Portfolio failure

Financial Independence/Retire Early -- Learn How!
[KenM]
*** Veteran
Posts: 133
Joined: Tue Mar 04, 2003 12:54 am

Portfolio failure

Post by [KenM] »

So, here we all are, happily retired at 50 - no need to argue about best estimates for SWRs anymore :).
Portfolio happily stocked up with REITs or whatever in accordance with the latest conventional wisdom.
We've happily produced our own best estimate of our SWR for 40 years for 95% safety.
We're happily convinced that we won't be one of the 5% failures.
...then the portfolio value goes down....and down...and down....
At what level/what point in time do we get very, very unhappy; think we may be one of the 5% failures; press the panic button and do something drastic like go back to work or severely cut withdrawals or whatever??????
Portfolio value down 30% at year 5?; down 20% at year 10?; down 50% at year 15?
Is there a best estimate method or would it be just a guess?
KenM
Never try to teach a pig to sing. It wastes your time and annoys the pig.
User avatar
BenSolar
*** Veteran
Posts: 242
Joined: Mon Nov 25, 2002 5:46 am
Location: Western NC

Post by BenSolar »

Greetings, KenM :)

That is an excellent question. One which we should look at more. JWR1945 has some posts along this line, IINM. John?

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
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

KenM
At what level/what point in time do we get very, very unhappy; think we may be one of the 5% failures; press the panic button and do something drastic like go back to work or severely cut withdrawals or whatever??????
Portfolio value down 30% at year 5?; down 20% at year 10?; down 50% at year 15?
Is there a best estimate method or would it be just a guess?

The threshold is a loss of 25% at any time within the first decade. You should take remedial action, but it need not be a full time job. If your balance has fallen by 50% within the first ten years, you must go back to work. You are doomed.

I posted those findings originally at the Motley Fool but I have not brought that post over here. This is one of the things that I would like to examine more thoroughly.

My methodology was based on the historical sequence approach and I used dory36's FIRECalc calculator.

This methodology includes no correction for valuations.

Your balance is most likely to dip a little bit and then recover. Eventually, it grows to very safe level. If you get to a level at which you can lock in success via TIPS, do so. If that is early, leave a little money on the table. If it is late, convert to 100% TIPS.

You may be interested in these threads as well:
JWR1945 The Three Level Portfolio Cookbook
http://nofeeboards.com/boards/viewtopic.php?t=458

Ben's SWR Study (I had a post referencing A Hidden Flaw)
http://nofeeboards.com/boards/viewtopic.php?t=856

KenM has been actively participating in the following threads. Others might want to look at them for quick reference:
Alternative Withdrawal Strategy-Part 2 (read the entire thread)
http://nofeeboards.com/boards/viewtopic.php?t=890

Gummy post: Sensible Withdrawal Rates on the Alternative Withdrawal Strategy-Part 2 (be sure not to miss this particular post)
http://nofeeboards.com/boards/viewtopic ... 6357#p6357

Gummy's post: The Great SWR Investigation-Part 2 (be sure not to miss this particular post)
http://nofeeboards.com/boards/viewtopic ... 7099#p7099

Be sure not to overlook ways to improve portfolio safety such as holding cash when investment opportunities are poor and selecting high dividend/low volatility stocks and/or REITS. Remember that it is selling shares during market downturns that kills retirement portfolios. High dividends reduce the number of shares that you must sell.

KenM: You have already made use of a wealth of practical advice and tend toward a modified version of Gummy's Sensible Withdrawal Strategy and a constant withdrawal percentage of the current portfolio balance method. The latter can never fall to zero (but it can come very, very close too early).

Have fun.

John R.
raddr
*** Veteran
Posts: 265
Joined: Mon Nov 25, 2002 3:25 am
Contact:

Post by raddr »

The threshold is a loss of 25% at any time within the first decade. You should take remedial action, but it need not be a full time job. If your balance has fallen by 50% within the first ten years, you must go back to work. You are doomed.


John,

Great observation What kills retirements is big losses early on. It almost doesn't matter what your withdrawal rate is. For example, if you loaded up on TSM stocks in 1999 you took nearly a 50% hit whether you were withdrawing 3%, 4%, 6% or whatever. You would've been screwed. The key is to avoid the big losses in the first place. This is why diversification is so important. 8)
User avatar
Bookm
Admin Board Member
Posts: 36
Joined: Wed Nov 27, 2002 4:00 am
Location: Norfolk, VA
Contact:

Post by Bookm »

Greetings raddr:
What kills retirements is big losses early on. It almost doesn't matter what your withdrawal rate is. For example, if you loaded up on TSM stocks in 1999 you took nearly a 50% hit whether you were withdrawing 3%, 4%, 6% or whatever. You would've been screwed. The key is to avoid the big losses in the first place. This is why diversification is so important.


This could make me believe that there is no 100% SWR, without considering asset allocation in the equation. How one's portfolio is allocated truely is vital to its (and our own) survival. Would I be correct to believe that these two factors (withdrawal rate and allocation) are equally important?

Bookm
Wall Street investment products suck because it's all about them and their revenue today. It's not about us and our income tomorrow. - Scott Burns
WiseNLucky
** Regular
Posts: 84
Joined: Tue Nov 26, 2002 3:59 am
Location: Florida

Post by WiseNLucky »

Bookm wrote:
Would I be correct to believe that these two factors (withdrawal rate and allocation) are equally important?


Absolutely! And I would add valuations to make it a triumverate. Valuations affect asset allocation which affects withdrawal rate which affects . . .

That's why rules of thumb like the one contained on the Ballpark site (see this post on the Newbies Board) are frightening. What if somebody believes that stuff?
WiseNLucky

I just wish everyone could step back and get less car and less house then they want, and realize they don't NEED more. -- NeuroFool
Trex
* Rookie
Posts: 27
Joined: Sat Feb 22, 2003 1:16 am
Location: Tallahassee, FL

Post by Trex »

Please note the Ballpark disclaimer:

Planning for retirement is not a one-size-fits-all exercise. The purpose of Ballpark is simply to give you a basic idea of the savings you'll need when you retire.

Trex
[KenM]
*** Veteran
Posts: 133
Joined: Tue Mar 04, 2003 12:54 am

Post by [KenM] »

Absolutely! And I would add valuations to make it a triumverate. Valuations affect asset allocation which affects withdrawal rate which affects . . .

........which affects our ability to remember that markets in the short term don't act in the sort of nice, ordered, commonsense way such as may be indicated by thoughts of a triumverate. (By short term I mean the timespan of someone retiring at 60). Most retirement strategies seem to have a "set-in-stone" SWR and asset allocation and have no what-if scenarios to allow for reacting to any unexpected future directions of the market which, as jwr says, always surprises us. I'm increasingly coming round to the view that rough, rules of thumb have as much validity as anything else and that allowing for flexibility in the strategy and perhaps setting up guidelines on how to react to future market directions in terms of valuations, returns etc is the most important aspect.
KenM
Never try to teach a pig to sing. It wastes your time and annoys the pig.
hocus
Moderator
Posts: 435
Joined: Mon Dec 02, 2002 12:56 am

Post by hocus »

That's why rules of thumb like the one contained on the Ballpark site (see this post on the Newbies Board) are frightening. What if somebody believes that stuff?

You are talking my language with this comment, WiseNLucky. I believe that far too much energy has been directed to issues of semantics. What matters in a practical sense if whether the tool you are using does the job you are asking it to do or not.

The conventional SWR analysis does not do the job. It always produces the wrong number, both at times of overvaluation and at times of underrvaluation. I see no constructive purpose served by performing an analysis in a way that always produces the wrong answer when there are ways available to modify the tool to provide the right answer (or at the minimum an answer that is more right than the one being produced by a tool that ignores a critical factor).

The is not a theoretical concern. It is an intensely practical one. If people make use of the flawed tool in constructing their FIRE plans, one of two things is going to happen: (1) they are going to think that their plans are safe even though the data shows that they are not; or (2) they are going to unnecessarily delay their retirements because the flawed tool provides a false read on the level of savings required to achieve their desired level of safety.

I am not advocating greater safety in retirement planning. I am advocating greater accuracy in tools used to craft retirement plans. More accurate tools will in some circumstances bring more safety and in other circumstances bring a safe retirement at an earlier date. In all circumstances greater accuracy is a good thing. I cannot imagine any circumstance in which it is a good thing to deliberately exclude data that bears on the question being examined in an analysis.
hocus
Moderator
Posts: 435
Joined: Mon Dec 02, 2002 12:56 am

Post by hocus »

I'm increasingly coming round to the view that rough, rules of thumb have as much validity as anything else

The poll that ataloss put up at the other board (showing that the vast majority of participants at that board now view the SWR tool as providing merely a rule of thumb) showed that my arguments have had a significant effect. It's clear that most people have lost faith in the claims that have been put forward for years that the conventional SWR analysis provides a valid data-based assessment of what is safe.

My guess is that changing people's views on how to assess the safety of a retirement plan is going to be a two-step process. Step One, causing people to doubt the validity of tools that they once had confidence in, is now close to being complete. Step Two is going to be making the case for what tools they should employ to replace the ones that are now discredited.

If you are suggesting in the comment above that we should give up on the idea of using historical data to assess safety, I do not agree. I believe that the SWR concept is a powerfully illuminating one. The problem is not with the idea of using historical data to assess safety, it is the failure of the conventional analysis to consider all the factors that bear on the question being posed.

It is not possible for any analytical exercise that fails to consider critical data to generate accurate results.So it is not fair to blame the SWR tool for failing to do so in cases in which the methodology employed ignored the effect of one or more factors of critical significance.
wanderer
*** Veteran
Posts: 363
Joined: Tue Nov 26, 2002 9:33 am
Location: anytown, usa

Post by wanderer »

which affects our ability to remember that markets in the short term don't act in the sort of nice, ordered, commonsense way such as may be indicated by thoughts of a triumverate. (By short term I mean the timespan of someone retiring at 60). Most retirement strategies seem to have a "set-in-stone" SWR and asset allocation and have no what-if scenarios to allow for reacting to any unexpected future directions of the market which, as jwr says, always surprises us. I'm increasingly coming round to the view that rough, rules of thumb have as much validity as anything else and that allowing for flexibility in the strategy and perhaps setting up guidelines on how to react to future market directions in terms of valuations, returns etc is the most important aspect.

exactly! except i accord these SWR analyses as lacking "as much validity as anything else". can you see how much moroe flexibility we have now: honey pot 127% larger and growing, draw 1/4 of cash flow? solvency + liquidity (cash) = financial flexibility. More opportunities to buy last march. less need to sell last July.
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
[KenM]
*** Veteran
Posts: 133
Joined: Tue Mar 04, 2003 12:54 am

Post by [KenM] »

except i accord these SWR analyses as lacking "as much validity as anything else".

Except I suggest that you've been looking at this stuff for a long time and may have forgotten what it would be like without these studies. Without them it's just a guess - with them at least there's a starting point for thinking about withdrawals in retirement - at least for people like me who only came across this stuff 6 months ago. However, as with anything to do with the market, skepticism and scepticism is the key - but please, please, hocus, let's not go round in circles again :)
KenM
Never try to teach a pig to sing. It wastes your time and annoys the pig.
wanderer
*** Veteran
Posts: 363
Joined: Tue Nov 26, 2002 9:33 am
Location: anytown, usa

Post by wanderer »

Except I suggest that you've been looking at this stuff for a long time and may have forgotten what it would be like without these studies.

You may be right. And the statement was a little for effect. still, i know several foks shipwrecked cause of overoptimistic rots.

Part of the problem is that it is a complicated question. And i think maybe people just don't want to hear bad news. Every time raddr pees in my corn flakes I thank him - for preventing a far worse fate. :wink:

i guess we're down to "it's better than nothing" and "it's just a rot" (whatever that means). :shock:
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
hocus
Moderator
Posts: 435
Joined: Mon Dec 02, 2002 12:56 am

Post by hocus »

Without them [the products of conventional SWR analysis] it's just a guess - with them at least there's a starting point for thinking about withdrawals in retirement

A guess that is formulated through use of a process that cannot possibly generate the correct answer to the question being posed is in many circumstances worse than a guess that is formulated by consulting an astrology chart. At least when you take a blind guess, you know not to place much confidence in the number you come up with. When you employ mathematics and charts and such, but do it in such a way as to blind yourself to the realities of what the historical data is telling you, you run the risk of thinking that the wrong number you have produced is through some magical process going to be close to the correct answer to the question posed.

My take on this is: (1) use of a valid data-based SWR analysis is the best way to plan a retirement; (2) use of a blind guess not making reference to data sometimes produces a number close to what examination of the relveant data would produce and sometimes does not, but the damage of a bad guess is mitigated by the fact that you know not to place much confidence in whatever number is produced; and (3) use of an invalid SWR methodology sometimes produces a number close to what examination of the relevant data would produce and sometimes does not, and in the cases in which it does not it generates the most dangerous result of all, a retiree who possesses confidence in a number not in accord with the relevant data.

please, please, hocus, let's not go round in circles again

I'm hard-pressed to see anything I have done to cause us to go around in circles, KenM. My longstanding plea has been for us to leave the semantics games behind and determine whether the conventional methodology is a valid one or not. I believe that, once we get that question behind us, we will be able to resolve all of the other questions with relative ease.

It is the preconception that the conventional methodology can do a reasonably good job, even without taking into consideration data critical to an infomed resolution of the question being posed, that is causing the discussions to go around in circles. Leave that preconception behind, consider what SWR analysis is supposed to do from a fresh perspective, and you can see quickly that it makes no sense whatsoever not to take into account the effect of changes in valuation levels when determining what allocation and take-out number to go with in crafting your retirement plan.
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

KenM
Except I suggest that you've been looking at this stuff for a long time and may have forgotten what it would be like without these studies. Without them it's just a guess - with them at least there's a starting point for thinking about withdrawals in retirement - at least for people like me who only came across this stuff 6 months ago.

You have been at it for only 6 months, yet you are now light years ahead of most. Outstanding!

Well done, KenM.

Have fun.

John R.
raddr
*** Veteran
Posts: 265
Joined: Mon Nov 25, 2002 3:25 am
Contact:

Post by raddr »

Bookm wrote: Greetings raddr:
What kills retirements is big losses early on. It almost doesn't matter what your withdrawal rate is. For example, if you loaded up on TSM stocks in 1999 you took nearly a 50% hit whether you were withdrawing 3%, 4%, 6% or whatever. You would've been screwed. The key is to avoid the big losses in the first place. This is why diversification is so important.


This could make me believe that there is no 100% SWR, without considering asset allocation in the equation. How one's portfolio is allocated truely is vital to its (and our own) survival. Would I be correct to believe that these two factors (withdrawal rate and allocation) are equally important?

Bookm


Hi Bookm,

Yes, I believe that asset allocation is very important. There is historical evidence that the SWR may be 1-2% higher for some allocations vs. others. IMO a portfolio dominated by small and microcaps (domestic and int'l), REITS, TIPS, and a dollop of precious metals equity will outperform the TSM (essentially large caps) approach going forward, FWIW. :wink:
raddr
*** Veteran
Posts: 265
Joined: Mon Nov 25, 2002 3:25 am
Contact:

Post by raddr »

wanderer wrote: Every time raddr pees in my corn flakes I thank him - for preventing a far worse fate. :wink:


LOL :lol: Glad I could be of service. :wink:
wanderer
*** Veteran
Posts: 363
Joined: Tue Nov 26, 2002 9:33 am
Location: anytown, usa

Post by wanderer »

kenm -

maybe a good analogy for the SWR estimate is to compare it to oil and gas accounting. it includes controversial theory, a math calculation and political considerations.

GAAP permits either "full cost" (expense costs dry holes) or "successful efforts" accounting (capitalize costs of dry holes as part of price of finding non-dry holes :shock:).

The SEC said, way back when: both is wrong. You should use reserve recognition accounting (present value the expected future cash flows - basically pull out the HP 12C).

Great in theory - tough in practice (as well as politically untenable). The price of oil fluctuates erratically (returns on equities? (pmt)), estimating the size of the reserve is difficult (like estimating longevity? (n)), estimating the prevailing discount rate (inflation (i)). Plus, technology, politics, etc. increase volatility throw in wrinkles. As a result the reserve estimates fluctutate wildly. So wildly that they lose much of their utility.

The SEC rescinded their command and the accounting poobahs complied and revoked their edict. Now RRA is relegated to the footnotes.

Pension accounting is similarly hamstrung (altho it's clear some folks have been way too aggressive).

Anyway. Part of why I take the SWR stuff with an oil barrel full of salt. As you know, our solution has been to work longer and avail ourselves of significantly greater assets and have to provide for ourselves for one less year.
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
[KenM]
*** Veteran
Posts: 133
Joined: Tue Mar 04, 2003 12:54 am

Post by [KenM] »

As you know, our solution has been to work longer and avail ourselves of significantly greater assets and have to provide for ourselves for one less year.

wanderer,
OK, been there - done that - but now is crunch time - stopping work - how much to withdraw???

Although I might agree take the SWR stuff with an oil barrel full of salt. , when it gets to crunch time it's necessary to make a judgement and the SWR stuff is all I've got. It seems to me it's one of the hard facts of life that our most important judgements in life usually have to be made based on extremely limited supporting evidence. Choosing an SWR and withdrawal strategy for 40 years is a bit like choosing a compatible wife for the next 40 years :D
An objective analysis of SWR studies or, perhaps, a potential wife's cooking skills etc might give you a feeling for what it's going to be like but you won't know you've made the right decision for 10, 20 years or so.
KenM
Never try to teach a pig to sing. It wastes your time and annoys the pig.
wanderer
*** Veteran
Posts: 363
Joined: Tue Nov 26, 2002 9:33 am
Location: anytown, usa

Post by wanderer »

Choosing an SWR and withdrawal strategy for 40 years is a bit like choosing a compatible wife for the next 40 years

understood. simple common sense would say take out the minimum (survival level) until the market "proves" itself/other things shale out. similar to gummy's, i guess.

reward yourself with a hellacious party if you're way ahead after a few years.

if you are at 2%, i would imagine you're safe. but who knows. i always go back to the height of the british empire, 1897, when their long bond rates were the lowest (cuz people thought they were the safest) and think about what happened to them over the next 50 years. the future will be different... i think...
regards,

wanderer

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