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. For example, Peter Lynch has said that a 100% growth stock portfolio can support a 7% SWR. This is of course way out to lunch and any knowledgeable discussion of SWRs would contradict this.

Sure it would, if you are 95 years old! That is why the whole concept of a SWR is loony.

It is great for planning, but this needs to be calculated on a yearly basis to take into consideration of all Market forces - returns, inflation and interest rates.

but the question [SWR] is important. Not so much as a one-size-fits-all number but as a starting point and then later as a reality check.

Absolutely. How would the average person even know where to start? And I use various SWR (by various "gurus") as reality checks - for a "just in case" or "what if" situation.

I think once I get a handle on Chips utility theory, I'll realize how personal SWR are. Until then, it's good to know where to start.

I am particularly interested in the "reality check" situation since it changes over time. Would that there would be a "whammy" to apply to any present day withdrawal. Where's Shakespeare when we need him? (probably drinking - wine, not beer!!).

karma

Hi Karma,

The whammy might be, if the market was down 50% for 10 years straight, how would you handle things and does your asset allocation hold up? In the UK we've just seen 5 years where we're down and the indexes in the UK, US and Europe are all on nil return, less investment fees, so effectively negative. That in itself is a good test as I see that possibility more frequent that a 10-20 year downturn.

That would be a good real world test, I plan to do the last five years when I've selected a testbed bunch of funds to match my planned asset allocation and have all the data. It may not be so easy to change the asset allocation later if you find it doesn't hold up well in a downmarket. These are good things to consider and backtest on before committing large sums I think. I have several years with other matters to attend to before I will be investing, so I have the time to start investing better prepared and hopefully make fewer mistakes along the way.

The average person gets it completely wrong. They tend to have far too high estimates of long term performance, picking 10% with no margin of error. American investors invest almost entirely in US stocks and bonds, no diversification into real estate or international investing. No consideration of valuations at the time of FIRE to appreciate that their portfolio was in a bubble, they FIREd, it burst and then they're down 40% permanently scratching their heads complaining about the market. The average person hasn't saved enough to begin with which only compounds the above problems and gives them absolutely no margin of safety. As Dave Ramsey often says, most people are normal and broke, I'd rather be weird! A work in progress..

Petey

karma wrote:

but the question [SWR] is important. Not so much as a one-size-fits-all number but as a starting point and then later as a reality check.

Absolutely. How would the average person even know where to start? And I use various SWR (by various "gurus") as reality checks - for a "just in case" or "what if" situation.

I think once I get a handle on Chips utility theory, I'll realize how personal SWR are. Until then, it's good to know where to start.

I am particularly interested in the "reality check" situation since it changes over time. Would that there would be a "whammy" to apply to any present day withdrawal. Where's Shakespeare when we need him? (probably drinking - wine, not beer!!).

karma

Petey wrote:

I plan to do the last five years when I've selected a testbed bunch of funds to match my planned asset allocation and have all the data.

Mike replies:

The mix of funds that performed the best in the last 5 years are not necessarily the funds that will perform the best in the next 5 years, or the next 50. They are not even likely to perform the same in the future as they have in the last 5 years.

Petey,

I agree with Mike. http://www.investorhome.com/mutual.htm#do is relevant and useful, with a large number of links to related studies. Here is a sample:

Malkiel admits that the analysis provided some support for the buying funds with excellent records since they outperformed during certain periods and do no worse than the average fund, however he presented three caveats. First, the results are not robust, second, the returns are not actually achievable because of load charges and third, survivorship bias has to be accounted for. He concluded that

"It does not appear that one can fashion a dependable strategy of generating excess returns based on a belief that long-run mutual fund returns are persistent."
"... funds have underperformed benchmark portfolios both after management fees and even gross of expenses."
"... while considerable performance persistence existed during the 1970s, there was no consistency in fund returns during the 1980s."
"... we have been unable to fashion a dependable strategy by which an investor can consistently achieve excess returns over long periods of time."
"Most investors would be considerably better off by purchasing a low expense index fund, than by trying to select an active fund manager who appears to possess a "hot hand."

Your research may be broader than this site cites, with more international diversification.

So, again, other than fun with numbers, what's the point?

There is a new post on the research board:
http://www.nofeeboards.com/boards/viewtopic.php?t=1492

Probably to be part of a faq. I still fail to see the point. If someone has a better method for calulating swr, I would like to know their answer (and probability distribution .) I guess I am disappointed that the question wasn't answered when raised in August. but maybe:

The time is not ripe for pushing forward on this

Hello,

Maybe someone already pointed this out, but, I thought that the SWR is supposed to be most important for understanding how large the "nestegg" should be in order to retire. Working backwards from how much you need each month and year and what that means as a percentage of your portfolio, in an "average" market. We just do our best in the accumulation phase to maximize our assets, since that's all you can do anyways- your best. Then when you get close to the time for fire, you get to disappoint yourself by reviewing the SWR that would be best for your particular sitaution- whether or not you want to die broke or wealthy....

Trex

Mike,

I was referring to index funds.

Additionally I was not suggesting that 5 years is a sufficient backtest, but it is a place to start.

Petey

Mike wrote: Petey wrote:

I plan to do the last five years when I've selected a testbed bunch of funds to match my planned asset allocation and have all the data.

Mike replies:

The mix of funds that performed the best in the last 5 years are not necessarily the funds that will perform the best in the next 5 years, or the next 50. They are not even likely to perform the same in the future as they have in the last 5 years.

I'm sorry, ataloss. The way John R. writes, not breaking up each point with a line break makes it very difficult to read. I can never seem to wade through that and take in the points being made. The format is too much of a distraction.

Petey

ataloss wrote:

So, again, other than fun with numbers, what's the point?

There is a new post on the research board:
http://www.nofeeboards.com/boards/viewtopic.php?t=1492

Probably to be part of a faq. I still fail to see the point. If someone has a better method for calulating swr, I would like to know their answer (and probability distribution .) I guess I am disappointed that the question wasn't answered when raised in August. but maybe:

The time is not ripe for pushing forward on this

Hey Trex,

Trex wrote: Hello,

Maybe someone already pointed this out, but, I thought that the SWR is supposed to be most important for understanding how large the "nestegg" should be in order to retire. Working backwards from how much you need each month and year and what that means as a percentage of your portfolio, in an "average" market. We just do our best in the accumulation phase to maximize our assets, since that's all you can do anyways- your best. Then when you get close to the time for fire, you get to disappoint yourself by reviewing the SWR that would be best for your particular sitaution- whether or not you want to die broke or wealthy....

Trex

I think that is roughly correct. I certainly use my personal w/d rate to extrapolate how much I need both for bare bones FIRE and comfortable FIRE budgets. The w/d rate takes into account my asset allocation mix, their returns less a margin for safety and investment costs. This delivers a figure which feels realistic based upon lower than the historical return expectations and a keen eye on what the market is expected to deliver over the next decade & not being too far out from that. This lowers the w/d rate & increases the sum I need which can be depressing but focusing first on the bare bones FIRE budget sum needed is a smaller number so it balances it out and doesn't make it all seem too impossible. What's impossible is imagining that I can invest enough to fund myself and a partner.

I agree that you can only do your best, but I have talked to some people who got the percentage they could have invested in a UK private pension fund wrong and said they would have invested more if they had known that as they age the percentage you can stash away tax-deferred increases dramatically. The information was of course available to them but they didn't pay enough attention to the details of it when they first signed up. The information is in the prospectus of every pension fund. That is to say that starting off with the wrong information could leave many putting not enough away for FIRE in the mistaken belief that it is enough by their target retirement age. Working up realistic numbers as if you are going to FIRE tomorrow is beneficial to know where you're going. If you don't have a map and know where you have to get to by what time, how can you expect to get there on time? Old line but I think it applies a great deal to the FIRE scenario. Part of my own motivation to build my business is to be able to fund FIRE. Knowing how much money achieves my goals is critical to my planning for my business growth rates, the time I can start to pay out dividends rather than invest all profits in the early years etc. It's a large part of why I go in the office every day.

Petey