Diversification improves SWR?

Research on Safe Withdrawal Rates

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ben
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Diversification improves SWR?

Post by ben »

I posted this on fool.com and partly due to Hocus fault (as I see it) the thread went completely off-topic. That said I think that a Dory-style calculator that incorporates say 10 mainstream asset classes would be a fantastic TOOL to spend your time on rather than the valuation tool, where I believe a conclusion have been reached.

It is in short: when valuation high - keep 30% equity, medium keep 50% equity, low: keep 70& equity.

Now a tool (Hocus; maybe on that homepage you wanted to create?) that covers the benefits (or not) of adding asset classes would certainly catch my attention.

Quoting post here:
I am well aware that the reason the SWR study uses SP500 and US bonds is the long long history we have for these asset classes.

Most on this board, including me, would never have a portfolio limited to these 2 asset classes and wonder whether we do not have a decent history for at least US small caps, foreign developed stock and bonds?

The fairly new Pimco fund PCRIX for commodities is also a rather big hit for diversification we discuss a lot on raddr-pages.com (I am ben there and have been preben here before the fees) - not sure if we have decent long term commodity class returns though. (And PCRIX is a slightly different animal than just owning the actual commodities).

REITs are also a fairly recent asset class - so presume hard to find long term data for same usefull to evaluate in portfolio?

Gold/PM equity we should have decent long term info on.

Emerging market equity?

There have been several articles lately about how commodities, gold, foreign stocks Etc. should add both less risk and more return.

A calculator or an analysis of the potential diversification benefits for FIRE SWR would certainly be an interesting tool rather than discussing the value issue to death. The calculator/study could simply state a disclaimer that E.g. REIT data dates xx years back, emerging markets xx years back Etc.

DFA: http://www.ifa.com/portfolios/p070/index.asp have 34 years of data on several of the asset classes I mention above - so is it maybe time for a study or even a calculator that lets one chose asset classes we actually use, rather than the SP500/US bonds combo only?

Cheers!
Normal; to put on clothes bought for work, go to work in car bought to get to work needed to pay for the clothes, the car and the home left empty all day in order to afford to live in it...
JWR1945
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Post by JWR1945 »

Normally, you should use a Monte Carlo simulation and lots of sensitivity tests when the number of years is limited.

I recommend that you purchase Gummy's computer CD and use these two Monte Carlo simulations in his files: Monte_Carlo_2.htm and sensible_withdrawals.htm. [It is possible that you can still access these files directly from his website.]

In terms of using historical sequences, I modified some calculators for Mike's use. Take any of my versions that has numbers in row 2550 and paste new data (such as the annual returns for Small Cap Value) on top of the existing numbers for the applicable years. In Mike's case, I pasted data on top of BF2550 through ED2550 (for the years 1927 through 2003).

I can introduce additional classes in a similar manner. That is, I can put new numbers into row 2550, either directly (as I did for Mike) or (with more asset classes) indirectly and in combination.

There is a danger of spurious correlations when looking at short histories and multiple asset classes. Be sure to identify cause and effect whenever possible. Otherwise, you might latch onto something false.

Have fun.

John R.
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Post by JWR1945 »

Please tell me more about what you are trying to determine, ben.

If you are simply after improved allocations of assets, I advise you to consider what John Bogle had to say about the Global Efficient Frontier on pages 189-192 in Common Sense on Mutual Funds. He pointed out that the choice of allocations was overly sensitive to small differences in estimates of risk (i.e., volatility).

From page 191:
Contrasting the periods ending in 1988 and June 1998, Figure 8.1 crystallizes two important realities of the global efficient frontier: (1) vast shifts in the frontier may take place over a decade, and (2) variations in risk near the efficient point of each curve are inconsequential, despite large variations in asset allocations. Slavish reliance on history seems particularly flawed in markets where currency fluctuations create substantial extra risk.
This is why making sensitivity studies and determining cause-and-effect are critically important.

I would be interested in knowing some candidates related to valuation when other asset classes are added. It seems to me that a valuation based asset allocation among multiple asset classes should make sense.

Keep in mind that, although asset allocation almost always reduces volatility, it does not always improve performance. This is especially significant if one of the asset classes has a return substantially lower than that of another. In at least one instance, rebalancing between stocks and commercial paper reduced the upside potential with almost no discernible improvement protecting you against the downside. [The Historical Surviving Withdrawal Rates differed by 0.1% or less.]

Have fun.

John R.
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Post by hocus2004 »

"I posted this on fool.com and partly due to Hocus fault (as I see it) the thread went completely off-topic."

Here is a link to the thread in question:

http://boards.fool.com/Message.asp?mid= ... e#21308800

AbrahamLinkin: "There are dozens of issues that we should be exploring at this board that have never been explored here before. The one you mention here is a good one.

We should stop telling people who come here asking for on-topic debate that we have already discussed everything there is to know about the subject. Instead, we should broaden the terms of debate to include all of the many aspects of the Retire Early question that have not been examined here yet."

inparadise: "Hocus, Hocus, Hocus...that is not what gets said, and in your more rational moments you know it. If a newbie has a question, then by all means they should ask it.

History shows that if an answer exists in our knowledge base, questions get answered pretty quickly. It's when they expect to get questions answered without asking them that things get a little quirky. "

AbrahamLinkin: "Here is a link to a goodbye post from a poster named TenaciousD.

http://boards.fool.com/Message.asp?mid=18809833

He is no longer with us because he came to realize that there was no hope here of finding reasoned discussion of early retirement topics outside of the small number of topics approved by one particular community member. Not every aspiring early retiree is interested in precisely the same list of questions as that one community member.

There are hundreds of such posts in our post archives. We need to change our ways so that we attract posters with an intercst in the subject matter of the board rather than discouraging them and alienating them and insulting them.

There's nothing wrong with off-topic posting. There's nothing wrong with on-topic posting either. Both should be permitted to co-exist. That way community members with all different sorts of interests obtain value from the same board community. When word gets out that that is possible, the board community grows and thrives.

Remember the old days, inparadise? This board was a very different place in the old days. We took a wrong turn a ways back, and it's time we reversed course and got back to where we once belonged.

2828: "I think you got it wrong hocus. The posts already coexist (on-off topic). We have posters that question the valuations of stocks like advo and solar and we have reasonable discussions. Sure Advo's wrong but he's German you have to expect that. The topics come up as they naturally would, you can't force the topic.

This board has become more than just a discussion group about safe valuation levels, it's become more of a friendship community. I don't think the board took a wrong turn, i think it took a right turn."

Evelynk: "It sounds to me like TenaciousD had some issues."

hocus2004: "Nobody is trying to take the friendship community part away, 2828. It is just fine that people use the board for that purpose.

I am trying to add something else to the mix, something that was very much part of the mix in earlier days. I am saying that on-topic discussions not in accord with intercst's views should be permitted here.

I intend to challenge intercst on his claims about SWRs and probably about a good number of other things as well. I will never attack him in personal terms. But I intend to challenge his claims and I hope to be able to bring new voices into this community who will join me in challenging his claims.

I am not asking this next question sacastically. I mean it as a serious question. Do you have a problem with that?

If you and others do not have a problem with me challenging intercst's Retire Early claims, then there is no problem here. If you do have a problem with me doing that, you should state in clear terms what your objection is so that we can try to work out some rules of the road by which things can proceed without any more friction than is absolutely required for us all to enjoy a Learning Together experience. "

hocus2004: "I don't think it would be a good idea to do this today, but if I were put to the challenge, I could put up 50 links from the Post Archives that offer views in line with those put forward by TenaciousD. Lots and lots of people have the same "issues" with the way this place is run as does TenaciousD.

I devoted thousands of hours of
my life energy to bringing fine on-topic posters to this place. I built it into what I think was the most thought-provoking board on the face of Planet Internet. It wasn't just me who thought that. There are scores of posts in the archives in which other posters say things along those lines. You rarely hear a comment along those lines about the board as it exists today.

I want the old REHP board back. I think we can get that old board experience back. I think that we can help thousands of middle-class workers achieve financial freedom years sooner than would otherwise have been possible by bringing that old board experience back. It was to provide that sort of experience for people that I started posting here in May 1999 and it was to recreate that sort of experience for people that I soldiered on re the SWR matter for as long as I have.

This board community matters. Let's all work together to make it the best it can possibly be. "

ogrecat: "You are still crazier than an outhouse rat. "

CatherineCoy: "I started to reply to Abe/hocus' unbelievably self-aggrandizing, ego-gratifying, grandiose statement, only to realize there are few words to describe the utter fabrication of his claim.

Then I remembered the synonym function of Microsoft Word.

arrogant
egotistical
self-important
supercilious
over-confident
patronizing
exaggerated
mendacious
misleading
embellished
over-stated
inflated
overblown
magnified"

hocus2004: "OK, Catherine. It wasn't just me, though. There were hundreds of other posters who put a good bit of time and effort into building up the board. When you mock my efforts, you mock theirs too.

Those people helped me learn a lot about the subject matter. I have written a book on the subject matter of this board, and that book is about 10 times better than what it would have been had I not had the insights of this board community to tap into.

Those people learned important things by making use of this board as a learning resourse. I want them to have it back for that purpose once again. And, for every aspiring early retiree who made use of this board back in its Golden Age, there are probably another thousand who would have done so in time had it stayed on track long enough for them to have discovered it.

Those people matter to me and I am going to do what I can to recreate the learning resource for them. If thinking that I can do that makes me "over-confident," then I'm over-confident. All that a person can do is try. So that is what I will do. Succeed or fail, there will be no hard feelings coming from my side of the table. I will give it my best shot, and see where the little red ball lands in the end. "

CatherineCoy: "You, of all people, didn't single-handedly make this board what it is. Far from it. No one's mocking the board's cumulative effort, just the idea that YOU, and you alone, to quote yourself, "built it into what I think was the most thought-provoking board on the face of Planet Internet."

hocus2004: "t's a fact that I spent thousands of hours doing work to bring fine posters to this board.

It is also a fact that there are hundreds of posters who made fantastic contributions to this board, who turned it into the most exciting board on the face of the internet.

Both things are true.

I don't for a second say that I built this board by myself. The very idea is an absurdity. The power of the board came through the fact that it was a community of people offering a diversity of viewpoints.

But I am not going to apologize for the work I did building this board community either. That is probably the most important work that I have done in my life. I am proud of that work. There was a time when virtually everyone in this community praised that work. That includes intercst. Intercst added a statement to the FAQ for this board advising newcomers to "read every post by hocus, they all are at the top of the most recommened list."

Did he mean it when he said that? I think he did. I think the scores of other community members who made similar comments (all still in the Post Archives) meant what they said too. I have a right to use the board for the purpose for which I worked to build it, and the hundreds of others who built it have a right to use it for the purpose for which they built it too. No one community member owns a public discusssion board. "

hocus2004: "Those who are saying that there is no difference between what the board stood for in its Golden Age and what it stands for today are mocking the work of all of the hundreds of people who built it.

People who want on-topic debate should not be required to phrase things in the form of a question to get it. This is not the Jeopardy board. People who want to engage in on-topic discussions should be permitted to do so, regardless of whether those on-topic discussions happen to be favored by any one particular community member or not."

ogrecat: "harmony and understanding
sympathy and trust abounding
no more falsehoods or derisions
golden living dreams of visions
mystic crystals revelations
and the minds true liberation "

hocus2004: "I'll stand up for the rights of any community member who built the board and who today wants to use it for the purposes for which he or she built it. It is those who did the work building the board who should have the largest say in determining its agenda, in my view.

I expect my efforts to benefit hocus. But I do not do the things I do solely to benefit hocus. I do them to benefit any member of the community of people seeking to learn how to retire early. I am a big believer in the power of community. That's the whole reason why I invested thousands of hours into building this community in the first place (ALONG WITH HUNDREDS OF OTHERS WHOSE RIGHTS SHOULD ALSO BE RESPECTED). "

CatherineCoy: "A community message board, other than the opening stated topic (in this case retiring early), doesn't really have an "agenda," in my opinion. It goes where it goes, from day to day, and no one person (even you) can direct its agenda. You'll make yourself crazy if you try.

I suggest you cease right now to create yet another debate about having a debate. If you've got something to say, say it; otherwise, it's the same old sad song, "Intercst won't let me have my say." Waaaaaa....."

hocus2004: "This is exactly what I believe, Catherine. The community decides the agenda.

I know that I cannot force this community to talk about SWRs or any other topic. The community will talk about what it wants to talk about when it wants to talk about it.

I watch for signs as to where the community wants to take things. When the community puts forward questions or comments in an attempt to decide where to take things, I do my best to be responsive and constructive. That's pretty much the extent of my influence.

I am one community member and you are another and inparadise is another and so on. No one of us decides where this ship goes. We decide together. The community as a whole has a wisdom than none of us possess as individuals. "

ogrecat: ""I am he
as you are he
as you are me
and we are all together"

sysdsydsyd: " hate to break it to you, but this is the Golden Age, or at least As Good As It Gets. Maybe you can play the dog who goes down the trash chute."

fleg9bo: " must say that I'm enjoying the board plenty these days, but in a different way than when I was first getting excited about REing and posting about getting closer, then doing it, then moving to OR, and learning the stuff I needed to know along the way. I still miss some posters, like GWM and Savagegrace and intercst, but there have been some excellent newbies along the way and it seems like we have a full contingent. I just wish someone would post something on-topic once in a while.<g>"

FoolMeOnce: "I believe just the opposite is true. In general the larger the decision-making body the more idiotic the decision. This tendency has been referred to variously as the "madness of crowds", "the lemming effect", Congress, etc. At IBM it was referred to as the "masses of asses" approach.

Of course a truly stupid individual would constitute an exception."

1HappyFool: "Unfortunately, the rules of TMF are sometimes used to stifle debate. Some people expect their opinions to be treated as valid simply because they are their opinions. Instead of groupthink, we get groupgrope. Imho, neither are desirable. Some people object to having their opinions pushed through a BS filter and so they fall back on "the rules" and cry "foul". We can probably only have a whole that is greater than the sum of its parts if we embrace common ideals, but they have to be the right ideals.

Foolishly embracing a "diversity of opinions" just results in noise that drowns out the only useful truth. Groups suffer when only one leads, but they also suffer when people use "the rules" as leverage to pull for or against the prevailing sentiment to further an ulterior motive or agenda."

hocus2004: "I understand the point that you are making, FoolMeOnce, and it's a good one. But I still believe that there are ways in which communities are "smarter" than individuals.
The problem with an individual is that he or she can only live one life. So he or she only has one set of experiences. That's limiting. In the days before I discovered this board, I read lots of books and lots of magazine articles trying to learn all that I could about early retirement. I found lots of good stuff. But I learned more from this one board community than I did from 10 or 20 books. Communities make mistakes. I am not saying otherwise. But there are things that you can learn from tapping into the wisdom of a community that you cannot learn from any one individual, no matter how smart he or she is.

The community is engaged in a learning process re the SWR matter. My goal (and I believe the goal of a good number of others) is to learn from the discussions. That is happening. The community expresses itself differently today re SWRs than it did two years ago. We all can learn from paying attention to the twists and turns and changes in the community voice on this question. We can and should learn from individual posters too. But there is a different sort of wisdom conveyed by the community voice and I believe that it is one worth taking note of. "

hocus2004: "I strongly agree with both parts of that statement, 1HappyFool [referring to the statement "We can probably only have a whole that is greater than the sum of its parts if we embrace common ideals, but they have to be the right ideals. "]
What are we about as a community? That's the root question at stake here.

The SWR issue is the device we use to discuss the root question, but it is not the root question itself. The root question is a deep one, and that is why discussions of this matter generate so many sparks. People sense that the implications are far-reaching, and they are right about that. We are talking about SWRs and we are also talking about a lot more than just SWRs. We are talking about what we are about as a community.

That's what makes this hard. It is also what makes it so important that we get it right. "

sykesix: "Dude, you are in serious need of a life. "

inparadise: "Wow. I find this statement [referring to the statement re "the most important work I have ever done"] incredibly sad. Pitiful really."

inparadise: " So we don't have to play your GroundHog Day game, where the same day is repeated time and time again, why don't you just go back a couple of years to the last time you tried to insist your right to debate. Guess what, no one contests it. So for crying out loud, stop the debate about debating and cut to the chase. Start a topic. How about an update on how your system is working for you given the current economic conditions. What did you do right and what would you have done differently with the benefit of hindsight?

You may have brought a fair number of people in to the board, but Hocus, when you are in a manic phase you drive a good number of people off too. "

hocus2004: "OK, inparadise. You're allowed to find the statement pitiful.

I think the stuff discussed at this board (when it is on-topic) is important. I really do."


hocus2004: "A lot of people were driven off as a result of the SWR discussions, that's a fact. The last thing in the world that I want is to have more people leave the community. So we should all be able to agree on some ground rules intended to insure that that doesn't happen.

I think that we need to bring the hostility level down several notches. People hate that stuff. People are always asking for more on-topic debate, and SWRs is as on-topic as it gets. So talking about SWRs attracts people to the board. But trash talk repels them. They have told us that lots of times. We need to rein that stuff in."

2828: "hocus the person that supposedly doesn't let you speak is in Boston giving his younger republican brother grief, you have the floor, why waste it by claiming intercst won't let you speak. It's all yours."

1HappyFool: "I don't think the hostility-averse are that great of an asset to the board. They are the kinds of people who want their opinions treated as valid when they don't pass through truth filters. We're better off with thick-skinned people who don't whine about being held to a high standard of honesty."

ataloss: "sort of interesting how hocus hijacked this thread into being a discussion of hocus- and never really addressed the original poster's question"

Preben0: "Ataloss you nailed it! Holy f... this thread being on-topic did not get many on-topic replies. "

hocus2004: "I'm not seeking to have a discussion behind intercst's back, 2828. He wrote the study, so he should be part of the discussion.

I am not seeking "the floor" in any event. I don't come to a discussion board just to hear myself talk. The benefit that I get from my participation is the feedback provided by other posters. I am looking for good faith discussions, discussions held for the purpose of learning. I am not interested in gamesmanship or point-scoring. I am here to help others learn how to retire early and to learn more about how to do so myself.

When conditions are right for a constructiive discussion, I'll be here. You can count on it. But as Catherine noted above, these things cannot be forced. I'll be ready to participate in the discussion when the community is ready to hold one that will serve a good purpose and make the board stronger for the future.
My sense is that we are making some progress. It's slow progress to be sure. But all is not dark and dismal in Retire Early land, in my view. "

hocus2004: "I'm thick-skinned enough for the job, 1HappyFool. I have had more punches thrown at me than any other poster in the history of this board. Ask me how many Fool Alerts I have filed."

hocus2004: "t did not, and that tells you something about the present composition of the board. The board's energies are being directed to blocking on-topic debate rather than to encouraging it. That's backwards.

Take a look at an SWR thread from the summer of 2000. You will find lots and lots of on-topic responses. You won't find many complaints in those days that this community was not able to sustain a strong on-topic discussion."

halite: "This board isn't a business with shareholders who have a <g>REAL<g> ownership. It is what it is. It goes where it goes. Take it or leave it."
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ben
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Post by ben »

JWR: your comments are well noted and appreciated. Meanwhile my suggested tool is not really that complicated: I would like a place where one could input various asset classes (beyond the Dory US bonds and SP500) and see the (historical) SWR for the chosen portfolio.

Like Hocus I am also not a nos person - but I believe that would be a usefull tool that can be used to learn about/understand the influence (historically at least) of adding various asset classes to ones FIRE-portfolio.

Cheers!
Normal; to put on clothes bought for work, go to work in car bought to get to work needed to pay for the clothes, the car and the home left empty all day in order to afford to live in it...
JWR1945
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Post by JWR1945 »

For Ben:
Meanwhile my suggested tool is not really that complicated: I would like a place where one could input various asset classes (beyond the Dory US bonds and SP500) and see the (historical) SWR for the chosen portfolio.
I do not have Dory36's software to modify the FIRECalc. Nor would I be able to change it (because it is written in PERL).

But I do have the Retire Early Safe Withdrawal Calculator, Version 1.61, dated 7 November 2002 along with several versions that I have modified on my own. It is an Excel spreadsheet and I have (slowly) learned how to make changes.

I am thinking about making a new calculator or series of calculators to do exactly what you want. All of them would be based on the Retire Early Safe Withdrawal Calculator. There are quite a few ways to go about this. My guess is that you would want something more complex than the Small Cap Value modification that I made for Mike.

There are lots of ways to put in additional data. For example, I might replace the 5-year treasury notes and the 30-year treasury bond data. I might put new asset classes into the areas reserved for stock returns for different months. I might set up completely new rows with new data, leaving all existing capabilities untouched.

There are lots of ways that we could be combining data to make an overall allocation. We might as well keep the ability to switch allocations in accordance with S&P500 P/E10 thresholds since doing so helped even when using Small Cap Value (instead of the S&P500).

I am asking for requirements.

I am also asking for data sources (that do not cost me money).

Have fun.

John R.
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