The Great SWR Investigation-Part 2

Financial Independence/Retire Early -- Learn How!
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gummy
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Post by gummy »

Some interesting numbers:
Over the last six years (May 1/97 - May 1/03) the S&P 500 annualized return was 2.3%. Scary, eh?

It's even more scary if we use this as a Monte Carlo input in order to generate a SWR.

Mamma mia! Forget retirement. Work until you drop.
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Post by hocus »

At first blush, it seems you can get Bernstein's 2% simply by making the Expected Annual Return "input" (to our blackbox) something smaller than the normal 10% "input".

I think that's right.

Although I once wrote a tutorial on Gordon's Equation (I think), I didn't think much of it (I think). Guess I'll have to find it.

OK. This is a helpful comment. I am basing my argument largely on what Bernstein says, and Bernstein absolutely raves about the Gordon Equation. I am not an investment expert, OK? I do consider myself a bit of an "expert" on FIRE strategies. So when I see someone like Bernstein rave about the Gordon Equation, my reaction is to want to put this wonderful tool to use for the construction of more effective FIRE plans. If someone persuades me that the Gordon Equation is not so hot, that would diminish my enthusiasm for this a bit (but not entirely).

If a young fella starts investing for his eventual retirement assuming an eventual 2% withdrawal rate, he'll be eating beans for a while.

I understand. But there is no need to accept a 2 percent withdrawal rate. By changing your stock allocation a bit, you can bring the SWR up higher. I don't know what the precise numbers are, but what would your reaction be if you found that lowering your stock allocation from 74 percent to 50 percent (with 50 percent TIPS at the 4 percent rate that applied in 2000) brought the SWR up from somewhere near 2 percent to something considerably higher? Would that not be a good argument for some aspiring early retirees to give serious consideration to going with 50 percent TIPS for a retirement beginning in that year?

Intercst says no. Intercst says that, you can go with 50 percent TIPS if you want, but it will take you longer to save enough for a safe retirement if you do that. My goal was to achieve a safe retirement as soon as possible, so the idea of doing something to make it take longer to achieve a safe retirement has little appeal to me.

The practical question that I am trying to answer is, Are there circumstances in which a 74 percent stock allocation is not the "optimal" allocation? If it is true that the SWR for a high-stock portfolio in 2000 was 2 percent, then there clearly are such circumstances because it was possible to get more than a 2 percent SWR from TIPS at that time.
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Post by hocus »

I agree with hocus and intercst that the logical thing to do is plan for lower withdrawals.

Ataloss:

You are misstating the intercst position. It is not fair to pull one or two statements out of the Post Archives where he said something reasonable and suggest that that is the entirity of his position.

There are hundreds of posts in which he says that, if you go with something other than 74 percent stocks, it is going to take you longer to achieve a safe retirement.

This is a demonstrably false statement. The data does not support it. It is advice that could cost a lot of early retirees a lot of money. Intercst should stop putting forward this false claim.

You are also misstating my position. I am not advising anyone to plan for lower withdrawals. I prefer the option of lowering one's stock allocation to the point necessary to obtain the SWR you prefer.
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Post by BenSolar »

ataloss wrote: I disagree with hocus that intercst was "wrong." He has correctly presented a historical method which has limitations.


I find his stubborn refusal to consider the effects of valuation to be so extreme that I would say he is wrong. Not once have I seen him acknowledge that the valuations of the 2000 bubble far above those found in the historical record might be cause to lower ones withdrawal rate from a 75/25 S&P 500/cash portfolio. Those valuations are not something 'in the future' they are/were there to consider now, and they were far worse than anything seen in the historical record used in the rehp study, yet not one peep of a disclaimer that they might lessen the relevance of the 4% rule of thumb.

And his strong claims that 75% S&P 500 is optimal and that one must lower ones WR if you chose another allocation, even in the face of his own evidence that using a different start month produces a far lower 'optimal' stock allocation, certainly stretches the meaning of 'correct presentation' of the results of the historical method. I'd call it flat out BS.

Ben
"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 wanderer »

I imagine that one day hocus will volunteer to reveal his "tool."

That might just get him arrested. :shock:

(Just adding a little levity...)
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wanderer

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Post by wanderer »

What more important project than enhancing SWR analysis could a community of people with a mutual interest in FIRE possibly work on?

I know not what course others may take, but, while reading and appreciating the many fine efforts here, I have elected to focus not on SWRs, but on all sorts of other more practical (imo) concerns (i started to list them but it took too long... practically speaking :wink:).
regards,

wanderer

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Post by ataloss »

That might just get him arrested.


I hoped that someone would notice my little attempt at humor :wink:
Have fun.

Ataloss
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Post by ElSupremo »

Greetings wanderer :)

I just wanted you to know I laughed at your joke. :lol:
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Post by bpp »

That might just get him arrested.


Then he'll be saying, "Love put me in prison..."

Cheers,
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Post by ataloss »

I find his stubborn refusal to consider the effects of valuation to be so extreme that I would say he is wrong.


a couple of days ago I was objecting to hocus saying that it was a matter of "athematical certitude" that 4% was not safe

I guess he has given up on that part :)
Have fun.

Ataloss
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Post by wanderer »

Bob is optimistic that the future is bright and a 4% withdrawal rate will survive for 30 years. He doesn't know what the probability of this is. He doubts that intercst ever took a stand on this and he asked me for a link showing intercst indicating a numerical probability of future success. Do you have such a link?

Yes. I provided it once before.

"...The $24,000 figure is "90% safe", so there's a 10% chance you'd run out of money in 40 years with the higher withdrawal rate."

http://nofeeboards.com/boards/viewtopic ... 7002#p7002
regards,

wanderer

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Post by wanderer »

hocus -

could i ask you, respectfully, to please stop referencing what YKI said? It is not helping. imo.

thank you.
regards,

wanderer

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Post by BenSolar »

gummy wrote: Some interesting numbers:
Over the last six years (May 1/97 - May 1/03) the S&P 500 annualized return was 2.3%. Scary, eh?

It's even more scary if we use this as a Monte Carlo input in order to generate a SWR.

What's scary is that even after years of sub-par return, we are back at extreme levels of valuation. The current 10 year rolling average PE is 23.9 based on Shiller's current 10 year rolling average earnings of 40.28 and a current S&P 500 price of 963.59. In the last century we have seen this is level only twice: during the two periods that set the historical SWR: 1965-66 and 1928-29. I'm thinking of selling some of my meager holdings of S&P 500 into this rally.

Does anyone see anything about the current US/global economic outlook to indicate that a massive growth spurt is about to lift the GNP at sustained rates far above any seen before? Because that is what we are priced for again.

If you accept that reversion to mean valuations is likely within the next 30 years, then an extended period with negative, no or very low returns is likely from this level. We were about this level in 1996 when Shiller made this forecast using PE-30:
Shiller wrote: If we substitute the January 1996 value for the ratio, that is 29.72, then the predicted log ten-year return is - 0.06, virtually zero. Of course, this is not the same as the expected return. If returns are skewed to the right, as would be suggested by a lognormal distribution, then the expected return may be substantially higher. The lognormal assumption and our estimated regression model would imply that the expected return is exp(mean + variance/2) where mean is the expected log gross return and variance is the squared standard error of the regression: with these we come up with an expected total return over the succeeding ten years of .009, or about a tenth of a percent a year.
http://www.econ.yale.edu/~shiller/data/peratio.html

Again, the forecast for low returns from S&P 500 are an argument for diversification into asset classes with higher long term expected returns, whether you are accumulating or withdrawing. :D(I may be deluding myself into thinking that long term returns are somewhat forecastable, but there seems to be good research to that effect, and a logical underpinning to the statistical stuff. Nice tool, if it works :D)

Ben
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Post by wanderer »

I'm thinking of selling some of my meager holdings of S&P 500 into this rally.

Does anyone see anything about the current US/global economic outlook to indicate that a massive growth spurt is about to lift the GNP at sustained rates far above any seen before? Because that is what we are priced for again.

hello, bensolar.

so how are your "lunkers"? :wink:

we have about 13% in US equities. I find myself ambivalent about the future beyond a salute (13%) to the past. :wink:

as to the second part: first hocus' "tool," now you and your "spurt". good lord! :wink:
regards,

wanderer

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Post by BenSolar »

wanderer wrote: hello, bensolar.

so how are your "lunkers"? :wink:

we have about 13% in US equities. I find myself ambivalent about the future beyond a salute (13%) to the past. :wink:

as to the second part: first hocus' "tool," no you and your "spurt". good lord! :wink:


:lol::lol:

No lunkers. Caught a few decent fish. Had a very nice dinner of mangrove snapper with shrimp etouffee using fish we caught. :D

I'm pretty light on US large cap but am finding it hard to justify owning as much as I do. I will keep some so that I don't get consumed by jealousy if it goes up, and to use the volatility and small dividend (which cash return is higher than the MMF I have available in my 401k).

My tool doesn't predict an extended drastic growth spurt. :wink:

B.
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Post by wanderer »

a couple of days ago I was objecting to hocus saying that it was a matter of "athematical certitude" that 4% was not safe

I guess he has given up on that part

check out my quote of the source you favor of late.

http://nofeeboards.com/boards/viewtopic ... 7157#p7157

I guess assertions of "mathematical certitude" are an affliction of all self-proclaimed "gurus" of SWRs. :wink:
regards,

wanderer

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Post by raddr »

BenSolar wrote: What's scary is that even after years of sub-par return, we are back at extreme levels of valuation. The current 10 year rolling average PE is 23.9 based on Shiller's current 10 year rolling average earnings of 40.28 and a current S&P 500 price of 963.59. In the last century we have seen this is level only twice: during the two periods that set the historical SWR: 1965-66 and 1928-29. I'm thinking of selling some of my meager holdings of S&P 500 into this rally.


Ben,

I think that would be a good move. The only domestic large cap exposure I have is through Buffet's BRK and it amounts to only about 3% of my portfolio. IMO valuations are better in small and mid caps, both domestic and international, as well REITS and precious metals. You can build quite a nice portfolio without big caps as long as you can tolerate the S&P500 tracking error which I can do just fine. :wink:
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Post by hocus »

hocus - could i ask you, respectfully, to please stop referencing what YKI said? It is not helping. imo.

I don't really know what "YKI" means. But I presume this means to stop mentioning intercst.

The references are to his study and to his claims about it. How am I to respond to a claim by ataloss that intercst has claimed such and such except by making a reference of my own to a statement by intercs that is in direct conflict? I don't see how as a practical matter this can be done.

I'm open to ideas if people know of ways to discuss this without bringing up certain words. But an important theme in this discussion is that giving out false advice on SWRs is dangerous. How can you show the danger without ever describing the false claims that cause the danger?

If there were universal acceptance that false and dangerous claims have been made, there would be no need to refer to them. But when this is being questioned, what else can you realistically do? I am trying to protect aspiring early retirees from dangerous SWR claims, and the idea that there is danger is being challenged, and all the examples of dangerous claims that I know of were put forward by the individual you are asking me not to mention.
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Post by hocus »

I guess assertions of "mathematical certitude" are an affliction of all self-proclaimed "gurus" of SWRs.

I know that you and Ataloss are kidding around here a bit. But there is an important point lurking underneath the surface that I think needs to be brought out.

Dogmatism is somewhat appropriate on some of these issues in the event that you are using a SWR tool that does what it says it does. The claim that I keep hitting intercst on is the one that it will take longer to retire safely if you go with an allocation other than 74 percent stocks. He is dogmatic on that point. Is he wrong to be so?

If the analysis he is using is invalid, he is absoluetely wrong to dogmatically put forward false and dangerous advice. But let's assume for a moment that the intercst analysis is valid. Then what?

In that circumstance, he is not so wrong to be dogmatic. Remember, the intercst claim that it will take longer to retire with any other allocation always contains the caveat that the future will not be worse than the past. Add that part in, and all that he is doing is reporting what the data says. Is it really so wrong to be dogmatic about the results of a mathematical calculation?

In this particular case, I do not fault intercst for his dogmatism. Either the data says what he says it says or not, and, if it does, there is no good reason why he should not state so in clear terms. My criticism on this point is that he is wrong about what the data says. The data (all of it that bears on the question, not just the part he incorporates into the study) does not support the dogmatic claim.

SWR analysis is by nature a somewhat dogmatic business. It is about numbers. You put rows of numbers into a spreadsheet and there are people who are going to believe that those numbers say something real, or at least largely real. Many people who would pay no attention if intercst said "it's my personal opinion that 4 percent is a good number," take it seriously when he says "there is data supporting the 4 percent number."

The claim that data supports the claims is a key aspect of the problem we are struggling with. When you cite data as support, you need to be doubly careful to get it right. People put more trust in data claims than they do in expressions of pure personal opinion.

My contention is that intercst is putting forward claims that are only his personal opinion because he selectively included some sorts of data and excluded other sorts. Had he included all the data that bears on the question, dogmatism would not be so out of place. But he didn't do so, so the claims he is being so dogmatic about are false claims. The combination of dogmatism and falsity is a powerfully dangerous one.
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Post by wanderer »

How am I to respond to a claim by ataloss that intercst has claimed such and such except by making a reference of my own to a statement by intercs that is in direct conflict? I don't see how as a practical matter this can be done.

It can't. However, I would like to resolve these matters rather than revisit that business.

That's why I have asked each of you to kindly stop referring to that troll's oeuvre: it's not conducive to getting an answer to the problem you/others/we seek to resolve.

Fair enough?
regards,

wanderer

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