws and just pay the 25% on the interest I made.

I of course know that there would be quite a big risk involved but in case this would work, it would leave me with roughly 60.000€ to live with per year and I would still double my investment in only 10 years.

It sounds a bit too good to be true, so please tell me if I am missing something.

Edit: After receiving all the feedback from you guys, which I am very thankful for, I came to the conclusion that 7% annually seems to be the aim and states the most reasonable point to aim for. Thanks again for all the pointer.

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    "It sounds a bit too good to be true," Correct... "please tell me if I am missing something." Your math is all correct, but the flaw is your assumption that -- as you mention yourself -- that growth rate is unmaintainable. – RonJohn Jan 28 '18 at 17:08
  • @RonJohn: So the only way to do it would be knowing which funds "explode" and buy them beforehand? Thanks for pointing that out. – huhnmonster Jan 28 '18 at 17:20
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    The funds that "explode" will likely collapse a few years later. There is no investment I am aware of that will exceed 10% return over a long period of time, such as ten years or more. – chili555 Jan 28 '18 at 17:24
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    I can't tell whether or not you're being sarcastic, but yes: perfect foreknowledge would allow you to earn oodles and oodles of money in the stock and bond markets. – RonJohn Jan 28 '18 at 17:25
  • You need to change your numbers. Assume 7% return after inflation, and see what numbers you get (remembering that you'll have good years and really bad years). Then adjust that "80.000€ yearly to finance your life" ($99,403.11 at today's exchange rate). With a more reasonable 4% average return, expect about 24,000€ ($30,000 US) per year. I can live quite comfortably on that. – jamesqf Jan 28 '18 at 19:57
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TL;DR - yes, any assumption north of 10% is a too good to be true scenario.

The US stock market, as measured by the S&P, has returned 10.51% CAGR. But, there was a standard deviation of 19.61% along the way. If one assumed 10%, but started out withdrawing funds up front as you propose, they would end up losing money fast. I am retired, 55, and while I'm hopeful for a continued good market, we've limited withdrawals to close to 4%/year, and even then, are not counting on our money lasting forever.

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  • IIRC, the actual long-term average US market return, after inflation, is almost exactly 7%. – jamesqf Jan 28 '18 at 19:49
  • You do, RC, take inflation off the 10% I cite and there you are. – JTP - Apologise to Monica♦ Jan 28 '18 at 19:51
  • I wouldn't even trust a 7% long term assumption if you consider Shiller CAPE ratio for many major markets right about now. – Chris W. Rea Jan 28 '18 at 20:35
  • Chris, doesn’t that just mean that in the very short term say, 5 to 10 years, we should not expect 10%? But still the long term, 10% should be a valid number? – JTP - Apologise to Monica♦ Jan 28 '18 at 20:42
  • We might see poor returns for over more than a decade from now. Refer to the table at bottom of page 3 here, for instance: CAPE: Predicting Stock Market Returns (PDF). We could see higher returns at some point in the future, but after a sizeable correction or else a lengthy flat period. Unless of course "this time it's different"... anyway with CAPE > 34 I'm increasing my cash & fixed income weighting. :) – Chris W. Rea Jan 28 '18 at 22:09
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Your main flaw seems to be in your understanding of what 'risk' really is. You indicate that you expect to take out 80k / year, but that due to 'risk', you accept that you might only be able to take out 60k per year.

This is not the true risk you should be worried about. By investing in funds exceeding expected return > 10%, you may suffer near-total loss of your investment. You may buy funds that hold companies which could completely go bankrupt.

Also I see that you indicate you expect to 'readjust' your portfolio 1x per year to maintain your aggressive growth target. This implies that at the time you readjust, you are actually able to see the future, and know which funds will do well and which funds will not do well. If you had this ability to target funds which return 20% / year, you would be a financial guru on par with Warren Buffet.

Standard rule-of-thumb math says that diversified (ie: mutual fund / index fund) equity investments in developed countries return about 7% annually after inflation, but even that 7% figure includes years of -20% and years of +25%. Unfortunately it's quite a bit easier to see which is which after the fact!

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Vanguard's own figures show their Small-Cap Value Index Fund returns around 9% per year since inception (1998).

Last year it returned 11%, some years such as 2010 the growth was approximately 0 according to the chart on the above linked page.

The fund's documentation says

One of the fund’s primary risks is its focus on the small-cap arena, which is an often-volatile segment of the market.

The more volatile a fund is, the more bad years hurt you. Let's say fund a) returns -50% in year 1 and 60% in year 2. Whereas the less volatile fund b) returns 0% in year 1 and 5% in year 2. You might be tempted to conclude that -50 + 60 > 0 + 5, but £100 invested in fund a) would drop to £50 and then rise to £80, whereas £100 would become £105 in fund b) over the same period.

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  • I am sure you experienced investors get questions like these all the time, but the Russell Growth 1000 Index Fund(VRGWX) has had average 17% over the past 5 years and seems to be super large cap. And running my previously mentioned formula, readjusting it to assume 15 percent growth with standard deviation of 10 still gives me a good profit after 10 years. And yeah, I thought about that, but neglected it since I did not find any past negative performance on the ones I looked at. But may very well be worth the look. Thanks :) – huhnmonster Jan 29 '18 at 0:27
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    @huhnmonster: The last 5 years have not been representative of the average. Look at the 5 years before that, which contained the '08 market crash. Indeed, the above-average results of the past few years are (IMHO, anyway) still include a lot of crash recovery. (Looking at my Vanguard account just now, I see 28.6% return for the past year, but 6.6% return for the last decade.) – jamesqf Jan 29 '18 at 4:30
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    @huhnmonster: Looking backwards, it's always easy to pick a well-performing fund. Looking forwards, less so. – MSalters Jan 29 '18 at 13:53

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