Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Re: 4% of what?
Old 03-31-2005, 02:53 PM   #161
Recycles dryer sheets
 
Join Date: Sep 2004
Posts: 108
Re: 4% of what?

Quote:

Mikey,

When Petey says that the 4% SWR guideline is plain wrong. This is his opinion. And in my Opinion he's wrong. That is what propelled this thread - different approaches.
For clarification, I feel that the US market is sufficiently overvalued that returns when allowing for mean reversion will be poor over the next decade or two. As such a SWR of 4% from the US total market is not viable. Perhaps with value style. In terms of a global asset allocation, with the addition of oil & gas, precious metals and global REITs & TIPS, this provides enough diversity than a SWR of 4%-5% should be possible.

The key is that not all other asset classes are priced the same and so return expectations are different. It will also be possible to obtain a rebalancing bonus when sufficiently diversified and this will help also. Rebalancing either the portfolio or with new capital deployed into asset classes with the highest future expected returns.

An allocation of 60% to S&P 500/Russell 3000/Wilshire 5000 and 40% to US bonds will not provide a 4% w/r over the next 1-2 decades unless markets do not mean revert, dividend payout ratios increase, real earnings growth leaps up or stocks get bid up substantially into a bubble pushing capital returns higher than supported by fundamental earnings. This viewpoint is backed up by numerous observers including Warren Buffett, Jeremy Grantham, etc., all whom see low real returns for a decade or more due to the reasons outlined above.

All the best,
Petey
__________________

__________________
peteyperson is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: 4% of what?
Old 03-31-2005, 04:07 PM   #162
 
Posts: n/a
Re: 4% of what?

Quote:
An allocation of 60% to S&P 500/Russell 3000/Wilshire 5000 and 40% to US bonds will not provide a 4% w/r over the next 1-2 decades
Whoa Petey! Considering that a 60/40 stock portfolio would survive 30 years with a 4.4% withdrawal rate in FireCalc over the last 120 years, you are predicting that it won't survive even 10-20 years. So when is the next Great Depression?

- That's a prediction that Buffet, Bogle and Berstein would all disagree with.

Better check your math dude!
__________________
  Reply With Quote
Re: 4% of what?
Old 03-31-2005, 04:41 PM   #163
Moderator Emeritus
laurence's Avatar
 
Join Date: Feb 2005
Location: San Diego
Posts: 5,234
Re: 4% of what?

Petey, I'm sorry if I'm asking you to repeat yourself, but did you mention how your portfolio is currently allocated? Did someone say you are in Great Britian?
__________________
laurence is offline   Reply With Quote
Re: 4% of what?
Old 03-31-2005, 06:27 PM   #164
Recycles dryer sheets
 
Join Date: Oct 2004
Posts: 214
Re: 4% of what?

A simple plan for those in anguish over high valuations:

1) Sell down till you can sleep

2) DCA back in over 5 years or until

3) A Bear crushes the market, then load up.

if P/E's "regress" during that time you might look smart...if they don't, then maybe it is different this time
__________________
RockMiner is offline   Reply With Quote
Re: 4% of what?
Old 03-31-2005, 07:42 PM   #165
Recycles dryer sheets
 
Join Date: Sep 2004
Posts: 108
Re: 4% of what?

Quote:

Whoa Petey! *Considering that a 60/40 stock portfolio would survive 30 years with a 4.4% withdrawal rate in FireCalc over the last 120 years, you are predicting that it won't survive even 10-20 years. So when is the next Great Depression?

- That's a prediction that Buffet, Bogle and Berstein would all disagree with.

Better check your math dude!
Hi CT,

I think you need to re-read my reply, mate!

I said I did not think it would produce 4% real. Never said the portfolio would not survive!

The 4% comment is based on 1.9% div, 1.8% real growth historical = 3.7% real. PE 19.7x on wider than historical profit margins i.e. earnings higher than would normally be the case. PEs will likely compress as market mean reverts. This will take 1% off over 20 years. Thus 2.7% real. Bond yields are not more than 5% currently, so any stock/bond mix of total market components does not look good for close to 4%.

Stock multiples could get pushed up like 2000 to temporarily boost returns. Real earnings growth could accelerate in a jobless recovery... Dividend payout rates could increase. But will any of that be enough and what state will the market valuation be in then? Any way you look at it - not pretty.

Petey

__________________
peteyperson is offline   Reply With Quote
Re: 4% of what?
Old 03-31-2005, 09:07 PM   #166
Thinks s/he gets paid by the post
 
Join Date: Feb 2003
Location: Mesa
Posts: 3,588
Re: 4% of what?

Quote:

For clarification, I feel that the US market is sufficiently overvalued that returns when allowing for mean revision will be poor over the next decade or two. As such a SWR of 4% from the US total market is not viable. . . .
You are certainly entitled to your opinion. But as far as I can tell, there is no analytical basis for your 4% conclusion. Valuation using P/E does not predict future stock return. I think people are often misled by the term "valuation". It sounds like a number that would be important to stock performance, but it is actually a backwards looking metric that is a very poor predictor of optimum future investment decisions.

Similarly, reversion to the mean is not based in fundamental analysis and even if it were does not predict future stock performance. There are many factors that contribute to P/E and reversion does not require that stock prices drop.
__________________
sgeeeee is offline   Reply With Quote
Re: 4% of what?
Old 03-31-2005, 09:20 PM   #167
Moderator Emeritus
laurence's Avatar
 
Join Date: Feb 2005
Location: San Diego
Posts: 5,234
Re: 4% of what?

Much thanks, Pete. I'm trying to figure out how to best take a position in REITs and natural resources myself. Just don't know enough.
__________________
laurence is offline   Reply With Quote
Re: 4% of what?
Old 04-01-2005, 03:29 AM   #168
 
Posts: n/a
Re: 4% of what?

Petey,

I did re-read your reply and you did say 4% w/r. In fact I've got what you wrote quoted. Maybe you should re-read what you wrote.

I would agree with you that the market may not produce 4% real. But this thread is under SWR. And SWR # Real. Two different animals.

I only need *about 1.5% real for a 4% SWR.

So the 4% w/r is a good guideline.
__________________
  Reply With Quote
Re: 4% of what?
Old 04-01-2005, 04:29 AM   #169
Recycles dryer sheets
 
Join Date: Sep 2004
Posts: 108
Re: 4% of what?

Quote:
Petey,

I did re-read your reply and you did say 4% w/r. In fact I've got what you wrote quoted. Maybe you should re-read what you wrote.

I would agree with you that the market may not produce 4% real. But this thread is under SWR. And SWR # Real. Two different animals.

I only need *about 1.5% real for a 4% SWR.

So the 4% w/r is a good guideline.

It depends purely on the asset allocation mix (and I did re-read my reply before, I was clear the first time).

Even if one assumed no reversion-to-the-mean, you're still looking at today's dividend yield and real earnings growth. As we don't know the earnings growth we have to use historical long-run data for that, smooth it out. 1.9% + 1.8% = 3.7%. Add bonds in the traditional US split and you're not seeing 4% real there. All the past research in the world won't make it so. The past research is based on historical dividend yields in the US of 4.5%. Logically a 4% w/r is possible with that and some bonds. The same logic shows the fallacy of relying on what is past to prove what is future. As Buffett said recently, future returns in the US total market he expected to be no more than 6.5% nominal. Fundamental returns are 3.7% real for the US total market, and not 6.3% real as they have been since 1900. The difference is simply lower dividend yields today with no increased real earnings growth to compensate!

If one held a globally diversified portfolio with a mix of assets then the situation changes. A 75/25 mix of S&P 500/US total bonds delivered 4% SWR. A mix of 37.5% S&P 500, 37.5% EAFE index & 25% US bonds would have delivered 4.7% SWR. The addition of value slant would have boosted yields on cheaper purchases, added a value "premium" and boosted SWR still further, as would emphasis on small cap, O&G or REITs. This gets you to 5% SWR from present valuation levels! S&P 500 on present fundamental returns won't do that. They did in the past, but the *makeup of returns* was different.

So we'll have to agree to disagree.

Petey

__________________
peteyperson is offline   Reply With Quote
Re: 4% of what?
Old 04-01-2005, 04:39 AM   #170
Thinks s/he gets paid by the post
 
Join Date: Dec 2002
Posts: 3,875
Re: 4% of what?

Hello everyone. Hey "agree to disagree"........... that's
the gentlemanly way to handle it.

What I am wondering is how many others basically
ignore SWR (in the traditional sense) and manage
ER purely by income/asset (net worth) preservation?
I enjoy all the SWR debate and have even run FIRECALC
but pay absolutely no attention to it in "real life".

JG
__________________
MRGALT2U is offline   Reply With Quote
Re: 4% of what?
Old 04-01-2005, 04:40 AM   #171
Recycles dryer sheets
 
Join Date: Sep 2004
Posts: 108
Re: 4% of what?

Quote:
Much thanks, Pete. *I'm trying to figure out how to best take a position in REITs and natural resources myself. *Just don't know enough.

Hi Laurence,

The applicability of REITs (US or Int'l.) depends on what your goals are. In accumulation phase they can diversify you but in distribution phase they come into their own by substantially boosting portfolio yield while maintain capital value buying power. Handy alternative to bonds for many (holding up to 20% US REITs provided higher risk-adjusted return than stocks & bonds alone). Int'l. REITs allow one to diversify more globally that the traditional US-only REIT perspective but you lose the connection to US CPI numbers (as you do with foreign stocks).

More foreign REIT funds are coming out. Range of funds, CEFs and ETFs will be much wider in a year or two than today I suspect. Costs will also come down.

In terms of natural resources, tricky area. Many different opinions on prospects, cheap vs expensive and so on. Having looked at it a bit I think one would really need to dig deep and spend a lot of time to learn & keep up with the sector. For the kind of allocation I would consider not really worth doing that. It is important to note that most try to predict which sectors will perform well but with something like oil & gas it has significant benefits in terms of correlations. Oil rises, oil co. profits but corporate profits fall. Stocks of the two can move in different directions. While oil co. included in indices do influence indice performance, owning separate energy fund allows for rebalancing, profit harvesting and more steady returns during distribution phase. It is also useful to mitigate rising inflation although oil is a small component of CPI overall. I would not own o&g or nat. res. to beat the market but for the diversification it provides in returns during accumulation and distribution phases.

I like Vanguard Energy ETF and Vanguard PM fund. Minimums high on the latter.

Hope that was useful to you.

Petey
__________________
peteyperson is offline   Reply With Quote
Re: 4% of what?
Old 04-01-2005, 05:11 AM   #172
 
Posts: n/a
Re: 4% of what?

Did someone let that flock of geese back in here?
__________________
  Reply With Quote
Re: 4% of what?
Old 04-01-2005, 11:17 AM   #173
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: 4% of what?

Hey guys, Petey has a different opinion (and it looks like its being expressed as an opinion), and he may be right. At least he's presenting it reasonably.

It bodes well to know and understand all of the viewpoints and prospects for the future. For many of us, that produces a Bogle-ean (is that a word?) "...and then do nothing" response. For others, they might like to have all the info in their brains.

While the "...and its always worked out that way historically for the last 100-and whatever years and something different happening in the future is unlikely to be worse than the depression or the 60's-70's sideways" sounds good. Look at a chart of the S&P500. It was pretty clean and smooth until 10 years ago. Something different HAS happened, and something different MAY happen going forward. Its NOT the same-old same-old.

Having had this feeling for several years now, I've avoided owning TSM/S&P500 type indexes since 2000. So far, thats a good thing as the S&P500 growth over the last 5 years has been zero. Inexpensive actively managed balanced indexes full of value stocks have been pumping out my income and growing my stash in the meanwhile.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: 4% of what?
Old 04-01-2005, 11:27 AM   #174
Recycles dryer sheets
 
Join Date: Sep 2004
Posts: 108
Re: 4% of what?

Quote:
Golllly petey -- THAT"S GREAT NEWS!! -- A couple years ago Buffett was absolutely convinced 7% for the next 5-10yrs was the limit. This prediction was followed by market returns of ~ 28% and 10%. Effectively using up 5 yrs of gains in 2... lol - I was afraid the next 3 yrs were going to be flat...

BTW: Don't you 'mean' reversion as opposed to "revision." Hmmm...
If you want to look at reversion to the mean, it would probably be best to isolate the cyclical stocks <vice entire market> - look for their bottoms to buy and sell at their tops... A strategy like 'dogs of the dow' would probably suit your beliefs. At least with blue chips your downside risk is somewhat mitigated. As you will probably notice with the p/e's and dividends these dogs are carrying - they do have their share of fleas and risk.

Reversion. Indeed. This burning the midnight oil is catching up with me!

Petey
__________________
peteyperson is offline   Reply With Quote
Re: 4% of what?
Old 04-01-2005, 11:31 AM   #175
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: 4% of what?

A lot of companies books are getting a mean revision lately
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: 4% of what?
Old 04-01-2005, 12:00 PM   #176
Thinks s/he gets paid by the post
Hyperborea's Avatar
 
Join Date: Sep 2002
Location: Silicon Valley
Posts: 1,008
Re: 4% of what?

Quote:
Reversion. Indeed. This burning the midnight oil is catching up with me!

Petey
Though as SG points out the mean that we revert to is constantly being revised.
__________________
Hyperborea is offline   Reply With Quote
Re: 4% of what?
Old 04-01-2005, 04:25 PM   #177
Confused about dryer sheets
 
Join Date: Mar 2005
Posts: 6
Re: 4% of what?

this post deleted by hix9
__________________
hix9 is offline   Reply With Quote
Re: 4% of what?
Old 04-01-2005, 04:45 PM   #178
Confused about dryer sheets
 
Join Date: Mar 2005
Posts: 6
Re: 4% of what?

this post deleted by hix9
__________________
hix9 is offline   Reply With Quote
Re: 4% of what?
Old 04-02-2005, 09:27 AM   #179
Recycles dryer sheets
 
Join Date: Sep 2004
Posts: 108
Re: 4% of what?

Quote:
hi petey

There are several problems with this analysis. *Firstly as Siegel seems to commonly do, it ignores the reality of taxes on dividend payments. This makes any findings inaccurate and possibly completely wrong.

This is of course not a problem with the analysis, it is a deficiency in Shiller's long term price index to be fair, correct? *

I don't think Shiller thinks dividends are particularly important with regard to mean reversion of the P/E ratio, but I don't have his paper. *If he did, I would have thought he would have included them in his long term price data. *Since he didn't I would guess he thinks them irrelevant to the concept.

You, or someone else more versed in mean reversion data should be able to help me out here though, since Shiller is fairly prominent in this area I believe. *Does Shiller think dividends are relevant when assessing validity of P/E reversion? *If not, then what is your point with reference to this paper as presented?
So no change in anything presented when they used Shiller's favored 10 yr earnings.

I will say I now understand Mikey's previous post about why he thought time was better spent elswhere rather than in debates of these types. *

hix9

If you're saying that there are some studies that refute mean reversion, I'm sure there are studies of all kinds! I have read more than enough on the matter to be satisfied. I have seen more than enough strong 5-year performance in both companies and countries, that then experience a poor following 5-years to appreciate what that means for reversion and value investing.

I agree the disclaimer is useful in the paper but I believe the basic conclusions are as wrong as those that believe in the random walk in long-run returns or in perfectly effiicient markets. Charlie Munger has said it is smart to not waste time with people (or ideas) that one knows immediately to be foolish. I feel that way about thinking that reversion isn't real, belief in perfectly efficient markets and all the rest of the hokum out there!

As for your comment in reference to Mikey, if you don't wish to discuss something, better to just not do so rather than make some backhanded insult towards me. That was completely unnecessary. I respect all the views on the board, regardless of whether I think they are wrong or not.

Petey
__________________
peteyperson is offline   Reply With Quote
Re: 4% of what?
Old 04-02-2005, 11:21 AM   #180
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,387
Re: 4% of what?

Just for the record-when I said I didn't think it was very prospective to discuss these complex issues, I wasn't referring to anyone's particular ideas or understanding.

I think message boards are good for statements of fact and sharing of experience- I have a 5.25% mortgage, etc. But often not so good for more complex things. If chaired PhD professors of economics and finance can't take the matter to a definite conclusion, how could we? We don't have to directly answer any questions, just whatever suits our purpose at the moment.

Can be fun, but essentially hopeless. And people do on occasion get aggressive toward one another

Mikey

__________________

__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 06:55 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.