Safe withdrawal quick questions and discussion.

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Safe withdrawal quick questions and discussion.

Post by peteyperson »

In summary of various threads on safe withdrawal rates, is it not the general consensus on this board that investors here feel the market won't return more than 6% on average comprising 4.5% growth and 1.5% dividends?

Is it further the consensus that with investment costs of 0.1 - 1% a year and 3% inflation, swf is reduced to 2% roughly?

Is it fair to say that the board are agreeing with the analysis of stock market valuation a la Bogle being Growth + Dividends + Over Exhuberance than will revert to mean eventually?

If we're now in a situation where the indexes and the market generally are overvalued above the historical PE of 15ish, how can one invest with safety in mind in a balance portolio including stocks? I've been reading articles about people who have retired at 60 with a £1m portfolio and saw it halve and think to myself, " Didn't they look at the average P/E of their investments, compare them to the historical average and re-calculate their actual valuation once the market corrects which history shows it overcorrects eventually and then rises too high and the cycle begins over..? " No one even mentions the idea of doing a recalculation of the value of your portfolio based on the historical mean, I wonder am I missing something or are people ignoring valuations because we seem to be in an environment where P/E has gone nutty and so throw that yardstick out with the bathwater? I see people now view future P/Es as a way to value a company (seems mad to me), or comparing free cash flow, or cash in hand in various ratios. I've not read how and where such analysis is useful and what the historical ratios are for such measurements. Are these used as alternative ways to measure companies (as well as avoiding dodgy accounting that can mess with profit figures but not so much with cash)?

Some random thought that have been running through my brain on this subject for a while. Thought I'd stop by and put them out there. Hope you guys don't mind.

P.S. I've just dropped my wd rate on years away planned FIRE to 2% based on 6% return, less 1% investment costs, less 3% inflation. Puts up a 50x spending figure however. If the math is right on that, it makes me wonder how almost anyone is expected in today's society to save 50x their retirement spending. It just seems such an unrealistic number. 25x sure, but 50x...? $1m only gets you $20k pre-tax. With medical costs spiralling out of control in the States, I nod in a agreement when articles question whether $1m is enough for a retirement today. World Wealth Report stated recently there are 7.3m $millionaires in the world, a world estimated to contain 6 billion + people. If $1m doesn't do it, then almost no one has enough. It truly seems to get to point where almost no one can retire.

Petey
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Post by ataloss »

Didn't they look at the average P/E of their investments, compare them to the historical average and re-calculate their actual valuation once the market corrects which history shows it overcorrects eventually and then rises too high and the cycle begins over..? "


I think people tended to think that we were in a new era and earnings didn't matter. I agree 50x spending is a lot to save :cry:. I think investing in less overvalued sectors (samll cap, emerging markets, real estate) can help. Also avoiding selling in down markets has the potential for improving withdrawals. I am looking at spending dividends in poor years and taking gains in good years. I am not sure what will happen with us health care. Increasing costs for consumers and physicians with too much (imho) diverted to attorneys, paper shuffling and other unproductive overhead.
Have fun.

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Post by peteyperson »

Hey there,

So you think that having a number of years in liquid investments while reducing your return partially, has a big benefit on not having to cash out investments early. I was thinking that on a 50x annual spend, you could comfortable have 20 years of cash at a 60/40 market to cash investment portfolio. Enough to cover every historic downturn in full.

My understanding of the 6% return before expenses and inflation is the average over the long term looking forward. I would assume this doesn't include selling out at various points. I understand that a large cash position protects you from forced sells in a down market, but other than that if the return really will be 6%, how does it push up your wd rate?

I work on a 6% gross, 1% investment costs (lowest UK index fund 0.56%, most other fund 0.75 - 2%, some with loads, some not) and 3% inflation (which may be low as historically it is been 4% but 3% and below over the last decade. The question also becomes whether using a 3% figure is reasonable as it has only been that low for a relatively short period historically.

Petey

ataloss wrote:
Didn't they look at the average P/E of their investments, compare them to the historical average and re-calculate their actual valuation once the market corrects which history shows it overcorrects eventually and then rises too high and the cycle begins over..? "


I think people tended to think that we were in a new era and earnings didn't matter. I agree 50x spending is a lot to save :cry:. I think investing in less overvalued sectors (samll cap, emerging markets, real estate) can help. Also avoiding selling in down markets has the potential for improving withdrawals. I am looking at spending dividends in poor years and taking gains in good years. I am not sure what will happen with us health care. Increasing costs for consumers and physicians with too much (imho) diverted to attorneys, paper shuffling and other unproductive overhead.
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Post by gummy »

What's scary is that, with 30 years of investing at 6% and 3% inflation/salary increases and 4% withdrawal rate (at retirement) to give 75% of your current salary (at retirement), a ballpark estimate suggests that you'll have to invest about 40% of your salary each year to achieve that goal ^#$%@!?
Mamma mia!!
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There's an easy fix: die young

What's interesting (to me) is that many gurus quote historical P/E ratios (like 15) yet suggest something much less than historical returns.
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Post by Heelir191 »

What's scary is that, with 30 years of investing at 6% and 3% inflation/salary increases and 4% withdrawal rate (at retirement) to give 75% of your current salary (at retirement), a ballpark estimate suggests that you'll have to invest about 40% of your salary each year to achieve that goal


The good news is, if you are investing 40% of your salary (I am), you are used to living on the remaining 60%. So if you feel that 75% of your current spending power is adequate in retirement (I do), then you actually only need 75% of the 60%, so your investment only needs to provide 45% of your current income during retirement.

I'm completely ignoring taxes for the sake of making a point, and that point is: that things are not quite so grim.
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Post by bubble »

Gummy wrote
What's interesting (to me) is that many gurus quote historical P/E ratios (like 15) yet suggest something much less than historical returns.


It seems to me that the historical return of say 4% will only be true at the historical PE ratio of 15. Therefore if the current trailing PE is at 30 then the current SWR will be a lot less than the historical 4%.


Bubble :D
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Post by gummy »

... if you are investing 40% of your salary ... things are not quite so grim


Quite true :D
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Post by BenSolar »

Greetings, all :)
peteyperson wrote: The question also becomes whether using a 3% figure [for inflation] is reasonable as it has only been that low for a relatively short period historically.


That is one reason I like using 'real' or inflation adjusted growth when thinking about this stuff. Historically the stock market earnings has grown 1.5% in excess of inflation. Inflation goes up, earnings go up to match, and vice versa.

So current S&P dividends of 1.6% + 1.5% real growth - 1% investment cost ~= 2% real return . Same result no inflation figure to worry about.

Back to your other questions, and I can only speak for myself (I do think some others generally agree, but others may not):
is it not the general consensus on this board that investors here feel the market won't return more than 6% on average comprising 4.5% growth and 1.5% dividends?

Assuming we are talking about the broad US stock market, I agree with the proposition as far as it goes (I can't speak to the international market's valuation with anything approaching certainty, what I've managed to track down indicates it is somewhat lower valued, so higher returns would be implied). But, it assumes a static valuation, which hasn't been the case historically. If down the line when you are withdrawing, then the actual return will be strongly influenced by the then current valuation. I.e. if we're back in a bubble and PE10 is 50, then you will have done better, or if in a trough, then worse. Further more, as we accumulate assets, then we will quite likely get to accumulate some at significantly cheaper prices. Dollar (or pound :)) cost averaging will lower your average purchase price and raise your return.

Is it further the consensus that with investment costs of 0.1 - 1% a year and 3% inflation, swf is reduced to 2% roughly?


I agree with this pretty much. Though caveats about timeframe and stuff come to mind. I think that if you are willing to deplete capital and only have a 30 year timeframe, it is reasonable to set something like 2 or 3 % as a baseline withdrawal, and take more after good years for the market. Planning for the absolute worst and limiting yourself in such a scenario to a strict 2% may be a bit extreme.
Is it fair to say that the board are agreeing with the analysis of stock market valuation a la Bogle being Growth + Dividends + Over Exhuberance than will revert to mean eventually?


If we substitute 'return' for 'valuation' I agree.
If we're now in a situation where the indexes and the market generally are overvalued above the historical PE of 15ish, how can one invest with safety in mind in a balance portolio including stocks?


Diversify away from the overvaluation. US large cap growth seems to be where the worst of it is. You can invest in value, non-US, small value, real estate trusts, short term bonds, inflation indexed bonds, etc ...
No one even mentions the idea of doing a recalculation of the value of your portfolio based on the historical mean, I wonder am I missing something or are people ignoring valuations because we seem to be in an environment where P/E has gone nutty and so throw that yardstick out with the bathwater?


Such a recalculation seems to be a reasonble stress test for your retirement account. I think the whole 'ignore valuations - the stock market is the best long term investment' is a product of our recent history, human psychology, and the money making drive of the financial industry. Analysis like Bernstein's and Bogle's aren't popular on Wall St., because they don't encourage stock buying. Instead they point to the long term returns, ignoring where the returns came from. When you realize dividends are low, and speculative return is likely to be negative because of mean reversion (though that's speculation :wink:), then you can draw different conclusions.
I've just dropped my wd rate on years away planned FIRE to 2% based on 6% return, less 1% investment costs, less 3% inflation. Puts up a 50x spending figure however. If the math is right on that, it makes me wonder how almost anyone is expected in today's society to save 50x their retirement spending. It just seems such an unrealistic number. 25x sure, but 50x...?


Remember, the 6% return is based on today's valuations. I certainly hope and expect to see lower valuations down the road, which will speed up accumulation, and provide higher returns. If you expect reversion to the mean to bring valuations down, then it might make sense to keep some assets in alternative asset classes so that you can rebalance with a extra kick when prices come down.

Just some thought, I can't see the future. Good luck, Petey
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus
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Post by ElSupremo »

Greetings Ben :)

I guess you didn't like "BS" eh? :wink:I like the sun! 8)
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Post by BenSolar »

gummy wrote: What's interesting (to me) is that many gurus quote historical P/E ratios (like 15) yet suggest something much less than historical returns.

Don't you buy into the 'valuation directly affects returns' thesis, gummy? It seems to me logic and evidence point to it being correct.

We can look back at times of similar valuation and see the long term returns. We had PE10 of 24-25 previously this century in late 1928, early 1930, and early 1966. Here's were PE10 ended up 20, 30, 35, 40 years afterward

Code: Select all

Date     PE10  20th year PE10   30th  35th  40th 
11/'28   25.1       10.2        17.0  20.7  22.2 
03/'30   24.6       10.9        17.3  23.3  16.5 
01/'66   24.1       11.7        24.8  37.0  NA 																																		

So, now if I/we can figure out the real return for these periods we can see the historic long term returns from current valuations and how much of that was from 'speculative return' or change in valuation. The 40 year period from 11/'28, the 35 year period from 03/'30, and the 30 year period from 01/'66 all ended with valuations roughly equal to the start valuations, so those would remove the 'speculative return' part and would theoretically match the 'dividends + real growth = real return' theory.

I not as handy with spreadsheets as some of you whizzes, but I'll be looking into it ...
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus
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Post by BenSolar »

ElSupremo wrote: I guess you didn't like "BS" eh? :wink:I like the sun! 8)

Hola, ES :)
I didn't quite like the ring of what I had before. I'll try something else before long. :wink:

It took me a while to track down a good sun gif: weather.com was the answer. :D
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus
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Post by peteyperson »

That's an interesting point, gummy.

(Hello to you BTW. I'm a Brit poster from the Fool boards so my perspective lends a different slant here on occasion).

Do you think therefore that someone should still be using a historical return to calculate swr? In which case, care to lay some numbers down as I did? (Having seen some of your site pages I know that I won't be able to understand your advanced math, so could you keep it simple enough for a layman?)

Thanks,
Petey
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outside of the USA even if you won't venture far enough to discover it!


gummy wrote: What's interesting (to me) is that many gurus quote historical P/E ratios (like 15) yet suggest something much less than historical returns.
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Post by peteyperson »

Another excellent point, Heelir.

I think my biggest problem will be buying property late when an apartment in suburbs of London costs around $200k now and
by the time I can afford to buy in 3-4 years time, more like $300k.

This will sap so much of my income that saving anything will be
a challenge! Moving out of London requires huge travel time
and travel costs which mean it doesn't necessarily make you
better off.

It's now a race against time to build my business up enough to
support a high enough income to qualify a large mortgage in
the first place and clear debts taken on to start the business
during a subsequent IT recession.

FIRE investing is a distant second but I try to keep my eye on it
as it is still a key goal. I may well end up apartment rich but
cash poor just due to circumstances. Sucks.

Petey

Heelir191 wrote:
What's scary is that, with 30 years of investing at 6% and 3% inflation/salary increases and 4% withdrawal rate (at retirement) to give 75% of your current salary (at retirement), a ballpark estimate suggests that you'll have to invest about 40% of your salary each year to achieve that goal


The good news is, if you are investing 40% of your salary (I am), you are used to living on the remaining 60%. So if you feel that 75% of your current spending power is adequate in retirement (I do), then you actually only need 75% of the 60%, so your investment only needs to provide 45% of your current income during retirement.

I'm completely ignoring taxes for the sake of making a point, and that point is: that things are not quite so grim.
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Post by peteyperson »

Firstly, where do you get the analysis of the market return is usually 1.5% above inflation?

The trick I suppose is to grasp which the return will be moving forward and plan a w'd rate based on that. Your math seems to match mine though you come to it from a different direction (which is always fun). That being the case, you debunk your own analysis on w/d rates why? You think dividends will go back up over time to increase the overall return and bump up w/d rates another 1% point? What do you use for your own FIRE calculations (I don't know if you're FIREd or not) in calculating the total investments required to FIRE? That sets my target.

I see the term PE10 here. I understand P/E, but what is PE10?

Dollar cost averaging is tricky. I'm also considering accerated mortgage payoff given the high value mortgage I will have and the low return predicted over the next few years in the market. I'm 32 in a week, so if I have 20 years until I'd like to retire, I'd only be in the market maybe 12 years if the first 8 is killing the mortgage. This I suspect is too sufficient a period to dollar cost average effectively given market volatility. Alternatively I could advance pay the mortgage down to a 15-20 year term which kills it in the mid-50s and use what ever is spare to invest with. Being that I'm personally in debt currently to finance a new business, I don't enjoy the idea of clearing that, getting debt-free, then going in hock again for a very large mortgage for a small property (think NY/San Fran pricing here for a comparison).

I didn't actually get whether you agreed with me that people should auto-correct what they have in an inflated stock market using historical P/E values so they don't retire with 80% in stock at avg P/E of 30 and then a month later the market massively corrects to 15 and they have to go back to work (read too many articles about people like this). Were you side-stepping the issue somewhat by suggesting investing in a variety of investment vehicles so I only have limited exposure to the market upon FIRE? In which case, isn't is usually the case the all other investments deliver inferior results to the market and yet we're examining swr based on what the markets do? Or did I miss something there?

I'm just thinking that I dollar cost average 15 + years of market investment, then I go to retire and the P/E is on 25. I've plowed my money into something overvalued and like okay, where do I go from there? Use the market as a growth vehicle, but heavily diversify away from it near FIRE in order to avoid the downsides? In which case, what happens to the expected return when dealing with other investments with lower returns? I wonder, how does Warren Buffett deal with investments he buys on the open market that later trade on a high multiple as most do now? He buy and holds. So does he just ignore that side of it?

Thoughts?

Petey


BenSolar wrote:
That is one reason I like using 'real' or inflation adjusted growth when thinking about this stuff. Historically the stock market earnings has grown 1.5% in excess of inflation. Inflation goes up, earnings go up to match, and vice versa.

So current S&P dividends of 1.6% + 1.5% real growth - 1% investment cost ~= 2% real return . Same result no inflation figure to worry about.

Back to your other questions, and I can only speak for myself (I do think some others generally agree, but others may not):
is it not the general consensus on this board that investors here feel the market won't return more than 6% on average comprising 4.5% growth and 1.5% dividends?

Assuming we are talking about the broad US stock market, I agree with the proposition as far as it goes (I can't speak to the international market's valuation with anything approaching certainty, what I've managed to track down indicates it is somewhat lower valued, so higher returns would be implied). But, it assumes a static valuation, which hasn't been the case historically. If down the line when you are withdrawing, then the actual return will be strongly influenced by the then current valuation. I.e. if we're back in a bubble and PE10 is 50, then you will have done better, or if in a trough, then worse. Further more, as we accumulate assets, then we will quite likely get to accumulate some at significantly cheaper prices. Dollar (or pound :)) cost averaging will lower your average purchase price and raise your return.

Is it further the consensus that with investment costs of 0.1 - 1% a year and 3% inflation, swf is reduced to 2% roughly?


I agree with this pretty much. Though caveats about timeframe and stuff come to mind. I think that if you are willing to deplete capital and only have a 30 year timeframe, it is reasonable to set something like 2 or 3 % as a baseline withdrawal, and take more after good years for the market. Planning for the absolute worst and limiting yourself in such a scenario to a strict 2% may be a bit extreme.
Is it fair to say that the board are agreeing with the analysis of stock market valuation a la Bogle being Growth + Dividends + Over Exhuberance than will revert to mean eventually?


If we substitute 'return' for 'valuation' I agree.
If we're now in a situation where the indexes and the market generally are overvalued above the historical PE of 15ish, how can one invest with safety in mind in a balance portolio including stocks?


Diversify away from the overvaluation. US large cap growth seems to be where the worst of it is. You can invest in value, non-US, small value, real estate trusts, short term bonds, inflation indexed bonds, etc ...
No one even mentions the idea of doing a recalculation of the value of your portfolio based on the historical mean, I wonder am I missing something or are people ignoring valuations because we seem to be in an environment where P/E has gone nutty and so throw that yardstick out with the bathwater?


Such a recalculation seems to be a reasonble stress test for your retirement account. I think the whole 'ignore valuations - the stock market is the best long term investment' is a product of our recent history, human psychology, and the money making drive of the financial industry. Analysis like Bernstein's and Bogle's aren't popular on Wall St., because they don't encourage stock buying. Instead they point to the long term returns, ignoring where the returns came from. When you realize dividends are low, and speculative return is likely to be negative because of mean reversion (though that's speculation :wink:), then you can draw different conclusions.
I've just dropped my wd rate on years away planned FIRE to 2% based on 6% return, less 1% investment costs, less 3% inflation. Puts up a 50x spending figure however. If the math is right on that, it makes me wonder how almost anyone is expected in today's society to save 50x their retirement spending. It just seems such an unrealistic number. 25x sure, but 50x...?


Remember, the 6% return is based on today's valuations. I certainly hope and expect to see lower valuations down the road, which will speed up accumulation, and provide higher returns. If you expect reversion to the mean to bring valuations down, then it might make sense to keep some assets in alternative asset classes so that you can rebalance with a extra kick when prices come down.

Just some thought, I can't see the future. Good luck, Petey
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Post by JWR1945 »

Welcome back, peteyperson. Referring to your latest question:
Do you think therefore that someone should still be using a historical return to calculate swr? In which case, care to lay some numbers down as I did?

My standard scale factor is to divide 25 (which corresponds roughly to the peak of the Great Depression) by today's PE10 number whenever it is larger than 25. If it is lower, I do not make any adjustment. Then I multiply this ratio by whatever I see from the traditional sources such as FIRECalc ( http://capn-bill.com/fire/ ). I get my PE10 data from Professor Shiller's website at www.econ.yale.edu/~shiller/ . (The transition point is close to an S&P 500 index value of 950. That is, if today's index value were 950, the PE10 would be very close to 25.)

My rationale for this approach is that it is the earnings that support safe withdrawal rate numbers. Similar earnings should support similar withdrawal rates.

That means that today's safe withdrawal rate is very close to the traditional 4% number. If valuations were lower, the safe withdrawal rate would be higher. (raddr has made some important investigations into the safety of those traditional numbers. They are not quite so secure as we would like, but they are not tremendously dangerous.)

For additional information be sure to read my comments on BenSolar's recent thread: Secular bear = PE contraction on Sunday, June 15, 2003 at 11:28 am CDT.
http://nofeeboards.com/boards/viewtopic ... 7692#p7692

I concluded that investment opportunities will be favorable once again after about a decade:
Last January's level of the S&P 500 with a P/E10 of 22.9 was high. If earnings continue to grow as well as they did during the last decade and if (real) prices remain steady, the P/E10 will be fairly valued at 16.0 after another decade.

I recommend following BenSolar's advice for the time being:
Diversify away from the over-valuation. US large cap growth seems to be where the worst of it is. You can invest in value, non-US, small value, real estate trusts, short term bonds, inflation indexed bonds, etc ...

I suggest that you find alternatives to gummy's tongue-in-cheek suggestion:
There's an easy fix: die young

That may be appropriate at the Motley Fool, but not here.

But as for what peteyperson should do, as opposed to people in general, I recommend that you focus carefully on buying that apartment in the suburbs. Find one that will maintain a decent resale price into the next decade or so. You will have the option of moving elsewhere when you do retire. You might as well have a decent quality of life today and you will not be throwing your money away.

Have fun.

John R.
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Post by peteyperson »

Hi JWR,

I had thought that bonds were a bad investment as many run from stocks to bonds when they dropped in value pushing bond funds up. The expectation was that the market would rise with an improving economy, that interest rates would go up naturally too as they are at historic lows currently and that bond returns have an inverse relationship to interest rates. Meaning people are selling stocks at the low and buy bonds shortly before the return is likely to tank, then when confidence is returned in the stock market they'll get rid of bonds in order to buy back the market (at the increase valuation), thereby selling low and buying high..

What is wrong or different from this analysis? Is it purely that the people here expect either a correction or limited upside to an inflated market as it corrects gradually over the next decade or is it something else?

Could you educate me on what I'm missing.

Could you point me at particular bond investments that I can research to get a handle on them in reference to your comments?

Thanks,
Petey


JWR1945 wrote: Welcome back, peteyperson. Referring to your latest question:
Do you think therefore that someone should still be using a historical return to calculate swr? In which case, care to lay some numbers down as I did?

My standard scale factor is to divide 25 (which corresponds roughly to the peak of the Great Depression) by today's PE10 number whenever it is larger than 25. If it is lower, I do not make any adjustment. Then I multiply this ratio by whatever I see from the traditional sources such as FIRECalc ( http://capn-bill.com/fire/ ). I get my PE10 data from Professor Shiller's website at www.econ.yale.edu/~shiller/ . (The transition point is close to an S&P 500 index value of 950. That is, if today's index value were 950, the PE10 would be very close to 25.)

My rationale for this approach is that it is the earnings that support safe withdrawal rate numbers. Similar earnings should support similar withdrawal rates.

That means that today's safe withdrawal rate is very close to the traditional 4% number. If valuations were lower, the safe withdrawal rate would be higher. (raddr has made some important investigations into the safety of those traditional numbers. They are not quite so secure as we would like, but they are not tremendously dangerous.)

For additional information be sure to read my comments on BenSolar's recent thread: Secular bear = PE contraction on Sunday, June 15, 2003 at 11:28 am CDT.
http://nofeeboards.com/boards/viewtopic ... 7692#p7692

I concluded that investment opportunities will be favorable once again after about a decade:
Last January's level of the S&P 500 with a P/E10 of 22.9 was high. If earnings continue to grow as well as they did during the last decade and if (real) prices remain steady, the P/E10 will be fairly valued at 16.0 after another decade.

I recommend following BenSolar's advice for the time being:
Diversify away from the over-valuation. US large cap growth seems to be where the worst of it is. You can invest in value, non-US, small value, real estate trusts, short term bonds, inflation indexed bonds, etc ...

I suggest that you find alternatives to gummy's tongue-in-cheek suggestion:
There's an easy fix: die young

That may be appropriate at the Motley Fool, but not here.

But as for what peteyperson should do, as opposed to people in general, I recommend that you focus carefully on buying that apartment in the suburbs. Find one that will maintain a decent resale price into the next decade or so. You will have the option of moving elsewhere when you do retire. You might as well have a decent quality of life today and you will not be throwing your money away.

Have fun.

John R.
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Post by gummy »

I suggest that you find alternatives to gummy's tongue-in-cheek suggestion. That may be appropriate at the Motley Fool, but not here.


Good idea.
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Post by BenSolar »

peteyperson wrote: Firstly, where do you get the analysis of the market return is usually 1.5% above inflation?


First, to be clear, I said that stock market earnings growth is usually 1.5% above inflation. I find the number quoted is usually 1.5 or 2%. Here Bernstein writes:
The long-term real growth of earnings and dividends had not budged from the historic 2% rate, and stock yields barely poked above 1%. A future of 3% real expected returns beckoned.


Asness estimated the relationship as follows:
Nominal Earnings Growth = 2.2 + .94 * inflation

John Cambell says about 2%:
Over long periods of time, these formulas have given results that are consistent with average realized returns. For instance, from 1871-2001, the average dividend/price ratio was just under 5 percent, while the average real growth rate was just over 2 percent, adding to about 7 percent, which is the long-term compound average realized stock return in real terms, that is, correcting for inflation.


So, hmm, I'm sure I've seen 1.5% referred to, but can't find a reference. Perhaps my memory is faulty. :? Let's use 2%, then we have 3.6% real return from S&P500.
you debunk your own analysis on w/d rates why?


Well, as I mentioned 'if you are willing to deplete capital', that is spend down your capital over your expected withdrawal period. I also mentioned 30 years, while you seem to be planning for longer/indeterminant withdrawal without depleting capital? As JWR mentioned 4% survived 30 years from these valuation levels in the past. A worse outcome is entirely possible, I think, as shown by raddr's mean reverting Monte Carlo analysis
What do you use for your own FIRE calculations (I don't know if you're FIREd or not) in calculating the total investments required to FIRE? That sets my target.

I'm shooting for a 4% WR for my planning purposes. I'm a long way from FIRE. I think I could build a portfolio that would support 4% in today's environment, and I hope valuations will improve.
I see the term PE10 here. I understand P/E, but what is PE10?

PE10 is a valuation measure that uses inflation adjusted price divided by inflation adjusted 10 year average earnings. Using the 10 year average earnings smooths out the bumps and dips in earnings, giving us a smoother picture of 'earnings power'. Shiller and Cambell established that PE10 is a pretty good predictor of future long term stock market returns. You can find recent values for PE10 here and you can determine current value using this formula: current PE10 = current price * last PE10 / last price .
I didn't actually get whether you agreed with me that people should auto-correct what they have in an inflated stock market using historical P/E values so they don't retire with 80% in stock at avg P/E of 30 and then a month later the market massively corrects to 15 and they have to go back to work (read too many articles about people like this). Were you side-stepping the issue somewhat by suggesting investing in a variety of investment vehicles so I only have limited exposure to the market upon FIRE? In which case, isn't is usually the case the all other investments deliver inferior results to the market and yet we're examining swr based on what the markets do? Or did I miss something there?

I do agree with you on the first point. I also suggested the option (desireable to me) of carefully investigating other investment options and diversifying into those with low correlation to the TSM and with decent returns. The assumption that the TSM is always the investment option with the highest return is not always correct, IMO. For instance in early 2000 in the US, the S&P 500 rose such that it's dividend yield was only 1.1%. Add 2% real growth for an expected real return of 3.1 %. At that time there were US inflation protected Treasury bonds with a guaranteed real return higher than that. REITs, small cap value, large cap value, all had higher expected returns then. Presently the options aren't as clear cut and returns from the alternatives look lower. But the Vanguard REIT index fund with current yield of about 6% still looks good to me compared to S&P 500. I don't know if you have any comparable option.
I'm just thinking that I dollar cost average 15 + years of market investment, then I go to retire and the P/E is on 25. I've plowed my money into something overvalued and like okay, where do I go from there? Use the market as a growth vehicle, but heavily diversify away from it near FIRE in order to avoid the downsides? In which case, what happens to the expected return when dealing with other investments with lower returns? I wonder, how does Warren Buffett deal with investments he buys on the open market that later trade on a high multiple as most do now? He buy and holds. So does he just ignore that side of it?


If you can identify asset classes that are more attractive, then you can move money there. If not, then I guess you are stuck with dealing with lower predicted returns. If you've been able to buy in at lower levels, then at least you've had the pop in return given by the growth in valuation. Buffet doesn't sell core holdings much, but he certainly wasn't buying when valuations were sky high. If the market continues north from here, I plan to sell the last of my S&P 500 by the time it hits PE10 of 30. I'll put proceeds in fixed rate bank contract available in my 401k for lack of better options. I like the guaranteed 1.7% better than the prospects of S&P 500 at PE10 30. I'll increase exposure to S&P 500 when valuations improve. Some frown at this, but it makes sense to me.
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus
JWR1945
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Post by JWR1945 »

peteyperson brings up a much better point than he may realize.
I had thought that bonds were a bad investment as many run from stocks to bonds when they dropped in value pushing bond funds up. The expectation was that the market would rise with an improving economy, that interest rates would go up naturally too as they are at historic lows currently and that bond returns have an inverse relationship to interest rates. Meaning people are selling stocks at the low and buy bonds shortly before the return is likely to tank, then when confidence is returned in the stock market they'll get rid of bonds in order to buy back the market (at the increase valuation), thereby selling low and buying high..

I am not quite sure how bonds entered into these discussions. Let me point out that this shift between stocks and bonds occurs much less than market commentators would have you believe. The bond market is much larger than the stock market. Along the same line of thought, the stock market is much larger than the gold market. I think that the dollar ratio of bonds to stocks is at least ten.

Most people know only one market really well. They do not shift from one to another very often. (I got this thought from listening to radio talk show host Roger Arnold of www.myhomelender.com .) By the sheer magnitude of the bond market, it would quickly swamp the other markets. People do change their allocations, but only slowly. And as peteyperson points out, they tend to do so at the worst possible times.

The most convincing information that I have seen is that stocks and bonds should be treated separately. Your total return (in nominal dollars) for bonds after a decade is almost identical to starting yields regardless of what happens in the economy. Your total return from stocks after a decade can be just about anything, regardless of initial dividend yields.

I have noticed that it is seldom a good time simply to shift between stocks and bonds. Usually, there is a gap when you would not be invested in anything, according to how gains are reported for the two markets. That gap can easily wipe out any trading advantage.

There is another point worth mentioning. There really is such a thing as a re-balancing bonus. That is, you re-balance your portfolio when it deviates greatly from your planned allocations. This forces a sell high, buy low discipline. You are best off by having more than a simple stock/bond selection, especially these days. Since neither stocks nor bonds look especially attractive at this time, you might do better by emphasizing such asset classes as REITS and small capitalization value stocks at this time. The discipline of re-balancing would work its wonders by making the timing decisions for you. (Use a re-balancing threshold of 5% to 10% such as raddr has found to be of greatest benefit.) The re-balancing bonus can add up to 1% to your total return. In the real world, that is a biggie.

Have fun.

John R.
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ataloss
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Post by ataloss »

The good news is, if you are investing 40% of your salary (I am), you are used to living on the remaining 60%. So if you feel that 75% of your current spending power is adequate in retirement (I do), then you actually only need 75% of the 60%, so your investment only needs to provide 45% of your current income during retirement.

things are not quite so grim.


or at least the relative grimness of the future will approximate current grimness :lol:
Have fun.

Ataloss
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