I think for small to even large numbers you are correct, but given how yuge this debt amount is a broad-based default will probably cause a contagion. I will not predict how far and wide.

Three things:

1) at least SpaceX is already in pension funds "thanks" to NASDAQ and MSCI relaxing their rules. Everyone who invests in NASDAQ or in MSCI World has SpaceX exposure, and assuming the bonanza lasts for 11 more months, so will everyone who invests into S&P 500. In addition NVIDIA, Google, Microsoft, Oracle and Amazon all have been in pretty much every investor's / pension fund depots. No matter what, everyone is going to get fucked when the party crashes, and it will make 2007 look harmless by comparison.

2) The debt of the AI companies is bad enough, but there's all the downstream credit as well, chiefly construction companies and public utilities that are undertaking absurd amounts of buildout. When the party crashes and the demand stops, there will be a lot of construction companies and possibly even a few large utility companies that will be unable to service their debt (because no datacenter means no income) or have to hike rates even more than they already are.

3) All this debt and speculation unwinding will cause an economic downturn. Most of Europe already is in or near recession territory, and the US would be in a recession if it weren't for the wash trading and circular investments artificially propping up the GDP. But unfortunately, with the exception of infamously austere Germany, everyone else has already fired all the guns during 2007ff and Covid, and all the ZIRP money never got slowly deflated out of the market, which means this time there will be no government help possible, it will be a hard crash. No way out of that one.

At this point these companies make up a huge portion of 401k's for a huge chunk of Americans. How would it affect retirees if they dropped 40-50%, likely taking the market with them?

Already happened: https://finance.yahoo.com/markets/stocks/articles/michael-bu...

Debt is senior to equity. For private credit to start taking haircuts, the equity has to have already gone to zero. At that point, this will already have been everyone's problem for some time.

Even better, that "gamble" will have to be rescued by taxpayer money.

if say meta owes 720Bn, they wouldn't have trouble paying that back in 10 years.

this doesn't take away the fact that 'a.i' right now is a bubble.

No correlation with future returns.

On the other hand the world is leveraged to insane levels not seen since world wars or global recessions.

At the same time yields are low while inflation is high.

There is definitely a high level of risk in the financial markets.

A risk nobody, especially politicians, want to look at, because it would unavoidably lead to some major pains, so procrastinating until it's unavoidable seems the way to go.

That's a fun way to say is not profitable and loses billions a year

ohh, their accountants just dont know where debt goes on the balance sheet. thanks for clearing it up

Take the circular money and add even more spend, even less profit, and somewhere in the background is a money tree that is about to die.

For the people who are close/early to retirement and can't do that, well, they need to manage sequence of returns risk.

Edit: I think some ppl might interpret this as me being bullish on the SP500. I'm not, I'm bullish on everything evens out and returns to the mean.

Your real personal agent which knows you and helps you like "good morning elmer2, your calendar invite for dinner is today, you will need to leave at 18:18 if you want to use your normal public transport route per train. I put an alarm in your phone for you"

Agents to agents

Agentic teams.

Finetuned models for everything like Java/spanish coding model.

Very long term research like multiply hours or days or weeks and plenty of these in parallel.

The plan is to have LLM working completely autonomously, in that case, the more resources you have, the better. Perhaps people will use local LLM to ask questions, or coders use them for their personal projects, but that's not where the real money is.

What they can't do is the rug pull of pricing like Fable did, hoping for profitability while playing the "it's so super smart" card. It's very profitable, but customer will be very happy to leave for cheaper pasture and that's why the recent news about this or that cheaper chinese models make headlines.

Essentially, the rush now is "if I make it a boring profitable company I'm not worth a trillion AND i'm overshadowed that plays the singularity card even if they're bullshitting"

If I make $200k I do not have $400k off-balance gambling debt

If one is over concentrated its easily avoided.

If you're truly at retirement, absolutely cycle out. But if you're still young and trying to maximize portfolio growth, it's not obvious that a non-tech strategy would yield better returns.

If 50 billion in revenue is from other companies debt spending… then You have a problem.

Personally, I drop the financial sector entirely (Thomistic prohibitions on usury) which leaves an even 10 funds which is easy to allocate mentally and in practice. For example, assuming a 60/40 allocation where one is holding the lion’s share in equities and the remainder in bonds (I substitute with a combination of gold, crypto, cash, and Swiss Franc here), one would allocate as follows:

XLC 6% XLY 6% XLP 6% XLE 6% XLV 6% XLI 6% XLB 6% XLK 6% XLU 6% XLRE 6%

(Note that XLF is consciously not taken as a position here, decide if it’s right for you. The Mortgate REITs which would make XLRE problematic are in XLF per the sector selection rules)

The remaining 40% is bonded debt if you are fine with usury, or some sort of asset negatively or neutrally correlated to equities.

I suppose it’s worse if your calculation is, “I’ll retire when my 401k hits $X absolute value,” but I think most people just retire at a certain age instead with risk spread across decades.

Still, if NVidia lost 50% of their market share, we would probably see a big collapse of the stock market.

EDIT: to note, the top ten companies in SP500 make up an unprecedented concentration but they're not "mostly AI".

Pretty much Buzzfeed level doomscroll slop

I don't treat it as a reliable publication when it comes to anything AI related.

For the moment.

There are several ways that ordinary investors and even simple pension holders could end up stuck with the downside of this.

The debt risk hidden in CDOs wasn't your debt either but if you had a pension plan, the crisis absolutely cost you money you would have earned, and in many cases pension fund values dropped by five to ten per cent within a year.

The SPV/CDO comparison being made is by no means exact, but hidden debt at this scale surprising analysts tends to cause problems. If more institutions are severely exposed than anyone thought, it is bad.

Especially since any success strategy is predicated on literally unbelievably rosy predictions.

A predictable reset schedule with refinancing ("valuations"). Loose money leading to debt obligations to be paid in the future. Circular financing.

And what's funny, is it's precisely the off-book debt that will make the compression happen slowly. There's no bailouts this time.

It really doesn't need your help, and it's already way too powerful. If you have money to spare, can't you give to good causes instead?

If the companies don't see that kind of value (so LLMs don't become dramatically better in some kind of quantum leap from where they are now), they won't want to pay those costs. Already, most AI projects in corporations tend to fail.

If the efficiency of LLMs gets 10x better, then either corporations will "private cloud" their own AI or start using competitors that aren't carrying those kinds of debt loads from the "gold rush" phase.

They're mostly either AI proper, or hardware manufacturers benefitting from AI boom, or provide cloud services to AI companies...

But the pendulum swinging rapidly to the other side has routed all those funds through the real economy, caused goods inflation, and looks like it will crash the economy.

But counterpoint, the S&P 100 gained over 24% this year. FTSE gained nearly 18%. Still good gains vs inflation!

Don't try to be too smart. Especially if this is not your full time job. The market is not rational. Dollar cost averaging and proper risk allocation is the way.

[1]https://www.hartfordfunds.com/practice-management/client-con... & https://www.fidelity.com/learning-center/wealth-management-i... (if you prefer an additional source)

As the boomers die off - if they have these accounts - their kids are quickly going to be forced to liquidate them over the course of 10 years. With some of them having to sell a chunk annually.

If Meta put every cent towards their debt, it would take at least 6 years, assuming 0 interest and 0 new debt. The interest alone in the next 5-10 years likely would push it close to 1T debt.

How on earth are they meant to pay for this?

we may have a problem then.

Couldn't you characterize Enron that way? The liabilities are there, you "just" have to look at Raptor II or whatever!

And even if you look at the debt, even companies like meta make 200 billion revenue in 2025 alone.

Isn't it good that these companies with these massive massive deep pockets invest?

And yet... the companies do this because it works. If they held this debt on balance sheet, the sensible assumption is that their stock values would take a rather substantial hit, and they could face other sorts of scrutiny. It works like pull-in sales works. It works like channel stuffing works. It works even when everybody knows that's what's happening. It works even when everybody knows that everybody knows that's what's happening.

There's something broken here. In an era where AIs move millions upon millions of dollars around because of some blip of a headline somewhere and every AI improvement of any kind is immediately scrutinized for its ability to be used by the financial system, it is completely incredible that the system doesn't know and react to these things. I'm not sure what's broken. My first best guess would be the increasingly mindless investment via index funds in pensions and the slow-but-ever-increasing ability of financial engineering to abuse that mindless investment, but I call that a "guess" for a reason. Possibly there's still a lot of really stupid AIs hooked up to the stock market that just look at the most basic of numbers and are easily fooled by this? But who is running such a precise combination of "huge" and "stupid" on the market? I dunno. Something's weird here.

Simply choosing not to get involved might be most reasonable action.

Your view seems very myopic.

AFAIK they have heavily relaxed the rules for IPO. Pension funds are practically forced to buy from the top-100 companies, and these companies risk crashing much more than the others.

SpaceX value is already lower than at launch. If this costs are externalized to the common public, this will be your debt.

All these companies are too big to fail, in an environment where you can buy pardons and laws.

Hell, a 3T$ crash will have global repercussion and probably partially crash many other countries, too.

I don't see how this will benefit the consumer, but I might be missing some second order effect?

A Bear Sterns moment would be more solid. Oracle might ge the first to collapse if things go south, so we might be fine until then(?).

Equity is a risky asset, so equity being wiped out should not be a surprise to anyone, but life insurance and pension funds failures is indeed a public problem.

In the run-up to 2008 a big factor in the bubble forming was that poor quality loans were packaged in a way to hide the risk in those investments. I'm not expert enough in finance to know if it's the case now, but we do know that clever accounting to hide debt can lead to the incorrect valuation of assets, potentially leading to financial ruin.

AI outputs have been ruled as not even copyrightable, isn't that even better than fair use?

The sound advice for the past decades has been, just invest in a low-cost ETF tracking the S&P instead of picking stocks to minimize risk and invest in the market broadly.

So a huge number of people have done that, believing they're diversified, while tech makes up 40% of the index.

Yes you could sell your S&P and find things to invest in least likely to be impacted by a potential bubble, but your average 9-5'er with automated contributions to their 401k is probably not sophisticated enough to do that.

And that's assuming only these companies would be affected if there was a massive draw-down in tech/AI related stocks. We haven't really seen a situation like this before, so it's not easy to predict what effects there might be in the broader economy.

Sorry, but this doesn’t make sense. The valuations of these companies reflect their growth.

In finance there’s nothing inherently virtuous about a “debt-light business”. It’s all an allocation decision based on how you expect to grow relative the cost of that growth.

Try and reframe it: are cash-heavy businesses given a premium?

This is all like CFO 101 type stuff, and not nefarious. I find it amusing that people assume the worst for things they understand little about, rather than trying to learn.

Maybe the best way I can explain it to the programming crowd is this: imagine how ridiculous it would sound if outsiders were saying that Google was on the verge of collapse because its codebase has billions of lines of code.

They aren't hiding it though. The contracts are recorded in regular filings.

Usually the financial services company will offer several options: more aggressive/high risk, or less aggressive/lower risk. Most people will just go with whatever is the default option.

So much of the American S&P 500 is dominated by handful of companies that the risk is not that easy to avoid. If or when the AI bubble pops, it's going to take down a lot of the economy with it. You can direct your retirement savings into the lowest yield/lowest risk assets offered by the firm, but you'll forego whatever growth happens in the mean time.

Will the bubble pop next week? Next month? Next year? Who knows. Timing the market is incredibly difficult.

There's a famous quote, attributed (perhaps apocryphally) to John Maynard Keynes: "The market can remain irrational longer than you can remain solvent."

It created an actual recession albeit thankfully short one for the case of dotcom (sadly not for 2007) and a really recessionary environment which causes unemployment and just straight up fear and panic.

I do understand what you are talking about and overall in long term, perhaps things flatten out but atleast speaking financially so, its better to be on a smooth sailing road rather than insane ups and downs with retirement money if preferable.

> I think most people just retire at a certain age instead with risk spread across decades.

The issue in my opinion is with people near that certain age you mention and who retire in the time during boom just before bust. They would then get the 50% hit on their savings instantly with an recession/inflation/unemployment environment which in my opinion might be genuinely devastating.

(supposing that they had their investments in stocks, I wouldn't consider that any retiree would have all their money in stocks but there have been some other comments which show a sizable amount, @kipchak's comment shows 50% stock for retirement. so a 50% shock on top of that could lead to a wipe out of 25% of your retirement fund which is honestly still pretty crazy.)

By the time we're reading headlines about this debt, it has been known to institutional investors for a long time.

The debt is priced into the valuation.

It wasn't like, "Nvidia took a hit and everyone else was fine". It was more like, "One or two companies were fine, and ALL others took a hit"

I think there is some sort of collective collusion. Like a school of fish moving. If there is an external stimuli the price can rise or fall eventhough it doesn't make sense from a 10y dividend perspective.

If there is really only a few dozen people doing the buying and the selling at the top on a weighted basis, then the prices are whatever they convince themselves of.

I don't know how specifically significant SpaceX being lower than at launch is, because actually most IPOs underperform the market and their own targets for the first three to five years. What is happening to it is not that unusual; its overvaluation is.

I do think there is a major risk here, and ordinary investors and pension holders will be hurt.

I am not sure any individual AI company is too big to fail, though probably one of the big two will be rescued, most likely Anthropic. I think OpenAI will fail, and it'll be stripped for parts. As will Oracle, who are overexposed to it.

If you look at was happening around 2022 - 2023, their growth was slowing down. Lots of the new growth is based on AI but since almost everything AI based is subsidized to hell and back, we have no way of knowing yet if that AI demand is real at unsubsidized AI prices.

>Experts continue to warn of an AI bubble, noting the enormous and widening gulf between company valuations and their comparatively measly profits

Agreed, there are many valid reasons to have subsidiaries of course.

The issue is rather with the fact that we are having the assumption that the threat is outside rather than inside and so systems with mechanisms to be less transparent are far more prone to this risk.

It has been academically shown that most corporate/ white paper scams aren't done from outside but rather from inside the company itself through genuine structures and incentives which go wild. (Something shockingly visible in AI space), Enron's example also comes to my mind.

The best way I can explain it to the programming crowd is this: Imagine how ridiculous it would sound if you are ranked with how many lines of code you ship and how much token you would spend and so we end up with tokenmaxxing and hearing stories about people literally burning tokens in innovative ways because they want to get on top of a leaderboard. Oh wait, it is already happening or has happened.

Generally speaking, It is preferable to be transparent with debt and other things rather than not especially so for long term because sooner rather than later you might get caught. Obviously if there is some stuff which prefers from ringfencing risk then sure.

Also as I spoke of Enron, but the exact structure was used by Enron as well as @fzeroracer discusses in their comment[0] so it might be a genuine question.

[0]: https://news.ycombinator.com/item?id=49023596

This is what caused the 08' crash. Everything was all tied together so as one massive bank failed it sent a cascading ripple effect through the entire industry which became a sort of black hole that took down many seemingly stable, profitable banks with it.

I can easily see the same happening with AI.

Apple's own desktops, with the fastest Apple Silicon GPUs and TDPs 20x higher than an iPhone still can't compete for real-world datacenter use even with RDNA clustering. Apple's GPGPU architecture is behind AMD at this point, there's a reason why Apple Intelligence is critically reliant on Nvidia and Google to provide inference backends.

I don't know if you intended this to be exclusive of the opposite, but I do often find actually the opposite thing is true. That is people tend to be wildly, inappropriately optimistic for things they don't understand well and more likely to be skeptical in the details of things they do.

Very much unlike with software. Where the goal for long while is to burn as many resources as possible on end user devices.

10 years ago i watched a talk about the problem of compute vs. memory. Compute increased significantly while memory speed did not.

This gigantic investment will solve this problem.

So either this blows and we will have way too much capacity which will lead to cheap and mass amount of memory for everyone + cheap GPUs again OR AGI. So win - win.

Truth be told ORCL already kinda went south: they're down 65%, at $120, compared to their all-time high.

Uh, no? Ignoring the rating, I think there are plenty of other bonds to be found that are less risky.

Dutch government bonds just to name one? The yield wont be the same but that's probably a good indicator?

https://workplace.vanguard.com/content/dam/inst/iig-transfor... (page 78)

I want to hope that this money will lead to more capacity, more R&D and lower prices in the long term again.

Nvidia would have changed its GPU strategy a long time ago if the demand wouldn't be real. They still can afford the GPU prices. But memory is not a monopoly.

For memory though i do assume a lot more people and companies want a massive amount more memory than ever before. I have 64gb in my pc for a few years now, i was quite happy with that. It became a no brainer. But today? Hey give me 100, 300 and even more. I really want to run bigger LLM models locally.

Jump in a time machine to 1515 and ask Martin Luther, or to 1260 and ask Thomas Aquinas, they'd tell you it's sinful.

And in the present age, a fair number of Islamic folk consider interest against their religion's rules. So there's a Halal finance industry where, for example, you can get a "murabahah contract" where the bank buys a house, then sells the house to you at a higher price, while allowing you to pay them in monthly instalments.

In other words, they are intentionally deceiving investors and hiding the risk from them. That does not sound like CFO 101, it sounds like fraud. But if grift is your business, I guess those are as valid reasons as any.

How much real impact is this really though?

An analogy that comes to mind is when companies used to book future sales in the present. They got in trouble for this and is now forbidden. I recall reading that one deal had terms that transferred assets if certain conditions were not met. If terms-based debt should be booked now, then terms-based assets should as well. This stuff makes my head hurt.

Either way, as long as it's not hidden (and it's not for the public companies), then it's fine.

No need to worry or discuss further, it’s all priced in! Everything’s totally fine!!

If a person has a lot of debt and no savings, and they lose their job, then they will find themselves in trouble a lot faster than someone who owns their home and car and has 6 months in a savings account.

If a company has a lot of debt, they might find themselves in trouble with credit rating agencies as soon as they have a bad quarter. Or they might have cashflow issues if rates increase. Both of these can lead to an accelerating negative feedback loop.

Governments (at least those with fiscal independence) have a unique set of tools to work around this situation, but they too can struggle with high debt loads acting as a drag on future prosperity.

Debt plays a critical societal role in allowing new production in advance of revenues, but it can also be a dangerous trap.

These AI and tech companies are priced as if they are still running a capital-light, 0-marginal-cost SaaS business. That's no longer what's happening. This economic engine makes up a substantial amount of both the value and the growth in the American stock market.

If there's a loss in confidence, high leverage will make things fall faster. This could be infectious. Not just the AI and tech companies, but the whole market might suffer.

In other words, a programmer should invest a bit more away from software than average, a realtor should invest a bit more away from properties than average, etc.

If you have your job, you can weather a stock-downturn, and if investments are solid, you can weather a period of unemployment, but if both go bad at once it's exponentially worse.

https://investor.vanguard.com/investment-products/etfs/profi...

No person puts all of their retirement savings into QQQ or SPY at the peak and sell it off at the trough. Instead folks drip their savings into their weighted portfolio and withdraw money from their weighted portfolio as expenses accrue. Now obviously the GFC was a huge deal, but this sort of facile understanding of stock markets always leads to big misunderstandings. There's a reason Monte Carlo analyses of these events are used to model these scenarios.

(Though I imagine there were many people who tried to re-balance their portfolio into a less equity-heavy model abruptly during the GFC and based on equities performance at the time, it was probably the right move as long as taxes were taken into account.)

Here is the link (oddly I could not find it with HN Search): https://news.ycombinator.com/item?id=48917135

Like my country pension scheme. It went through ups and downs for a hundred years but has always come on top. All you need is a long horizon and a trillion dollars and you basically can't lose.

I'm not saying I see them going that way or that I would, but at least THAT would possibly work.

What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will. Going 100% bonds is simply intolerable for the time window for most retirees, but an equity wipeout of this magnitude is equally intolerable.

https://asia.nikkei.com/business/technology/five-us-tech-gia...

"Companies disclose such future debt not in their balance sheets, but in annotations to their quarterly financial statements. This is a legitimate practice under accounting rules, but may make it difficult for retail investors to recognize risks."

"Today's AI industry is partly supported by demand generated by circular investment. Nvidia and tech giants invest in data center operators and AI companies, with that money then turning into GPU and cloud usage fees. Actual demand is difficult to see, increasing the likelihood of over investment in data centers."

Right now it's not clear that is true.

Most people in actual retirement I know do something like keep ~2 years of cash in short-term treasuries and everything else in equities. That gives you a lot of buffer to time-shift equity drawdown, which is the main risk with equities, while retaining almost all of the benefit of equities. Simple and relatively robust.

Generally speaking after commencement the former will become both liabilities (for a smaller amount than the number they listed due to discounting) and an asset (representing the asset of the right to occupy the lease)

The latter will generally become some sort of asset

I have no idea what the people going on about subsidiaries could even possibly be referring to as it relates to this article, this is just lease accounting

Now, that’s not to say that there aren’t other benefits of having a separate balance sheet related to moving numbers around. But it doesn’t have to be nefarious.

Who is stuck with that bill and what is their ultimately their primary source of financing?

In the real world, recovery rates for corporate bonds are between 30% to 70% or so, depending on the seniority of the debt and the collateral.

all three major remaining players in the mem sector have already tried in the past to collude for memory price fixing.

this is the first time I'm rooting for chinese chip tech to reach more or less parity.

But minimal real impact

Investment companies have to remain profitable or at-worst neutral as such they would generally charge a decent bit of money for this type of setup. (If they end up having too big of losses then perhaps it could be similar to the the 2007 Banking/Investment companies crisis.)

Generally speaking I am not a financial advisor but you can take a look at international index funds/ETF's in general which have less exposure to AI in general.

and you can follow the age rule created by Mr Bogle where you have (age)% in bonds and (100-age)% in stocks, so at 70 you have 70% bonds, 30% stocks.

So again taking the example of dot com bubble, International Index funds fell from my understanding 30-40% and suppose that you had 30% stocks and 70% bonds.

So that would only have a 30% times 30 % which is 9% which perhaps might be more managable as compared to the previous 25%. There might be some other strategies as well which can help in diversification

Hope this helps!

Ok, so just to be clear: institutional investors are (a) the ones investing the large proportion of capital in these companies and (b) are well equipped to decipher financial statements. The idea that any significant amount of retail investors have even seen a financial statement, let alone is making decisions based on their analysis of a financial statement, is laughable. And, even then, if someone is putting in that effort, then presumably they're not going to get tripped up by a legitimate practice that they ought to specifically be looking for given the context.

And all of that doesn't even take into account that every article discussing the financials of AI firms over the last half a decade have been pointing out these dynamics. We're literally in a thread discussing this exact dynamic. Retail investors are certainly far more likely to make investing decisions based on these kinds of articles and threads than they are based solely on independent financial statement analysis that they're conducting. At a minimum, I think anybody taking any of this seriously has gotten the hint by now.

If it comes out that these firms are committing straight-up fraud, then there will be a lot more to discuss. But, as of now, the sentiment is that these firms are behaving perfectly legitimately, just abnormally and maybe irresponsibly compared to their historical context. If an investor isn't equipped to handle this kind of analysis under these circumstances, then I'm not going to feel too bad if they lose their money "investing" when they're really just gambling.

You can use a collar for this at somewhat reasonable cost. Not sure how rolling that would compare to just using it to defer until you can cheaply sell and buy some fixed income ladder. Probably badly.

Also, there’s no capital gains to defer if you use a retirement account, which will be a better place for fixed income anyway.

Plus apparently at least for Google, but from other news sources I've seen, at least Amazon and Oracle have basically mortgaged their future in other business units to fund AI, so it's likely many of these other business units will underperform (or already are).

So lots of new debt, unverifiable growth that could be shady, coupled with a slow down of their other businesses could be a really bad combo.

It is worth saying however that part of tail hedging is that the payoff is worth a lot more when everything else has tanked, so e.g. even if you (say) get 10% on your puts when the wider portfolio is still down 40% (made up numbers), you can deploy that capital at probably quite a high expected return.

For example, you could have an S&P 500 fund that, over the next year, will have a maximum of 0% capital losses (it can't go down), you will only get the first, say, 5% of gains that the equity index makes. So if stocks go up 20% the next year, your return is capped at 5%, but if they crash 50%, you don't absorb any capital losses. In practice, the return cap is going to be just a bit above the corresponding Treasury bill for the same duration.

These can be constructed in various different ways and institutionally I'm sure there are more bespoke ways that are more efficient from a fees/returns and tax perspective, but one way to do this on your own without going the ETF route is:

- Pick an amount you'd like to invest. - Buy a Treasury bill for some duration. Treasury bills are discounted at the time of purchase and return the target amount when the bill matures. For instance, if you buy a $100k 1-year Treasury bill, it might cost $96.5k today. - Now you have $3.5k in your pocket and a guarantee that you'll get $100k in a year when the bill matures. Use that $3.5k now to purchase call options or vertical spreads on the S&P 500 index to capture the upside that you can. Your return is limited by the structure of that options trade and what its maximum payoff is.

If you're willing to accept more than 0% downside, then you can achieve a higher potential upside cap as well.

SPY260821P00738000 (OCC symbol: PUT on SPY expiring the 21th of August 2026 at a strike of $738) is $12.20 as I type this, so $1220 per lot. So $16 800 to protect for a month. So $200 K per year.

A solid 20% yearly, unless my math is way off.

Now of course you can buy, instead of a PUT, a PUT debit spread, or you can buy further from the strike, or you can finance or partially finance your PUT or PUT debit spread with a CALL you'd sell (turning it into a covered strangle) etc. That's not the point of this exercise though. And anyway I doubt many retirees have the know-how to do that.

In any case it's well known that the costs to hedge are extremely high.

In 1929 those who had 10% gold for example "only" lost 25% overall: gold has value since thousands of years. My dumb thinking is that if gold has value since thousands of years, there's an extremely high probability that it'll keep value for the few decades I've got left at most.

I expect that would not be a cost-effective way of attaining the risk profile you'd be looking for.

I expect there won't be a more cost-effective way of managing your portfolio risk than by simply adjusting your split of broadly-diversified equities vs bonds.

Surely you need about 20 years?

ATM options cost approximately 0.4 S sigma T^0.5 (do a Taylor expansion of the "N"s in the Black Scholes formula), so indeed, for current index vols of about 16% we are talking 0.4 * 16% * (1/12)^0.5 = 1.85% for a 1 month option, and 12 of them indeed cost 22% of your portfolio. Not a good idea.

However, if you hold the options only half the way to expiry, you lose only 1/4 of the time value. And if you buy OTM, you have convexity coming your way on the way down.

Lastly, index vols were very low (until yesterday, ha), as so many firms entered the dispersion trade: they wanted to go long dispersion (some firms do well with AI, some lose out), so short correlation, therefore long single stock vol and short index vol. Which means you could buy index vol (ie protection) quite cheap.

Presumably this is their total net worth. I think this is way more common than people on this type of forum realize. Most will work until they literally can't anymore, then scrape by on social security until they die. I think it's important to keep that perspective.

That was the message that I got from a financial podcast I listened to a couple weeks ago anyway.

What you propose takes on a huge amount of inflation risk. How are you hedging that risk? A guaranteed yield doesn't mean you aren't getting poorer. Obsessing over one type of risk and ignoring another isn't rational.

Reducing variance of net worth has a very high cost. Over-indexing on that singular property, particularly when most people can afford some variability, is a recipe for relative impoverishment.

https://en.wikipedia.org/wiki/Enron_scandal

The average person is struggling in modern America.

not if you're 80 dude...

I'm saying that for the cost of buying puts to hedge against equity downside in a retirement portfolio, for any given level of risk, you'd probably be better off just selling some of the equities and buying bonds instead.

e.g. try and find any equity-focused ETF with downside protection that generally outperforms a bog-standard stock/bond split total-market ETF for whatever measure of volatility/downside protection that you want.

401k lets you rebalance a portfolio with zero tax implications.

The downsides are generally high fees and a 10% penalty for early withdrawal which makes them surprisingly bad for young people. They tend to start in lower tax brackets, have fewer reserves when unemployed, and face fewer risks from an unbalanced portfolio.

Pay down debt then Roth IRA when young 401k after 40 is often better than defaulting to a 401k, but saving anything tends to be more important than such optimizations.

And more specifically, it's not low growth/high inflation that kills bond portfolio returns, it's interest rates increasing that devalue bonds, i.e. the transition from low inflation to high inflation. So yeah, you can construct a portfolio that hedges against that... but I'd be surprised if you can do it without decreasing your risk-adjusted expected returns below a plain stock/bond index fund - whatever hedging method you use is either going to increase your interest-rate risk (bonds), or your inflation-rate risk (cash), or is going to limit your upside (buffer etfs), or is just going sap your upfront returns (protective puts).

Cars, student debt, credit card debt all gone. (And I dread needing a new car). Covered downpayment on my house and cash for a nice shed that matches the house and a fence so my kid can play in the back yard with no issue.

Invested low 5 figures into myself taking a year off and now I am getting serious about the 401k at 41. And I am ok with that.

I never worked at a big tech company and I covered my mom's down payment and appliances and new carpet and part of her move for her to move close to me. Dad died when I was 11 so I am all she has and she was a public school teacher so she's on a small pension.

We all walk a different life and I know people that make my entire life savings in a year but I will eventually grow a retirement to get me through 10-15 years and then it will be what it will be. (Maybe a tank of helium and bag)

To me the diversification hedge options (say GUNR) seem like they are helping you get closer to regime neutral. Or in other words you are giving up returns to cover more macro scenarios and betting less on what the future looks like.

It's effectively impossible to hedge against every possibility, including temporary drawdowns, while still having positive returns after inflation.