This sounds familiar

Research on Safe Withdrawal Rates

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NeuroFool
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This sounds familiar

Post by NeuroFool »

I was skimming the morningstar boards this morning and came across a post by a guy who seems to be a coauthor with Ben Stein (Phil Demuth) on his "yes you can time the market" book. In his post he writes:
Ben and I have nothing but the utmost respect for John Bogle and we are definitely low expense, index kind of guys. Our point is that market valuation matters. The more expensive the market is, the lower the future return is likely to be; the cheaper the market is, the better the future return. But while "buy low" is an empty Wall Street cliche, our book quantifies and operationalizes this recommendation.

Valuation does not solve what is called the "is/ought problem" in philosophy, but the historical record shows that, for the last 100 years at least, valuation has had considerable predictive utility.
Although, according to someone who saw ben stein on tv recently, stein was quoted as saying that "by almost every valuation the market is historically cheap right now". That seems to contradict the general view right now. Hmmm.

So these guys have a metric for using valuations to predict future returns, while the SWR tool is an attempt to use valuations to predict a future safe withdrawal rate, right? Or maybe their analysis is more akin to a switching strategy? As I said, don't know anything about it but need to read some more.

Neuro
JWR1945
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Post by JWR1945 »

The following post may help you to put the matter into its proper context. It was on the thread:
Discussion with Ed Easterling of Crestmont Research from Wed, Aug 06, 2003.
http://nofeeboards.com/boards/viewtopic.php?t=1232
hocus,

Most will say that it's not possible to 'time' the markets and I agree. There are several ways to view timing though. If timing intends to be for the weeks and months that it goes up and out when it goes down, I've yet to see anyone that can consistently do that. However, some reasonable techniques (more frequent rebalancing, for example) can be successful in using the volatility or directional trends of the market to an investor's favor.

The recent book by Ben Stein is an interesting read, however has a critical fallacy. Their strategy says that it works well to buy with the market is below the moving averages (yet stay invested otherwise). Not only is this somewhat of a compromise to the integrity of the argument (i.e. wouldn't it be even better to exit the market when the signals are reversed?), but also it works because it reflects a fairly simple concept: in upwardly sloped cycles, it will always mathematically produce positive results to buy in the dip and ride the cycle wave up. It does not do a good job of addressing the impact of executing the same strategy over the past few years or though an extended flat choppy secular bear cycle.
Apparently, there are big differences in how we might look at valuations and at what Ben Stein has suggested.

However, I have spoken out in favor of price discipline. I have maintained that it is possible to buy stocks within the lower third of their 52-week highs and lows and to sell them within the upper third. If you are able to do just that (with individual stocks), you will add 1% or more to your total return. [I am talking about buying and selling once per decade or two, not rapid trading.]

Have fun.

John R.
unclemick
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Post by unclemick »

Heh heh - I of course am timing the market all the time. By holding balanced index funds, the computers are continuosly rebalancing to hold a fixed stock/bond ratio. Sometimes I don't even watch.

As for my small stash of individual stocks - I prefer to buy high and sell low. Buy a dividend stream plus div. growth - if they don't double in 7-10 yrs or the DRIP div stream isn't better than long Treasuries - I dump them, often at a tax loss.
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Post by Mike »

Although, according to someone who saw ben stein on tv recently, stein was quoted as saying that "by almost every valuation the market is historically cheap right now".
Ben is a fairly regular guest on Neil Cavuto's Saturday morning Fox show. He mostly seems to react to earnings. A year ago, he was concerned about the market's low earnings, but now that they have recovered he likes equities again.
hocus2004
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Post by hocus2004 »

"So these guys have a metric for using valuations to predict future returns, while the SWR tool is an attempt to use valuations to predict a future safe withdrawal rate, right? "

Thanks for asking that question, Neuro.

What I did in the mid-90s was to marry the "Valuation Matters" concept to the SWR concept. SWR analysis is a powerful investing tool, but the conventional methodology ignores the effects of changes in valuation. When I was putting together my plan, I spent some time studying investing questions and I determined that this was a critical flaw in the conventional methodology. I made the best stab I was capable of making at determining what the SWR was when you counted for valuation, adjusted my portfolio accordingly, and that was that.

I had no intention at the time of publishing my findings. My plan was to start a tax newsletter business after I "retired" from my job as a Director at a Big Five accounting/consulting firm.

What happened on May 13, 2002, is that I went public with what I knew and I asked for help with confirming what I had learned. JWR1945 has worked on this on a virtually full-time basis for two years, showing that the historical data does indeed say what I have always said it said.

I ended up getting into the financial independence book writing biz rather than the tax newsletter publishing biz. So I now plan to write a book on our SWR findings. I am now packaging our insights as a tool to help inform investors' investing stratagies. Because of the enormous amount of work that JWR1945 has put into refining the tool, I commonly refer to him as co-developer of the data-based SWR tool.

I don't personally endorse any one approach to incorporating the effects of changes in valuation into the analysis. William Bernstein has one way of doing it. JWR1945 has another way of doing it. Raddr uses Monte Carlo runs, but an argument can be made that he is incorporating the effects of valuation in yet a third way. JWR1945 had an earlier approach that could be pointed to as a fourth approach to incorporating valuation into the analysis. My philosophy is, Let a thousand flowers bloom! I would like to see as many approaches as possible, and I would like to see as much commentary brought forth on all of those approaches as possible so that we all learn the strong and weak points of each.

JWR1945's approach is the most fully developed. It also has stood up to scrutiny well so far. And the JWR1945 approach can be used to do a lot of exciting stuff not directly tied to the calculation of SWRs. So I see his approach as the most promising. But my understanding of statistical stuff is so limited that I am not capable of making any definitive pronouncements re his approach or any of the other approaches. We need people with greater technical skills to come forward and offer their views on the strengths and weaknesses of the various approaches.

The thing that I claim credit for is being the first to see that it is not possible to determine the SWR without taking changes in valuation into account. I'm extremely proud of that contribution. Bernstein said it publicly earlier than I did (his book was published prior to May 13, 2002), but I discovered the importance of valuation to SWR analysis back in the mid-1990s and I put up posts that hinted at this discovery prior to the time at which Bernstein published his book. In any event, I stated things more clearly than Bernstein. To this day, he has not stated in clear terms that the conventional methodology is analytically invalid for purposes of determining SWRs. Bernstein is a Giant, of course. I am not trying to take anything away from his contributions by making these observations.

I do not possess the skills needed to develop the tool in a technical sense. That work will be left to JWR1945 and any others who care to get involved. I see my role as publicizing the tool. I will be doing all sorts of things to get the word out. I of course want to be certain that we are right in what we are saying before I go too far down that road. I'm pretty darn sure of things at this point, so I have been putting my toes in the publicity waters in recent months. As I see how my initial efforts pan out, I will inform the board community of my future plans in this regard.

The "tool" is not any one approach. The tool is SWR analysis itself, and I expect that there are always going to be a number of different ways of approaching the analytical process. There is not only one valid methodology.

The reason for referring to the tool that I developed as the Data-Based SWR Tool is to distinguish it from the conventional methodology tool, which purports to be data-based but which in fact is not (because it ignores critical data). The old approach has been discredited. The conventional methodology SWR tool is the SWR tool of the past. The data-based methodology SWR tool is the SWR tool of the future.

One thing I am trying to do with this board is to build a record in support of valid SWR methodologies. In the event that stocks perform in the future somewhat in the way that they have always performed in the past, we are going to be hearing from investors who suffer severe life setbacks that SWR analysis "does not work." I want to be in a position to respond effectively to those arguments when they are made.

Investors who lose big portions of their life savings because they relied on the REHP study have no complaint with SWR analysis. Their complaint is with a particular methodology, a methodology that has been thoroughly discredited by informed analysts. SWR analysis provides powerful insights. It is not reasonable to blame the tool for wrong numbers generated by those using invalid methodologies.

The short version is--I am trying to save SWR analysis, not to bury it.

I am extremely impressed by the research that JWR1945 has put forward. I do not possess the skills to vouch for it in a technical sense, however. One thing I can say for certain even with my limited technical skills is that the conventional methodology is analytically invalid for purposes of determining SWRs.

The short version of that one is, intercst needs to make some serious changes in the words set forth in the study published at RetireEarlyHomePage.com. He needs to make those changes today, before he turns in for the night. It is entirely possible that leaving it as the first thing on his "To Do" list for tomorrow morning might be leaving it for too late to protect some aspiring early retirees who placed their trust in his veracity and competence to their personal detriment. I hope that all community members will do what they can to persuade intercst to make the changes that are required as quickly as it is humanly possible to make them.

As for the "Yes, It Is Possible to Time the Market!" book, that is a book that explores some techniques for engaging in long-term timing that would have worked in the past. The idea that long-term timing is not possible is just silliness. There are studies showing that short-term timing is either extremely difficult or impossible. There are no studies proving that long-term timing is not possible because the historical data does not support this claim.

When stock prices fall, you will see all sorts of people looking into long-term timing strategies. The benefits of these strategies are too great to ignore indefinitely. The Ben Stein book and the Peter Bernstein speech are just early signs of a phenomenon that will come to full flower in another year or two or three. A few years from now, it won't be just this board community that will be talking about how to time successfully. Everyone everywhere will be talking about it.

That's one of the reasons why I find this board so exciting. We have used SWR analysis to get a jump on everyone else. Others will be looking at what the historical data says re timing only after they have lost large portions of their accumulated capital. We have a chance to do it before we lose our shirts. That's an exciting opportunity.

It's an opportunity that was opened to us as a result of my study of SWRs in the mid-90s. I had most of my money in stocks too before I engaged in valid SWR analysis. The wonderful thing about a valid SWR analysis is that it does not tell you what you want to hear. It is an objective analytical tool; it tells you what is. I did the analysis, I saw that if I wanted to retire on schedule I needed to make some changes in my investing strategies, and I made the changes required.

Thank heavens I did so. I would be back at the accounting firm today had it not been for my discovery of the data-based SWR tool. I think of the data-based SWR as The Number That Saved My Life.

My hope is that we will be saving the financial lives of lots of other aspiring early retirees before the work of this board community is done. We do it day by day, thread by thread, post by post. Yours was a construcitve one, NeuroFool. The Wave applauds you for it.
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Post by unclemick »

And then there are the all time retro blockheads(ala Charlie Brown of Peanuts) who take the div/interest and let the principle ride. People used to do that - long, long ago.

Heh heh heh heh heh. But I'll be the first to admit 2-3% of OUR portfolio is er chewy in today's market.
hocus2004
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Post by hocus2004 »

Here's a link to an earlier thread that discussed "Yes, You Can Time the Market!"

http://nofeeboards.com/boards/viewtopic.php?t=1178
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