Different methods of safe withdrawal / strategy. Re: Hocus

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peteyperson
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Different methods of safe withdrawal / strategy. Re: Hocus

Post by peteyperson »

Hey hocus (and REHP refugees)!

I'm trying to understand Hocus's post about safe withdrawal strategies which I have copied below.

Hocus, to live off the investment return less inflation and not touch the principle was intercst's philosopy too, no?

You say that taking your yearly spending, estimating your likely lifespan and multiplying that number up to get the total funds required is more risky or unstable etc. I can kinda see what you are getting at here, but it would actually require you to have more funds available (depending on your lifespan I guess that situation could reverse) so it then becomes an idea but with more funds how does it matter. You are less likely to run out period.

For instance:

i)
Annual spend $12,500
Age 40
Max Lifespan 100
FIRE Years = 60

$12,500 x 60 years = $750,000

With these funds in place, you would only need an inflation level return to keep your entire funds index-linked. 2-4% depending.

ii)
Annual spend $ 12,500
Age 40
Max Lifespan 100
FIRE Years = 60

$ 12,500 / 2.5% withdrawal rate = $500,000

Now I do content that should you change withdrawal rates you'll get very different figures, this is just an one example. This said, FIREing on method 2, you would be required to earn an inflation level return + a withdrawal rate return on top. Given this, I fail to comprehend how you think this is " safer ".

I do think this is a matter of perception but could you give me an answer based on my examples so I can see where you're coming from?

Thanks,
Petey



Hocus said:

I find more safety in an approach where you rely only on earnings of your portfolio to cover spending for the year, leaving principle untouched. That's what I do. Each year, when I make adjustments to my plan, I check to see that, in inflation-adjusted terms, I possess either an equal or greater level of financial independence than the year before. If I had $700,000 working for me at the beginning of Year A, and inflation for the year is 2 percent, I want to have at least $714,000 working for me at the end of Year A. So long as I have that much, I know I am not falling behind. If I am falling behind, I need to make adjustments.

This approach gets complicated when you have a large percentage of your assets in volatile asset classes (like stocks). A downturn in the reported prices of stocks does not mean that the real value of the stocks has gone down. So you need some way to reflect in your records the real value of the investment rather than the reported value. I have devoted some preliminary thinking to this problem, but I have not spent a great deal of time on it as of yet. Since I do not currently own stocks, it has not been a priority.

But I agree with the general principle that Wanderer is advocating. It is not such a great idea to be basing your annual withdrawal on a calcualtion that requires that some portion of principle be "eaten up" each year. If you do that, you must be very sure that you will not live longer than you expected starting out. A safer approach is to cover annual expenses with earnings, and allow the principle to remain in place indefinitely.
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Post by hocus »

To live off the investment return less inflation and not touch the principle was intercst's philosopy too, no?

No. Intercst's SWR numbers assume that you will be eating up principle every year. The withdrawal that he says will allow you to finance 30 years of retirement works only if you die in 30 years or less. If you happen to live 31 years, it is possible that you will be stone broke in the last year, according to the historical data he examines in his study.

FIREing on method 2, you would be required to earn an inflation level return + a withdrawal rate return on top. Given this, I fail to comprehend how you think this is " safer ".

I devised my own plan to provide a real return (after factoring in inflation, that is) of 4 percent. My analysis of the historical data tells me that this is a reasonable expectation. There is some risk in the 4 percent withdrawal. For absolute safety, I would need to have reduced my withdrawal to 3 percent. If I were in a position to take on more risk (if I were not married, for example) I might be willing to go with 5 percent. I am in a mix of circumstances that permit me to take on only moderate risk, so I went with 4 percent.

It gets very confusing comparing my approach to the intercst approach because we seem to have started with entirely different goals in mind. My goal was to determine the investment allocation that would permit a reasonably safe retrement as quickly as possible. It appears to me that intercst's goal was to come up with an approach that would make the numbers look good for a 74 percent allocation to S&P 500 stocks. I know that last sentence sounds biased, but I am not able to come up with any other reason why he designed his study the way he did.

Going with a 74 percent S&P allocation can require either that you delay your retirement by many years from when it would have started had you elected some other allocation, or that you take on a big risk that the plan will go bust. Intercst refers to this allocation as "optimal," but he seems to have some special meaning in mind for the word that is the opposite of the English language meaning.

The reasons why the big S&P stock allocation makes it so much harder to retire early are discussed on this board all the time. Probably the easiest one to understand is the concept of diversification. It's common sense that you make your plan safer by being diversified--if one asset class does badly, another may do well, and overall you do fine.

With the intercst approach, you put all your money on a single horse. Studies touting such approaches sound plausible in the middle of roaring bull markets. The historical data tells us that most investors come to see the holes in this "all or nothing" investment approach when stock prices hit a downturn.

The short answer to your question is that, if you are willing to choose your investment allocation wisely, you can make your money go farther. To make wise choices, you must be willing to consider the merits of more than a single asset class. Intercst is not open to doing that, and there is often a price to be paid for narrow-mindedness. The "price" in this case is that you must take out principle each year in order to support a 4 percent withdrawal.
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Post by JWR1945 »

Welcome peteyperson
Hocus, to live off the investment return less inflation and not touch the principle was intercst's philosophy too, no?

No. intercst's philosophy is based on being able to run out of assets, but not before the end of your planned portfolio lifespan. He always sells stock.

In addition, intercst blocks any discussions ranging beyond using an S&P 500 index fund plus a cash equivalent. He has excluded real estate, REITS, high dividend approaches and others. He has resisted posts favoring more asset CLASSES (with carefully selected allocations).

In addition, intercst strongly resists allowing anybody else to suggest that the future will be worse than the past. He does this in spite of evidence to the contrary. Along with others, he launches a vicious series of attacks...first by altering definitions and misdirecting discussions, then by spurious semantics arguments and finally by ridicule. He does not even bother to read what others have said. He has admitted as much!

intercst always makes sure to limit the definition of the historical record to what he has extracted. He also restricts any conclusions drawn from the historical record to those based on the methodology that he used in his study.

peteyperson, I believe that you still have access to the Motley Fool's discussion boards. Locate hocus's My Plan post from around mid-May to late-May 2002. He goes into much detail. It is very well written and highly recommended. It will answer your question.

hocus has a semi-retirement approach. He has been able to leave a high paying but unsatisfying job to pursue his dreams. He has to make a small amount of money each year. But it is much less than he used to make and he can earn it easily.

At this stage, hocus does not have sufficient money to retire completely. But he does have enough to enjoy almost all of the benefits of a full retirement. Since he is young, his work is not too demanding.

I have written several posts relating to this kind of semi-retirement. My Three Level Portfolio series is my latest example. (See my Beyond Dual Portfolio post as well. It helps you understand some important points.)

Have fun.

John R.
peteyperson
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Hey guys

Post by peteyperson »

Thank you, John and Hocus. I have been trying to get my head around your various opinions on different approaches but with limited time to play with and the structure of these boards being different it is hard to get a clear, consise explanation.

My understanding of asset class investments is that stocks are understood to have paid the most over time (tho FoolMeOnce would clearly disagree) and whilst heavy diversification can in part protect from steep drops in the market as are being current experienced, they reduce your overall return. Given for instance that CDs and money market investments pay less as do Bonds on the whole (tho they pay more currently while interest rates are low but will conversely do very poorly when interest rates rise as is expected in the short term).

The fundamental problem I have with intercst's study is that it expects past performance will be future performance. A reasonable basis to go forward with considering that you want to work from some kind of solid basis rather than lots of hypertheticals. That said, most commentators including Warren Buffett state that future performance is expected in the 6-7% rate of return, which would blow the past perfomance as a predictor/basis for analysis out of the water completely. Currently on a 80/20 stocks to cash ratio, I put return at 6%, investment costs at 0.3%, returns at 5.7% and using inflation of 3% here in the UK, real returns at 2.5% after accounting for a 4% return on the cash portion of the investment. Outside of the complex subject of heavy diversification, this completely alters the kind of money required to retire from the previous SWR of 4% via intercst.

Pete
peteyperson
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Okay hocus

Post by peteyperson »

Let me put it a different way then.

Why would you wish to have substantial money at the end of your life?

Okay, pass on to the kids. Fine. But beyond that?

For people saving towards this goal instead of already being there, if would mean staying in the workforce longer to save the funds sufficient to generate enough of a return to not ever touch the principle. Or are you simply in the belief intercst's study is wrong, unreliable and you are safer aiming at a sum that will provide a net of investment costs & inflation enough to live off? As you're working off a 4% w/d rate for that, does it not just work out to the same sum but using a different much more diversified investment portfolio aimed at getting there?

Think I've talked myself around in a circle there, but it's late here over the pond so pls forgive.

If you have links to some recent posts that cover your strategy in greater detail I would love to read more, rather than ask you to repeat yourself.

Petey
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Hey John

Post by peteyperson »

Locate hocus's My Plan post from around mid-May to late-May 2002

Tried on Fool.com, no luck finding that.


Reading your 3 Levels post, couldn't spot the other couple of threads on the same subject past. You have links to them?

Pete
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Post by JWR1945 »

peteyperson
I understand about your comment about having limited time. That is why you should want to retire!

hocus's My Plan post is on the Motley Fool's Speakers Corner/Retire Early Home Page discussion board. You can get to it in at least two ways: use the RECS button on the line with Threaded/Unthreaded,Author,Recs,Date and Number. The post has 84 recommendations. Hit next until you find it (4 times). The other way is to go into the threaded mode(collapsed) and take big time jumps until you get to May 20, 2002. Trying to look at hocus's 99 most recent posts fails. That list stops in December 2002.

I did get the link.
It is http://boards.fool.com/Message.asp?mid=17246781

The first person who replied was peteyperson.

It has taken most of us a lot of time to appreciate fully the value of My Plan.

To find my FIRE Beyond Dual Portfolios post, go to page three on this board (the FIRE board). My post is dated Wed, Dec 18, 2002. (I ended up posting this at the Motley Fool's REHP discussion board...to help people understand my Three Level Portfolio Concept post. On that second thread, I explained some of my terms better...the meaning of thresholds...and I made it clear that I had taken inflation into account.)

In terms of diversification, it can include stock funds in addition to the S&P 500. Things such as Small Capitalization Stocks (usually Value is selected instead of growth) and International Stocks (EAFE index). It can be stocks that pay higher dividends...such as selecting from the Dow Jone Utility Average instead of the Dow Jones Industrial Average. It can be REITS and so forth.

In general, when diversification and allocation are done correctly, you can increase your safety and returns at the same time. That finding won somebody the Nobel Prize (Dr. Fama?). However, this means that you are behind everybody that you know some of the time and you are ahead at other times. You are always unpopular because you appear to be stupid when your friends are doing well and you appear to be arrogant or obnoxious when they are doing poorly. (It is really envy that causes them to think that way.)

Hidden in the details of managing your allocations is the frequency at which you re-balance your portfolio. As far as I know, none of the models currently address the transaction costs of buying and selling when you re-balance. That can be expensive. Taxes make things even more difficult.

raddr has done ground breaking original research on this board that shows that diversification (mostly among stock categories) can increase a true safe withdrawal rate by 1%. That is a biggie...going from 4% to 5%. He has also done other ground breaking original research that indicates that the historical returns in the actual record was a lucky sequence! Again, that is a biggie.

Have fun. Enjoy yourself.

John R.
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ataloss
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Post by ataloss »

The fundamental problem I have with intercst's study is that it expects past performance will be future performance.


The problem I have with it is that the data is so limited. It would be fair to say that if you randomly select 4 non-overlapping 30 year withdrawal periods over the 130 year period that a 4% withdrawal rate will have a success rate of 98% (or 100% or whatever he says.) I don't think many would find this very reassuring. Pretending that there are 120 periods or 12x 120 periods is silly since the data overlaps although most readers are probably not sophisticated enough to see the distinction. The question of statistical significance does not even arise. The superiority of Monte Carlo is obvious. Still I think that there is some value to the study in setting an upper limit of possible safe withdrawal rates for the proposed allocation.
Have fun.

Ataloss
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Post by wanderer »

But I agree with the general principle that Wanderer is advocating.

one minor point - i am definitely not advocating not spending the principal (except at the extremes). I thot what i said was something to the effect that this was what i was seeing among real investors - a reluctance to spend the principal. whether that is "rational" (and i think in many cases it is) or not, it appears to be reality from where i sit.

we are definitely not touching due to being slightly below our nest egg threshold, our age (about 40) and waiting to see how market matters shake out.

i am simply not constituted like the putative re*p investor who can sit staring at a nut diminished by 43% from its 1999 level and calmly allocate based on a "theory" (which i distinguish from "common sense":wink:).

to each his own...
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
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Post by wanderer »

In addition, intercst strongly resists allowing anybody else to suggest that the future will be worse than the past. He does this in spite of evidence to the contrary. Along with others, he launches a vicious series of attacks...first by altering definitions and misdirecting discussions, then by spurious semantics arguments and finally by ridicule. He does not even bother to read what others have said. He has admitted as much!

as we speak, hocus and jwr and bensolar are pointing out, explicitly these maneuvers. no less than eurotrash fell for several of them. eurotrash "fell" for the following:

1. the suggestion that hocus was asserting that the math was "wrong",
2. the suggestion that hocus had asserted that numbers that were pulled from the numerals diligently recorded by Mr. Shiller and used in a methodology originated by William Bengen 9 years ago and in "study" copied by inter*st 4 years ago, were not "objective";
3. the suggestion that hocus has said that intercst's study is useless (it is my assertion that his study adds little since bengen and trinity antedated inter*st's exercise by 3-5 years but that the organization of the data in one place and with an apparently accurate calculator is useful);
4. the suggestion that interc*st, especially, and others, have not said, repeatedly, when asked, "how much is enuf (to retire)?" that you need 25X your living expenses. In fact, that response occurred so many times that it has been enshrined as the "4% rule". hence, "predictive" is a perfectly appropriate word.

the assertion that hocus has done this is a fallacy. the suggestion that inter*st has not is a fallacy.

Look. intercst's study is what it is. The math isn't wrong. He repeatedly tells folks that IF ONE ASSUMES that in the future, things will not unfold in a way worse than they have shown over the last 120yrs, then the following study shows you what the SWR is given your time and asset inputs.

From that point, intercst often jokes about asteroids (falling space debris in TX is a concern) and he offers his tongue-in-cheek opinion that the odds are better on the asteroid than running out of cash. That's fine...that isn't his study.

I'm not completely against your way of thinking here, hocus...I'm just tired of this mission you're on. Give it a rest.

I disagree that extrapolating future events from the US historical series is "safe." I am of the very humble opinion that the US has had an amazing period of overperformance versus the rest of the world since the dawn of the industrial age (150yrs or so), but I believe that our relative position can't increase by like amounts going forward. Therefore, the historical series of returns as seen from today looking backward...will lead folks to expect higher returns than is truly possible. Risk premiums should be lower. The law of large numbers applies...and that works against 7-8% real returns on US equities. Again, just MHO. No study. No thesis. Just common sense.

Do I think folks should invest per the intercst study in retirement? No. Far too few asset classes with much too high a standard deviation of return for folks with better things to think about. My suggestion - add more asset classes...and lower expectations of return.

But that doesn't mean intercst's study is useless. IF ONE ASSUMES that things won't unfold in a way worse than they have in the past...it shows you those numbers. That's what it does. I want to know those results!

Those numbers (please note - for some reason, I don't call them "predictive data")are still worth knowing. They are indeed "objective" GIVEN THE LIMITS OF HIS STATED ASSUMPTIONS.

The numbers should give folks who thought, "hey - 6-8% should be safe, right?" reasons to doubt.

Maybe that's enough.

http://boards.fool.com/Message.asp?mid=18530040
Last edited by wanderer on Mon Feb 03, 2003 9:59 pm, edited 1 time in total.
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
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Post by wanderer »

Let me put it a different way then.

Why would you wish to have substantial money at the end of your life?

Okay, pass on to the kids. Fine. But beyond that?

petey - let me put it another way -

i have no desire to leave anyone or anything any money. i could die broke by purchasing an annuity but that enriches those rather unpleasant annuity folks while exluding potential gains (compounded over time, this can be a very hefty number). still, i don't wanna run out of coin and i don't know when i will die, so, it is highly probable that there will be some left over (un spent).

so we, too, are wrestling with this (as do many FIREs). I recently calculated that we could spend many tens of thousands beyond our budget and still not get get completely down to just ssi (old age pension in the states) in 27 years. we don't wanna be the richest folks in the graveyard. we have to think about this some more...

many are of a mind that we should quit now. that is a suggestion not entirely without merit.
regards,

wanderer

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Post by raddr »

The fundamental problem I have with intercst's study is that it expects past performance will be future performance.


Nice answer to the above quote from ataloss.

What intercst apparently doesn't understand is that we can have an even better return over the next 130 years (not very likely IMO) and still have a lower SWR. How's this? It is explained by the sequence of returns. If the run of numbers is even slightly altered then the SWR can vary a whole lot even if the total return is the same. See this thread:

http://nofeeboards.com/boards/viewtopic.php?t=391

What intercst really needs to say is something like "my study assumes that not only will the magnitude of returns be no worse than in the past but that the sequence of returns will be exactly the same or even more favorable and that year-to-year volatility will be the same or less."

Those are three very big ifs, particularly the sequence postulate. I've shown that randomly switching only 2 years out ot 130 and leaving the other 128 exactly the same can lower the SWR to below 3% for a 30 year period. Keep in mind that this exercise keeps the avg. return and std. dev. of returns exactly the same. Thus, the intercst qualifier "my study assumes that the future will be no worse than the past" is at the very least very misleading and implies a lack of understanding on his part as to the factors that influence the SWR. The really sad part is that so many over there on the REHP have bought into this nonsense. Some, like hocus, have tried to challenge him but they are quickly drowned out by ad hominem attacks and demagoguery from intercst and his henchmen.

Hang around here an you'll get a lot truer picture of the realities of trying to project SWR probabilities into the future. :D
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Post by hocus »

As we speak, hocus and jwr and bensolar are pointing out, explicitly these maneuvers. no less than eurotrash fell for several of them. eurotrash "fell" for the following....

Thanks for pointing that out, wanderer.

One reaction I get a lot is, "So intercst puts up deceptive posts. What's the big deal? People here are smart enough to see through that stuff."

And then you see posts from some of the smartest people on the board revealing that they have been taken in by all sorts of things. You repeat a deception enough times, and people believe it. And since they believe it, they presume it's not a deception.

Sometimes, they are not even aware where they heard these things from. They think that the way that the SWR concept is described on that board is really the way that it is. I don't think that most people have ever encountered anyone so dishonest. They can't imagine that someone would engage in the level of trickery that intercst practices against that community.

The wildest one of them all was when InParadise claimed that I was obviously in need of help because I believe that it is not possible for a stock to go up by more than 100 percent. I noted that she must have picked up that idea from something that one of the Disrupters said, and she got extremely huffy. She said that she had better not write anymore in her post because she was so angry that I was suggesting she was stupid.

I didn't know at the time where she got the idea that I thought such a thing. But it sounded like Telegraph's work to me. So I went through some old Telegraph posts the other day, and sure enough, was able to dig it up. I had said that it is not possible for an investment approach to be more than 100 percent safe, and he said that I was wrong about that because it is possible for a stock to go up by more than 100 percent. I don't recall, but he probably got about 15 recs for contributing that insight to the board.

Yet still people say, why should anyone object to deceptive posting? Shouldn't everyone just be permitted to post whatever they want? How the heck can you trust anything that anyone says if there are no standards whatsoever? Forget the attack stuff. That stuff doesn't bother me one-tenth as much as the deceptions. But how can anyone expect a discussion board to work when the Board General doesn't tell the truth about the results of his own study?

As JWR1945 noted today, he drags that study through the mud on a daily basis. Me and JWR1945 have high respect for the study compared to intercst.
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Post by wanderer »

The wildest one of them all was when InParadise claimed that I was obviously in need of help because I believe that it is not possible for a stock to go up by more than 100 percent.

i saw that. reminded me of when the "facilitators", arrete and phantomdiver, piped in. pd questioned my mental health and suggested i get help. reminded me of a communist takeover where the "wrong thinkers" are accused of everything from exploitation of the proles to mental instability. (offline someone offered that he wished inter*st would promote her to kapo to just shut her up!:wink:)

abio, ironically, one of eurotrash's faves, chimed in that her comment was ad hominem and that it was precisely the expression of the pov of the malcontents (like yours truly;-)) which would ensure the board of its vigor. abio no longer posts. neither do i. and you get a similar reception.

i've seen all their moves. you have hung in there far longer than i felt necessary. that's the only basis on which i'd question your sanity.:wink:
regards,

wanderer

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Post by bpp »

Peteyperson asks,
Why would you wish to have substantial money at the end of your life?


In case you get to the end of your life, and then accidentally live longer.

You really need to plan for potentially forever, in my view.
Never know what medical science might come up with next year.

Cheers,
Bpp
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Post by hocus »

Reminded me of when the "facilitators", arrete and phantomdiver, piped in

We discussed the Enablers (that's the term you were searching for, I think) at our lunch last summer. You were right. I was wrong.

I was shocked when Phantondiver played the mental health card against me a little while back. This is someone who I traded e-mails with back in 2000, when she was trying to get out of a bad job situation. She worked at the same place I used to. She told me at the time that I had changed her life for the better with the good advice I gave her. And now that counts for nothing when I dare to tell the board the truth about safe withdrawal rates. That's amazing to me.

And what can you say about Arrete? She's a mouse in the corner for years while intercst gives fallacious advice causing board members to lose hundreds of thousands of dollars of hard-earned wealth. That doesn't bother her. She says nothing while his actions causes a board she has been participating in since day one sinks lower and lower into the mud. That's not worthy of comment in her scale of values. She raises no objection to a viscious smear campaign directed at one of the board's best posters. That's no biggie.

But someone refers to her as a "fawning admirer" of intercst, and we need to call in an international task force to address the problem of her wounded feelings. Oh my! What a board we have here, one who refers to people like arrete as "fawning admirers." How uncivil we have become! And she is so worried that I am being unfair to ES by continuing to post there. She is oh so concerned about ES at all those moments she isn't engaged in a slam at the wonderful site he has created for us all. As if the ES's of the world needed the support of the Arrete's of the world for their ventures to succeed. It's beyond pathetic.

Everything that happens has an explanation, I believe, and one of the reasons I enjoy writing on boards is that I like trying to piece together the puzzles. But it's gonna be awhile before I am able to figure out why someone would give up her self respect to defend an individual of the caliber we are talking about in this particular case.
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Post by hocus »

I've seen all their moves. you have hung in there far longer than i felt necessary. that's the only basis on which i'd question your sanity

The type of moves they engage in has caused many people to come to think of the board as their board, or what's worse, his board). It is not their board or his board. The board belongs to Motley Fool. Regardless of what you think about Motley Fool otherwise, they have rules that require civil posting on their discussion boards. I read those rules before posting, making a conscious effort to direct my energies toward building up a board where those efforts would not be undermined by some Disrupter like intercst..

When he violates the rules, he is stealing from me, that's they way I see it. The fee that I will pay to participate there is meaningless in comparison to the lost person-hours that I have put into building up that site only to watch intercst destroy the value of the asset. I am not the only one who intercst stole from, of course. He stole from wanderer, and ptsurmr, and TheBadger, and JWR, and lots of others.

You think people come to that board to hear intercst's witty repartee? Some do. Most come to learn about early retirement. Most are sick of the nonsense. They just don't know an effective way to deal with it. So they walk away. Which means that he gets away with the theft.

If discussion boards are communities, as Motley Fool describes them, then they are going to need to have police. Communities have police to deal with people who commit crimes. In Internet World, there is no crime greater than Deception. This is the worst crime you can commit against a discussion board community because Deception is a poisoning of the well. Engage in enough deliberate deception, and learning becomes impossible. He is a threat to the premise of discussion boards, that it is possible for ordinary people to profit by sharing ideas with each other.

People think that what I am doing is strange because they have not seen it done before. You're not supposed to try to save discussion boards from Disrupters, you are supposed to walk away. Well, who says? I think Motley Fool is right about the community thing, and a person who loves a community doesn't walk away from it.

Something was stolen from Wanderer when he was driven from that community for the "crime" of disagreeing with one of its posters. Something was stolen from me when wanderer was driven away. I have gained financially from my exposure to his ideas, and when that exposure ws cut off (as it was until this site was created), I lost money as a result of intercst's actions.

I like money. That's sort of the whole point of all this, isn't it? I don't like it when people steal money from me and lots of others. So I decided to do something about it. Nothing dramatic. I suggested that the people whose money is being stolen make a request of the thief that he kindly stop picking their pockets. I think that's a reasonable thing to suggest.

Maybe it works, maybe it doesn't. You know what? In the end, Nas90Skog is right; it's only a message board. The ultimate downside for me is that I lose a message board that was going to die anyway. Not much downside. The ultimate upside is that I regain access to the Greatest Resource on Planet Earth for Learning How to Achieve Financial Independence Early in Life. Fantastic upside.

That's my take on it, anyway. My wife agrees with you, wanderer, and I have the greatest possible appreciation for insights that both of you have provided me on other occasions. So I try to keep an open mind.
peteyperson
**** Heavy Hitter
Posts: 525
Joined: Tue Nov 26, 2002 6:46 am

Hey wanderer

Post by peteyperson »

What would you do instead? Lets say you retire with 100% of the lumpsum you need, and the portfolio drops by 43%, what then?

Is it not fair to say that you'll spend down your cash, because the rest of your investments will return to their previous value eventually? Or are you thinking because PE ratios are still above historical norm, the market is still overvalued and not worth investing in as it will keep going down to the mean/have a later crash? I liked Bogle's approach in his recent book where he states a historical return for growth, and for dividends and puts anything above that as temporary exhuberance on the part of investors that should be assumed to disappear at any time.

Petey


wanderer wrote:
i am simply not constituted like the putative re*p investor who can sit staring at a nut diminished by 43% from its 1999 level and calmly allocate based on a "theory" (which i distinguish from "common sense":wink:).

to each his own...
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

This is a little silliness. But I think that it gets very close to the truth.

hocus
It gets very confusing comparing my approach to the intercst approach because we seem to have started with entirely different goals in mind. My goal was to determine the investment allocation that would permit a reasonably safe retirement as quickly as possible. It appears to me that intercst's goal was to come up with an approach that would make the numbers look good for a 74 percent allocation to S&P 500 stocks. I know that last sentence sounds biased, but I am not able to come up with any other reason why he designed his study the way he did.

Consider a student starting in college in one of the technical areas. He does not know enough to understand that how real world results differ greatly from his textbook formulas. He has worked on a laboratory project and he knows what the correct answer should be.

Consider another situation. A college student has difficulty solving a problem. He has a ballpark estimate of the correct answer.

Typically, such students try again and again to get that right answer. They will change assumptions, modify approaches and so forth until they can hand in a report with the right answers. Because they are only students, they are not concerned as much about discovering the truth as they are about getting a decent grade.

(Such situations frequently apply to high school students and experienced professionals as well.)

I view intercst's study along these lines. He did not demand that the answer be 74% stocks. He actually searched for the correct answer. It is just that he knew that the correct answer was in that ballpark...say 70% to 90% stocks.

There is nothing wrong with identifying what a reasonable number should be. In fact, knowing a good ballpark answer is a very good idea. It is only bad when you refuse to update, modify and refine your answers as new information becomes available.

It is also bad when you insist that your answer to a particular problem applies to all situations.

Have fun.

John R.
hocus
Moderator
Posts: 435
Joined: Mon Dec 02, 2002 12:56 am

Post by hocus »

He did not demand that the answer be 74% stocks. He actually searched for the correct answer. It is just that he knew that the correct answer was in that ballpark...say 70% to 90% stocks.

We disagree on this, JWR1945. That's OK, disagreement is healthy on a discussion board. I just don't want people trying to figure this out to get too confused in thinking that because you and me are on "the same side" that we don't have disagreements on various details.

I am speculating on intercst's state of mind when he sat down to do the study. I have no way of knowing for sure.

I am stating as objective fact that the historical data does not support a safe withdrawal rate of 4 percent for 74 percent S&P stocks for a retirement beginning in the year 2000.

Or are you saying that intercst thought he knew that the correct answer was somewhere between 70 percent stocks and 90 percent stocks, but that he was wrong about what he thought he knew? If that is what you are saying, then I suppose that it is theoretically possible. This is what I believed back in May 2002. I thought at the time that the things he was saying that are not so were simply mistakes.

What changed my mind was that post of his in which he acknowledged that the number of independent data points used in his study does not permit statistically meaningful claims re the results generated. This shows that he knew all along that the claims he was making were fraudulent. I believe that it was around the time that that post went up that I began referring to his scheme as a "con."

He knew. And he didn't tell us. I view the post in which he acknowledges that the data used in the study cannot generate statistically meaningful results as the most damning post in the entire debate transcript, when you consider that he never cautioned the board about this critically important reality.
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