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Old 11-16-2007, 06:13 PM   #21
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Everyone including the paper's authors agrees that withdrawing bonds first is overall a more volatile approach overall than rebalancing, because you wind up with 100% stocks. So it should be more likely to fail in worse-than-history cases. As the study shows, it may do slightly better in no-worse-than-history cases, but who is to say the future won't be worse than history?
Yes, but after 40-50 years of stock compounding the all-stock portfolio may be so large by the time you make your first stock sale that you won't give a darn how volatile it is.

Volatility is not evil, but the fear of volatility can be.
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Old 11-16-2007, 06:20 PM   #22
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Thanks for the HarvestingWithdrawals link. I thought the John Spitzer and Sandeep Singh article was interesting. Though I wish the authors had used all the possible portfolios from 0/100 through 100/0.

Despite the authors headline "bonds first" conclusion, I was actually most struck by the 3% and 4% withdrawal rate lines in Table 1. At those withdrawal rates, it looked like the rebalance option actually had the lowest failure rate in 11 of the 12 cases. The one exception was the 4% withdrawal rate with 30% equity where rebalance had a 9% failure rate while "bonds first" had only an 8% failure rate.

Looking further at Table 1, assuming failures are your main worry, it looked like at a 3% withdrawal rate should have between 30% and 50% equities, while at 4% you should want between 40% and 70% equities. Taking the overlap, perhaps 40% to 50% equities is optimum!

My personal take away summary of the article is that if you are going to start with a withdrawal rate where Table 1 shows a double digit failure percentage, then if you can stomach a 100% stock allocation, you can increase the odds of your portfolio surviving by switching to a 100% stock allocation as quickly as possible. However, you will still have a double digit failure percentage.

Of course, a 100% stock allocation can cause some emotional distress. As they write: An advisor, however, still needs to be cognizant of the behavioral aspects associated with portfolio volatility.

The other gotcha with this approach is that unless the funds are being invested under the terms of some irrevocable trust, the reality is there will be mid-course corrections over a 30 year investment period. Certainly if my brilliant investing shrinks a 4% initial SWR to 1% of my portfolio's current balance, I am quite likely to reset my withdrawal rate! Likewise, if we have a world wide market crash which hurts my portfolio, I will probably lower my spending.

Still an interesting article. I need to make time to track down and read their references. (Maybe when I retire. )
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Old 11-16-2007, 06:25 PM   #23
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An advisor, however, still needs to be cognizant of the behavioral aspects associated with portfolio volatility.
I'll say. Like lawsuits.

Ha
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Old 11-16-2007, 06:35 PM   #24
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That sounds reasoned and i am impressed by your assertion. What is your present age and asset allocation?
Heh, Ha follows the "Morlock" investment strategy: Sit on a pile of TIPS and puts until there is a crash. Then run out and lap up the blood running in the streets until it stops flowing.
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Old 11-16-2007, 06:49 PM   #25
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assuming failures are your main worry ...
Failures are my only worry. Successes I can deal with.

If you play with the simulator, the sequence starting in 1966 is the most fun. Just about everything fails at a 4% SWR for that sequence unless you add small stocks to the allocation. In fact, during that period 100% bonds outlasted 100% large stocks.

Given that many of us are looking at retirements that will last longer than 30 years, I think an understanding of the historical failure sequences is important.
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Old 11-16-2007, 08:24 PM   #26
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I had the same reaction last time this was paper was posted. Let see over long periods of time stock have higher returns than bonds.

So it doesn't really take an excel spreadsheet much less a PHd in finance to conclude that if you withdraw your bond portion first on average you'll end up with more money. Nor is very surprising that in almost all case your chances of 30 years survival are greater with higher stock allocation.

The trick is getting a real good crystal ball that will predict that the next 30 or 40 years will be a lot like the last 100....
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Old 11-16-2007, 08:41 PM   #27
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The trick is getting a real good crystal ball that will predict that the next 30 or 40 years will be a lot like the last 100....
Yikes, I sure hope not.
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Old 11-16-2007, 09:00 PM   #28
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Retiring into a bear market with a high allocation to stocks is a potential retirement killer
I handled it by taking almost 3 years to average in a lump sum into my asset allocation. Initial plan was 2 years, but as the bear market stretched out, so did my averaging in plan!

On top of that upon retiring I already had 2 years of expenses available in cash in a separate account so that I didn't need to withdraw from the portfolio for a while.

This was all a good thing, because I retired in late 1999!!!

It was tough to do that last investment in late 2002, but by late 2003, I was well ahead of the game!

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Old 11-16-2007, 09:10 PM   #29
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The period beginning in 1966 makes the 2000-2003 bust look like a cake walk.

From 1966-1986, the S&P 500 was flat on an inflation-adjusted basis. 20 years with no real capital gains! The first part of the sequence was fairly boring and flat, punctuated by a crash in 1973-1974, followed by years of high inflation.

It hurts just thinking about it.

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Old 11-17-2007, 06:03 AM   #30
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Ah, nothing like bringing up the Retirement Calculator from Hell for the 1965-1995 period. It seems that the real determinant of portfolio success was the withdrawal rate, not necessarily the allocation to stocks/bonds. Even scarier [sp], is when stock and bond returns aren't that far apart, as in Part II.

- Alec
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Old 11-17-2007, 11:02 AM   #31
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BTW, I think Bunny has a great plan. Just retire twice as rich as you need to be, so you can live off 1/2 your stash without selling securities.
Oh Ha, come on. Thats not what I said and you're smarter than that.

Retirement is a balance of certainties and uncertainties. I've simply chosen a different balance of those. I dont have twice as much money, just less costs and less uncertainty.

I havent created a bunch of constructions that may produce a future uncertain higher rate of return and then made a bunch of certain constructions with poor rates of return to offset the future uncertain volatility and uncertain inflation levels.

Its just a matter of ascertaining ones spending needs going forward, minimizing unnecessary costs and risks and putting together a mix that meets that need.

Theres two ways to run a business.

1) Think up all the cool products and services you can conceive, then try to figure out how to sell those to people, spend a bunch of money in the process and hope your income meets the expenses and produces a profit. Cut expenses, headcount and projects if you dont. Do lots of projections, make lots of guesses, and build all sorts of layers of failsafes into the company.

2) Determine what kind of company you want to run, what sorts of needs customers have that you can solve, determine what people will pay for those products and services, produce them, sell them, keep the spending and company size in line with the expected income, and have a fairly predictable business.

The sort of planning most ER's engage in is #1..and thats how many businesses are run as well. Its not needs based and planned, its ad-hoc and improvised. Which is what most people are comfortable with. Until they start bitching about having to deal with all the surprises and shortfalls, or they fail because they built in too many failsafes that drained off too many resources.

ER Planning Process: How can I build an asset allocation that produces the most money with the best expected risk to reward factor, coupled with a bunch of personal implications like ones willingness to experience volatility and loss. Then when I get that worked out, how much money can I take out without it imploding. Now, can I live within that spending limit.

Problems come up when any expectations or uncertainties in the process crop up. A bear market. Lower future returns than historic. Unexpected inflation.

I did #2. Figured out how much I needed to spend, eliminated unnecessary expenses, broke my portfolio in half, crafted one half to meet the reduced current expenses with expected future cost increases over the next 20 years, and deployed the other half for maximum growth to service the second half+ of my retirement.

Most of those uncertainties no longer matter. Granted a severe long term bear market with extensive defaults and bankruptcies would screw me. But it'll screw everyone equally.

Hence not needing to outrun the bear, just the other participants...

I'd rather used fixed income to produce a steady predictable stream of funding than as a brake and parachute against all the other frightening uncertainties and failsafes I've invested in to try and maximize future earnings so as to meet my costs and debt payments.
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Old 11-17-2007, 11:26 AM   #32
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Ah, nothing like bringing up the Retirement Calculator from Hell for the 1965-1995 period. It seems that the real determinant of portfolio success was the withdrawal rate, not necessarily the allocation to stocks/bonds.
Actually, playing with Bob's simulator has caused me to reexamine my asset allocation. I was surprised by the historical robustness that a high exposure to small stocks provided -- not only in the 1965-1995 period, but in every 30-year period examined.

My current allocation is basically 50/50 stocks/bonds, with an 80/20 large/small mix and a strong value tilt.

If I move from 80/20 large/small to 50/50 large/small, the historic volatility stays very similar (it goes from a Std Dev of 9.2% to 9.4%), and FIREcalc gives a 4.59% SWR with 100% success.

I've been turned off by Small Value due to the recent historically high run-up for that asset class, but I think I may average into a higher exposure to it over the next few years....

I also like the idea of the bonds-first withdrawal strategy, but mostly for psychological reasons. By withdrawing from cash/bonds/cds in the first 10 years, it's simply easier to ignore my stock portfolio. I could figuratively bury it in the backyard for 10 years and completely ignore the volatility. Maybe.
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Old 11-17-2007, 12:47 PM   #33
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Ah, nothing like bringing up the Retirement Calculator from Hell for the 1965-1995 period. It seems that the real determinant of portfolio success was the withdrawal rate, not necessarily the allocation to stocks/bonds. Even scarier [sp], is when stock and bond returns aren't that far apart, as in Part II.

- Alec
FAQ archives: http://www.early-retirement.org/foru...nfo-30505.html
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Old 11-17-2007, 06:22 PM   #34
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Hey Twad...make those changes you're talking about and you're pretty much at the same AA and strategy that i'm at.

Now what are the odds of that...?
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Old 11-17-2007, 08:11 PM   #35
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Well twaddle I thought that was very interesting and will definitely take note as I was a big fan of rebalancing before looking at that!
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Old 11-17-2007, 08:55 PM   #36
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Hey Twad...make those changes you're talking about and you're pretty much at the same AA and strategy that i'm at.

Now what are the odds of that...?
Great. See you in the soup line if this strategy fails us.
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Old 11-17-2007, 09:39 PM   #37
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I'll give you a little extra. My promise to you.
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Old 11-17-2007, 09:58 PM   #38
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It'd be interesting to me to see how this strategy would have worked in Japan-1990. I'm not sure 50% bonds would have been enough to make it through that bear.
You rang?

50/50 Japanese stocks/Japanese bonds, starting 1 Jan 1990.
Expense ratio 0.5%
Yearly withdrawals: 4% in first year, indexed to inflation thereafter.
Starting portfolio: 1,000,000 yen.

[Removed bad numbers. See next post for fixed numbers]

But nowadays, we all know better than to go 100% domestic, right? So, same as above, except:

25/25/25/25 Japanese stocks/foreign stocks/Japanese bonds/foreign bonds, starting 1 Jan. 1990.

[Removed bad numbers. See next post for fixed numbers.]

Summary:
[Removed bad numbers.]

Bonds first seems a bit riskier overall, in this historical case.
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Old 11-17-2007, 10:10 PM   #39
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Bonds first: Hit 100% stocks by 1993, portfolio goes bust in 2004.
Can that be right? How can a 4% WR deplete the 50% allocation to bonds in just 3 years?

In any case, an ER bust after just 14 years would definitely be a record I wouldn't want to beat.
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Old 11-17-2007, 10:33 PM   #40
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Can that be right? How can a 4% WR deplete the 50% allocation to bonds in just 3 years?
Oops, found a mistake. Thanks for the sanity check.

If I have not made a mistake this time (no guarantee), then:

100% Japanese portfolio:
Rebalanced: 101,000 yen by end of 2006.
Bonds First: 12,000 yen by end of 2006, hit 100% stocks in 1999.

50/50 Japanese/foreign portfolio:
Rebalanced: 608,000 yen by end of 2006, minimum 560,000 yen hit in 2002.
Bonds First: 729,000 yen by end of 2006, minimum 487,000 yen hit in 2002, hit 100% stocks in 2002.

I think the conclusion remains, that Bonds First looks riskier.
(Another conclusion is that there are bigger issues to worry about, like diversification.)
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