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Old 12-26-2010, 02:32 PM   #141
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However, he adds that P/E ratio is just another thing to consider, and is not a fool-proof signal. To paraphrase it, a high P/E when you start your retirement is almost a sure thing you will be doomed, but a low P/E only reduces the risk and does not guarantee success.
IMO, this quote from Otar is a meaningless statement that perhaps sounds profound but isn't. First, I would like to see examples of normal length retirements with normal asset allocation and SWR no greater than 4% failing when started say, at a a PE10 of 10 or lower.

Second, of course it is not guaranteed. What is? But unless the world is so different from the past that we will all be swimming for survival, low PE retirements as defined above will be fine. Certainly compared to a 4% SWR retirement started today.

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Old 12-26-2010, 02:40 PM   #142
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Sure, I will try to reserve a slot with full hookup for you in the NM state campgrounds. But when SHTF, these spots would fill up fast and you'd better hurry on down. I don't know how long I will be able to keep them at bay.
If stuff is hitting the fan, then what would there be to hook up to?
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Old 12-26-2010, 03:10 PM   #143
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IMO, this quote from Otar is a meaningless statement that perhaps sounds profound but isn't. First, I would like to see examples of normal length retirements with normal asset allocation and SWR no greater than 4% failing when started say, at a a PE10 of 10 or lower.

Second, of course it is not guaranteed. What is? But unless the world is so different from the past that we will all be swimming for survival, low PE retirements as defined above will be fine. Certainly compared to a 4% SWR retirement started today.

Ha
On page 227, Otar's chart of P/E vs. portfolio life shows that there are many data points of P/E of around 12-13 with portfolio life of less than 20 years. I assume that he was talking about a reasonable portfolio with, say 50% equities. I looked in the narration and failed to see an explicit mention of the WR to see if his computation was based on 4% or something higher.

Otar also has other discussions on how P/E affects portfolio life in Chapter 21. People who are interested should read for themselves.

Of course we all want to have a lower P/E, but given that the E being tougher to increase than the P to go down, do people want to see their portfolio being halved, in order to have the P/E down in the low teens?

There are still companies with forward P/E much lower than the S&P 500. I own some. Why are they so low? You've got to wonder if they aren't a value trap for some reasons.

Anyway, with the P/E being above 20 most of the last two decades (see S&P 500 PE Ratio Chart) , perhaps future as well as current retirees should plan on drawing only 3% or less. Should we adopt that as the new SWR?

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If stuff is hitting the fan, then what would there be to hook up to?
Some of us are closer to the fan than others, and will be sprayed with stuff more. Just in case I am among the former group, meaning there are other people with income (those damn w*rkers), I think society would still be soft-hearted to provide me with some amenities.

If not, oh well, those parking spots I share with Hankster will be nice level pads, with enough clearing to stretch out our solar panels.
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Old 12-26-2010, 11:53 PM   #144
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OK, this may seem sort of naive, since for some reason we all are convinced we need balanced portfolios, but....HYPOTHETICALLY, let's say
Bob figures, applying the 4% rule, that he can live comfortably on $x/yr in 2010 dollars . Let's say he's figuring on a 30 year forward horizon until death. So if x represents 4% of his current holdings he would need 30 times x to retire and to be 95% secure, right?.

Well, let's say he has a buffer in excess of that figure. Would it not be logical for him to invest his ENTIRE nest egg in TIPS? If he could lock in at any real positive return over inflation over the course of his retirement (it would have to be at least positive ENOUGH to offset taxes on gains, etc, but that's not much), he would be free from most of the concerns expressed in this forum, which imply greater risk. Am I naive in assuming this strategy would be safer in assuring his likely financial comfort in retirement than the "balanced portfolio" strategy (since over the long run it would be very difficult for him to lose, unless confronted by unusual expenses which are always a risk).?

What element am I missing here?
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Old 12-27-2010, 12:28 AM   #145
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On page 227, Otar's chart of P/E vs. portfolio life shows that there are many data points of P/E of around 12-13 with portfolio life of less than 20 years. I assume that he was talking about a reasonable portfolio with, say 50% equities. I looked in the narration and failed to see an explicit mention of the WR to see if his computation was based on 4% or something higher.

Otar also has other discussions on how P/E affects portfolio life in Chapter 21. People who are interested should read for themselves.
I am not interested in a long discussion of this, as the reality is already quite clear to anyone who looks. But the chapter you cite tells that the failures he finds with PE below 12.5 are at 6% WR, 40% equities. He also states that at a WR of 4%, you should have a lifelong portfolio.
As PE he is using what he calls PE4.

A guy could get confused by looking at charts and accepting conclusions without reference to the relevant parameters.

By the way, I still would like to see what I asked for- examples of portfolio failures at 4% WR and PE 10s <=10, and normal allocations.

Ha
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Old 12-27-2010, 05:28 AM   #146
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On page 227, Otar's chart of P/E vs. portfolio life shows that there are many data points of P/E of around 12-13 with portfolio life of less than 20 years. I assume that he was talking about a reasonable portfolio with, say 50% equities. I looked in the narration and failed to see an explicit mention of the WR to see if his computation was based on 4% or something higher.

...

That book is a good read. It provides some insight into some the questions we all have asked many times... and a few things I had not thought about.



The PE4 indicator would seem to be a more tangible indicator of risk than the probability of failure (i.e., probability of success) from sources like the trinity study. Years to fail... makes it more concrete.


Since the indicator is linked to the state of the market (given the cyclical nature).... it would seem to indicate the potential for stressing the portfolio. A high average PE might predict at the least, the lack of growth... at worst harbinger of a fall in the near term.

Plus it would seem to provide a rough gauge of how one might judge the safety of their WR% in years. For example... if one is 75, what WR% might the portfolio withstand given life expectancy?

But like any of these models... it just provides some insight... one needs to be prepared to make adjustments.

I have also seen the success of a nominal WR% (no CPI-U adjustment). The Trinity study shows a portfolio sustaining up to 7% if no inflation adjustment is taken.

Compliments of Bob.

Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable

I believe we (DW and I) will spend more at a younger age and have a stair stepped reduction in spending that will reduce somewhat with each decade of FIRE (as we age). However, there is no way to predict the future so I am planning a level income (inflation adjusted).

We seem to be solidly in the green zone.
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Old 12-27-2010, 05:54 AM   #147
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One observation.

The book did not portray the buckets approach as an optimum strategy (i.e., Asset Dedication).

The table on page 470 shows probable outcomes for a Green Zoner scenario using each management approach

All approaches but Asset Dedication had 100% chance of success till age 95.

Page 471 states that

Quote:
Asset Dedication performed the poorest
The use of annuities with a portfolio seems to provide the greatest safety and highest terminal portfolio.

Many of us have SS and/or pensions which are annuities. According to these illustrations, those income streams are very important risk reducers that help sustain the portfolio (by lowering the WR%). I think all of us already knew that, but it is nice to see a study that compares the options with probable outcomes.


Since I am right in the middle of planning how to manage our portfolio and income... this is timely information.

It confirms some of my planned approach and challenges other parts of it.
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Old 12-27-2010, 09:46 AM   #148
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That book is a good read. It provides some insight into some the questions we all have asked many times... and a few things I had not thought about.
Yes. And this thread discussion has also led me to ask more questions. Please see below.

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... the chapter you cite tells that the failures he finds with PE below 12.5 are at 6% WR, 40% equities. As PE he is using what he calls PE4.
Thanks for pointing this out. At my previous post, I did not go back far enough from the referenced chart to see that the above was the premise for all the subsequent discussions. My fault.

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He also states that at a WR of 4%, you should have a lifelong portfolio.
I see that too, but now I have other questions after thinking more about this P/E business. More on this below.

Quote:
By the way, I still would like to see what I asked for- examples of portfolio failures at 4% WR and PE 10s <=10, and normal allocations.
Using past histories, FIRECalc says that one would fare better with a higher stock allocation, so I use 70% equities, 4% SWR, and with everything else in default. It told me that the chance of success would be 83%. So, I have no doubt that if one imposes the PE condition like you stated, there would be no risk of failure.

But, but, but the problem we have is with the PE being as high as it has been, should we reduce the SWR to reflect the higher risk of lower total returns of the years ahead?

Let me state here again that, as I still have part-time income and not yet in the distribution phase, I have not studied this subject as thoroughly as many people here. Most of my experimentation with FIRECalc was made in the last few days. And I just read Otar's book a couple of days ago. This means that other people have given this much more consideration, and I will have much to learn from this discussion.

All this talk about P/E got me more curious, and I have more questions. Looking at the past histories of PE here going back to 1881, one can see clearly the effect of "P/E expansion" since 1990. This has been discussed much by experts in the past. Something has changed fundamentally. Is it better or worse, I don't know, but the stock market is definitely different than it was before 1980 or 1990. The phenomenon of P/E expansion was what gave me the stash that I have now. I once thought its growth was due to my brilliance, but it now makes me leery.

And speaking of the dividend yield, this chart also shows the dividend yield going back to 1881. It looks like it was averaging around 5% up to 1955, and perhaps 3.5% from 1955 to 1990. Compared to those, the S&P 500 dividend yield since 1990 looks pitiful, and is only 1.8% now.

With a high dividend yield in the past, it is no wonder then that a WR of 4% would be no sweat in the past. And for a retiree in the 1990-2010 period, the P/E expansion gave plenty of cap gains to enjoy.

By the way, I also found this chart of historical inflation interesting. A hundred years ago, there were periods of high inflation alternating with high deflation. The wild gyration in the past (1882-1950) makes our recent experience a mere molehill. Should we thank the Fed for that?

Looking ahead, what can we expect? Dividend yields to return or should we continue to look for and depend on cap gain? I recall that we have had a recent thread about 2.1% real return in the years ahead, and rereading it, I now remember that I decided then that a small motor home in the mountains of New Mexico would be my back up solution.

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We seem to be solidly in the green zone.
The truth is that if I am to retire right now, we can maintain the existing lifestyle on 3%. Once we get SS at 62, we can live well on even less. In addition, I do not worry about living for more than 30 years. So, I'm set, I think.

Even though my conservative nature will not let me push the WR to the highest possible whatever that might be, the discussion of SWR leads to me learning more, and is intellectually interesting.
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Old 12-27-2010, 10:38 AM   #149
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OK, this may seem sort of naive, since for some reason we all are convinced we need balanced portfolios, but....HYPOTHETICALLY, let's say
Bob figures, applying the 4% rule, that he can live comfortably on $x/yr in 2010 dollars . Let's say he's figuring on a 30 year forward horizon until death. So if x represents 4% of his current holdings he would need 30 times x to retire and to be 95% secure, right?.

Well, let's say he has a buffer in excess of that figure. Would it not be logical for him to invest his ENTIRE nest egg in TIPS? If he could lock in at any real positive return over inflation over the course of his retirement (it would have to be at least positive ENOUGH to offset taxes on gains, etc, but that's not much), he would be free from most of the concerns expressed in this forum, which imply greater risk. Am I naive in assuming this strategy would be safer in assuring his likely financial comfort in retirement than the "balanced portfolio" strategy (since over the long run it would be very difficult for him to lose, unless confronted by unusual expenses which are always a risk).?

What element am I missing here?
Sure, if Bob has a lot in excess of the Magical Figure, he can put it all in TIPS, or in bonds and live off the interest -- assuming he is living in the right part of the cycle that represents the "long run."

If Bob can count on that happening, then, that's how he should invest. If he isn't sure his life will exist only in the "long run," then rather than a 'balanced' portfolio, he should construct a portfolio that represents an asset allocation which will provide growth and safety.

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Old 12-27-2010, 04:19 PM   #150
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Thanks for the reply, Gotadimple!

But please explain, what do you mean when you refer to the "long run" scenario? And under what conditions would a balanced portfolio be less risky than an all-TIPS portfolio, which almost guarantees Bob to beat inflation in any market, despite the scenario? The balanced portfolio is providing for likely greater gains combined with commensurate much greater risk (vs all TIPS). If greater gains are likely unnecessary (according to the 4% rule), then a balanced portfolio seems like a gamble with a small up-side but a potentially devastating down-side.

Does that make sense?
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Old 12-27-2010, 05:07 PM   #151
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OK, this may seem sort of naive, since for some reason we all are convinced we need balanced portfolios, but....HYPOTHETICALLY, let's say
Bob figures, applying the 4% rule, that he can live comfortably on $x/yr in 2010 dollars . Let's say he's figuring on a 30 year forward horizon until death. So if x represents 4% of his current holdings he would need 30 times x to retire and to be 95% secure, right?.

Well, let's say he has a buffer in excess of that figure. Would it not be logical for him to invest his ENTIRE nest egg in TIPS? If he could lock in at any real positive return over inflation over the course of his retirement (it would have to be at least positive ENOUGH to offset taxes on gains, etc, but that's not much), he would be free from most of the concerns expressed in this forum, which imply greater risk. Am I naive in assuming this strategy would be safer in assuring his likely financial comfort in retirement than the "balanced portfolio" strategy (since over the long run it would be very difficult for him to lose, unless confronted by unusual expenses which are always a risk).?

What element am I missing here?
First, you're describing the "Groucho Marx" retirement strategy as modified by Suze Orman and Oprah Winfrey, with an update for TIPS: "Sure, you can retire on Treasuries, as long as you have enough of them!"

Second, there's still plenty of uncertainty around parameters like "30-year longevity" and "real positive return over inflation". Longevity risk is only guaranteed by the Hemlock Society or some other form of ammunition, and 31 years into a 30-year retirement is a bad time to try to rectify the oversight. And while I feel that the CPI is a pretty good gauge of "real inflation", whatever that is, it's way too susceptible to political manipulation. Still, it's the best measurement available.

Third, 30-year TIPS have gone in & out of auction availability. I think they're back for now, but that's no guarantee of their availability in future years.

Finally, at today's TIPS rates it'd take a heapin' big steaming pile to guarantee an ER budget. Most ERs have neither the patience nor the stamina to endure the workforce stress for the time necessary to accumulate that stash. (Hey, if they did have those characteristics then they wouldn't be interested in ER in the first place.) It's much more tempting to go with the Trinity Study and hope that some sort of variable spending plan (like Bob Clyatt's "4%/95%" system from Work Less, Live More) or part-time work will paper over the black swans gaps.

Or else they could buy a COLA'd annuity from Vanguard/AIG.

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This has been discussed much by experts in the past. Something has changed fundamentally. Is it better or worse, I don't know, but the stock market is definitely different than it was before 1980 or 1990. The phenomenon of P/E expansion was what gave me the stash that I have now. I once thought its growth was due to my brilliance, but it now makes me leery.
I'd go for two factors:
- the markets and public accounting are much more heavily regulated today than even 20 years ago, let alone 50 years ago. Stocks have a much better reputation for being a "fair game" instead of a rigged casino.
- information is much more accessible to individual investors and analysis is much more widespread for all. Much of Buffett's success during the 1950s-1970s came from being able to read things that many people couldn't or wouldn't have access to (Moody's, thousands of company quarterly/annual reports for the price of 100 shares) and then from being able to critically analyze the data for opportunities that were well within the average MBA's capability.

Look at how much of that has been dumbed down automated today for the convenience of millions of eager investors with no institutional memory. Imagine what Buffett could have done back then with Yahoo! Finance, a Morningstar Premium subscription, The Motley Fool, and discussion forums like GuruFocus & Seeking Alpha...
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Old 12-28-2010, 08:47 AM   #152
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Chapter 33 has some useful information about setting up a reserve portfolio to provide inflation protection for nominal SPIAs and Nominal Pensions.
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