GARCH

Research on Safe Withdrawal Rates

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JWR1945
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Post by JWR1945 »

Gummy wrote:What I did was "pretend" I was doing the 4% so-called SWR and added (each year) last year's E10/P - 7.0%, then scaled down to 90%.

Example for 1974:
The 4% SWR was 6.5% (of the initial portfolio).
That's 4%, increased by 9 years of inflation.

E10/P was 5.9%

The "calculated withdrawal" is then:
0.9 (6.5 + 5.9 - 7.0) or 4.8%
The key is that you multiply this rate by the portfolio's initial balance as opposed to multiplying it by the current balance, which is what I did.

My calculators are all modified versions of the Retire Early Safe Withdrawal Calculator, Version 1.61, dated November 7, 2002.

The normal input for Initial Withdrawal Rate withdraws a constant amount in terms of inflation adjusted (real) dollars using the default settings. Internally, the all calculations are in nominal dollars.

This is where I would put the Gummy 2 algorithm.

Notice that, your algorithm algorithm can be written:

Nominal amount withdrawn = Multiplier*(4%*inflation+[100E10/P-7])*(the portfolio's initial balance) = [Multiplier*4%*inflation*(the portfolio's initial balance)] + [Multiplier*(100E10/P-7)*(the portfolio's initial balance)] = [a standard withdrawal rate input using Multiplier*4% instead of 4%] + [a new withdrawal amount that is equal to Multiplier*(100E10/P-7) times the initial balance].

I can insert the Multiplier*4% term already. I only have to do this multiplication myself. I cannot yet introduce the second term, which is Multiplier*(100E10/P-7) because it is multiplied by the initial balance instead of the current balance.

In terms of my implementation, I will introduce new calculations and put them on row 2580. They will apply to all of the adjustments to the initial balance. I will change the references for each year's withdrawal calculations of the amount withdrawn (in two places, one at the beginning of a year and the other at the end of a year).

Right now, I am referencing row 2570 with the new algorithm when I calculate expenses. Expenses are a percentage of a portfolio's current balance.

Have fun.

John R.
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Post by gummy »

... I will introduce new calculations and put them on row 2580.
Mamma mia! That must be one huge spreadsheet 8)

I can recall (some time ago) thinking I should download a copy to see what's up, then finding that it'd take me a half-hour.
(I have the world's slowest Internet connection.)

Further, I get so many spreadsheets via e-mail with a request:
"Can you fix the attached spreadsheet?"

I can never figure out how they work!

About "real" dollars:
My "sensible withdrawals" spreadsheet also does everything in "today's dollars" to avoid having the user get too excited about a $100K portfolio turning into a $200K portfolio after 40 years when, in fact, she'd wind up with less money than she started with (in "today's dollars").
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Post by Mike »

The spreadsheet (such as it is), is here:
Large cap value, and especially small cap value really did well during that period.
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Post by gummy »

Large cap value, and especially small cap value really did well during that period.
... which is the point of burning question #1:
What does Sally do if her portfolio is 100% GE stock?

... or 100% large cap value where there ain't no E10/P to guide her?

Alas, there appear to be no anwers to my burning questions? :?

I can understand the need to demonstrate that current valuations (like E10/P) should determine withdrawal rates.

I just don't understand how one should advise Sally if she has no access to E10/P for her particular portfolio.

Mike
Try 100% large cap value, starting in 1928.
The maximum you could withdraw to survive 30 years was 3% :cry:
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Post by hocus2004 »

I can understand the need to demonstrate that current valuations (like E10/P) should determine withdrawal rates.

I just don't understand how one should advise Sally if she has no access to E10/P for her particular portfolio.


You are making a good point here, Gummy. My sense is that you and me are coming from a very similar place re investing questions but I have some concern that there is a perception among some that I am coming from a different place. I am going to put forward a somewhat expansive response to your comments in hopes of making it clear to as many community members as possible where I really am coming from with my interest in SWR analysis.

I do NOT make my investing decisions solely by looking at what the historical data says. I think that that would be madness. I do find lots of value in the Data-Based SWR Tool. Not because it makes my investing decisions for me. Because it informs my investing decisions. SWR is a descriptive tool, not a prescriptive tool. That's a very important distinction.

I moved all of my money out of stocks in 1996, largely as a result of the research I did on SWRs. It was not a lot of money, so it was not as dramatic a move as it might sound to be now. But I did do that. SWR analysis did prompt a real-world action out of me. SWR analysis made a difference in my quest for financial freedom.

Now, please consider something. I don't recall off the top of my head the SWR number for S&P stocks that JWR1945 gives for 1996. I believe that it is less than 4 percent and more than 3 percent. Let's say 3.5 for purposes of discussion. Does a 3.5 percent SWR mean that one should be taking all of one's assets out of that investment class? IT DOES NOT. Clearly I was looking at something OTHER than just the numbers in making that decision. I think that everyone should be doing that. Everyone should be looking at more than just the numbers.

There are two big reasons why I took all of my money out of stocks instead of just some (the numbers did support taking some of it out of stocks). One, I was planning to "retire" in five years or so, and I felt a great sense of urgency about getting to the next stage of my life. Even the greatest stock enthusiasts in the world acknowledge that stocks can do poorly for time-periods like 5 years or so. So in the particular circumstances in which I found myself, it did not make sense to have all of my money in stocks, regardless of what the historical data said re long-term returns. I had a certain retirement awaiting me in 5 years time if I invested with some concern for holding onto the wealth I had already accumulated and a darn good chance of delaying my retirement for many years if I went solely with stocks. So 80 percent stocks just didn't make sense for me. That allocation didn't match up well with my particular life goals.

Two, that particular allocation also did not match up well with my particular financial circumstances. I was planning to retire with a bare-bones plan. Those who retire with a bare-bones plan need more of a cushion that those who retire with a lot of slack in their plans. I needed assets that were sure to deliver a minimally expected return. I needed assets that were "100 percent safe." The reality, of course, is that that is not attainable in the real world. But I needed to get as close to that ideal as possible. The phrase "100 percent safe" is not just throwaway language for someone in my sorts of circumstances. For me, a failure to obtain a good bit of safety from my investments translates into not being able to provide for myself and three other human beings who are depending on me to bring some money in the door on a regular basis. I need my Retire Early income stream to be somewhat predictable. Really.

The bottom line, then, is that someone in my circumstances is not "mentally ill" if he goes with TIPS when they are providing a government guarantee of a real return of 4.1 percent (that translates into an SWR of 5.85 percent). He is, if anything, mentally ill if he instead goes with the asset class (S&P stocks) that according to the historical data provides an SWR of only 1.6 (this was the SWR for stocks in the year 2000, when I handed in my resignation). If no one on any of these boards had ever heard of SWR analsyis, I think it is safe to say that we would have a virtually 100 percent community consensus that someone in my circumstances should not have been going with 74 percent S&P stocks back in August 2000, when I left the world of corporate employment behind me.

So far so good. The wrinkle comes in with intercst's posting of the REHP study to the internet in 1996. Intercst says that his study "proves" that any aspiring early retiree who goes with something other than 74 percent S&P stocks is hurting himself by doing so. This is of course complete 100 percent pure nonsense gibberish. I have no doubt but that every community member with the exception of intercst (and I have my doubts about him) understands this. So what's the problem? The problem is that no one will say so on the boards. Everyone is afraid of telling this guy the facts of life, so we all tolerate all sorts of nonsense that we should not tolerate.

I'll give you an example that gets to me in a big way. In the early days of the Great SWR Debate, I was subjected to a lot of heat and decided to drop out of the debate. JWR1945 was urging me to get back in because he thought that what I was saying was important. I told him that if he wanted to trade e-mails with me, that was fine, but that I was not going to put myself through any more of the abuse that comes with pointing out what the historical data really says re SWRs. There was a thread that went up at the Motley Fool board that so upset me that it caused me to rejoin the debate.

I don't recall the name of the poster, but there was a guy (it may have been a woman) who had invested in accord with the intercst recommendations and who had lost a good bit of money. He realized that he was in way over his head with his heavy stock allocation and he put up a post saying that he was going to cut back on his stock allocation. The response that he got was a blizzard of smears. He was a "dimwit." He was showing just the sort of stupidity that showed why the people on the Motley Fool board are superior to all other investors anywhere else in the world. He deserved to have his Retire Early dreams crushed because he just didn't have the gonads needed to pull this sort of thing off. And on and on.

I find this sort of response shocking and ignorant and unacceptable. The guy was making a good point. He was raising a question that everyone on that board should have been looking at and talking over. If, at the end of their discussions, most decided to stick with 74 percent S&P stocks, then fine. But why the hostility to even taking up the question? Why the abuse?

The reason for the abuse is that even the strongest REHP study enthusiasts know in their hearts that the study's findings are nonsense. There is no one magical asset class that you can invest in in any circumstance and which is always going to be superior to all other possibilities. How could there ever be such an asset class? If there were really such an asset class, interest in all other asset classes would dry up and that would be the only one remaining. There are other asset classes because there are in many circumstances a need for other asset classes. Intercst's claim to having "invented" the idea of early retirement by publishing the REHP study is so absurd a claim that it should be rejected by all reasonable people out of hand. The guy is a con man.

OK. Now here is the point. If you believe that the REHP study got the number right, then the intercst claim that everyone should always be invested in stocks is pretty much on the mark. His conclusion really does prretty much follow from his "findings." That's why you never saw reasonable people speaking up to him when he put forward his nonsense gibberish claims. People of course know that there is something fishy about these claims. But he has this study, and it had all these pretty charts in it, and who is going to dare to go up against it? What percentage of the community do you think has even read the darn study? Probably 10 percent or 20 percent. Most people just assume that there must be something to it because so many community leaders talk about it with such reverance.

The study is pure nonsense. It does come even close to reporting accurately what the historical data says on the queston of what is safe. But so long as no one questioned it, we had no chance of ever examining the investing questions that we need to be examining.

I am not at all saying that SWR analysis provides all the answers. What I am saying is that it provides some important clues. But in order for it to provide useful clues, you need to get the number right. When you are a country mile off in your report of the number, all you are doing is putting retirements at risk of going bust. You aren't helping anyone at all by doing that. You are doing big-time harm.

If the number is what intercst says it is, there is nothing to talk about. We should all become automatons and just do what the darn study tells us to do--it's all stocks all the time and there is nothing for us to bother our pretty little heads about. If the number is what I say it is, then there are a thousand things for us to talk about. One of the questions we should talk about is the one you raise in the words quoted at the top of this post. But that is just one of hundreds of things that we should be looking at.

Getting the number right changes what SWR analysis contributes to our discussions in a dramatic way. Do it the intercst way, and SWR analysis is our master. The 1996 settled everything and there is nothing more to be said, except perhaps a hearty "Thanks, Intercst!" every now and then. Do it the hocus way, and Retire Early investors are much like all other investors all over the world. They need to look at data, yes. They also need to use their common sense. And they need to look at their particular life goals and financial circumstances and all sorts of other stuff.

I am NOT telling people how to invest. I am NOT doing this. I am NOT.

I am trying to open things up. I am saying, let's all get to the place where we would have been had this monster deformity of a study never showed its ugly face in our community. How would we be talking about investing questions had we never heard of the name "intercst?" We would be talking about investing in the same manner as we talk about everything else. We would be sharing ideas, contributing insights, learning together, all that good stuff.

There is only one reason why for the first five years of our discussions we have not been able to pull that off in the area of investing questions. The problem is the phony reverance that people show to that darn study. If there were some reason to believe that the study got the number right, or at least got in the right ballpark, I would say "fine, get down on your knees and kiss intercst's ring every day for the rest of your lives." But why the heck would we want to spend the rest of our lives kissing the ring of a guy who got the number wrong? That's pretty darn absurd, is it not? I sure think so.

We can't solve all of the world's investing problems. That is beyond us. It is not reasonable to expect us to do that at this board. The aim of this board is to open things up a little, to make it possible for community members to speak in an honest and informed way on investing questions. Why? Because we have seen that great things can come of discussion board conversations when honest and informed posting is permitted. We have seen great things accomplished re non-investing questions and there is no reason that we can not see similar results in the investing area as well.

We can't get to Square One until we reach a consensus that intercst got the number wrong. The DCMs have made it clear that they have no intention of permitting honest and informed investing discussions without putting up a hell of a fight. So we need to put up a hell of a fight too. The DCMs didn't build this community (I mean the larger community, not just this board), we did. So we need to develop the gumption to stand up and defend what we built, what is rightfully ours.

"For once I can say, 'this is mine, you can't take it!
As long as I know I got love, I can make it."

That's Stevie Wonder. Fitting words, are they not? The work that we do at these boards is an expression of love for our fellow aspiring early retirees. We give of ourselves to help others. That a beautiful thing to watch play out. The DCMs hate us for that. They want to destory that beauty because they are not capable of it. The correct response to a post employing a DCM-type posting practice is to politely but firmly explain to the DCM who crafted it that "this community is mine, and you can't take it!"

We don't want to be rude. If we do that, we sink down to their level. But we do want to be firm. We need to be firm to attain our goals. Our goals are not selfish ones, remember. They are community goals. Our goals are an expression of love. That's why I say the DCMs are in a fundamental way not like the rest of us. DCM posting is not an expression of love. Quite the contrary. We can all "make it." Not with the DCM ugliness that has become dominant over the past 34 months. By getting back to where we once belonged. By becoming again what we were when it was common for newcomers to describe our boards as the most thought-provoking boards on the face of Planet Internet.

We may not answer your particular question to everyone's satisfaction, gummy. But working together on it, we at least have some hope of doing so. So long as we remain stuck in the mud brought to the community by the DCMS, all that we have to offer poor Sally is a big pile of nonsense gibberish. That's Nowheresville. I say, let's start moving in the direction of Somewheresville.

What's the downside?
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Post by gummy »

hocus:
Okay, let's agree that any SWR ritual that doesn't take some sort of "current valuation" into account is flawed. No question about that (in my mind), so there's no need to refer to intercst's posting of the REHP study.

You're talking to the converted!
(Indeed, I've been converted ever since I wrote the "sensible withdrawals" strategy !!!)

Now comes the problem!!
What should one take as "current valuation"?
Should it be E10/P?

Although I had started to write a tutorial which suggests a SWR based upon E10/P (using Schiller's numbers), I have decided to scrap it ... for the time being.

Why?
Because Schiller's E10/P data ONLY REFERS TO THE S&P500 !!

It does NOT refer to some 80% stock + 20% commercial paper portfolio
:twisted:

Perhaps one should:
1: Look at the returns of your own portfolio, where historical return data is available.
2: Determine the correlation between your portfolio returns and those of the S&P500.
3: Modify Schillers' E10/P numbers based upon the correlation obtained in step #2.

Aah, that leaves the sticky problem posed in step #3
If the correlation is high, then maybe Schiller's E10/P values can be used.
If the correlation is low (or negative), then ... what to use as "your portfolio's E10/P" ??
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Post by gummy »

As a point of interest, here's how Schiller calculates his E10/P:

1: Every month, divide the S&P value and S&P earnings by the CPI for that month.
(This gives so-called "real" values.)

2: Average the "real" S&P earnings (obtained above ) over the previous 120 months (10 years).

3: Every month, divide the "real" S&P value by the "real" Average obtained in step #2 to get E10/P.

As y'all can see, it's really applicable ONLY to portfolios which mimic the S&P500 ... and that ain't mine :roll:
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Post by JWR1945 »

gummy wrote:I just don't understand how one should advise Sally if she has no access to E10/P for her particular portfolio.
Benjamin Graham recommended that investors average 5 to 10 years of earnings when evaluating a stock.

Sally can construct P/E10 for any company by using its financial reports.

We do not have a basis (yet) for projecting the returns of individual stocks. [It would be interesting to have an appropriate statistical analysis based upon large groups of companies and long time periods. I have no desire to conduct such an investigation.]

It terms of Large Cap Value and similar groups: it should be easy to calculate P/E10 and compare performance provided that a reasonable amount of total return data are available. If necessary, we could construct total return data from prices and dividends and then find the relationship with E10. Our calculators make doing this easy.

To make recommendations, we would need to establish the quantitative relationship between 100E10/P and Historical Surviving Withdrawal Rates. The process is simple. Replace the S&P500 data in our calculators with the data for the new index.

Have fun.

John R.
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Post by gummy »

... it should be easy to calculate P/E10 and compare performance provided that a reasonable amount of total return data are available.
In order to replicate Schillers' E10/P for a particular portfolio, one would need CPI and Earnings every month for the past ten years, for every stock in your portfolio.

Is that "easy" to obtain?
(Once obtained, of course, it's trivial to replace S&P E10/P with a portfolio's E10/P.)

What IS easy to obtain is your portfolio performance, last year :D
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Post by JWR1945 »

In order to replicate Shiller's' E10/P for a particular portfolio, one would need CPI and Earnings every month for the past ten years, for every stock in your portfolio.
Yes for (annual) CPI and PPI index values. Both are in the calculator already. Monthly CPI is in Professor Shiller's data for the S&P500.

Professor Shiller gathers the data himself. All of his data are monthly.

Annual data are sufficient. All of my findings are based on annual values (January of each year). Our calculators, which are modified from the Retire Early Safe Withdrawal Calculator, incorporate only the January values of P/E10. In normal usage, all of these calculators use January S&P500 data.

Have fun.

John R.
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Post by gummy »

It occurs to me that IF one could find historical P/E values for a stock then it would be an easy task to generate E10/P ratios for that stock.

Anybuddy know where to find historical P/E values for a stock?
(Bloomberg's got 'em, but it costs !!)

I googled for "historical P/E" and got 5000 hits.
I looked at the first dozen. Nothing there.

Then I googled "historical E/P" and got 5 hits.
:great:
Alas, two were references to gummy-stuff and a discussion forum where I participated :?
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Post by hocus2004 »

Okay, let's agree that any SWR ritual that doesn't take some sort of "current valuation" into account is flawed. No question about that (in my mind), so there's no need to refer to intercst's posting of the REHP study.

You're talking to the converted!
(Indeed, I've been converted ever since I wrote the "sensible withdrawals" strategy !!!)


I understand that you are "converted" on the substance question, Gummy. Lots of others are too. My aim is to get a larger number converted on the process question--my proposal for revocation of intercst's posting privileges on the various FIRE/Retire Early/Passion Saving boards. I'll try to explain a bit in bottom-line practical terms why I see that as being so critical a goal for us all to strive to accomplish together.

You put up a tutorial on JWR1945's work the other day. That's news. We should be spreading the word in a number of board communities so that we can share with more people the findings described in the tutorial and so that we can get more people to share with us feedback on the claims made in the tutorial and the approach employed in it and so on.

In ordinary circumstances, the first thing we would do is have JWR1945 put up a post at the raddr-pages.com site announcing the availability of the tutorial. That won't fly, will it? It won't fly because the owner of that site has vowed to delete any post that JWR1945 puts up there. Why? Because in the past JWR1945 has posted in an honest and informed way on the SWR question, and the DCMs have been waging a vicious battle for 34 months against anyone who does that, and so JWR1945 has been banned from that forum for no legitimate reason whatsoever.

It is my job to make this board as fine a learning resource as it can be, and my efforts are being blocked by the DCMs and their smear campaign against JWR1945. The revocation of intercst's posting privileges at all of the boards would take the steam out of the DCM's sails. He is the leader, and once he is gone, you ain't going to see the same level of terror coming forth from the other DCMs. So getting him removed is the first step to making this a far more powerful learning resource.

It's not just the raddr board, of course. I want JWR1945 posting his findings at the Early Retirement Forum too. Again, it is not reasonable to expect this to happen until something is done about the intercst matter. There were some DCMs a few weeks backs who were waging a smear campaign against me to block reasoned discussions of SWRs and one community member came forward and said that his access to the site had been blocked at work because his employer has an obscentity filter and the DCM postings caused the filer to block his access.

How the heck am I supposed to answer this poster's questions when the DCMs have successfully blocked him from participation? It just can't be done. We need to solve the DCM problem in order to have the reasoned discussions on matters of substance that all the rest of us have been struggling for 32 months to have amongst ourselves. Intercst is the leader of the DCMs and he is the poster on whose behalf the others engage in their various abusive posting practices (all of the DCMs have shown that they are capable of posting in a perfectly reasonable manner when they are posting on some question other than the REHP study). Solving the DCM problem means solving the intercst problem.

It's the same at the Motley Fool board. JWR1945 is one of the most popular posters in the history of that community. The most common complaint in the community is the lack of on-topic posting. JWR1945 puts up fine on-topic posts on a daily basis. So it makes perfect sense to have him reporting on his SWR findings at that board, does it not? There are 2 million visitors to the Motley Fool site each month, and we have attracted some of our finest posters to other boards by our writings re early retirement put to the Motley Fool board. But we can't do that today, can we? None of us wants to put up an honest and informed posting re investing given the price that we have to pay to do so at the Motley Fool board, do we?

It's not just the Motley Fool board that loses when honest and informed on-topic posting is not permitted there. All boards in the FIRE/Retire Early/Passion Saving community lose. We all would benefit from having the Motley Fool board send us scores of additional great posters. But those great posters have no idea from looking at the current-day Motley Fool board that any of us have anything interesting to say. How would they know that there is anything to the Retire Early idea when no one at that board ever dares to post about it?

The issue you are raising is a substance issue, Gummy. It is a good one. You got a response from JWR1945, and that's a good thing. That helps. But you would be getting a response from JWR1945 plus about 10 others if we took action on the intercst matter.

My focus is on the process question. I don't say that substance doesn't matter. It matters a lot. Ultimately, the whole point is to develop good responses to substance questions. But we need to address process questions from time to time too. Process questions are generally more important than substance questions.

You know about the answers that have been posted to your question. You can evaluate those, decide whether they are good answers or not. You can't even evaluate the answers that have never been posted, either because the answer would have come from one of the scores of posters who left the community because of the intercst business or because the answer would have come from someone who would have joined us had it not been for the intercst business.

I am tired of seeing my community damaged by the DCM's efforts on behalf of this individual. I want to see us grow and thrive and succeed. We have all the makings of a great board community but one. The one thing that we lack at this point is the courage to face up to intercst and apply to him the same rules that we apply to all others. I am saying that we need to get about working up that courage so that our next 34 months of discussions will be far more fruitful than our past 34 months of discussions.

We haven't done all that bad over the course of the past 34 months. We have learned a lot, despite all the DCM nonsense. The tutorial is the result of things we have learned while the DCM noise was all about us. Now let's take it to the next stage. Let's get rid of the leader of the DCMs and thereby put a quick stop to the DCM nonsense altogether. If we can accomplish what we have over the past 34 months with intercst still among us, think what we can pull off in 34 months of community delieberations in which he and his abusive posting tactics are nothing more than a bad memory. We can do some wonderful things for a lot of aspiring early retirees.

Again, does anyone see any potential downside?
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Post by gummy »

hocus:
I can understand your preoccupation with intercst.
Personally, I couldn't care less what he or anybuddy else says**

I'm interested in a strategy that generates a SWR that depends upon "current valuations" (whatever form that takes).

Whether it's "last year's portfolio performance" (as per "sensible withdrawals") is irrelevant.
I'd like to investigate several schemes for determining "current valuations" ... and compare them on a historical basis.

If I could only find the data %#$@!*?
(not just S&P500 data)
I could write up a tutorial
generate a spreadsheet
and we'd get lots of feedback :D

**
Arguing with somebuddy about their beliefs is pointless.
Try arguing with a Catholic about Islam.
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Post by hocus2004 »

As y'all can see, it's really applicable ONLY to portfolios which mimic the S&P500 ... and that ain't mine

It's true that in a direct sense the JWR1945 findings are applicable only to an S&P portfolio. Many of the insights that can be gathered from consideration of his findings have broader applicability, however.

One of our key findings is that long-term timing is possible. There were many community members who did not know that before formation of this board. Now they know it. Or at least they know the case that has been made for it via JWR1945's research. They can accept the claim that long-term timing is possible or they can reject the claim that long-term timing is possible. Whatever they do, their views are better informed as a result of the research that JWR1945 has posted and the discussions that the posting of that research has generated at this board.

You can't just take the SWR numbers that JWR1945 reports and apply them to your own portfolio as if they were equally valid for different for different asset mixes. But you can inform your investing strategies by taking the research posted here into account. We have learned that the first 11 years of a retirement are the danger zone. That's probably generally so even for allocations other than 80 percent S&P stocks. We have learned that stocks offer a far more compelling value proposition when valutuations are low than when they are high. That is probably so for allocations other than 80 percent S&P stocks. We have found that you do a lot better when your stock allocation is low enough so that you do not need to sell stocks when there are dramatic price drops. That's probably generally so for allocations other than 80 percent S&P stocks.

SWR analysis is a tool for generating insights into how to invest successfully. It's fair to say that it is nothing more than that. But it' is also fair to say that is is nothing less.
hocus2004
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Post by hocus2004 »

We do not have a basis (yet) for projecting the returns of individual stocks.

That's so. We have learned important things about how to invest in individual stocks all the same.

Say that there was an investor who planned to retire in Janaury 2000 and who planned to use a portfolio of individual stocks to finance his retirement. Say that he was looking for a 4 percent withdrawal for 30 years. Say that he happened across the REHP study. If that investor was taken in by the study's false claims, it is entirely possible that he might have given up his plans to invest in individual stocks because of the claims made in the study.

The study says that a 4 percent withdrawal is "100 percent safe" for those going with 74 percent S&P stocks. This investor might well conclude, "Why take a chance on individual stocks?"

The reality is that taking a 4 percent withdrawal from a 74 percent S&P portfolio for a retirement beginning at those valuation levels was a high-risk bet. That investor might have been able to do a lot better for himself by going with individual stocks (perhaps stocks paying juicy dividends) rather than the S&P index.

Our findings have all sorts of implications applicable to all sorts of investing circumstances.
hocus2004
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Post by hocus2004 »

I can understand your preoccupation with intercst.

I don't have a preoccupation with intercst, Gummy. He means zero to me. What matters to me is the success of our community. He is a threat to the continued survival of our community, so I need to direct some energies to the problem. But I don't wish him any ill. If he were to go to some other community to post about politics or television shows or whatever he wants to talk about, that is just fine with me.

My position on intercst is that I do not want him posting on any of the FIRE/Retire Early/ Passion Saving boards. There is no place for him on any of these boards, so he should be asked to leave the rest of us in peace. The community's right to be left in peace is board business. My proposal is board business.

Personally, I couldn't care less what he or anybuddy else says

I have seen comments from you that tell me otherwise, Gummy.

You had a post in which you said that you gave brief consideration to putting up a discussion board at your web site, but that you decided not to on the thinking that it is not worth putting up with the abusive posting that often is found on discussion boards. You ain't the only one who feels those sorts of concerns, Gummy.

I have spoken to a lot of people trying to find out what can be done to get more people to participate at our boards. The most common criticisms I hear of the discusion-board communications medium is that the information is unreliable and there is too much abusive posting. Intercst is a big negative for us in both of those areas.

I want to grow these boards. I want to see them thrive. There are many, many people who have an awful lot to contribute and who are willing to do so free of charge. But they are just not willing to pariticipate in a community that permits a poster with intercst's posting record to participate. His continued participation here reflects on all of us, and it does not say something good about us.

There is an old saying that you are known by the company you keep. Do you feel comfortable having people seeing the sorts of posting tactics that intercst employs on a daily basis and knowing that you, Gummy, are a part of the community that permits him continued access to the forums? I sure don't. I think this community is better than that. It certainly was better than that in an earlier day, and I see no reason why it should not be able to get its bearings and rise to the top once again. We belong at the top, in my view.

Arguing with somebuddy about their beliefs is pointless.

I'm not trying to involve anyone in any sort of argument, Gummy. I am proposing a course of action. I am saying, let's take care of this intercst matter once and for all. There's no need for discussion after 34 months of this nonsense. What we need is not more talk. What we need is some actions that get the job done.
hocus2004
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Post by hocus2004 »

It occurs to me that IF one could find historical P/E values for a stock then it would be an easy task to generate E10/P ratios for that stock.

In the case that he makes for the predictablity of long-term stock returns in his book "The Four Pillars of Investing," William Bernstein draws a distinction between investing in an index and investing in an individual stock. He notes that any one stock can shoot to the moon or fall to the floor. In contrast, when you are invested in an index, your results depend on a mix of companies, some of which do well, some of which do poorly,. and some of which do something in the middle. He argues that there is more long-term predictability when investing in an index.

I don't think that means that there is not useful data-based research that can be done re investing in individual stocks. My guess is that there are a lot of interesting questions that could be examined. I think that there are some important distinctions between the sorts of analyses that can be done for individual stocks and that can be done for indexes, however. I believe that the Bernstein point is a good one.
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gummy
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Post by gummy »

The point I'm making is this:

If I could find historical P/E values for individual stocks I could generate E10/P values for a portfolio with a dozen (two dozen? three dozen?) stocks.

P.S.
The S&P500 tends to be large cap growth stocks.
Many people believe that value stocks are a better investment.
Alas, E10/P for the S&P is of little value for these guys.
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gummy
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Post by gummy »

I have seen comments from you that tell me otherwise, Gummy.

You had a post in which you said that you gave brief consideration to putting up a discussion board at your web site, but that you decided not to on the thinking that it is not worth putting up with the abusive posting that often is found on discussion boards.
You got me there :D

If I were the administrator I'd actually have to read all that crap :oops:
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Post by JWR1945 »

gummy wrote:John
When I clean up my spreadsheet** I'll stick it on my website.

What I did was "pretend" I was doing the 4% so-called SWR and added (each year) last year's E10/P - 7.0%, then scaled down to 90%.

Example for 1974:
The 4% SWR was 6.5% (of the initial portfolio).
That's 4%, increased by 9 years of inflation.

E10/P was 5.9%

The "calculated withdrawal" is then:
0.9 (6.5 + 5.9 - 7.0) or 4.8%

(which is significantly less than the 4%SWR of 6.5% as shown on the 2nd chart above).

** The spreadsheet is in such a mess (and no doubt has bugs), but the idea will remain the same when it's neat and tidy.
For Gummy: We get different numbers for all of these values! In 1974, I find that the 4% has increased to 5.666 using the CPI. It is not close to 6.5%. The PPI results are similar.

HINT: 4%*0.9 = 5.85%. Is this relevant?

The biggie, however, is that we don't have the same values for the percentage earnings yield 100E10/P. You show 5.9%. That corresponds to a P/E10 level of 16.949. Professor Shiller's data for 1974 start at P/E10 = 13.53 in January 1974. It falls to 8.24 in December 1974.

I have been able to reconstruct your conventional results. The main thing is to allocate 100% of withdrawals to the beginning of each year. The default setting is to apply 50% of each withdrawal amount to the beginning of a year and 50% to the end.

Have fun.

John R.
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