Concrete actions to take in todays valuation enviroment

Research on Safe Withdrawal Rates

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Concrete actions to take in todays valuation enviroment

Post by ben »

Hi guys,
I normally do not post here, mostly because the whole SWR discussion is too theoretical for me and most of the posts too long :lol: .

I have read the sticky posts and several others here and am as usual very impressed with the energy put into the discussions!. Meanwhile I would like to see some more CONCRETE rules to follow based on all this research. Please do not refer to other posts Etc. but instead it could be in style of:

1. Buy equity when PE10 is at xxxx
2. sell equity when PE10 at xxxxx
3. when not in equity put (all?) the cash into xxxxx (10 year TIPs?/5 year CDs?/other?)
4. Of other asset classes put xx% into xxxx (REITs?/other?)
5. alternatively to pt. 1 buy 3% dividend payers when they change to x%
dividend?

Round it off with what YOU would do TODAY with say $1mill in cash you had to live off rest of your life (forget other income sources for now).

Should I wait 10 years to pick up a 3% dividend payer when it drops in price and gets me to 4%? or Stick 50% in 30 year(or 27 year) TIPs while waiting for PE10 to drop to above no?

I think the above would help the average poster link the SWR theory with concrete actions - for sure it would help ME understand better :D .

Ps. Hocus; is your book out in draft form? - would love to see it!
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Post by hocus2004 »

"I would like to see some more CONCRETE rules to follow based on all this research. "

A question along these lines came up on the "Yahoo Finance Quiz" at the Early Retirement Forum. Here is a link to page 14 of that thread, on which JWR1945 provided his response.

http://early-retirement.org/cgi-bin/yab ... ;start=195

Here's the text of his response.
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Re: Yahoo "Finance Quiz"
« Reply #202 on: Jun 6th, 2004, 6:07pm » Quote Modify
------------------------------------------------------------------------
For Cut-Throat who wants a very definite and very simple answer.

I have no numbers for the DOW. This is what I have for the S&P500 index.

I quote myself from TIPS Switching Surveys from Tue Mar 09, 2004 at 1:28 pm CDT. http://nofeeboards.com/boards/viewtopic.php?t=2208
These are the optimized results for switching allocations with stocks and TIPS with a 2% (real) interest rate.
..
Optimization turned out to be much more difficult than I had anticipated and my progress was awkward. I am satisfied that I have come reasonably close to the true optimal values. I am satisfied that the highest Historical Database Rate of 5.2% is a consistent ceiling using simple P/E10 thresholds. I am satisfied that the best reason for using additional thresholds and allocations is to reduce the sensitivity of results to minor differences from the optimal values. That is, I expect that the optimal values in the future will be similar to those extracted from historical data, but not identical. My goal is to reduce the effects of errors because we are depending upon historical data.
In the summary, I wrote:
The simplest approach uses two thresholds and one adjustable stock allocation (for a total of three). The best choices are P/E10 thresholds of 11 and 24 and stock allocations of 100%-30%-0%, respectively.

When there is more than one, the most important thresholds are the lowest thresholds.

The best choice with three thresholds and two adjustable allocations (for a total of four) is to use P/E10 thresholds of 9-13-24 ..Using P/E10 thresholds of 9-12-24 is another a good choice.

The best choice with four thresholds and three adjustable stock allocations (for a total of five) are 9-12-21-24 or 9-13-21-24 (with no preference) with 100%-50%-30%-20%-0%, respectively. There is relatively little sensitivity to changing the lowest adjustable allocation or the lower middle P/E10 threshold.

Here are the latest numbers from Yale Professor Robert J. Shiller's web site.
http://www.econ.yale.edu/~shiller/data.htm

Date: November 2003
S&P500 price was 1054.87
P/E10 was 25.898702
E10 is the ten-year trailing average of earnings. P is the current index value or price.

Assuming that E10 has not changed significantly from last November, for P/E10 to equal 24.0 would require that the S&P500 index value fall to 977.53.

The current value of the S&P500 index is 1122.50 and the current value of P/E10 (assuming that E10 has not changed significantly since last November) is close to 27.559.

Therefore, when the S&P500 falls close to 977.53, you may reasonably allocate 20% to 30% of your portfolio to stocks (or, more precisely, to an S&P500 index fund with 0.20% expenses).

This is my best answer for today within the constraints of our existing calculators.

Have fun.

John R.
I am reluctant to hand out investment advice to people. I don't think that I am qualified to do so. I don't possess any degress in the field or anything like that.

What I am trying to do is to provide people a tool so that they can figure out what to do for themselves. SWR analysis, properly done, does not just provide you with a take-out number that worked in the past. The really wonderful thing that it does is to provide you a means of COMPARING different asset classes. That is the primary purpose to which I put the tool.

JWR1945 put up a post here yesterday ("SWR as a Tool") that did an outstanding job of explaining how I used the tool back in 1996, when I first developed it. He put that together by himself, just going by what he knows about what I did from posts of mine he has read and from our e-mail conversations. He sent it to me to check it, and I made two changes, but 90 percent of that he came up with just from reading posts that are already out there.

People have not focused on that post. I wish they would. It's a short post, but one with an awful lot of meat. If you get what is being said in that post, you get the idea of the tool. My sense is that most people today do not get the idea of the tool. That's unfortunate.

It is not because we have not explained what the tool does. The problem is that people are starting out with preconceptions that they just have not been able to get out of their heads. The key purpose of the tool is to COMPARE asset classes in an informed way.

If you believe in the "Stocks for the Long Run" paradigm, you don't need to compare asset classes. You buy stocks. Allocation decisions are easy as pie. They are easy, but they are also poorly informed. The historical data says that, if you make your asset allocations without taking valuation levels into account, there is a good chance you are going to get yourself killed. Those blindly following the "Stocks for the Long Run" paradigm are playing Roussian Roulette with a loaded pistol. They just don't know it yet.

All aspiring early retirees need a tool by which to compare the mertits of various investment classes at various times and for various purposes. To make valid comparisons, you need to form some expectation as to how the various investment classes are likely to perform. The best guide to how they will perform in the future is data showing how they performed in the past. Our tool looks to the historical data to inform you as to how your investments choices are likely to work out.

The trouble we are having has nothing to do with the new tool. The trouble is a consequence of the confidence that people have come to place in the old tool. If people had never heard of these conventional studies, I think that just about everybody would get this. The things that hurt you most are not the things you don't know, but the things that you know for absolutely certain that happen not to be true. Lots of people know with absolute certainty that the SWR for stocks is always 4 percent, and that number is 2 full percentage points off the mark of what the historical data tells us.

You need to get back to zero. You need to ask yourself, why is it that safe withdrawal rate studies were developed in the first place? The core purpose is to tell you what withdrawal rate is safe. The 4 percent number is a high-risk number. There is no informed researcher who denies this. Does it make sense to refer to a high-risk number as a "100 percent safe" number? It makes no sense.

The statistical analysis that JWR1945 presents in the material I quoted above suggests that you should have a zero percent stock allocation today. I personally am reluctant to advise that. It is possible that stocks will go up 30 percent in the next 12 months, and that that will cause you to regret getting out of stocks. You might get back in just at the worst possible moment to do so.

I think it makes sense to always have some skin in the stock game. My circumstances do not permit it at this time. But I tend to think that most others should probably always have 20 percent or 30 percent in stocks.

But not 74 percent! That is a suicidal allocation for the average aspiring early retiree. We regularly inform newcomers to these boards that a 74 percent stock allocation combined with a 4 percent take-out number is "100 percent safe." That advice is so dangerous that I can't think of a word to describe it.

If you are going to tell people what the historical data says is safe, you have to look at what the historical data says re what is safe. I don't see any way around it. If you look at what the historical data says, you won't come up with a number anywhere remotely in the ballpart of the numbers you get from those conventional methodology studies.

Here's an interesting fact to know and tell. There is NOT ONE study of SWRs that has come out since we reached the valuation levels of the late 1990s that shows an SWR for stocks of anything close to 4 percent. There is not one. Every single conventional methodology study was done BEFORE we reached those valuation levels.

Will there ever again be a study showing that the SWR is 4 percent? I doubt it. Why would a researcher want to put out a study giving people the wrong number? What would be the point? I don't think that we will ever again see a new study saying that the SWR is always 4 percent.

So why not just go ahead and do what the whole world is going to do sometime within the next few years and acknowledge that we know for a "mathematical certainty" (Bernstein's phrase) that changes in valuation levels affect long-term returns? If we take that common sense step, it becomes possible for all of us to talk in an honest and informed way about what the historical data says re SWRs. I think that taking that step would be huge.

I understand that there are people who do not like long posts. The truth of the matter is that I have always posted long, even back in the days when I was one of the most loved posters on the Motley Fool site. What people who don't like long posts should do is what you did here, Ben. Put up short posts! That will show old hocus, that will put him in his place. Bury this board in short posts and no one will even notice his lengthy ones anymore. Please feel free to take that as a challenge.

It's true that the board has been too theoretical and complex in the past. The problem has been that JWR1945 has been the dominant poster. His stuff is wonderful beyond words, but, like all of us, he has things he is great at and things he just doesn't do. JWR1945 doesn't do hocus, and hocus doesn't do JWR1945, and hocus doesn't do FoolMeOnce, FoolMeOnce doesn't do Wanderer, and on and on.

We need to get back to the idea of working as a community. When you want long enthusiastic stuff, you dial up hocus. When you want a numbers guy, JWR1945 is the man. When you've got real estate on your mind, it's FoolMeOnce to the rescue. Petey reads lots of books, and is happy to tell you about what he has learned. Wanderer possesses insights on this ex-pat living stuff that few others do.

We all have the same goal, or we all should. Somewhere along the line the idea caught on that we must destroy this new idea that hocus has turned up at all costs, and that has caused a lots of riffs. You can't kill the historical data. If I didn't tell you what it said, it would still say the same thing. You must come to understand that studies that pop up numbers far off from what the historical data says cannot be right. When we get past that point, all the other stuff falls into place again.

Anyway, I hope that the material I quoted from JWR1945 gives you a little bit of an answer to your question. Perhaps some others will expand on that answer or challenge it or whatever.

Here's the key thing that I am trying to communicate. This is not a hocus board. I hate it when people say that. I started the board and I moderate it. But the board is run for the benefit fo the community. For the board to serve the community, the community has to get involved and see that the board does what they want it to do. Change the ratio of short posts to long posts by putting up short posts. Change the theoretical and complex tone by employing a practical and simple tone yourself. And so on.

Board boycotts are stupid. Why the heck would anyone want to put a board out of business? Boards are a free information resource. The idea of putting any of your human energies into trying to kill them off is just plain stupid. Community, stop that stuff! Stop being so stupid!

Make the board what you want it to be. If you find it to be too much about hocus, there is an easy solution. Put up non-hocus stuff, lots of it. Everyone keeps thinking that they can make people stop talking about hocus by demanding that people not talk about hocus. It doesn't work that way. Try this. Don't think about flowers! You're thinking about flowers, are you not? Come on.

We need to de-hocusfy the SWR discussions. That's part of the Normalization process, dehocusification.

That means we need to stop the silliness. When someone uses the word "troll," they are not Normalizing, are they? They are flashing a big red light saying "this issue is different than all the others, this one board members may not talk about, they will get smeared if they talk about it."

Why smear people? If the SWR issue is important enough to smear people over, then it must be important enough to talk through as well. If protecting the conventional methodology from scrutiny justifies smear campaigns, then surely the subject is important enough that we should want to get the number right. Why is it then that few will speak out against the smear campaigns, yet when I suggest that we should get the number right, people say "oh, does it really matter so much, it's only people's retirements at stake afterall?"

I'll stop. I think that we have a tiger by the tale here. People get very emotional about SWRs. The reason is that in the back of their minds they do not believe that the assumptions of the conventional methodology studies could possibly be true. They know those numbers are wrong, but they don't want to know it.

All the angst goes away when we just reach down to the bottom and come up with the truth. The old number is wrong. We all know it. Since it's wrong, we should acknowledge it. Acknowleding the truth about SWRs is the turning point in the discussions. That part is hard, for several different reasons. After we do that one hard thing, the rest off the ride is downhill.

Anyway, thanks for the short post, Ben. Keep 'em coming. You are going to have to come forward with a whole bunch of short ones to counter the effect of my long ones, you know.

I want to see you knock me out of the box. Ker-Pow!
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Post by hocus2004 »

Sorry, I forgot to answer the question about the book.

I have an editor looking at it now. I expect to be offering free copies to community members at some point. I won't put a date on that because my tentative dates never seem to work out. But I will put an announcement up at some point re the details of how to get a free copy. I have a few different ideas re how to go on that one.

I am very much looking forward to community feedback on the book. The community helped me write it, that's for sure. I think of this as OUR book (my wife says I have to keep all the royalties, however, so don't get any funny ideas).

JWR1945 is the only one here who has seen it. He says it is "better than a blockbuster," don't you know? As always, I agree with John. I would say it a little different. I would say it positively rocks. Reading it for the first time is like hearing "Can't Buy Me Love" for the first time in that scene from "A Hard Day's Night." The scene with the high energy footage of the lads jumping around and such.

Anyway, we'll see what you all think in the not too distant future.

What is intercst going to say?

My prediction: He puts his name on a blurb on the back cover.

Don't let me down, intercst! Get back to where you once belonged!
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Post by ben »

Thanks - that WAS more concrete (albeit long :D ).
So PE10 at 24: completely out of equity with 30%-100% range in equity when PE10 is lower than 24. 100% in equity below PE10 at estm. 10.

You add that you would advise always some equity exposure (avg 25%) nomatter what, to avoid regrets. I think that makes good sense.

So of the $1mill I mentioned you would then put 25% in equity today. Where would you put the remaining $750k and what would be your max WR based that?

Looking forward to see book. Cheers!
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Post by hocus2004 »

"Thanks - that WAS more concrete (albeit long )."

OK, Ben.

I think what I may do is to start charging double for short ones. That way we will see if the market really is as big for that sort of thing as some people are letting on.

"Where would you put the remaining $750k and what would be your max WR based that? "

I can't give advice like that. There are all sorts of investment vehicles that I know little about. It's entirely possible that I do not know anything about the investment that would be best for you, and would fail to mention it for that reason. So I don't want to go down the road of giving specific recommendations.

Here's a link to a post by JWR1945 from Saturday titled "A Bright Future." It argues that there are good alternatives to stocks available to today's investor.

http://nofeeboards.com/boards/viewtopic.php?t=2598

JWR1945: "A 100% TIPS portfolio at currently available rates are truly safe at a withdrawal rate of 4.0% more than thirty years. This finding is highly significant considering the hazards in today's stock market. We are well outside of the ranges of dividend yields and valuations that supported 4.0% withdrawals in the past.

"I am confident that stocks will become attractive once again. We need not concern ourselves as to whether we will have some really good buying opportunities by 2010 or 2015 or even 2020.

"We can wait as long as necessary. When stocks become attractive once again, retirees can expect to enjoy a high level of safety at withdrawal rates of at least 5% to 6%. "

Here's another JWR1945 effort that relates.

http://nofeeboards.com/boards/viewtopic.php?t=2158

JWR1945: "It is quite clear what my research to date has shown. Current retirees should be out of stocks (as represented by the S&P500). Today's valuations are much too high.

"In terms of selecting investments, I have restricted myself to looking at what is available in the calculators. That suggests that 2.2% TIPS (available on the secondary market) is the best choice.

"Alternatives that focus upon dividends and/or low valuations make sense. It is just that they are not characterized by the tools that I have at hand. I believe that carefully selected equities can do at least as well as TIPS even in today's market. Real estate can do even better.

"What I have not calculated in the past is the withdrawal rate that retirees should use. That is what I present here. "

I hope that provides at least a partial answer to your question. I liked your quick comeback with the follow-up question. That's "Ker-Pow!" posting.

I have a favor to ask, Ben. I am keeping a list of people who have indicated that they are making use of the data-based SWR tool in their personal Retire Early planning. I want to be able to make use of this list to counter the efforts of the various Smear Campaigns aimed at denying the community information re what the historical data says re SWRs. If you make any allocation changes as a result of what you learned here, it would help me out a lot if you let me know.

Welcome aboard, Ben.
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Post by unclemick »

If the computer, spreadsheet, index funds,TIPs etc had never existed and all you had was your trusy Ben Graham, My guess is that you would own 25% stocks,solid div. payers in different industries, and a 75% mix selected treasuries and investment grade corp. bonds.

Now - if you step back and think about it - not all that far from what the SWR tool is telling you using 'modern tools'. Things change - but fundamentals are fundamentals.
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Post by hocus2004 »

"Things change - but fundamentals are fundamentals."

The fundamantal rules apply.
As time goes by.

That's it!

It all clicks!
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Post by hocus2004 »

hocus (in a post above): "Somewhere along the line the idea caught on that we must destroy this new idea that hocus has turned up at all costs, and that has caused a lots of riffs."

I've made another big mistake.

I shouldn't have said that the Smear Campaigns have caused a lot of riffs. I should have said rifTs.

Riffs are fine. You know that Rolling Stones song, "Start Me Up"? It's really just one riff over and over. When you catch hold of a really strong riff, that's often enough.

I don't want people getting the idea that hocus is anti-riff. I have enough troubles.
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Post by ben »

Hi Hocus,
I might not have been clear; i meant (and thought I said): what would YOU do now with $1mill? Not what I should do of course. :D

$250k in equity -the remaining $750K you would put where today?

Looking at JWR comments it would be mainly TIPs (and maybe some equity: "unfairly fallen angels" where dividend have reached 4%+).

Sorry but I don't fit on your mentioned list at all. No changes done based on SWR debacle. If it should change I will let you know.
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Post by JWR1945 »

unclemick
If the computer, spreadsheet, index funds,TIPs etc had never existed and all you had was your trusty Ben Graham, My guess is that you would own 25% stocks,solid div. payers in different industries, and a 75% mix selected treasuries and investment grade corp. bonds.
Benjamin Graham recommended stock and bond allocations that ranged between 25%-75% and 75%-25%, never letting either allocation fall below 25%.

unclemick is right.

Have fun.

John R.
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Post by th »

Funny, in light of this I looked at my allocations.

In my taxable fund, 28% equities, mostly large cap with a P/E of 14 or less, high dividend yield, a small chunk of europe and pacific stock indexes. The rest split equally between short corp and intermediate corp and financial bonds.

My IRA is 100% equity - small cap value, reit, emerging market, healthcare. I wont be touching it for 20 years...

Looks like I found myself at the "desired" allocation, but just happenstance...no tools required. Its what felt right to me. I keep looking at vanguard energy and other pure stock funds with desire, but then I look at the price and the 1 year run up and mutter "wait for it..."...
He who fights with monsters might take care lest he thereby become a monster. And if you gaze for long into an abyss, the abyss gazes also into you. - Nietzsche
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Post by hocus2004 »

"I might not have been clear; i meant (and thought I said): what would YOU do now with $1mill?"

I'd buy myself a bunch of discussion boards, and name myself Board General at every blessed one of them. I'd get stationery printed up so no one would forget. I'd but the world a Coke and invite everyone in it to say whatever they pleased about early retirement at my boards (except not the word "troll"). I'd put on Van Morrison's song "And the Healing Has Begun." I would get deep into the groove and not come up for air until Labor Day.

This is all hypothetical. I don't have a million dollars. So I do what I do instead.
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Post by ben »

Ehh... i guess same asset allocation would apply with a 100k or whatever you DO have today? The amount is not important in my question - the asset split (the 75% non-equity right now) and what assets was the question. Any serious comments on that?

Hocus? JWR?

Cheers, Ben
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Post by JWR1945 »

ben
Round it off with what YOU would do TODAY with say $1mill in cash you had to live off rest of your life (forget other income sources for now).
This is a little bit awkward because I would have learned more details about several asset classes including REITS than I know today.

Although I think that personally managed real estate is great, I would not go that route. It is a personal preference, not a financial decision.

I have generally favored BenSolar's choices as general guidelines, but you are asking for specifics during the distribution phase.

Historically, I have favored owning individual stocks. But now, as a result of my research, I have purchased some 2.5% TIPS bonds on the secondary market. I hold them in my IRA. That was the first time that I have bought bonds. [I did buy some bond funds for my wife's IRA back when I first started.]

The tax issue that Mike is worried about would also concern me. I know that I would be heavily invested in long-term TIPS bonds inside my IRA, but not necessarily so heavily in my taxable accounts.

I would probably be easing into my TIPS purchases to assure reasonably good yields to maturity. I believe that I could satisfy all of my income needs with 2.5% TIPS (available soon), but I would look at other investments and/or hold out for even better TIPS rates for a portion of my portfolio.

I would have some stock holdings. They would have to have unusual characteristics that would make them worthwhile even if the market sinks deeply. For example, I recently bought some Merck shares when its P/E was 14 and it was yielding more than 3%. Even if Merck's pipeline is empty and all sorts of bad things happen, I don't think that I would lose very much, if anything, in Merck at this price. Of course, it has an upward potential based upon past history.

I would probably design my approach to produce $30K per year income. It is certainly enough..actually, a little bit luxurious..down here in Florida prior to making gifts. Note: I get my health insurance at the same rates and same benefits as currently employed Federal Government workers.

That's the summary: a base in long-term TIPS bonds with additional selections in the taxable account.

Have fun.

John R.

P.S. If you subscribe to the Motley Fool, read hocus's post My Plan. It is among the best real-life summaries that you will ever find.
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Post by JWR1945 »

Let me add that I turn 59 later this year. I would be very comfortable with anything that would last for 35 to 40 years. See A Bright Future.

Have fun.

John R.
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Post by unclemick »

Ben

100k or 1 mil - best guess - for most people - often a big difference. Chapter 5, 4th ed The Intelligent Investor. Heh, heh - (Ben Graham again) uses the widow, the doc. and the young man starting out. What the money Has to do (assigned mission), your emotional comfort, and the time you have availible for investment study all interplay. These considerations bumped against valuation interplay to get to final selection.

BTY - I'm with Peanut's the cartoon - I've met the enemy and I am them. Hence (hobby stocks aside) since 1977 I've been pretty much within hand grenade distance of Chapter 5 - EVEN THOUGH I MAY BE LEAVING MONEY ON THE TABLE by not husbanding cash and waiting on valuation.

Rephrased in terms of income streams: 1. pension plus hobby stocks cover the core budget and 2. SS (soon I'm 60) and IRA balanced index are lagniappe.
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Post by unclemick »

50/50 is the default (Defensive Investor and Common Stocks, ch 5) position.
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Post by ben »

Thanks again for input from all. Again; I asked what would YOU do - so the discussion on doctors, widows or whatever is not needed (unless you should be one of those of course!) :D .

As for the amount involved pick whatever makes sense to YOU. I used $1mill just for perspective. Point was to focus on distribution phase and leave other income sources out of equation to better understand the theory - therefore a too small amount would not give right perspective.

To stay concrete/keep simple I lump most of the info:
------------------------------
PE above 24: out of equity(or max 25%) - remaining mostly in TIPs
PE up to 24 : 100%-25% in equity on a scaled basis - rest mostly TIPs
Equity focus: higher dividend "no reason fallen angels" and low cost index fund. Maybe other asset classes like REITs would add benefit.
-----------------------------
Hocus does that sum it up?
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Post by hocus2004 »

"Hocus, does that sum it up?"

It ended up being a very fine thread, Ben. I much appreciate you getting it started.

I was probably too silly in one response. I get in silly moods from time to time. That's definitely part of the mix that I bring to the table, for good or ill.

I'm glad that other people came forward with thoughts. You probably picked up on the idea that I am uncomfortable talking too much about my personal situation. It's not that I am trying to be secretive. The "My Plan" post that JWR1945 mentioned spilled most of the beans, so there's not much point in me being too coy at this point. My unease is that I just don't feel competant to offer too much advice in the "how should I invest?" field of questions.

My sense is that some people have gotten the wrong idea. I say "the Data-Based SWR Tool is going to change the world" and people read that as "hocus thinks he is some kind of investing wiz." I do not think I am an investing wiz. One of the reasons I put forward the May 13, 2002, post was that I was thinking about moving some money into stocks and I wanted to know whether the historical data supported the idea. I started this thing partly because I knew there were things I needed to learn about the historical data, and indeed I have learned. I look forward to learning a lot more.

If there are community members who are under the impression that I think I am above others who contribute here, they have just picked up a wrong vibe. I can't apologize for it because I never thought such a thing. I can certainly acknowledge that it is not so, however. It is far from true. There are lots of people on the various boards who know more about how to invest than me.

The claim that I have put forward goes to one narrow point. My claim is that the Data-Based SWR Tool is an absolutely amazing tool that all aspiring early retirees should at least be looking at to see if it is for them. That claim I stand by. I don't make the claim to gratify my ego. I make the claim because lots of people have come to think that this tool is defective in some way because of unwarranted disparagement that has been directed to it, and I want to set community members who might benefit from it straight. You cannot go by what defenders of the conventional methodology are saying. You need to look at the tool for yourself and assess for yourself its value. I am convinced that most community members who do that will have their socks knocked off.

Anyway, it was a good thread. You came at things from a different angle, and that often helps. I think this thread helped. I hope you stay around, Ben.

I'd like to ask you a question.

You said above that you have not obtained any benefits from the tool. I want you to obtain benefits from the tool. I am asking you this question so that I might obtain feedback that would let me know what sorts of things I need to be focusing on to open up the benefits of the tool to you.

Is the reason that you have not obtained benefits from the tool that:

1) You have not yet spent enough time examining the posts here to come to possess a full understanding of what the tool can do for you;

2) You don't find the arguments and data supporting the findings on which the tool is based credible; or

3) You don't find much appeal in the idea of using SWR analysis to inform your investing decisions?
JWR1945
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Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

For ben:

Upon further reflection, I would separate my investments into two categories: that which produces a minimal income that I want to continue regardless and that which is discretionary and has growth potential.

You have set the initial amount at $1.0 million. I would not have to use all of it to provide an adequate minimal income.

I would be able guarantee myself a minimal annual income of $25000 using only $625K. All that I would have to do is invest in 2.5% long-term TIPS until maturity and then in something that matches inflation. It would last 38.5 years (and longer if my second investment delivered a non-zero, positive real interest rate). That would last me until age 97 years.

I would set aside $625K in 2.5% TIPS, as noted above, and never reinvest any portion of those funds. To the greatest extent possible, I would hold them in an IRA. [I will be able to withdraw freely in less than 2 years.] A lifetime income stream of $25000 per year provides a comfortable standard of living in this area. I would not place any of it at risk because I would not need to.

The remaining $375K would be invested more along the lines that you have indicated. Most would stay in 2.5% TIPS as long as P/E10 remains high (in the neighborhood of 20 and above). None of it would go into the stock market as a whole with P/E10 above 24. Some might when the P/E10 decreases to 14 to 24. More likely, I would choose selected investments of the kind that you have indicated. I would start buying heavily as P/E10 falls to bargain levels of 13 and below.

Notice that the application of Safe Withdrawal Rate research is tailored to individual needs and preferences. Safe Withdrawal Rate information provides the factual background upon which one develops his own approach.

Have fun.

John R.
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