The Risk and Reward of Investing a Lost Earnings Award: A Comparison of Stocks, Bonds, and Bills

Abstract This note analyzes the risk and reward of investing the present value of a 40-year worklife of lost earnings (of $10,000 per year), discounted using rates of returns on various portfolios. Eight portfolios are examined: 100% in Treasury bills; 100% in intermediate-term government bonds; 100% in corporate bonds; four mixtures of the SP and 100% in the S&P 500. The rates of return on the portfolios and the growth rate in hourly earnings are randomly selected from a year in the 1965–2010 period. The results of 10,000 Monte Carlo simulations indicate that a 40-year portfolio will face “ruin” roughly 51% to 52% of the time for all portfolios. However, the portfolios differ greatly in the median year of ruin (if ruin occurs), ranging from a high of the 38th year for a 100% Treasury bills portfolio, to the 22nd year for a 100% S&P 500 portfolio. The percent of time that the award greatly enriches (with an ending balance over $1,000,000) the p...