Importance of the sequence of returns for calculating SWR

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Importance of the sequence of returns for calculating SWR

Post by raddr »

Wanderer and I were discussing awhile back how sensitive the SWR ("safe" withdrawal rate) is to the sequence of returns from year to year. I played around with Shiller's market data since 1871 and found that merely switching two years in the sequence could make a huge difference. IOW if you take the 130 years since 1871, randomly switch two, and leave the other 128 alone you can significantly change the SWR in many cases. Each time I started out with the historical data anew before switching 2 years.

I took the TMF's REHP methodology and ran it 1000 times exactly as was done for the historical data exceptly I randomly switched 2 years of historical data for each run. Details: -75:25 stocks:commercial paper - real inflation adjusted (CPI)returns
-30 year simulated retirement for each year from 1871 to 1971 (100 overlapping periods)
-0.2% annual expenses
-returns for two random years switched for each run

Here's what happens:



As you can see just above the blue "simulation mean" line there is a dense green line of dots at about 3.85%. This is the historical 30-year SWR as determined by the real historical data. Note that this is where most of the dots are congregated which means that switching 2 years in the return sequence made no difference in the SWR for most of the simulated runs. However, approximately 25% of the dots fall below this meaning that the SWR would've been lower if only 2 years in the sequence had been different. In a few cases the SWR would have been below 3%! Of course, in some cases the switch would have raised the SWR but not by much (less than 0.5%). Not only that but only 13% of the time did the SWR go up - roughly half of the number of times it went down.

Just to show how little the change was in the returns sequence here is a representative sample of 9 switched-data return histories (red lines) plotted against the actual historical data (blue line):



A fair criticism could be made that taking returns out of sequence is an artificial situation and I wouldn't disagree. However, I left 128 out of 130 exactly the same. And history won't repeat exactly the same way which is why you have to take a study like that done at REHP with a large grain of salt. :wink:I mean who can predict when an event like 9-11 will happen and throw the markets out of whack for a year or two :?:
Last edited by raddr on Thu Dec 05, 2002 5:59 pm, edited 1 time in total.
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Post by wanderer »

i bet someone would argue that you are therefore "predicting something worse than the past" whatever the f that means. LOL.

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Of course there is the 'asteroid defense' ...

Post by BenSolar »

i bet someone would argue that you are therefore "predicting something worse than the past" whatever the f that means. LOL.


Funny! You would definitely get that response elsewhere, as well as the other stock defense: "Well, even 0% wouldn't help if an asteroid hit."

Of course the point that you can't plan for catastrophe is a good one, but studies like raddr's are invaluable as a sanity check.

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Post by wanderer »

ben -

that's another part of the misdirection and deception - anyone who questions 4% is "hysterical", overly obsessive abt control.

did someone ever respond to your challenge abt knowingly misdirecting the debate when you called him on it?

wanderer, so tempted to remind folks of the facts...
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Post by raddr »

Ben and wanderer,

i bet someone would argue that you are therefore "predicting something worse than the past" whatever the f that means. LOL.


Funny! You would definitely get that response elsewhere, as well as the other stock defense: "Well, even 0% wouldn't help if an asteroid hit."

This is precisely my point. :lol: I'm not factoring in lower returns, increased volatility, etc. I'm just showing what can happen with the exact same average yearly gains and volatility just arranged a little differently. IOW this shows what could happen if the future returns are no worse than in the past but don't follow the exact same sequence.
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Post by wanderer »

raddr -

but that would be "worse than the past" cuz you should expect 7% pa added due to an expanded multiple - cuz that's what happened in the really awful past.

see why i say, "whatever the f that means"?:wink:

w
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Post by raddr »

w,

but that would be "worse than the past" cuz you should expect 7% pa added due to an expanded multiple - cuz that's what happened in the really awful past.

Actually part of the 7% pa (or whatever the real number is) includes the multiple expansion to the tune of about 1% per year IIRC. IOW, real returns would've been 1% lower if no multiple expansion had occured. This is accounted for in my model. So you see it really isn't worse. :wink:
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Post by wanderer »

the 7% is from bogle (common sense) who i trust infinitely more than mr greaney.

unless you include such an expansion, no doubt he will accuse you of "fudging" with the past. trust me raddr, i concur 100% with your perspective. i give the 4% rule it's due: about 15 seconds of thought. then i start to figure where i might be vulnerable over the next 60 yrs.

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Post by BenSolar »

wanderer: did someone ever respond to your challenge abt knowingly misdirecting the debate when you called him on it?


Nope. Apparently my more nettlesome posts are better left unanswered.
raddr: This is precisely my point. I'm not factoring in lower returns, increased volatility, etc. I'm just showing what can happen with the exact same average yearly gains and volatility just arranged a little differently.


That is great stuff your putting up, raddr. I love it!

The only argument I see against these being pretty much the same as historical returns is that it ignores (the debatable) mean reversion. That is, if mean reversion (or a valuation effect) helped pull the market out from the depths of single digit PEs seen at the end of the 1929 and 1972 bears, then adding another 30% decline at that time may be questionable. Presumably, that type scenario is causing some of the lowest SWRs in your results.

However, the comment about never knowing when something like 9/11 will throw a wrench into things is quite true. Who's to say that the returns you've run are out of the question. Not me.

Ben
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Post by raddr »

Ben,

The only argument I see against these being pretty much the same as historical returns is that it ignores (the debatable) mean reversion. That is, if mean reversion (or a valuation effect) helped pull the market out from the depths of single digit PEs seen at the end of the 1929 and 1972 bears, then adding another 30% decline at that time may be questionable. Presumably, that type scenario is causing some of the lowest SWRs in your results.

Very astute observation. If you look, however, at the second graph in my post you'll see that the simulated 130-year sequences end up at about the same place as the true historical returns and they follow the course of the actual historical returns quite closely. Thus, I believe, these simulated sequences mean revert as much as the actual returns did. The changes are pretty small but they make a big difference.:)
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Post by wanderer »

Nope. Apparently my more nettlesome posts are better left unanswered.

ben - apparently i left because i couldn't convince someone to change his claustrophobic mind on an asset class that represents 50% of us market cap. apparently knowingly misquoting the return for 2 years had nothing to do with it. deception, misdirection... copare his response to a "problem" to that of jwr... bizarre.

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Post by Dagrims »

I'm hoping that this board will eventually get to the point where comments about posters at other boards will dwindle to almost nothing. Jabs at posters that are 'over there' aren't any more constructive than the personal comments made on the Fool board.

I can certainly understand the reason for the griping, but I'm attracted to this board's idea of being an oasis from that sort of stuff. I like to see threads like raddr's and JWR's standing on their own merit, without as many of the distracting sidebar comments. The 'You Know Who' comments at the Fool bother me, and the veiled references here bother me a little as well.

Please feel free to tell me to stuff it if I'm out of line here, as I haven't exactly contributed anything of worth to this board :)(yet)

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Post by JWR1945 »

Dagrims asks for civility and then says

Please feel free to tell me to stuff it if I'm out of line here....

You are far from being out of line. I think that there are some frustrations that will still take a little bit more time to work out. But civility is always in style and it is always appreciated.

I doubt that El Supremo will let us get too far out of line.

Thanks. Have fun.

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Post by ElSupremo »

Greetings JWR1945 & Chris :)
I'm hoping that this board will eventually get to the point where comments about posters at other boards will dwindle to almost nothing.


IMO that will happen sooner rather than later. I understand there was a lot of pent up frustration for those coming from other boards. While these comments are better left to one's private thoughts, it's also good to get that crap out of one's system. With the quality of posters we already have here I have no doubt that things will resolve in short order. Rest assured any misstep where NFB rules are involved will not be tolerated. Up to and including disruption of any on topic discussion.

If anyone wants trouble, there is a site I know of you can join for as little as $60 bucks. Then cause all the trouble you want! :wink:
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Post by wanderer »

chris -

nah, you're not out of line. civility is always in fashion. i agree that can get tiresome. if it's any consolation, i see it dropping and i will publicly commit to doing my best from my end.

i tend to go over to tmf when posters alert me off-line: that i am being misrepresented or that one of my familiar themes comes up. As you can imagine, i am in a difficult bind: i don't want my posting there to redound to the benefit of certain folks there; on the other hand, what they are saying is patently untrue. so where does it leak out? here.

at $60 bucks a throw, hocus may get his wish (the bulk of those folks may depart - altho i predict one person won't give up his "cash cow"). see how hard it is?:wink:

wanderer
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Post by hocus »

Rest assured any misstep where NFB rules are involved will not be tolerated. Up to and including disruption of any on topic discussion.

ElSupremo:

Depending on how exactly you mean this, I either strongly agree with you or strongly disagree with you.

If what you mean here is that no one on this board should be making personal comments about intercst, then I strongly agree with you. That sort of thing is none of our business. It is wrong when people do it on the TMF board, and it would be equally wrong for us to do it here. Here, we have you available to step in and stop it when it happens, and I hope you do so.

That said, I'm not at all sure that personal comments are what Dagrims was getting at in his comments. The way that he put it was that he would like the research of JWR and raddr to "stand on its own merit" without "distracting side comments." If what he meant by that was that we should refrain from saying that "intercst is a so and so," with the "so and so" issue in question having nothing to do with the subject matter of this board, then I agree with you that such comments serve no useful purpose.

But the study that intercst offered for public consideration and the comments he makes interpreting said study are critical board business here, in my view. By putting forward a long string of deceptions on critical points, intercst has put his honesty or lack therof into play in this thing. People need to know who they can trust on this question, and the practice of an important player in the Retire Early movement regularly putting forward untruths is an issue that people in the movement are going to have to come to terms with at some point, no matter how unpleasant a task it is undoubtedly going to be.

I have used words like "con" and "fraud" over at the TMF board to describe the deception intercst has practiced on that community. I do not use those words lightly, and I thought the matter over for a long time before going public with them. I believe those words are an accurate description of the true state of affairs, and there is large body of material in the debate transcript backing up this position of mine.

I do not believe that it was fraud when intercst first posted the study. My sense is that he made a few honest mistakes. But now that the errors in his interpretation of the study have been pointed out to him in clear and forceful terms, for him to continue the charade is indeed an act of fraud on the people going to that board for information on how to put together a successful plan for early retirement.

Put yourself in the shoes of someone who, in reliance on claims described at that board as scientific truth, gave up a big corporate paycheck at the top of the bull market. You are now wondering whether you should go back to work while your skills are still in a little demand, or whether to tough it out with a portfolio allocation that you were told was "100 percent safe." Presuming that the work that raddr has done is valid, the real chances of that portfolio surviving until death are perhaps 50-50, it's the toss of a coin. An individual in such circumstances is in dire need of a discussion board at which the realitires of safe withdrawal rates may be discussed without gun threats being directed at the posters trying to bring the issue to the table. People are wrong when they say "it's just a message board." Getting this stuff as wrong as the intercst study does can result in terribly serious life setbacks.

There is a web site that has been linked to at the TMF board from time to time where a real estate guy lists all the problems with the thinking of the guy who did the "Rich Dad, Poor Dad" books. I like some of the Rich Dad stuff (not all of it), but I think it is a great use of internet technology that this real estate guy was able to make the contrary case available to interested parties. If the "Rich Dad" guy wants to respond on his own site, he is free to do so, and interested parties are free to weigh the evidence and decide for themselves. That is the way it should work in regard to the intercst study, in my view.

We should be presenting out own research when we can. Raddr and JWR1945 and others have made tremendous contributions here. But we should not be satisifed with doing only that. We need to put the research we do in context by demonstrating to readers of this board the terrible consequences that can follow from taking the loosey goosey "oh, this is close enough, and I can't really be bothered to get it right because then I wouldn't be early retired anymore" approach that intercst follows. It's OK, in my view, if we make mistakes, as the whole point of discussion boards is to bounce tentative ideas off of other interested parties. But I hope (and believe) that this board is going to be taking a far more serious approach to this stuff than the TMF Retire Early board has taken towards it.

Part of being a serious-minded person is at times saying things that some people do not want to hear. I would love to live in a world where I never had to say a word that caused discomfort to another human being. You can look at my posting track record and see how uncharacteristic of me it is to find fault with other posters, including those who disagree with me in strong terms. My presumption is that those offering criticism are sincere in their claims, and they deserve respect for taking the risk that comes with putting them forward in a public forum.

In this case, we are dealing with an individual who is not sincere, and it is not making a "personal" statement to point that out. When the insincerity can be demonstrated by making referece to a transcript, it becomes legitimate board business to make note of the character of the poster making the invalid claims. This is especially so when the poster in question has accumulated a strong measure of good will in the community by virtue of earlier contributions, and is thereby more dangerous than he would be if he were just one more guy on the internet offering his personal opinion.

We do not live in the sort of world I wish we lived in, where we can always make nice and not cause harm to a great many others by doing so. If we are going to talk about early retirement, we run the risk of causing people to get swept up in the appeal of the idea and give up their income-earning potential earlier than they can realistically afford to do so. When we talk about these things, we take on ourselves a responsibility to talk about them honestly.

It is not my opinion, or Wanderer's opinion, or JWR1945's opinion, or BenSolar's opinion, or Raddr's opinion, or FoolMeOnce's opinion, that intercst has been dishonest on this question. The dishonest statements are in the public record, they have been pointed out to him, and he has continued to put them forward after they were pointed out. People on the TMF board who come here for a little reality check need to know something about the character of the individual in whom many there are putting their trust.

Incredibly (even to me, and I thought I had seen it all), he continued to engage in deception in his posts after I put up a request that his posting privileges be revoked! There have been about a half-dozen serious public deceptions since the day I asked that his posting privileges be revoked for this exact posting infraction!

Perhaps I misunderstood what Dagrims was getting at. His comments can be taken either way, I believe. But I sincerely hope that this board will not fall into the trap of refraining from calling a spade a spade because it seems like the "nice" thing to do. It is not the nice thing to do for the many people who are going to see their retirements go bust if intercst does not permit the other side of the story to be told on that board.

I believe that we are performing a valuable service for those in that community who have understood enough of what has gone on to grasp that they are not being dealt with fairly by their "Board General." I hope that we continue to serve that most constructive purpose, and that ultimately we take the research we have developed here to the other board in a Phase Two debate that puts that entire community on notice as to the risks they are taking if they place much hope in an expectation that things intercst is saying are all but certain to happen will actually take place for real live investors in the real live world.
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Post by ataloss »

There is a web site that has been linked to at the TMF board from time to time where a real estate guy lists all the problems with the thinking of the guy who did the "Rich Dad, Poor Dad" books.

One of my favorites:

John T. Reed

http://www.johntreed.com/Kiyosaki.html

Ataloss
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Post by ElSupremo »

Greetings Hocus :)

I pretty much agree with you on most of this. Let's just say if we get into a gray area on board rules or ethics I'll do what I've always done, listen to the long time board members who I've come to know and trust over the years. If push comes to shove and it's a more or less split decision then I'll have to make the best choice I can and do what I feel is best for the boards. We were at MSN for almost a year and this situation only came up once. Both posters realized what was happening and that was the end of it. Unfortunately one of those members has never posted since.

You just can't please everyone and those that are not happy for whatever reason will either have to agree to disagree or move on. The good of the many must outweigh the needs of the few.

That said, everyone knows my only goal in life is to make everyone happy. :wink:
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Post by ElSupremo »

Ataloss wrote:

confident that ES sees the value of allowing criticism of a study


If anyone has a question on which way the wind will blow around here they might ask ataloss. We've been around the boards together for years. And he was around well before I. Ataloss knows me well.
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Post by raddr »

hi hocus,

I wouldn't worry about it too much. I know I have been guilty of bashing the person in question from the REHP but what I have said about him is true. He personally attacked me over there which is something I've never participated in so I left. You'll find that ES, and just as importantly the rest of the forum members, don't tolerate personal attacks, innuendo, etc. If at such time you see nasty REHP-type attacks here and nothing is done about it then you can worry. If I know ES and the others here, then hell will freeze over before that happens. :wink:

As opposed to the REHP there is no one mantra here that is held as gospel. Members are free to offer opinions and analyses as they see fit as long as they are willing to politely debate the issues and respect others as human beings.
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