Defense of Switching

Research on Safe Withdrawal Rates

Moderator: hocus2004

Post Reply
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Defense of Switching

Post by JWR1945 »

Defense of Switching

Raddr has mis-characterized the contents of the SWR Research Group board. He does not know its contents. He cannot possibly know its contents. He has stated repeatedly that he does not read the contents of this board.

Raddr currently allocates nothing (or next to nothing) to the S&P500 index. By his actions he shows that he accepts our most important finding related to switching.

In our recommendations we have repeatedly advised people not to depend on numbers alone. Rather, we have advised people to look for cause and effect. We have searched out sensitivities to reduce our dependence on the numbers themselves. We have found, for example, that stock allocations (as represented by the S&P500) may be shifted gradually, reducing one's dependence upon specific numbers with virtually no detrimental effect.

In our recommendations we have looked beyond the limitations of our calculators. We have often suggested TIPS and/or high dividend investments (including stocks and REITS). Frequently, we have used existing TIPS as a baseline. They prove feasibility.

In terms of 5-year returns, it is dangerous to look at the bubble for guidance. Are we to anticipate a bigger bubble in the immediate future? Even if valuations have reached a permanent, higher plateau, we cannot expect the kind of returns that the bubble provided. Such returns can come about only when there is multiple expansion. Bubble has to be followed by super-bubble.

In terms of comparisons of being in the market or out during the bubble, it is important to make the right comparisons, not restricted by the limitations of our calculators. The right comparisons would have included TIPS with coupons reaching as high as 4% (real interest). I noticed today that 30-year TIPS with a coupon of 3.375% are selling for 120-06. The relevant comparisons would have had even higher yields and larger capital gains.

Have fun.

John R.
User avatar
ElSupremo
Admin Board Member
Posts: 343
Joined: Thu Nov 21, 2002 12:53 pm
Location: Cincinnati, Ohio

Post by ElSupremo »

Greetings John :)

Raddr did say he read the post. So I guess he's expressing his opinion based on that.
In terms of 5-year returns, it is dangerous to look at the bubble for guidance. Are we to anticipate a bigger bubble in the immediate future? Even if valuations have reached a permanent, higher plateau, we cannot expect the kind of returns that the bubble provided. Such returns can come about only when there is multiple expansion. Bubble has to be followed by super-bubble.
IMO it's dangerous to look at anything less than a 10yr time frame. 15-20 is much better. So that makes a switching strategy, or any other based on shorter time periods dangerous does it not? :wink: I don't concern myself with short term results but if I did I would agree with most of what you've said. My problem is I can't predict what will happen. So I try to keep my market exposure diversified (That includes VFINX and sans international.) and target the market average return. I realize this is not what most of the folks here and on the FIRE board are about I but thought I'd comment anyway. ;)
"The best things in life are FREE!"

www.nofeeboards.com
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

Our investigations into switching are not meant to encourage frequent trading. What we are looking at is the age-old advice to take a little money off the table (i.e., out of the market) when risks far exceed any upside potential. Our investigations provide some numbers to supplement our own common sense. They help you understand the magnitude and the nature of the risks involved and also how much tolerance there is when you make your own decisions.

We have found that there is a time to be out of the stock market, a time to be in only the stock market and a time for something in between. Although I caution against depending upon a single number, I point to two investigations into switching. They identified the historical P/E10 thresholds of 21 and 24 as being when it has been best to be out of the market entirely. P/E10 is 26 or 27 today. This is a good time to examine your holdings carefully and think through the next decade.

We know that there is a fair amount of tolerance as you take money off the table. You do not have to act abruptly. You do not have to do anything rash. You might limit your actions entirely to new money going into investments as opposed to selling anything now. Fees and commissions for selling have zero risk. Other gains and losses are uncertain even though the likelihood of losses is much higher than normal.

I have begun cutting back on my stock holdings for the first time in my life. Previously, I had been 100% in stocks all of the time.

There are important differences as to whether you are accumulating money, maintaining your investments or withdrawing money from your investments. Generally speaking, your most important decisions are those that you make at the end of accumulation and the beginning of withdrawals. On this board, our emphasis is when we are making withdrawals. Our actions in the first few years of retirement are, by far, the most important. It becomes more and more important not to make serious mistakes as you approach the beginning of retirement.

From our switching studies, we have learned that you can step aside for a decade, if necessary, until the stock market becomes more attractive. The numbers from the past have told us that a withdrawal rate of 4% could have been lifted to 5% with equivalent safety. With today's market and today's valuations, a withdrawal rate of 4% is the best that you can hope for (since P/E10 is very close to the highest level before the bubble, 27.0 in 1929). With today's markets and today's dividend levels, even 4% appears to be highly optimistic. Instead of seeking to increase withdrawals from 4% to 5%, we now apply switching with the hope of allowing withdrawals a large as 4% plus a small fraction.

I was not the one to choose to look at 5-year returns, although it is necessary to limit your time period if you wish to determine returns during the bubble years. Having said that, I will point out that the maxim that prices do not matter in the long-run is highly misleading. I call it an illusion of numbers. Prices matter a lot. The first ten or eleven years into retirement are critically important.

I am among those who avoid international holdings although my rationale is different from yours. I think that peteyperson is right in advocating international holdings, except for one detail. I consider the penalties associated with my own ignorance in this regard to be far more important than any potential gain.

Have fun.

John R.
User avatar
ElSupremo
Admin Board Member
Posts: 343
Joined: Thu Nov 21, 2002 12:53 pm
Location: Cincinnati, Ohio

Post by ElSupremo »

Greetings John :)
Our investigations into switching are not meant to encourage frequent trading.
Somehow I knew that post would be misunderstood. :lol:
I am among those who avoid international holdings although my rationale is different from yours. I think that peteyperson is right in advocating international holdings, except for one detail. I consider the penalties associated with my own ignorance in this regard to be far more important than any potential gain.
That's an interesting reason. I like it so much I'll add it to my "I just don't need it!" ;) Now I can be stupid and right!!! :lol:

I think this is a very interesting study. I'll continue to follow your progress.
"The best things in life are FREE!"

www.nofeeboards.com
Mike
*** Veteran
Posts: 278
Joined: Sun Jul 06, 2003 4:00 am

Post by Mike »

We have found that there is a time to be out of the stock market, a time to be in only the stock market and a time for something in between.

More specifically, the best valuation levels to be in the S&P prior to approximately 1993, since no 10 year data return exists beyond this date. We have not yet determined the best valuation levels for equity sub classes such as SCV. If we can determine what makes P/E 10 rise and fall, we may be able to improve the accuracy of our model when extrapolating to valuations outside of their 1871 ot 1992 range. Examining sub sectors of the market such as SCV will help to show the best place to reallocate money when the S&P is over valued.
Because investor newbies who chance upon the board may misinterpret what they are reading, I wonder if a sticky post at the top carefully worded to explain things to newbies might help to avoid actions by them based upon incomplete understanding. Most of the regulars who post on NFB are seasoned investors who think before they act, but I have no idea how many newbies might be lurking on the boards.
User avatar
ataloss
**** Heavy Hitter
Posts: 559
Joined: Mon Nov 25, 2002 3:00 am

Post by ataloss »

abcde
Last edited by ataloss on Mon Jun 14, 2004 3:09 am, edited 1 time in total.
Have fun.

Ataloss
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

In view of ElSupremo's comments, I have posted An Illusion of Numbers. It has a strong message. The message is important. But it is easy to overlook.

As a response to Mike's request, I ask for people to identify the important points that I should include. It is true that, over time, I have stopped repeating things that readers should keep in mind when applying this research. The more important issue is that we do not wish to restrict our actions to those that are available from our research tools.

As an example of what I have not repeated, examine this series of posts regarding TIPS Switching Surveys from Mar 09, 2004.
http://nofeeboards.com/boards/viewtopic.php?t=2208
I brought up the more general context only at the very end.
http://nofeeboards.com/boards/viewtopic ... 101#p18101

Look also at this thread: Historical Database Rates with Switching from Mar 07, 2004.
http://nofeeboards.com/boards/viewtopic.php?t=2203
I provided a more general context in this post and the one that followed it in response to remarks by Mike and BenSolar.
http://nofeeboards.com/boards/viewtopic ... 023#p18023

[Mike's more immediate goals are best handled for now by looking at the results from raddr's and gummy's Monte Carlo models. They help to fill in the gaps.]

I caution readers regarding posts about our results as reported on the other boards. There is quite a bit of misinformation including faulty statistical commentary. There have been repeated attempts to trivialize our research. There has been baiting to distract readers from the content of what we post and to focus instead on personalities. Currently, I am reluctant to venture off of this board to address such comments directly. The last two times that I have ventured off of this board, I ran into immediate, open attempts to shut this board down completely.

Have fun.

John R.
Mike
*** Veteran
Posts: 278
Joined: Sun Jul 06, 2003 4:00 am

Post by Mike »

What you have written sounds good. Since this is a research board, every post does not have to be a polished presentation with the complete picture on it. A simple sticky post with something like, "People new to this board, read this message first.", should do the job. That will free us up to examine sub topics in various stages of completion without as much danger of newbies acting on an incomplete picture. Research proceeds best when the ability to explore a variety of new ideas freely is preserved, even if some of them wind up needing modification as new information is found.
Mike
*** Veteran
Posts: 278
Joined: Sun Jul 06, 2003 4:00 am

Post by Mike »

Thank you for implementing my suggestion John. Now the board can proceed with its primary mission, research into SWR, without attempting to put the complete story into every post that examines sub topics. Newbies can get a more rounded picture from what you have written, and what ever others who feel the need may add to it.
Post Reply