MPT discussion

Research on Safe Withdrawal Rates

Moderator: hocus2004

hocus2004
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Post by hocus2004 »

"Perhaps I wasn't clear [shocker, eh?]"

Your earlier statement was not unclear, Alec. It was incorrect. I explained why in my earlier response.
hocus2004
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Post by hocus2004 »

"The worst case scenario is that all of your assets become worthless at once, and you're left starving. You cannot get worse than this. This is a real possibility, however very small, no matter what valuation levels are."

This is of course so. As you probably know, SWR analysis assumes this possibility out of existence. SWR analysis assumes a future no worse than the worst that we have seen in the past. Were this assumption not made, the SWR would always be zero and the analytical tool would not be nearly as valuable to aspiring earlier retirees seeking insights as to how their investments may perform as it in fact is.
hocus2004
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Post by hocus2004 »

"It is also a real possibility, however small, that valuation levels keep increasing."

As you probably know, SWR analysis also assumes this possibility out of existence. SWR analysis assumes that stocks will perform in the future somewhat in the way in which they have performed in the past. SWR analysis does not take into account the remote possibility that stocks will become an entirely new asset class on the day your retirement begins, an asset class which behaves in ways different than the way in which stock have always performed in the past, the possibility you draw our attentiion to with the words quoted above.
hocus2004
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Post by hocus2004 »

"Just b/c this may have not happened yet doesn't make it any less of a possibility. "

On this we disagree. Some scenarios are more far-fetched than others. Raddr did a standard deviation analysis to determine how likely it is that we will see the scenario used in the REHP study to generate the finding that a plan calling for a 74 percent S&P allocation and a 4 percent take-out is "100 percent safe." Raddr found that the odds of us seeing the return levels needed to make this claim accurate are 1 in 740. Bernstein has offered comments along the same lines, saying that anyone who is thinking of using a conventional methodology study as a guide for planning his retirement should "fuggetaboutit" given the far-fetched long-term return assumptions built into the conventional methodology studies.

Have there been 1 in 740 long-shot bets that have come through? There have indeed. Would I want to take my life savings and put it all on a horse at the race-track paying 1 in 740 odds? I would not.

It's remotely possible that we will see the sorts of returns embedded into the analysis done in the REHP study. You suggest above that this no less of a possibility than the more reasonable assumptons that were used in the SWR analyses done by Bernstein, raddr, and JWR1945. This I do not buy. Those studies are analytically valid. The REHP study is not. Analytically valid studies are far more likely to produce useful results than analytically invalid ones, in my view.

Some possiblities are just too far-fetched to be given serious consideration by serious people. The assumptions employed in the REHP study are assumptions of that type. Anything could happen. But to claim that a strategy that depends on a 1 in 740 long-shot coming through is "100 percent safe" is "highly misleading," just as William Bernstein says it is.
hocus2004
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Post by hocus2004 »

"then the realized SWR could..."

There is no such animal as a "realized SWR."

If you have already realized your return, then you know what it is. Once you know what your return is, it is not a "safe" return, but a "certain" return.

The "realized SWR" concept is a self-contradicting one. You can have an SWR if you do not yet know your return or you can have a realized return if you do. You cannot possibly have both at the same time.
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