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Old 11-18-2007, 04:53 PM   #41
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Interesting article. At first I thought it was breaking major ground, maybe it still is. However I think the strength of the authors' conclusion is overstated.

The article makes it sound like the "take out bonds first" strategy is solely responsible for higher portfolio survivability over 30 years. For example, bonds first gives a 27% failure rate at 50% stocks and 5% withdrawal rate. Rebalancing gives 37% failure rate. But I would suggest this is an apples to oranges approach to analyzing failure. The portfolio under the bonds first strategy would be 80-100% stock for the great majority of the 30 year withdrawal period. I would say an apples to apples comparison should be the 40% or 50% or 60% stock allocation "bonds first" withdrawal strategy versus the 80% stock rebalancing strategy. In this manner, you get a more similar average % stocks over the course of the 30 years. When comparing the two withdrawal strategies on this basis, the bonds first withdrawal strategy looses its luster. At 50% stock, bonds first withdrawal at 5%, the failure rate is 27%, versus a failure rate of 22% with 80% stock, rebalance, 5% WR. (See attached diagram).

I also have questions about how adding in multiple asset classes (SCV, international, commodities, intl bonds, etc) would affect the survival percentages using bonds first versus annual rebalancing harvesting strategies.

The takeaway from the paper seems to be "higher allocation to higher returning asset classes = better portfolio survivability". And the data used in the paper (US stock/bond returns from 1926-2003) is fairly limited and maybe optimistic, given widely varying market returns seen in other countries throughout the same time period.
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Old 11-18-2007, 05:30 PM   #42
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As others have said, there isn't really any new ground being broken here. It's just another way to look at bonds and volatility.

Why do people want bonds in their portfolio? To reduce volatility, right? Why don't they like volatility? Because they don't want to experience drawdowns, right?

So, you have three choices as I see it:

1) Go with a high stock allocation and learn to live with the drawdowns.

2) Stick with your bond allocation, sleep well, but suffer in terms of both long-term portfolio survival and terminal value.

3) Start with a high allocation to bonds, consume them while you let your stocks simmer for 10 years or so in the hope that they grow, and then live with the same volatility in (1) but with a potentially much larger nest egg.

The simulator doesn't explore this, but once you hit that 100% stock allocation, maybe your portfolio has grown enough that you can buy another slug of bonds to help you sleep better. (Think of it as a 10-year rebalancing if you like.)

Also, the simulator does include small cap, and you're right -- other asset classes have historically improved things a bunch.
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Old 11-19-2007, 09:29 AM   #43
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Fuego,

IMHO, there doesn't appear to be that great a difference, or that much of an improvement, with rebalancing vs. bond first strategy. For example, a couple of quotes:

From Table 1:

Quote:
The amount of information gathered is too voluminous to present, but for the particular (and arguably “most practical”) cases of (1) 4 percent withdrawals, with 50/50 stock/bonds and (2) 4 percent withdrawals with 60/40 stock/bonds, the shortfall frequency pattern by year for the Rebalance model and the Bonds First model were trivially different. Shortfalls did not occur earlier when there was no rebalancing. In both cases, the timing of the shortfalls was quite similar; the earliest shortfalls occurred at year 12, with the frequency of shortfalls increasing over time. The risks appear to be very much the same for these cases.
From Conclusions:

Quote:
3. The probability of shortfall with either Rebalance or Bonds First is relatively low (10 percent or less) as long as withdrawals do not exceed 4 percent of the starting portfolio value and stock exposure is less than 70 percent (λ < 0.7.) Shortfall risk increases as the withdrawal rate, γ, increases. This is in line with findings of Cooley et al. (1999, 2003), Bengen (2004), and others.
and

Quote:
The conclusions on the efficacy of depleting bonds first (and hence not rebalancing) may seem risky. Suppose that an investor has a 50/50 stock/bond portfolio at the onset of retirement. If the bonds are withdrawn first, over a period of, say, 12 years, the stock component of the portfolio has had 12 years to grow undisturbed by withdrawals. Even though stocks are more volatile, this 12-year hiatus could have allowed a significant increase in the stock part of the portfolio. Both of the shortfall analyses demonstrate that one is no more likely to run out of money using this strategy than if one rebalances. While one can argue that the retiree’s portfolio will get more and more volatile over time as fewer and fewer bonds remain, the evidence does not suggest that shortfall is less likely with rebalancing. It then becomes a matter of how risk is viewed—as portfolio volatility (return variance) or as shortfall risk.

The PIBR analysis suggests that the Bonds First withdrawal strategy is likely to leave a larger portfolio at the end of 30 years than rebalancing would. A reasonable recommendation to a retiree would be to first harvest bonds and then harvest stocks. This strategy provides outcomes at least equivalent to rebalancing with respect to shortfalls and has the added benefit of a potentially larger estate. An advisor, however, still needs to be cognizant of the behavioral aspects associated with portfolio volatility.
I think the bootstrap analysis/simulation, which considers many more stock/bond return series than the temporal analysis/simulation, may be a little better when comparing rebalancing vs bond first. This is mainly because the temporal analysis/simulation could be labelled as data mining.

Overall, if you're 50/50 or 60/40 stocks/bonds and withdrawing 3-4%, this article is probably much ado about nothing.


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Old 11-19-2007, 01:19 PM   #44
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current yield 3.99%(that's close to 4%) on Yahoo at 1 pm local time.

Pssst - Wellesley!



heh heh heh - And my sister tells me the Pats are a good football team.
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Old 11-19-2007, 07:07 PM   #45
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Yep, a few more years of seasoning and the pats might make the playoffs.

Wellesley adm shares...4.44% yield....shoot...forgot the 'pssst'!
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Old 11-19-2007, 07:31 PM   #46
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Overall, if you're 50/50 or 60/40 stocks/bonds and withdrawing 3-4%, this article is probably much ado about nothing.
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Originally Posted by unclemick View Post
current yield 3.99%(that's close to 4%) on Yahoo at 1 pm local time.
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Originally Posted by cute fuzzy bunny View Post
Wellesley adm shares...4.44% yield...
So it's even less fuss if the principal remains intact.
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Old 11-19-2007, 08:12 PM   #47
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I thought the idea of a 4% SWR was to increase the withdrawal each year for inflation.

Yahoo tells me I couldn't do that with Wellesley. The dividend in 2006 was about the same as it was in 1989, for example.

Also, everybody knows you're not supposed to consume all of your income, right? The returns on stocks only look good if you reinvest dividends (and that's what this study assumes).
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Old 11-19-2007, 10:01 PM   #48
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Yahoo tells me I couldn't do that with Wellesley. The dividend in 2006 was about the same as it was in 1989, for example.
VWINX 1, 3, 5, 10 and 38 year (since inception) annualized returns are all more than 4% plus the CPI for those terms.

But there are plenty of reasons why it may not repeat that performance. Or why it will. Or better. I guess the future might throw some curveballs at us that the last ~40 years didnt.
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Old 11-19-2007, 10:07 PM   #49
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I have no idea what the future performance will be. I'm just saying that the fact that the current yield is 4% is meaningless in terms of SWR. Yahoo data only goes back to 1987, but the dividend history doesn't show any increase with inflation since that time. It goes up and down, and right now it's about the same as the 18-year average.

It would be interesting to see a SWR simulation based on consuming dividends, but so far every simulation I've seen assumes that dividends are reinvested. And everybody knows that half of the returns from stocks over the last 100 years or so have come from dividends, so reinvestment is a huge assumption to ignore.
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Old 11-19-2007, 10:14 PM   #50
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Now if you'd be so kind as to explain why I'd get a 4% yield on something, pay the taxes on that, reinvest it, then sell shares, and pay taxes on that?

Isnt it kinda nice to just get your 4% paid out, let the principal (and therefore the payout) adjust somewhat with inflation, and throw in a few lumps of faster moving stuff to assure maintaining principal levels against cost of living?

Isnt that the "black swan" idea you were so fascinated with a month or so ago? A big lump of slow moving assets with a few choice juicier picks made with smaller amounts?
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Old 11-19-2007, 10:21 PM   #51
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I have no idea what the future performance will be. I'm just saying that the fact that the current yield is 4% is meaningless in terms of SWR. Yahoo data only goes back to 1987, but the dividend history doesn't show any increase with inflation since that time. It goes up and down, and right now it's about the same as the 18-year average.

It would be interesting to see a SWR simulation based on consuming dividends, but so far every simulation I've seen assumes that dividends are reinvested. And everybody knows that half of the returns from stocks over the last 100 years or so have come from dividends, so reinvestment is a huge assumption to ignore.
You're a smart, quantitative guy Twaddle, so help me here. What would the difference be between:

1. Selling 4% of your equities after reinvesting the dividends.

2. Harvesting dividends and selling enough equities so that the total of havested dividends and liquidated equities equals 4%?

Just a little confused here.....
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Old 11-19-2007, 10:22 PM   #52
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Now if you'd be so kind as to explain why I'd get a 4% yield on something, pay the taxes on that, reinvest it, then sell shares, and pay taxes on that?
I will be so kind.

It's different than the simulation. For all I know, reinvesting dividends and then selling the stock a year later beats consuming the dividends. And it certainly makes a big difference in the bonds-first case, since those reinvested dividends obviously have a big compounding effect over time.

Maybe Bob will read this thread, add a new feature, and then we'll know how it differs.
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Old 11-19-2007, 10:34 PM   #53
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I think you're a little too focused on simulations. This is real life!

Things were a lot simpler for me before I heard of SWR's and simulators. I figured if I could squeeze enough money out of the stash and keep it growing at least 3-5% a year on average, I was good.

Obviously, in real life or simulation, if the share price of the item in question goes up more than the CPI, and the yield is >4%, then aint ya good ta go?

VWINX falls a teeny bit short in that analysis for some time frames, its data mineable. But since 1980 it roughly doubled while it would have needed to increase about 2.5x to match the CPI. I guess the good news is that in the "bad inflation" period of the late 70's, the yield was pretty dang juicy and the share price kept up nicely, so extending that 1980 back a little further improves things a bit. I guess the bad news is that the long bull market in bonds was just starting so we'd need to see some better rates before we could count on such good performance repeating.

I wouldnt put all my money in wellesley and hope for the best, but I do still have a good size holding in it. No sudden moves, no loud noises, nice regular deposits from it, and I can play with the other slices to juice up the return.
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Old 11-19-2007, 11:16 PM   #54
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I guess the bad news is that the long bull market in bonds was just starting so we'd need to see some better rates before we could count on such good performance repeating.
Yeah, that's my concern. We focus a lot on the last 20-30 years, which was perhaps the biggest bull run for stocks combined with the biggest bull run for bonds.

When I look at the 60 years since WWII, I see a 20-year bull, followed by a 20-year bear, followed by a 20-year bull. What's next? Anybody know?
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Old 11-20-2007, 03:06 AM   #55
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Yeah, that's my concern. We focus a lot on the last 20-30 years, which was perhaps the biggest bull run for stocks combined with the biggest bull run for bonds.

When I look at the 60 years since WWII, I see a 20-year bull, followed by a 20-year bear, followed by a 20-year bull. What's next? Anybody know?
No one knows what the future will hold, but the bears are predicting that a 10-20 year bear market in stocks (as represented by the DJI and S&P 500) is about to begin
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Old 11-20-2007, 10:11 AM   #56
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Seems that your basic thesis is that things that go up a lot are going to subsequently go down a lot. Not a bad thesis. But I guess that means most of us are screwed.
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Old 11-20-2007, 12:07 PM   #57
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He he. Humans are pattern matching machines. We love to look for a pattern and try to predict the next in the sequence. It probably helped us a bunch when we used to have to chase bunnies down for snacks.

But, no, I'm not predicting a 20-year bear. I just think it makes more sense to plan for the bear case than for a continuation of the recent bull. And, in the case of bonds at least, as you noted, it's hard to replicate the bond bull market when you're starting from a 4% yield....
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Old 11-20-2007, 03:20 PM   #58
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But, no, I'm not predicting a 20-year bear. I just think it makes more sense to plan for the bear case than for a continuation of the recent bull. And, in the case of bonds at least, as you noted, it's hard to replicate the bond bull market when you're starting from a 4% yield....
As many of the regulars here know, I have been mostly bearish on the major indexes for over a year. But I am beginning to think that for some sectors at least, much more bearish price action and we will be almost in uncharted territory. The housing industry is demolished. Look at USG, look at OC, and look at high quality lenders like Wells Fargo and USB. Look at the US land drilling industry, scraping along in many cases at multiyear lows. There may not be any obvious reasons why any of this should change anytime soon, but so what? We are buying stock, not options.

Look at the major drug makers-Pfizer is yielding 5%, and though it may not have visibly bright prospects, this is one of those black swan businesses and here we would be entering very cheaply.

Look at retail- many of these outfits have some real warts, but they are pretty cheap- including companies like Wal-Mart and Target.

So I feel like the high flyers have a lot of falling to do, but not so some of these others. It is analysis intensive though.

I know I would far rather own well chosen stocks today than long term governments or any bonds. I think many stocks are also more attractive than most commodities and certainly gold.

Even if the US is going to hell in a hand-basket, there will be lots of viable businesses serving the hell and hand-basket space.

Ha
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Old 11-20-2007, 05:43 PM   #59
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It probably helped us a bunch when we used to have to chase bunnies down for snacks.
Got nothing in my pocket except for a little lint. Sorry...
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Old 11-20-2007, 06:11 PM   #60
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I agree with you on the "uncharted" comment for some sectors, and I wish we weren't already fully invested. I suspect that we would regret selling Berkshire now to buy cheap ETFs, but we're considering it. Some of our ETF dividends are going to be re-invested at good prices and we'll figure out the money-market & CD cashflow later.

As for those in the accumulation phase, some still don't get it. The blue lights are flashing and DCAs/reinvestments are happening at bargain prices. This is a once-in-a-decade opportunity. Mutual-fund redemptions I can understand, and it's their own darn fault. But why are so many retail investors running screaming for the exits?

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Look at the major drug makers-Pfizer is yielding 5%, and though it may not have visibly bright prospects, this is one of those black swan businesses and here we would be entering very cheaply.
Remember the legendary Canadian ER who bought Pfizer in the early 1990s when it was yielding closer to 10%?

I can hear the nay-saying now: "Yeah, but GM was just up to 8% last year and they whacked their dividend in half!!"

My BIL is getting mighty tired of averaging down on Citi...
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